Chapter 1
The demand curve

The demand curve represents the willingness to pay for a good or service of all consumers in a market. The demand curve D(p) indicates at a price p the total quantity of the good demanded.
The (market) demand curve represents the sum of all individual demands.
A point on the demand curve has the following meaning (see graph): For this price (y-axis), this amount of goods (x- axis) is being demanded.

Please note: In contrast to the usual mathematical representation, the free variable (the price) is shown on the ordinate (y-axis) and the dependent variable (the quantity) on the abscissa (x-axis).
The demand curve is generally negatively sloped, meaning that the higher the price, the less demand there is. There are two main reasons for this. Firstly, if the price is higher, fewer customers are willing to buy the good, so the number of consumers decreases. Secondly, individual demand also decreases at a higher price (we will deal with exceptions such as the Snob Effect later). This can be explained by the budget effect or alternatives.
The budget effect will be illustrated by an example:
On a hot summer day, a boy wants to buy ice cream at an ice cream parlor with 5 Euros in his pocket. If the scoop costs 50 cents, he can afford 10 scoops. If the scoop costs 70 cents, he can only buy 7 scoops, at 1 euro per scoop he can buy 5 scoops, and at 2 euros per scoop the boy can only afford 2 scoops.
At a price above 5 Euro per scoop, he can no longer buy a scoop, the demand is zero. This price, at which there is no more demand for a good, is called the prohibitive price. The quantity that is demanded at a price of zero, i.e. when the good is given away, is called saturation quantity. This is finite, since every commodity will eventually reach saturation, even ice cream in summer.
As you can see from the example, demand curves are actually step shaped, as only whole units or certain fractions can be demanded. As a rule, however, demand curves are not modeled as step functions but as smooth curves, for example as straight lines like in the above graphic. This is based on the assumption that if markets are sufficiently large, for example, 80 million consumers in Germany, the steps are infinitesimally small.

(c) by Christian Bauer
Prof. Dr. Christian Bauer
Chair of monetary economics
Trier University
D-54296 Trier
Tel.: +49 (0)651/201-2743