One of the most basic relationships in economics is between supply and demand. Supply and demand together determine the price of an item in the marketplace and the quantity of that item that will be produced at equilibrium. Graphically, the relationship between supply and demand is represented by two sloping lines, with supply sloping upward and demand sloping downward.
In economics, demand is a function of three elements: the desire to own a product or use a service, the ability to pay for that product or service and the willingness to pay for that product or service. Because of the ability and willingness to pay elements, price plays a significant role in determining a consumer's demand.
Aggregate demand is simply the combined demand of all consumers in a market. For example, if there are 1,000 consumers in a market and 50 percent demand one unit of an item, 25 percent demand two units of that item and 25 percent do not demand the item, the aggregate demand would be 1,000. It is important to note that aggregate demand measures the total units demanded, not the total number of consumers demanding the item.
The demand curve is a graphical representation of the quantity of an item demanded over a range of prices. With quantity on the horizontal axis and price on the vertical axis, the demand curve is a collection of all combinations of price and quantity in the market. Each point on the demand curve shows how many units of an item the consumers in the market will buy at a particular price.
Downward Sloping Demand
Because consumers are sensitive to price, less of an item is demanded as price increases. For example, if a car costs $20,000, consumers may be willing to purchase 5,000 of those cars. However, if the price increases to $45,000, consumers will be willing, and able, to purchase fewer cars. If one were to connect all the combinations of price and quantity for this item, the line or curve created would slop down because demand decreases with price.
In economics, there are certain atypical items that have an upward sloping demand curve. For example, for some luxury goods, more units will be demanded if the price increases, because the items are seen as more of a status symbol.