Demand curves plot the relationship between price and demand (consumption). The horizontal axis (X axis) shows the unit price of the commodity, and the vertical axis (y axis) shows the total amount of that commodity consumed at each of the prices.
Because less of a commodity is consumed when the price goes up, the demand curve drops.
The slope of the demand curve may be different for different commodities.
For some commodities, a small change in price will mean a big drop in consumption, but for others, even big changes in price will not change consumption much at all. The slope of the demand curve is an important way to describe the relationship between price and demand (consumption). If the line has a gentle slope, this indicates that large price increases do not lower consumption very much, but if the slope is steep, this means that small changes in price cause big changes in consumption.
The relationship between price and consumption can be described mathematically by using the slope of the demand curve. People almost always use less of a commodity when the cost goes up. For this reason the line of the demand curve almost always drops, the slope always has a value of 0.0 or a negative value, eg, -.125 or -1.36.
The demand Curve for Cookies To demonstrate demand curves let us use chocolate chip cookies. Sally has a stand in the lobby of an office building where she sells her own home made chocolate chip cookies. She charges $1.00 per cookie and normally sells 100 cookies a day.
The slopes of the demand curves for different types of commodities may be considerably different. If price goes up and people pay the extra money and consume as much as they always did, the line on the graph would be horizontal, i.e., it would have a slope of 0.0.
Sally's cookies. Thus, if the price of Sally's cookies doubles to $2.00 and she still sells 100 a day, the demand curve would have not decline at all. The slope would be 0.0.
If people pay more when the price increases, but their consumption goes down, the slope of the line will be between 0.0 and -1.0. When this happens, it is said that the demand is "inelastic". The basic necessities of life such as food and shelter are usually purchased no matter what the price and therefore consumption may only drop slightly when the price increases. Sally's cookies. Thus, if the price of Sally's cookies doubles to $2.00 and she still sells 75 cookies, we would say that the demand for Sally's cookies is "inelastic". Even though consumption is down, Sally now makes more money, $150.00. As you can see, Sally would still make more money as long as she sold more than 50 cookies.
If the price of a commodity goes up and people consume less to the point they are not spending as much money on the commodity as they did before the price increase, the slope of the line would be a negative number larger then -1.0. When this happens, it is said that the demand is "elastic". We usually see elastic demand for luxury items, things like vacations and jewellery that people can do without.
Sally's Cookies. Thus, if the price of Sally's cookies doubles to $2.00 and she sells fewer than 50 cookies, we would say that the demand for Sally's cookies is "elastic". Not only does Sally sell fewer cookies, but the consumers are not spending as much they did before the price increase.
What can change the demand curve?
One factor that can change the slope of a demand curve for a commodity is whether or not something else is available that can act as a substitute. If nothing is available to act as a substitute, people may continue to buy a product as the price goes up, i.e., the demand may be inelastic, but if there is a substitute available, then they will switch to the substitute and the demand for the original product will be elastic.
Sally's Cookies. Bob has a cookie stand in the same building. His cookies are not as good as Sally's, so people usually eat Sally's cookies. Now, if Sally doubles her price to $2.00 per cookie, and Bob keeps his price at $1.00, the demand curve for Sally's cookies would probably become much steeper as people switch to Bob's cookies. If no substitutes were available, the slope of the demand curve for Sally's cookies would not be as great.
Many products can substitute for each other. Bob may sell muffins rather than cookies. Muffins could act as a substitute for cookies and the presence of muffins for sale could also change the slope of the demand curve for cookies.
How can you tell if one product is substituting for another? Well, you can look to see if the consumption of one product increases when the consumption of another declines as its price increases.
Sally's cookies. If consumption of Bob's muffins increases as the consumption of Sally's cookies goes down, then this indicates that Bob's muffins are acting as a substitute for Sally's cookies.
When two commodities are substitutes, increases in the price of one will lead to a) a decrease in the consumption of that product, and b) an increase in the consumption of another commodity that is a substitute. Sometimes, increases in the price of one commodity will cause a decrease in the consumption of two commodities. When this happens, the two products are said to be complements.
Sally's cookies. In Sally's building, there is also a booth that sells coffee and most people get a cup of coffee in the morning or during a break before getting a cookie at Sally's. If there is a shortage of coffee beans and the price of coffee doubles, people will buy less coffee and consequently, they will not come to Sally's for a cookie.
Thus, the relationship between cookies and coffee is complentary, but the relationship between cookies and muffins is supplementary.
Summary. Demand curves that have a slope between 0.0 and -1.0 show that as price goes up, people pay more, but their consumption decreases to some extent (inelastic demand).
A line with a slope of exactly -1.0 shows that as the price increases, people pay exactly as much as they always did, but consume perportinately less. Thus, at a slope of exactly -1.0, indicates that when the price doubles, people consume half as much.
If price increases cause people to actually spend less on a commodity, the demand curve will have a slope of greater that -1.0., i.e. they they consume less of the commodity and they spend less on the commodity (elastic demand).
The slope of the demand curve for one product will become steeper if a supplementary commodity is available.
If two commodities are complements, then decreases in the consumption of one will cause decreases in the consumption of the other.