Demand curve

The demand curve is the graph depicting the relationship between the price
of a certain commodity, and the amount of it that consumers are willing
and able to purchase at that given price. It is a graphic representation of a
demand schedule. The demand curve for all consumers together follows
from the demand curve of every individual consumer: the individual
demands at each price are added together. Despite its name, it is not
always shown as a curve, but sometimes as a straight line, depending on
the complexity of the scenario.

Demand curves are used to estimate behaviors in competitive markets, and

are often combined with supply curves to estimate the equilibrium price
(the price at which sellers together are willing to sell the same amount as
buyers together are willing to buy, also known as market clearing price) and
the equilibrium quantity (the amount of that good or service that will be
produced and bought without surplus/excess supply or shortage/excess
demand) of that market. In a monopolistic market, the demand curve
facing the monopolist is simply the market demand curve.

Characteristics

According to convention, the demand curve is drawn with price on the vertical
axis and quantity on the horizontal axis. The function actually plotted is the
inverse demand function.
The demand curve usually slopes downwards from left to right; that is, it has a
negative association (for two theoretical exceptions, see Veblen good and Giffen
good). The negative slope is often referred to as the "law of demand", which
means people will buy more of a service, product, or resource as its price falls.
The demand curve is related to the marginal utility curve, since the price one is
willing to pay depends on the utility. However, the demand directly depends on
the income of an individual while the utility does not. Thus it may change
indirectly due to change in demand for other commodities.

Demand schedule

Market demand schedule

A demand schedule is a table that lists the quantity of a good a person will buy at
each different price. The demand curve is a graphical depiction of the relationship
between the price of a good and the quantity of the good that a consumer would
demand under certain time, place and circumstances. The demand relationship
can also be expressed mathematically: Q = f(P; Y, Prg, Pop, X) where Q is quantity
demanded, P is the price of the good, Prg is the price of a related good, Y is
income, Pop is population and X is the expectation of some relevant future
variable such as the future price of the product. The semi-colon means that the
arguments to its right are held constant when the relationship is plotted two-
dimensionally in (price, quantity) space. If one of these other variables changes
the demand curve will shift. For example, if the population increased then there
would be an outward (rightward) shift of the demand curve, since more
consumers would mean higher demand. This shift is referred to as a change in
demand and results from a change in the constant term. Movements along the
demand curve occur only when quantity demanded changes in response to a
change in price.
Linear demand curve

The demand curve is often graphed as a straight line of the form Q = a - bP where
a and b are parameters. The constant “a” “embodies” the effects of all factors
other than price that affect demand. If for example income were to change the
effect of the change would be represented by a change in the value of a and be
reflected graphically as a shift of the demand curve. The constant “b” is the slope
of the demand curve and shows how the price of the good affects the quantity
demanded.

The graph of the demand curve uses the inverse demand function in which price
is expressed as a function of quantity. The standard form of the demand equation
can be converted to the inverse equation by solving for P or P = a/b - 1/bQ.[4]

More plainly, in the equation P = a - bQ, "a" is the intercept where quantity
demanded is zero (where the demand curve intercepts the Y axis. "b" is the slope
of the demand curve. "Q" is quantity. "P" is price.

Shift of a demand curve

The shift of a demand curve takes place when there is a change in any non-price
determinant of demand, resulting in a new demand curve.[5] Non-price
determinants of demand are those things that will cause demand to change even
if prices remain the same—in other words, the things whose changes might cause
a consumer to buy more or less of a good even if the good's own price remained
unchanged. Some of the more important factors are the prices of related goods
(both substitutes and complements), income, population, and expectations.
However, demand is the willingness and ability of a consumer to purchase a good
under the prevailing circumstances; so, any circumstance that affects the
consumer's willingness or ability to buy the good or service in question can be a
non-price determinant of demand. As an example, weather could be a factor in
the demand for beer at a baseball game.

When income rises, the demand curve for normal goods shifts outward as more
will be demanded at all prices, while the demand curve for inferior goods shifts
inward due to the increased attainability of superior substitutes. With respect to
related goods, when the price of a good (e.g. a hamburger) rises, the demand
curve for substitute goods (e.g. chicken) shifts out, while the demand curve for
complementary goods (e.g. tomato sauce) shifts in (i.e. there is more demand for
substitute goods as they become more attractive in terms of value for money,
while demand for complementary goods contracts in response to the contraction
of quantity demanded of the underlying good).

Demand shifters

Changes in disposable income

Changes in tastes and preferences - tastes and preferences are assumed to be

fixed in the short-run. This assumption of fixed preferences is a necessary
condition for aggregation of individual demand curves to derive market demand.

Changes in expectations

Changes in the prices of related goods (substitutes and complements)

Population size and composition

Changes that increase demand

Some circumstances which can cause the demand curve to shift out include:

increase in price of a substitute

decrease in price of complement

increase in income if good is a normal good

decrease in income if good is an inferior good

Changes that decrease demand

Some circumstances which can cause the demand curve to shift in include:

decrease in price of a substitute

increase in price of a complement

decrease in income if good is normal good

increase in income if good is inferior good

Factors affecting market demand

Market or aggregate demand is the summation of individual demand curves. In

addition to the factors which can affect individual demand there are three factors
that can affect market demand (cause the market demand curve to shift):

1. Change in the number of consumers,

2. Change in the distribution of tastes among consumers,
3. Change in the distribution of income among consumers with different
tastes.
Movement along a demand curve

There is movement along a demand curve when a change in price causes the
quantity demanded to change. It is important to distinguish between movement
along a demand curve, and a shift in a demand curve. Movements along a
demand curve happen only when the price of the good changes. When a non-
price determinant of demand changes the curve shifts. These "other variables"
are part of the demand function. They are "merely lumped into intercept term of
a simple linear demand function." Thus a change in a non-price determinant of
demand is reflected in a change in the x-intercept causing the curve to shift along
the x axis.

Discreteness of amounts

If a commodity is sold in whole units, and these are substantial for a consumer,
then the individual demand curve can hardly be approximated by a continuous
curve. It is a set function of the price, defined by a price above which no unit is
bought, a price range for which one is bought, etc.
Units of measurement

If the local currency is dollars, for example, then the units of measurement of the
variable "price" are "dollars per unit of the good" and the units of measurement
of "quantity" are "units of the good per time (e.g., per week or per year). Thus
quantity demanded is a flow variable.

The Determinants

Economists approach the analysis of demand for a product by considering each of the same
determinants or elements Bob considered in Part I. These determinants are

1. Price of the good.

2. Taste or level of desire for the product by the buyer.
3.  Income of the buyer.
4. Prices of related products:
a. Substitute products (directly competes with the good in the opinion of the
buyer)
b. Complementary products (used with the good in the opinion of the buyer)

5. Future expectations: Expected income of the buyer expected price of the good. 
6. For the total market demand the number of buyers in the market is also a
determinant of the amount purchased.

References

Wikipedia, Google Books.