What is the relationship between demand curve and demand function?

The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity demanded for a given period of time. In a typical representation, the price will appear on the left vertical axis, the quantity demanded on the horizontal axis. 

Understanding the Demand Curve

The demand curve will move downward from the left to the right, which expresses the law of demand—as the price of a given commodity increases, the quantity demanded decreases, all else being equal.

Note that this formulation implies that price is the independent variable, and quantity the dependent variable. In most disciplines, the independent variable appears on the horizontal or x-axis, but economics is an exception to this rule.

Image by Julie Bang © Investopedia 2019

For example, if the price of corn rises, consumers will have an incentive to buy less corn and substitute it for other foods, so the total quantity of corn consumers demand will fall.

Demand Elasticity

The degree to which rising price translates into falling demand is called demand elasticity or price elasticity of demand. If a 50% rise in corn prices causes the quantity of corn demanded to fall by 50%, the demand elasticity of corn is 1. If a 50% rise in corn prices only decreases the quantity demanded by 10%, the demand elasticity is 0.2. The demand curve is shallower (closer to horizontal) for products with more elastic demand, and steeper (closer to vertical) for products with less elastic demand.

If a factor besides price or quantity changes, a new demand curve needs to be drawn. For example, say that the population of an area explodes, increasing the number of mouths to feed. In this scenario, more corn will be demanded even if the price remains the same, meaning that the curve itself shifts to the right (D2) in the graph below. In other words, demand will increase.

Other factors can shift the demand curve as well, such as a change in consumers' preferences. If cultural shifts cause the market to shun corn in favor of quinoa, the demand curve will shift to the left (D3). If consumers' income drops, decreasing their ability to buy corn, demand will shift left (D3). If the price of a substitute—from the consumer's perspective—increases, consumers will buy corn instead, and demand will shift right (D2). If the price of a complement, such as charcoal to grill corn, increases, demand will shift left (D3). If the future price of corn is higher than the current price, the demand will temporarily shift to the right (D2), since consumers have an incentive to buy now before the price rises.

Image by Julie Bang © Investopedia 2019

The terminology surrounding demand can be confusing. "Quantity" or "quantity demanded" refers to the amount of the good or service, such as ears of corn, bushels of tomatoes, available hotel rooms or hours of labor. In everyday usage, this might be called the "demand," but in economic theory, "demand" refers to the curve shown above, denoting the relationship between quantity demanded and price per unit. 

Exceptions to the Demand Curve

There are some exceptions to rules that apply to the relationship that exists between prices of goods and demand. One of these exceptions is a Giffen good. This is one that is considered a staple food, like bread or rice, for which there is no viable substitute. In short, the demand will increase for a Giffen good when the price increases, and it will fall when the prices drops. The demand for these goods are on an upward-slope, which goes against the laws of demand. Therefore, the typical response (rising prices triggering a substitution effect) won’t exist for Giffen goods, and the price rise will continue to push demand. 

Demand for a commodity refers to the quantity of the commodity that people are willing to purchase at a specific price per unit of time, other factors (such as price of related goods, income, tastes and preferences, advertising, etc) being constant.

Demand includes the desire to buy the commodity accompanied by the willingness to buy it and sufficient purchasing power to purchase it. For instance-Everyone might have willingness to buy “Mercedes-S class” but only a few have the ability to pay for it. Thus, everyone cannot be said to have a demand for the car “Mercedes-s Class”.

Demand may arise from individuals, household and market. When goods are demanded by individuals (for instance-clothes, shoes), it is called as individual demand. Goods demanded by household constitute household demand (for instance-demand for house, washing machine). Demand for a commodity by all individuals/households in the market in total constitute market demand.

Demand Function

Demand function is a mathematical function showing relationship between the quantity demanded of a commodity and the factors influencing demand.

