Demand Curves

UNIT - I
In a typical representation, the price appears on the left vertical axis while the quantity

demanded is on the horizontal axis.

• A demand curve doesn't look the same for every product or service.
When the price rises, demand generally falls for almost any good, but
the drop is much greater for some goods than for others. This is a
reflection of the price elasticity of demand, a measurement of the
change in consumption of a product in relation to a change in its
price.

• The elasticity of demand for products varies between and within

product categories, depending on the product’s substitutability.
Shifts in Demand Curve
• We observe a shift in the curve when the requirement for commodity changes due to factors other than
price. 

Shifts Towards Right:

• An increase in consumer preference or income level leads to a rise in goods demand. Also, when the
supply of goods decreases or when consumers anticipate a future price rise, demand increases—a
rightward shift of the curve.

Shifts Towards Left:

• In contrast, when consumer preference or income level decreases, there is a fall in demand. Similarly, a
rise in the supply of goods and anticipation of price reduction reduces demand. In such scenarios, the
curve shifts leftward.
Movements Along the Demand Curve

• Upward and downward movements on the graph are brought out by

changes in price (and not other factors). There is an inverse relationship
between price and demand.

• Upward Movement: If the curve moves upward, the price of goods

increases—demand falls at the same rate. 

• Downward Movement: On the other hand, if there is a downward

movement, the price of the goods falls—demand rises proportionately.
Types of Demand Curve

• There are two types of demand curve: an individual demand curve and a market demand curve.

• Individual Demand Curve

• An individual demand curve is one that examines the price-quantity relationship for an individual consumer, or how much of a

product an individual will buy given a particular price.

• Let's say the price of a slice of pizza is $1.50 and Joel is accustomed to buying four slices for lunch every workday (4 x $1.50 x 5 =

$30). If the price drops to $1 a slice, four slices will cost Joel $20 (4 x $1 x 5), and Joel might demand six slices instead of four.

• But if the price drops to 75 cents a slice, he might demand eight slices a day. With the price information and the number of slices

Joel will demand at that price, it would be possible to plot an individual demand curve.

• The individual demand curve—sometimes also called the household demand curve—that is based on an individual’s choice among

different goods.
• Market Demand Curve
• The demand curve plots out the demand for an individual consumer, hence the name individual demand curve.

But they don't take entire markets into account. That's where the market demand curve comes in.

• A market demand curve is the summation of the individual demand curves in a given market. It shows the

quantity of a good demanded by all individuals at varying price points. Keep in mind that this graph doesn't

outline what consumers want. Rather, it depicts the goods and services they'll buy if they purchasing power to

do so.

• Determining the market demand curve is as easy as adding up all of the individual demand curves. This is then

plotted along the horizontal or x-axis of the graph. Unlike individual demand curves, which are generally steeper,

market demand curves tend to be flatter. That's because demand in the market is more proportionate as prices

change compared to changes in individual demand.

What Is Elasticity?

• Elasticity is a measure of the change in one variable in response to a

change in another, and it’s usually expressed as a ratio or percentage.
In economics, elasticity generally refers to variables such as supply,
demand, income, and price. The responsiveness to these changes
helps identify and analyze relationships between variables.
Elastic Demand
When a price rise causes a sharp decline in goods demand, the scenario is called an Elastic demand. Also, when price
reduction causes an increase in demand, the market behavior is considered elastic.
Let us assume that there are two hotels in a tourist destination with the same room tariffs. If the first hotel reduces its
tariff by 10%, the demand for its hotel rooms will increase by 20%.

Inelastic Demand
If the price change doesn’t affect an item’s demand, it is called inelastic demand. Perishable items and life-saving drugs
are examples of inelastic demand. For instance, if the milk price increases by 5%, its demand will remain the same—it
is an essential commodity.
What Are Inelastic Goods?

• An inelastic good will have a smaller percentage change in quantity

demanded/supplied. This indicates that elastic items are more
sensitive to changes in price while inelastic items are less sensitive.
Elasticity Formula
• To calculate elasticity, the following formula is typically used:
What Does the Value of Elasticity Coefficient Mean?
The value obtained from the above equation is called the elasticity coefficient (which measures the responsiveness of variable A to changes in variable B). The elasticity
coefficient can be understood with the following information:
Elastic Demand Curve Example
• The price of soft drinks is $3 per can, and the market demand is 40,000 cans per month. Next month, the price goes up to $3.50,

and the demand falls to 30,000 cans. Then, in the consecutive month, the price changes to $4—demand further goes down to

25,000 cans. Later price hits $5 per can, and demand plummets to 15,000 cans per month. Plot the demand curve graph.

Elastic Demand Formula

e(p) = (∆Q/Q) / (∆P/P)

Here, 

• e(p) is the price elasticity of demand.

• ∆Q is the change in demanded quantity.

• Q is the previous quantity.

• ∆P is the change in the price of the product.

• P is the previous price of the product.

Relevance and Use of Elastic Demand Formula

• Based on this concept, companies can make important product pricing decisions.

• If a product falls under the elastic demand curve, substitutes can easily replace

that product. Therefore, companies should prepare a price-volume analysis

before increasing the price of products.

• On the other hand, if the product has an inelastic demand curve (availability of

substitutes), companies can increase their prices.

Inelastic Demand Curve Example
Given below is the data of a dairy. The price change for milk per liter
(over a period of four months) resulted in the following shift in demand:
• There is a second reason why demand curves slope down when we combine
individual demand curves into a market demand curve. Think about the situation
where each household has a unit demand curve: that is, each individual buys at
most one unit of the product. As the price decreases, the number of individuals
electing to buy increases, so the market demand curve slopes down.See 
Chapter 3 "Everyday Decisions" and Chapter 5 "eBay and craigslist" for
discussions of unit demand. In general, both mechanisms come into play.
• As price decreases, some households decide to enter the market; that is, these
households buy some positive quantity other than zero.
• As price decreases, households increase the quantity that they wish to purchase.
• When the price decreases, there are more buyers, and each buyer buys more.