Question

Explain the demand curve, using an example of a particular good or service.

Describe the difference between a change in the quantity demanded--movement along the curve--and change in the overall demand--shifting of the curve itself.

Answer 1

The explanation of the demand curve

Answer - According to the law of demand, price and the quantity demanded of a product are inversely related. This means that higher the price of the product, lower the quantity demanded. Demand for a product refers to the quantity that consumers want to buy at that price or more specifically, refers to consumer’s willingness to pay. Since quantity demanded and price of the good is inversely related, the demand curve is downward sloping.

Let us explain this with the help of an example.

Example - Suppose the price of apples is $1 per pound and quantity demanded at $1 = 100 apples. Now, if the seller increases the price of apples from $1 to $3, then quantity demanded at $3 = 50 apples according to the law of demand.

By plotting these two combinations of price and quantity, we can derive the downward sloping demand curve, given by DD.

Difference between quantity demanded and demand for a product

Answer:

A change in price of the product causes the quantity demanded to change, not the demand for the good. Demand changes when factors except price changes. These factors include income of the consumer, change in taste and preferences, age, availability of alternatives, etc.

When quantity demanded changes due to change in price, the movement takes place along the demand curve, but does not shift the demand curve.

However, when demand changes for factors except price, the demand curve shifts to the right or left. When the demand curve shifts to the left (inward), then there is fall in quantity demanded. Similarly, when the demand curve shifts outward to the right, the quantity demanded increases.

Let us consider the following two examples and identity what is change in quantity demanded and what is change in demand!

Example 1 – Let us consider the previous example used to explain the law of demand. When price of apples is $1 per pound, quantity demanded at $1 is 100 apples. Now, if the seller increases the price of apples from $1 to $3, then quantity demanded at $3 is 50 apples. So, according to the law of demand, when price of apples increases, the quantity demanded falls from 100 apples to 50 apples, causing movement along the demand curve.

Example 2 – Now suppose price of apples is $1 per pound and quantity demanded at $1 = 100 apples. A health report published that fertilizers and pesticides used in apples causes health issues. As a result, the quantity demanded falls from 100 apples to 50 apples. The price is constant at $3, but the health report causes the shift in demand curve, thus causing quantity demanded to fall.