Demand curve

In most circumstances the demand curve has a negative slope, and therefore slopes downwards. This is due to the law of demand which conditions that there is an inverse relationship between price and the demand of commodity (good or a service). As price goes up quantity demanded reduces and as price reduces quantity demanded increases. For convenience, demand curves are often graphed as straight lines, where a and b are parameters: :Q = a+bP\text{ where }b. The constant a embodies the effects of all factors other than price that affect demand. If income were to change, for example, the effect of the change would be represented by a change in the value of "a" and be reflected graphically as a shift of the demand curve. The constant b is the slope of the demand curve and shows how the price of the good affects the quantity demanded. The graph of the demand curve uses the inverse demand function in which price is expressed as a function of quantity. The standard form of the demand equation can be converted to the inverse equation by solving for P: :P = \frac{Q - a}{b}. ==Assumptions underlying the derivation of the demand curve==

• Income of the consumer remains constant. • Price of other related goods remain constant. • Preference, tastes, habits and fashions of consumer remains constant. • Number of buyers remain constant. ==Three categories of demand curves==

• Individual demand curve: the relationship between the quantity of a product a single consumer is willing to buy and its price. • Market demand curve: the relationship between the quantity of a product that all consumers in the market are willing to buy and its price. The market demand curve can be obtained by adding up the individual demand curves of individual consumers in the industry horizontally. • Firm demand curve: (A firm demand curve may also be referred to as the demand curve of the market to which the firm is exposed.) It refers to the relationship between the number of customers willing to buy a certain product from the enterprise and its price. The slope of the market industry demand curve is greater than the slope of the individual demand curve; the slope of the enterprise demand curve is less than the slope of the industry demand curve. The slope of a firm's demand curve is less than the slope of the industry's demand curve. ==Shift of a demand curve==

The shift of a demand curve takes place when there is a change in any non-price determinant of demand, resulting in a new demand curve. Non-price determinants of demand are those things that will cause demand to change even if prices remain the same—in other words, the things whose changes might cause a consumer to buy more or less of a good even if the good's own price remained unchanged (exogenous changes). Some of the more important factors are the prices of related goods (both substitutes and complements), income, population, and expectations. However, demand is the willingness and ability of a consumer to purchase a good under the prevailing circumstances; so, any circumstance that affects the consumer's willingness or ability to buy the good or service in question can be a non-price determinant of demand. As an example, weather could be a factor in the demand for beer at a baseball game. When income increases, the demand curve for normal goods shifts outward as more will be demanded at all prices, while the demand curve for inferior goods shifts inward due to the increased attainability of superior substitutes (the demand decrease for each price). When a good is a neutral good its demand want change by a change of income. With respect to related goods, when the price of a good (e.g. a hamburger) rises, the demand curve for substitute goods (e.g. chicken) shifts out, while the demand curve for complementary goods (e.g. ketchup) shifts in (i.e. there is more demand for substitute goods as they become more attractive in terms of value for money, while demand for complementary goods contracts in response to the contraction of quantity demanded of the underlying good). Some factors which increase the demand (the demand increase for every price - a shift of the demand curve to the right) • Decrease in price of a substitute • Increase in price of a complement • Decrease in income if good is normal good • Increase in income if good is inferior good ==Movement along a demand curve==

There is movement along a demand curve (edogenous changes) when a change in price causes the quantity demanded to change. When a non-price determinant of demand changes, the curve shifts. These "other variables" are part of the demand function. They are "merely lumped into intercept term of a simple linear demand function." ==Elasticity of demand for a good with respect to its own price==

The price elasticity of demand is a measure of the sensitivity of the quantity variable, Q, to changes in the price variable, P. The elasticity of demand for a good with respect to its own price is the percentage of change in quantity divided by the percentage of change in price. For example an elasticity equals to -2 (The elasticity is negative because the price rises, and the quantity demanded falls, a consequence of the law of demand) means that if the price increases by 4% the quantity decreases by 2%. This is thus important in determining how revenue will change. Formally, the elasticity of demand for good X with respect to its price is calculated as following: E_x,p_x = \frac{\Delta x} {x} / \frac{\Delta p_x} {p_x} = \frac{\Delta x} {\Delta p_x} \frac{p_x} {x}. If we have a specific differential function we can use derivatives: E_x,p_x = \frac{dx} {dp_x} \frac{p_x} {x}. The elasticity of demand indicates how sensitive the demand for a good is to a price change. If the elasticity's absolute value is between zero and 1, demand is said to be inelastic; if it equals 1, demand is "unitary elastic"; if it is greater than 1, demand is elastic. If it is smaller than 1, wh have inelastic demand, which implies that changes in price have little influence on demand. High elasticity indicates that consumers will respond to a price rise by buying much less of the good. For examples of elasticities of particular goods, see the article section, "Selected price elasticities". The elasticity of demand usually will vary depending on the price. If the demand curve is linear, demand is inelastic at high prices and elastic at low prices, with unitary elasticity somewhere in between. There does exist a family of demand curves with constant elasticity for all prices. They have the demand equation Q=aP^{c}, where c is the elasticity of demand and a is a parameter for the size of the market. These demand curves are smoothly curving with steep slopes for high values of price and gentle slopes for low values. A demand function that exhibits a constant elasticity of demand with respect to the price is formulated as follows: Q_x =k p_x^\epsilon where \epsilon. E_x,p_x = \frac{dQ_x} {dp_x} \frac{p_x} {x}=\epsilon k p_x ^{\epsilon-1} \frac{p_x} {k p_x ^{\epsilon}} = \epsilon . ==Taxes and subsidies==

A sales tax on the commodity does not directly change the demand curve, if the price axis in the graph represents the price including tax. Similarly, a subsidy on the commodity does not directly change the demand curve, if the price axis in the graph represents the price after deduction of the subsidy. If the price axis in the graph represents the price before addition of tax and/or subtraction of subsidy then the demand curve moves inward when a tax is introduced, and outward when a subsidy is introduced. == Effect of taxation on the demand curve ==

• When the demand curve is perfectly inelastic (vertical demand curve), all taxes are borne by the consumer. • When the demand curve is perfectly elastic (horizontal demand curve), all taxes are borne by the supplier. • If the demand curve is more elastic, the supplier bears a larger share of the cost increase or tax. == Derived demand ==

The demand for goods can be further divorced into the demand markets for final and intermediate goods. An intermediate good is a good utilized in the process of creating another good, effectively named the final good. It is important to note that the cooperation of several inputs in many circumstances yields a final good and thus the demand for these goods is derived from the demand of the final product; this concept is known as derived demand. The relationship between the intermediate goods and the final good is direct and positive as demand for a final product increases demand for the intermediate goods used to make it. In order to construct a derived demand curve, specific assumptions must be made and values held constant. The supply curves for other inputs, demand curve for the final good, and production conditions must all be held constant to ascertain an effective derived demand curve. ==See also==