Definition of the Demand Curve in Economics

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Companies use demand curves to determine ideal price points at which to market products.
Companies use demand curves to determine ideal price points at which to market products. (Image: Jupiterimages/Comstock/Getty Images)

A demand curve is a relatively simple economic concept to understand. In simplest terms, a demand curve is a graphical representation of the reality that price and demand move in inverse directions. As price is increased, demand generally falls. When you lower the price of a product, demand increases. This is known as the law of demand.

Demand Schedule

The graphical demand curve is generally created from a table that lays out various price points and quantities demand at those price points, indicates the website "Net MBA." For instance, a table may show that a product is sold at three price points over time - $5, $7 and $10. At $5, the demand is 100 units. At $7, the demand is 70 units. At $10, the demand is 50 units. This shows a typical demand change result of increasing or lowering price points.

The Graph

A typical demand curve shows price on the vertical axis and demand quantity on the horizontal axis, according to the online Encyclopedia Britannica. The curve generally slopes down from upper left to lower right. Using the examples prices and demands noted before, the first point in the upper left is $10 and 50 units. As the price is lowered to $7 on the next point, demand increases, shifting the lower point to the right. Similarly, the $5 price point is lower and to the right horizontally as demand again rises.

Exceptions

When all other basic economic conditions are consistent, the conventional downward left to right slope of a demand curve remains intact. A few exceptions to this consistent depiction exist. For instance, if all other competitors raise or lower prices in line with your company, your demand is less likely impacted. More consumers in a market naturally leads to higher demand, which can offset slight price increases. If economic conditions improve and consumer income rises, this may offset increased prices. A positive or negative news event can also impact demand at various price points.

Demand Curve Shift

When the aforementioned influences prompt increased or decreased demand at various price points along the demand curve, a graphical demand curve shift can occur, indicates "Net MBA." For instance, news that your product has a major benefit previously undiscovered may heighten demand and prompt significant buying regardless of price point. This can lead to a shift to the right on the curve, whereby price points are constant by horizontal movement takes place because of higher demand. Inversely, negative news about your product may diminish demand at each price point and produce a shift to the left.

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