Tipos de Aduanas

What is a Demand Curve?

So far in this study unit we have considered some of the consequences of price and income changes for the amounts of goods purchased. The general, and in most cases "normal"

relationship between price and quantity changes, is frequently illustrated by graphing the anticipated amounts of a good that people can be expected to buy, in a given time period, at a series of different prices within a given price range. This produces a demand curve.

Bear in mind that the demand curve is a simple two-dimensional graph. It shows the relationship between just two variables – the price of a good and the quantity of that good that we believe is likely to be purchased over a given time period.

In concentrating on just price and quantity we make the assumption that all other possible influences on demand (quantities of possible purchases) are held constant. These other influences, including income and prices of other goods, will be considered again in the next study unit. For now we can conveniently ignore them. Our concern, for the moment, is with price.

This graph in Figure 2.2 shows the market demand for a good, let's call it X, over the range of prices £12 to £5. That is, it shows how all the consumers in the market for good X vary their weekly purchase of this good as its price rises or falls in the price range £5–£12. It is the market demand curve for the good X.

Figure 2.2: A demand curve

This example illustrates the general shape of the demand curve and the normal relationship between price and quantity demanded of a product. If all other influences remain constant, we would expect the quantity demanded to rise as price falls and to fall as price rises. Notice that, in our example, we have made the following assumptions:

(a) The price of all other goods and services remains constant as the price of good X changes. That is, we are making use of the simplifying ceteris paribus assumption once again.

(b) The incomes of consumers also remain constant when the price of good X changes.

(c) Another point to remember is that we are considering here a flow of demand related to a set period of time. It is always necessary to do this. We cannot compare a weekly amount at one price directly with a monthly amount at another. When we change one variable – here price – to analyse its effect on quantity, we have to keep all other elements constant, including the time period to which the stated quantity relates. In our example, this period was a week.

Use and Importance of Demand Curves

As you will see as you progress through this course, the demand curve is used extensively in economic analysis. The price-quantity relationship is one of the most important things we need to know when considering sales of products. A firm must know the likely result of a change in price, because any alteration in quantity demanded will affect the total sales revenue.

Governments also need to know the probable effects of any change in a tax imposed on products. Because such a tax will influence price, the price-quantity relationship is again an important issue. If a government is considering an increase in a tax such as value added tax, which influences a very wide range of goods, it needs to know what extra total revenue it can expect to gain from the tax increase. It cannot assume that quantities consumed of all goods affected will remain the same; it must take into account the probable changes in quantity demanded that will result from the changes in price.

4 5 6 7 8 9 10 11 12 13

40 50 60 70 80 90 100 110 120

Quantity (units of x) per week Price

(£ per unit)

Demand for x at prices from £5 to £12 per unit

General Form of Demand Curves

At this stage of study, you will meet demand curves chiefly in relation to general analytical problems. Actual figures are then less important than the general shape and slope of the curves. It is therefore normal to draw general curves, in which price and quantity are denoted simply by letters. For reasons that will become clearer in later study units, it is simpler to draw what are called "linear curves" (i.e. straight-line graphs) for part only of the full price and quantity range. This is because, for most purposes, we are concerned only with a limited range of possible prices and quantities. When there are special reasons for departing from these normal practices, we shall explain them. Examples of typical general demand curves are given in Figures 2.3 and 2.4.

Notice that in Figure 2.3 a given change in price appears to produce a greater change in quantity demanded than in Figure 2.4. This assumes that both figures are drawn to the same scale. You must remember that the steepness of a demand curve will be affected by the scale of the (horizontal) X-axis, and graphs must be drawn to the same scale, so that comparisons can be made.

It is a convention or general rule in economics that price per unit is measured on the vertical axis or Y-axis, while quantity in units per period of time is measured along the horizontal axis X-axis. It is often customary to label the axes simply "Price" and "Quantity".

Figure 2.3: General demand curve

q1

O

D

Quantity (units per time period) Price

(£ per unit) An increase in price from Op

to Op₁reduces quantity demanded from Oq to Oq1

q p₁

p D

Figure 2.4: Another demand curve