- The demand curve is the graphical representation of the negative relationship between the price of a good or service the quantity of it that is demanded.
- This relationship is described by the law of demand (2.1.1).
- Since higher prices lead to less quantity demanded (negative relationship), the demand curve is downward-slopping (Figure 1).
The figure above showcases a demand curve that is downward-sloping due to the law of demand:
- For a price of $2$, consumers are willing and able to buy $50$ units of the good (it is cheap and has a lot of utility!).
- However, as the price rises to $3,4$ and $5$, the quantity demanded by consumers decreases to $40, 30$ and $20$ respectively. This is because of (2.1.1):
- The law of diminishing marginal utility.
- The income and substitution effect.
Drawing the demand curve
Three important points to ensure when drawing the a demand curve diagram:
- Make sure to label the axis (holds for any diagram). In this case, for any diagram representing the market for a good or service:
- Prices $P$ will be on the $y$-axis (add the currency being used too).
- Quantity $Q$ will be on the $x$-axis
- The demand curve should show an downward-sloping curve (negative relationship) such that a decrease in price leads to an increase in the quantity demanded.
- If you're showcasing a specific point on the curve, make sure to label the price and quantity associated with it clearly. For example label the price $P_1$ and quantity as $Q_{s1}$
- It is important to note that the demand curve doesn't indicate anything about the actual quantity consumers are consuming:
- The curve indicates what quantities consumers are willing and able to potentially buy in the market.
