The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity demanded of that good or service. It depicts how the quantity demanded changes as the price changes, ceteris paribus (all other factors remaining constant).
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The demand curve is typically downward-sloping, reflecting the law of demand that as price increases, quantity demanded decreases.
Shifts in the demand curve occur when a factor other than price changes, such as changes in consumer income, preferences, or the prices of related goods.
The demand curve is a key component in analyzing equilibrium price and quantity in markets for goods and services, as well as in financial markets.
Demand curves can be used to measure the efficiency of a market by examining the relationship between consumer and producer surplus.
The position and slope of the demand curve are important considerations for a profit-maximizing monopolist in determining output and price decisions.
Review Questions
Explain how the demand curve is used to analyze equilibrium price and quantity in a market for goods and services.
The demand curve, when combined with the supply curve, can be used to determine the equilibrium price and quantity in a market. The intersection of the demand and supply curves represents the equilibrium, where the quantity supplied equals the quantity demanded. Changes in the position or slope of the demand curve will shift the equilibrium, leading to changes in the equilibrium price and quantity.
Describe how a monopolist can use the demand curve to make profit-maximizing decisions regarding output and price.
A monopolist, unlike a firm in a perfectly competitive market, has the ability to influence the market price through its output decisions. The monopolist can use the demand curve to determine the profit-maximizing level of output, where the marginal revenue (the additional revenue from selling one more unit) equals the marginal cost (the additional cost of producing one more unit). The monopolist can then charge the price corresponding to that profit-maximizing output level on the demand curve.
Analyze how changes in consumer income and the prices of related goods can shift the demand curve and affect equilibrium in a market.
Shifts in the demand curve occur when factors other than the good's own price change. For example, an increase in consumer income would shift the demand curve to the right, as consumers are willing and able to purchase more of the good at any given price. Similarly, a decrease in the price of a substitute good would shift the demand curve to the left, as consumers would demand less of the original good. These shifts in the demand curve would lead to changes in the equilibrium price and quantity in the market.
The principle that, all else equal, as the price of a good rises, the quantity demanded falls, and as the price falls, the quantity demanded rises.
Elasticity of Demand: A measure of the responsiveness of quantity demanded to a change in price, calculated as the percent change in quantity demanded divided by the percent change in price.