In economics, graphical representations of basic concepts and specific data help make sense of what might otherwise seem like meaningless, unrelated information. Supply and demand curves are among the most basic representations in economics, showing how differences in supply of, and demand for, goods and services affect prices and lead to financial outcomes for buyers and sellers.
A demand curve is a single line that represents the various points on a graph where the price of a good or service aligns with its quantity. It is a downward curve or line that moves from left to right on a graph, where the vertical axis represents price and the horizontal axis represents quantity demanded. The downward shape of a demand curve indicates that, as price decreases, customers will demand more of a product. Understanding what a demand curve's position, slope and shift indicate is essential to putting it to use.
A demand curve's position refers to its placement on a graph. Since economic analysts use the same graph to chart both a demand curve and the related, inverse supply curve, the scales representing price and quantity must remain the same. If a demand curve is positioned far to the right, it indicates a high quantity of demand from consumers at a given price. When a demand curve is low on the graph, it indicates that low prices create steady demand. These relative differences are most important when an analyst observes a demand curve's change in position over time.
The rate of change in demand over various price points gives a demand curve its slope. Demand curves can be concave, convex or form straight lines. In each case, the rate of change in quantity demanded as price decreases forms the changing angle of the curve. A steep demand curve means that price reductions only increase quantity demanded slightly, while a concave demand curve that flattens as it moves from left to right reveals an increase in quantity demanded when low prices drop even slightly lower.
Shift refers to a demand curve's change in position over time. As the demand curve moves to new positions on the graph, it reveals changing trends in consumer behavior. For example, when a demand curve falls on a graph from one measuring period to another, it indicates that lower prices produce the same level of demand as higher prices did during an earlier measuring period. Comparing demand curves over time allows business leaders to make important decisions about changing prices or altering supply levels to maximize profit.