The demand curve resulting from the Demand function shows how the demand is developing in relation to the price. As a rule, the price is shown on the vertical Y-axis and the quantity requested is shown on the horizontal X-axis. Normally, the demand curve is falling. The demand curve for an entire economy is known as the “aggregate demand curve”.
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Relationship between price and demand
The falling course of the demand curve can be explained as follows:
A product becomes more expensive as the price increases. At the same time, the benefit of the product decreases because more money has to be spent on purchasing the good. If, on the other hand, a product becomes cheaper, the product benefit increases because less money has to be spent. If the price falls, the demand usually increases.
The so-called Giffen goods represent a special case: Although the product becomes more expensive (cheaper), demand increases (decreases). This phenomenon is particularly noted in luxury goods.
As a rule, demand increases when the product price decreases. However, the demand only grows to the point of saturation. This phenomenon is particularly evident in the case of staple foods. However, if the price of bread is almost zero, the demand for bread does not increase because it has reached the saturation level.
Shifts in the demand curve
A shift in the demand curve must be distinguished from a shift in the entire curve. A shift in the demand curve means that the consumer demands a larger or smaller amount regardless of the price. Curve shifts come into consideration for the following reasons:
Changes in income - If a consumer's disposable income rises / falls, demand shifts to the right / left.
Substitutes (e.g. butter and margarine): If the prices of substitutes rise / fall, the demand curve shifts to the right / left.
Complementary goods (e.g. pipe tobacco and tobacco pipes): If the prices of complementary goods rise / fall, the demand curve shifts to the left / right.