Demand Curve

What Is a Demand Curve?

A demand curve is a graph that shows the relationship between the price of a good or service and the quantity of it that buyers are willing and able to purchase during a given period. Price is usually plotted on the vertical axis and quantity on the horizontal axis. In most markets the curve slopes downward from left to right, which reflects the general pattern that people buy more of something when it costs less and less of it when it costs more.

How It Works

Each point on the curve pairs one price with one quantity. The curve is drawn on the assumption that everything other than price stays the same, such as consumer income, tastes, the prices of related goods, and the number of buyers. When one of these other factors changes, the whole curve shifts. For example, if consumers suddenly have more income and buy more of a product at every price, the curve moves to the right. A change in the price itself does not shift the curve. It moves the market along the existing curve to a different quantity.

Why It Matters to Investors

The demand curve helps explain how markets set prices. Where it meets the supply curve, the market reaches an equilibrium price at which the quantity buyers want matches the quantity sellers offer. Investors use this idea to think about how a company's pricing decisions, competition, or changes in consumer preferences might affect sales volume and revenue. A company with demand that is highly sensitive to price, known as price elasticity of demand, may see large changes in sales when it adjusts prices, while one with less sensitive demand may have more room to raise prices without losing many customers.

Demand curves are simplified models. Real markets involve many buyers with different preferences, and the shape of the curve for a particular product is often hard to measure directly. Analysts typically estimate it from sales data, surveys, and market studies, and the estimates can be wrong. Understanding the basic concept, however, gives investors a common framework for reasoning about how prices and quantities interact.