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
$D\left(p\right)$
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

E-mail: Bauer@uni-trier.de

URL: https://www.cbauer.de