THE DEMAND CURVE
The graphical representation of the demand schedule is the demand curve.We show the demand curve in Figure 3-2, which graphs the quantity 0 cornflakes demanded on the horizontal axis and the price of cornflakes on the vertical axis. Note that quantity and price are inversely related; that is, Q goes up when P goes down. The curve slopes downward. going from northwest to southeast. This important property is called the law of downward sloping demand. It is based on common sense as well as economic theory and has been empirically tested and verified for practically all commodities- cornflakes,gasoline. college education, and illegal drugs being a few examples.
Law of downward-sloping demand: When the price of a commodity is raised (and other things are held constant). buyers tend to buy less of the commodity.Similarly.’ when the price is lowered, other things being constant, quantity demanded increases.
Quantity demanded tends to fall as price rises for two reasons. First is the substitution effect. When the price of a good rises. I will substitute other similar goods for it (as the price of beef rises, I eat more chicken). A second reason why a higher price reduces quantity demanded is the income effect. This comes into’ play because when a price goes up. I find myself somewhat poorer than I was before. If gasoline prices double, I have in effect less real income,so I will naturally curb my consumption of. gasoline and other goods.
In the demand curve for cornflakes. price (P) is measured on the vertical axis while quantity demanded (Q) is measured on the horizontal axis. Each pair of (P. Q) numbers from Table 3-1 is plotted as a point. and then a smooth , curve is passed through the points to give us a demand curve, DD. The negative slope of the demand curve-illustrates the law of downward-sloping demand.