Economists graphically represent the relationship between product
price and quantity demanded with a demand curve. Typically, demand
curves are downwards sloping, because as price increases, buyers are
less likely to be willing or able to purchase whatever is being sold.
Each individual buyer can have their own demand curve, showing how many
products they are willing to purchase at any given price, as shown
below. This graph shows what Jim's demand curve for graham crackers
might be:
Jim's Demand Curve for Graham Crackers
To find out how many boxes of graham crackers Jim will buy for a given
price, extend a perpendicular line from the price on the y-axis to his
demand curve. At the point of intersection, extend a line from the
demand curve to the x-axis (perpendicular to the x-axis). Where it
intersects the x-axis (quantity) is how many boxes of graham crackers
Jim will buy. For instance, in the graph above, Jim will buy 3 boxes
when the price is $2 a box.
Aggregate Demand and Horizontal Addition
Typically, economists don't look at individual demand curves, which can vary
from person to person. Instead, they look at aggregate demand, the combined
quantities demanded of all potential buyers. To do this, add the quantities
which buyers are willing to buy at different prices. For instance, if
Jim and Marvin are the only two buyers in the market for graham
crackers, we would add how many they are willing to buy at price
p=1 and record that as aggregate demand for p=1. Then we
would add how many they are willing to buy at price p=2 and
record that as aggregate demand for p=2, and so on. This
results in the following graph of aggregate demand for graham crackers:
Jim and Marvin's Demand Curves for Graham Crackers
Aggregate Demand Curve for Graham Crackers
This method is called horizontal addition because you look at a
price level, and add the separate quantities demanded across that price
level, giving you total quantity demanded for that price.
There are many factors that can affect demand quantity, including income,
prices, and preferences. Let's look at one good to see how this works. How
much are you willing to pay for a cold soda? If you recently got a raise at
your job, you might not mind buying a pricier soda, even if you don't
need it. Your friend who has less money, however, might pick a generic
brand, or they might stick with tap water. Below are possible demand curves for
you (with your big raise) and your friend (without your big raise). Note that
you are willing to buy more soda than your friend is:
2 Demand Curves for Soda
What if soda cost a dollar yesterday and costs two dollars today? That
might make you think twice about getting the same soda you drank
yesterday. Likewise, if it cost two dollars yesterday and a dollar
today, you might be more willing to buy the soda than usual. We can
see this on the graph on a single demand curve. When the price is a
dollar, the quantity demanded is higher than when the price is two
dollars. What this means in the real world is that if two companies charge
different prices for the same good, the company that charges a lower price will
get more customers. (Exceptions to this general rule may occur when there is a
real or perceived difference in quality of the goods being sold).
