A demand and supply chart is a visual means by which economists and business leaders examine the interaction of supply and demand for a product or service at varying price levels. The chart consists of two curves: one for demand and one for supply. The slope of the demand curve illustrates how the quantity demanded by consumers changes in response to shifts in price. For most products, the demand curve slopes downward.
A downward-sloping demand curve illustrates what economists call the law of demand, which holds that, other factors being equal, the quantity demanded of a good or service falls when the price rises, according to Harvard economist N. Gregory Mankiw. Conversely, the quantity demanded increases when the price declines.
Economists plot a demand curve on a two-dimensional graph with a horizontal axis for quantity demanded and a vertical axis for price. Along the horizontal axis, quantity increases from left to right. The vertical axis displays price, from highest price at the top to the lowest at the bottom. This means that a downward sloping demand curve illustrates a negative relationship between price and quantity. As the price of the product in question increases, quantity demanded declines. A price cut, meanwhile, causes quantity demanded to increase.
Demand curves for most products and services slope downward, but the steepness of those curves varies because of what economists call elasticity, or the extent to which a change in price affects the quantity demanded. A flatter, more horizontal demand curve, for example, means that even a small change in price leads to larger shift in the quantity demanded. In contrast, a steeper demand curve means that a price change, even a large one, has little effect of quantity demanded.
A key factor in the elasticity of demand, according to Mankiw, is whether a product is a luxury or a necessity. For products that are considered necessities, large shifts in price may have little effect on the quantity demanded.