Empowering Economic Minds
Demand Curve Equation
The Demand Curve Equation
Have you ever wondered why some products fly off the shelves while others gather dust? How one simple price change can make or break a business. Let me introduce you to a fascinating tool that unlocks these mysteries-the demand curve equation.
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Imagine you have a lemonade stand on a very hot summer. You notice that the lower the price of the product, the more people buy your refreshing drinks. But how low? And what if you raise the price instead? This is where the equation for the demand curve comes into action.
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The demand curve shows the amount of the good a consumer is willing to buy at each prevailing market price.
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​A linear demand curve can be plotted using the following equation.
The intercept a represents the quantity demanded when the price is zero. While in real-world scenarios, goods rarely have a price of zero, the intercept helps to establish the maximum quantity that would be demanded if the good were free. This theoretical maximum demand is useful for constructing the demand curve.
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For example, let's assume that if lemonade were free, people might demand 200 cups per day in a small town. Here,
The rate at which the quantity demanded changes in response to variations in price is indicated by the slope b of the demand curve. A slope that is steeper indicates that the quantity demanded is less dependent on price fluctuations (inelastic demand), whereas a slope that is flattened indicates that the quantity demanded is more susceptible to price fluctuations (elastic demand).
Continuing with the lemonade example, suppose that for every $0.50 increase in the price of lemonade, the quantity demanded decreases by 20 cups per day. Here,
Constructing and Interpreting the Demand Curve Equation
Using the components discussed above, we can construct the demand curve equation for our lemonade example. Let's assume the following:
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When lemonade is free (P=0), the quantity demanded is 200 cups per day.​
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That for every $0.50 increase in the price of lemonade, the quantity demanded decreases by 20 cups per day, meaning the slope b is 40.
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The demand curve equation can thus be written as:
Example 1: Price of Lemonade at $1.00
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If the price of lemonade is $1.00, we can substitute P = 1.00 into the demand curve equation:
Therefore, at a price of $1.00 per cup, the quantity demanded is 160 cups per day.
Example 2: Price of Lemonade at $2.00
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If the price of lemonade increases to $2.00, we can substitute P = 2.00 into the demand curve equation:
Therefore, at a price of $2.00 per cup, the quantity demanded decreases to 120 cups per day.
Example 3: Price of Lemonade at $0.50
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If the price of lemonade decreases to $0.50, we can substitute P = 0.50 into the demand curve equation:
Therefore, at a price of $0.50 per cup, the quantity demanded increases to 180 cups per day.
The Demand Curve Equation on a Graph
Once we have identified the respective values of the quantity demanded Qd at any given price P, we can create the demand schedule. For our previous lemonade example, we have:
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From this demand schedule, we can now construct the Demand Curve in a graph by simply plotting the values to its respective X and Y axis. Thus,
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Many economic decision-makers, including company owners, government officials, and academics, rely on the demand curve equation.
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The demand curve is a tool that businesses use to determine the optimal price point. To anticipate the impact of pricing adjustments on sales, a business has to be aware of the product's demand curve.
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Furthermore, Taxes and subsidies can be better anticipated by governments by analyzing the demand curve. Lemonade and other sugary drinks can see a leftward shift in the demand curve as a result of a levy.
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Moreover, to predict the impact of changes in economic variables like consumer income or the price of associated goods on demand, economists examine market circumstances and utilize the demand curve.
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Next time you enjoy a cool glass of lemonade, take a moment to consider the invisible economic forces at play. You might start seeing economics from a fresh perspective.
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Conclusions
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The demand equation is fundamental in economics as it describes the relationship between the quantity demanded of a good or service and its price. Typically, the equation takes the form:
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The demand equation can be represented graphically as a downward-sloping demand curve on a price-quantity graph, where the slope of the curve reflects the rate at which demand decreases as price increases.
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In real-world scenarios, understanding the demand equation helps businesses set prices, forecast sales, and make decisions about production levels. It also assists in analyzing the impact of economic policies or market changes on consumer behavior.​
References
Orejana, A.J., & Teves, M.R.Y. (2014). Introduction to Economics, Land Reform, Taxation and Cooperatives: Text and Workbook. MSU-IIT: Iligan City, Philippines.
Stigler, G. J. (1966). The Theory of Price. Macmillan.
University of Minnesota Libraries. (2016). 3.1 Demand. https://open.lib.umn.edu/principleseconomics/chapter/3-1-demand/
University of Southern Philippines Foundation. (2023). Law of Demand. University of Southern Philippines Foundation. https://www.studocu.com/ph/document/university-of-southern-philippines-foundation/business-administration/law-of-demand-lecture/47974063