What is the Demand Curve?
Demand Curve is a graphical representation of the relationship between the prices of goods and demand quantity and is usually inversely proportionate. that means higher the price, lower the demand. It determines the law of demand i.e. as the price increases, demand decreases keeping all other things equal.
Types of Demand Curve in Economics
The following are two types of demand curve in economics along with examples.
#1 – Elastic Demand
Elastic Demand shows the sharp decline in demand quantity if price increase or vice- versa. This curve can hold good for non- perishable items. For example, if two stores sell identical goods. One of the stores reduces the price of the item by 10% and with that its demand increases by 20% compared to another store.
In this, the demand for commodities comes down as price goes up and vice versa. In a store price of kerosene is $3 per liter and demand is 40,000 liters per month. Next month the price of kerosene increased to $3.50 and demand reduces to 30,000 liters. In the consecutive month, again price changes to $4 because of which demand further goes down to 25,000 liters. Below is the data for the price and demand of kerosene for the store.
- Q1 = 40,000
- P1 = $3
- Q2 = 15,000
- P2 = $5
- Q3 = 30,000
- P3 = $3.50
- Q4 = 25,000
- P4 = $4
Below is the elastic demand curve for the above data:
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As we can see the decline in demand is high as price shoots up. That’s why the slope of the curve is steep in the above graph.
#2 – Inelastic Demand
If the change in price won’t affect the demand of the item then the type of curve is knowns as the inelastic demand curve. Perishable items of life-saving drugs can be an example of the inelastic demand curve. For example, if the price of milk increased by 5%, it won’t affect the demand by much.
Now let’s discuss this example. Below is the price of one liter of milk for 4 months and demand in liters based on that for one store.
- Q1 = 200
- P1 = $1
- Q2 = 180
- P2 = $1.05
- Q3 = 150
- P3 = $1.05
- Q4 = 130
- P4 = $1.1
Below is the inelastic demand curve for the above data:
As we can see that demand quantity is not changing even though price changes.
Relevance and Use of Elastic Demand Formula
It is very important for companies to understand this concept. Based on this they can make an important decision regarding their pricing policy of products.
If a product falls inelastic demand curve, substitutes can easily replace that product. Companies should prepare a price-volume analysis before increasing the price of these products.
On the other hand, if the product is having an inelastic demand curve that means there are not too many substitutes available for the product. Companies may go ahead and increase the price of the product if the situation demands.
Limitation of Demand Curve in Economics
- It does not explain the reason for not changing the demand for some products if price increases.
- There are some commodities that are necessary for the economy. For these commodities, the change in price won’t affect the demand.
- There are some commodities for which an increase in price results in an increase in demand. This law is known as Giffen’s good law.
- The shift in the demand curve can be affected by the change in the income level of consumers. If income level increases, demand for normal goods increases.
- In a growing market, as market size increases demand from consumers also increases resulted in an outward shift of the demand curve.
- Usually, the demand quantity and price of goods have an inverse relationship.
Demand Curve in economy describes the quantity demanded by the market at a various price level. It has 2 types. It can be elastic which means the demand for goods is very sensitive to the price. Another type is the inelastic demand curve which shows that demand for some goods is not affected by the change in price. The demand curve for one product can be affected by another product which can be a substitute or complement of that product. The overall change in the income level of consumers also affects the demand curve for products.
This has been a guide to what is the demand curve and its definition. Here we discuss two types of demand curve shapes in economics with the help of examples. we also discuss the relevance and use of elastic demand formula. You can learn more from the following articles –