US & World Economies Economic Terms The Demand Curve and How It Works Understanding the Relationship Between Price and Demand By Kimberly Amadeo Kimberly Amadeo Kimberly Amadeo is an expert on U.S. and world economies and investing, with over 20 years of experience in economic analysis and business strategy. She is the President of the economic website World Money Watch. As a writer for The Balance, Kimberly provides insight on the state of the present-day economy, as well as past events that have had a lasting impact. learn about our editorial policies Updated on January 20, 2022 Reviewed by Somer G. Anderson Reviewed by Somer G. Anderson Somer G. Anderson is CPA, doctor of accounting, and an accounting and finance professor who has been working in the accounting and finance industries for more than 20 years. Her expertise covers a wide range of accounting, corporate finance, taxes, lending, and personal finance areas. learn about our financial review board In This Article View All In This Article The Law of Demand The Two Types of Demand Curves Shifting the Curve Aggregate or Market Demand Curve Frequently Asked Questions (FAQs) Photo: Photo by Erik Isaacson / Getty Images The demand curve is a visual representation of how many units of a good or service will be bought at each possible price. It plots the relationship between quantity and price that's been calculated on the demand schedule, which is a table that shows exactly how many units of a good or service will be purchased at various prices. As you can see in the chart, the price is on the vertical (y) axis, and the quantity is on the horizontal (x) axis. This chart plots the conventional relationship between price and quantity. The lower the price, the higher the quantity demanded. As the price decreases from p0 to p1, the quantity increases from q0 to q1. Demand Curve. The Law of Demand This relationship follows the law of demand, which states that the quantity demanded will drop as the price rises, all other things being equal. The relationship between quantity and price will follow the demand curve as long as the four determinants of demand don't change. These determinants are: Price of related goods or servicesIncome of the buyerTastes or preferences of the buyerThe expectation of the buyer (especially about future prices) If any of these four determinants changes, the entire demand curve shifts because a new demand schedule must be created to show the changed relationship between price and quantity. Note Demand curves are also used to show the relationship between quantity and price in aggregate demand, which is the total demand in society. It has the same determinants of demand, plus the number of potential buyers in the market. The Two Types of Demand Curves The example above provides a general overview of the relationship between price and demand, but in the real world, different goods show different relationships between price and demand levels. This produces different degrees of demand elasticity. Elastic Demand In an elastic demand situation, a price decrease causes a significant increase in the quantities bought (and vice versa). Like a stretchy rubber band, the quantity demanded moves a lot with just a little change in prices. An example of this would be ground beef; if prices drop just 25%, you might buy three times as much as you usually would because you know you'll use it eventually and can put the extras in the freezer. If demand is perfectly elastic, the curve looks almost like a horizontal flat line. Inelastic Demand In a situation involving inelastic demand, a price decrease won't increase the quantities purchased. An example of this is bananas. No matter how cheap they are, there's only so many you can eat before they spoil. You won't buy three bunches even if the price falls 25%. If demand is perfectly inelastic, the curve looks almost like a vertical straight line. The reason you react more to a sale on ground beef than a sale on bananas is because of the marginal utility of each additional unit. Marginal utility refers to the usefulness (utility) of each additional unit the further out on the margin you go. Because you can freeze ground beef, the third package is just as good to you as the first. The marginal utility of ground beef is high. Bananas lose their consistency in the freezer, so their marginal utility is low. Shifting the Curve If any determinants of demand other than the price change, the demand curve shifts. If demand increases, the entire curve will move to the right. That means larger quantities will be demanded at every price. If the entire curve shifts to the left, it means total demand has dropped for all price levels. For instance, if you just lost your job, you might not buy that third package of ground beef, even if it is on sale. You might just buy one package and be glad it's 25% off. Aggregate or Market Demand Curve The market demand curve describes the quantity demanded by the entire market for a category of goods or services, such as gasoline prices. When the price of oil goes up, all gas stations must raise their prices to cover their costs. Oil prices comprise 70% of gas prices; even if the price drops 50%, drivers don’t generally stock up on extra gas. That's why when the price skyrockets by $0.50 to $1 per gallon, people get upset. They can't cut back their driving to work, school, or the grocery store, and they are forced to pay more for gas. That’s an inelastic aggregate demand curve. High gas prices lower people's disposable incomes for things other than gas, and that means the demand curve for those other things will drop. This is called a "demand shift," and in this case, the entire demand curve for other goods shifts to the left. Since buyers have less income, they will purchase a lower quantity of a product even if its price doesn't rise. Frequently Asked Questions (FAQs) Why is the demand curve also referred to as the "marginal benefit curve"? The demand curve measures the marginal benefit of the units being produced. If a supplier were to produce units beyond the demand curve, there wouldn't be any demand to consume those units, and they would impose a marginal cost rather than a marginal benefit. Why is the demand curve downward-sloping? The demand curve slopes downward because quantity is measured horizontally, and the price is measured vertically. As the price of something decreases, consumers are willing to buy more. Thus, as the price falls on the vertical axis, the quantity demanded may increase and create a demand curve that bends downward and to the right along the horizontal axis. If higher prices made you want to buy more of a product, the demand curve would instead move from the lower-left corner to the upper-right corner of the chart. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. The University of Victoria. "Principles of Microeconomics. Chapter 3.3. Other Determinants of Demand." Federal Reserve Bank of St. Louis. "Elasticity of Demand - The Economic Lowdown Podcast Series, Episode 16." Lumen Learning. "The Demand Curve and Utility." Federal Reserve Bank of St. Louis. "Rockets and Feathers: Why Don't Gasoline Prices Always Move in Sync With Oil Prices?" The University of Minnesota. "The Logic of Maximizing Behavior."