Dx = f (Px, Py, T, Y, A, Pp, Ep, U)

In the above equation,
Dx = Quantity demanded of a commodity
Px = Price of the commodity
Py = Price of related goods
T = Tastes and preferences of consumer
Y = Income level
A = Advertising and promotional activities
Pp = Population (Size of the market)
Ep = Consumer’s expectations about future prices
U = Specific factors affecting demand for a commodity such as seasonal changes, taxation policy, availability of credit facilities, etc.

Law of Demand

The law of demand states that there is an inverse relationship between quantity demanded of a commodity and it’s price, other factors being constant. In other words, higher the price, lower the demand and vice versa, other things remaining constant.

Demand Schedule

Demand schedule is a tabular representation of the quantity demanded of a commodity at various prices. For instance, there are four buyers of apples in the market, namely A, B, C and D.

Demand schedule for applesPRICE (Rs. per dozen)Buyer A (demand in dozen)Buyer B (demand in dozen)Buyer C (demand in dozen)Buyer D (demand in dozen)Market Demand (dozens)10103049316414872972571141210376136141245

The demand by Buyers A, B, C and D are individual demands. Total demand by the four buyers is market demand. Therefore, the total market demand is derived by summing up the quantity demanded of a commodity by all buyers at each price.

Demand Curve

Demand curve is a diagrammatic representation of demand schedule. It is a graphical representation of price- quantity relationship. Individual demand curve shows the highest price which an individual is willing to pay for different quantities of the commodity. While, each point on the market demand curve depicts the maximum quantity of the commodity which all consumers taken together would be willing to buy at each level of price, under given demand conditions.

Demand curve has a negative slope, i.e, it slopes downwards from left to right depicting that with increase in price, quantity demanded falls and vice versa. The reasons for a downward sloping demand curve can be explained as follows-

1. Income effect- With the fall in price of a commodity, the purchasing power of consumer increases. Thus, he can buy same quantity of commodity with less money or he can purchase greater quantities of same commodity with same money. Similarly, if the price of a commodity rises, it is equivalent to decrease in income of the consumer as now he has to spend more for buying the same quantity as before. This change in purchasing power due to price change is known as income effect.
2. Substitution effect- When price of a commodity falls, it becomes relatively cheaper compared to other commodities whose price have not changed. Thus, the consumer tend to consume more of the commodity whose price has fallen, i.e, they tend to substitute that commodity for other commodities which have not become relatively dear.
3. Law of diminishing marginal utility- It is the basic cause of the law of demand. The law of diminishing marginal utility states that as an individual consumes more and more units of a commodity, the utility derived from it goes on decreasing. So as to get maximum satisfaction, an individual purchases in such a manner that the marginal utility of the commodity is equal to the price of the commodity. When the price of commodity falls, a rational consumer purchases more so as to equate the marginal utility and the price level. Thus, if a consumer wants to purchase larger quantities, then the price must be lowered. This is what the law of demand also states.

Exceptions to Law of Demand

The instances where law of demand is not applicable are as follows-

1. There are certain goods which are purchased mainly for their snob appeal, such as, diamonds, air conditioners, luxury cars, antique paintings, etc. These goods are used as status symbols to display one’s wealth. The more expensive these goods become, more valuable will be they as status symbols and more will be there demand. Thus, such goods are purchased more at higher price and are purchased less at lower prices. Such goods are called as conspicuous goods.
2. The law of demand is also not applicable in case of giffen goods. Giffen goods are those inferior goods, whose income effect is stronger than substitution effect. These are consumed by poor households as a necessity. For instance, potatoes, animal fat oil, low quality rice, etc. An increase in price of such good increases its demand and a decrease in price of such good decreases its demand.
3. The law of demand does not apply in case of expectations of change in price of the commodity, i.e, in case of speculation. Consumers tend to purchase less or tend to postpone the purchase if they expect a fall in price of commodity in future. Similarly, they tend to purchase more at high price expecting the prices to increase in future.

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