2.1.2
Note

The Demand Curve

2.1.2 Demand & supply

Idea

The demand curve shows, for each quantity, the maximum price consumers are willing and able to pay for the good — equivalently, the quantity demanded at each price. Read down the price axis, it traces willingness to pay; read across the quantity axis, it traces how much is bought at each price.

Diagram

PriceQuantityDS
A market demand curve. Price is read on the vertical axis; the quantity demanded at each price is read on the horizontal axis. The curve slopes downward by the law of demand.

Mechanism

The downward slope is the law of demand — an inverse relationship between price and quantity demanded — and it rests on the law of diminishing marginal utility (LDMU):

  • Utility is the satisfaction a consumer derives from a good; marginal utility is the satisfaction from consuming one additional unit.

  • LDMU states that as successive units are consumed, the additional utility from each falls. A consumer cooling off after exercise gains high utility from the first cold drink, but progressively less from each further one as thirst is quenched.

  • Because each extra unit is worth less to the consumer, they will buy more only at a lower price — which is exactly the inverse price–quantity relationship the curve depicts.

Considerations

The H2 demand curve is the market demand curve, the horizontal sum of all consumers’ demand for the good. A change in the good’s own price is a movement along this curve (a change in quantity demanded); a change in a non-price determinant is a shift of the whole curve, treated under non-price determinants of demand and shifts versus movements.