Part I: The Fundamentals
Constructing a Demand Curve
A demand curve is a graphic representation of a demand schedule. In economics, the vertical axis represents price and
the horizontal axis represents the quantity, in this case the quantity demanded. Referring back to our demand schedule
for baseballs, we can begin to graph the data provided in the table. Figure 2-2 demonstrates the downward slope of the
demand curve where an inverse relationship exists between price and quantity demanded.
Figure 2-2The demand curve is downwardly or inversely sloped because more people are willing to buy at a lower price or fewer
people are willing to buy at a higher price.
The concept of diminishing marginal utility also contributes to the downward slope of the demand curve. If James goes
to McDonald’s and buys five cheeseburgers at $1.00 each, his satisfaction from each cheeseburger will slowly decrease
with every cheeseburger eaten. The first burger always tastes the best, but with each additional cheeseburger consumed,
James’ satisfaction decreases because of diminishing marginal utility. You should take this concept into account when
examining a demand curve.
The Six Determinants of Demand
The determinants of demand are factors that change demand. We already know that quantity demanded is changed or
influenced by price. Demand, on the other hand, is changed by these six factors: tastes or preferences, income, the sub-
stitution effect, the price of complementary goods, population, and consumer expectations.
Taste or Preference
When Brenda decides to go to the mall and buy the smallest neon green t-shirt she can find, she is consuming a product
according to her taste or preference. You or I may look at the t-shirt and think “You couldn’t pay me to wear that thing,”
but the shirt happens to appeal to Brenda’s taste or preference. In our earlier example, when Polena went to the store
and discovered that cigarettes fell 50 percent in price, she did not feel compelled to start smoking because of the price
change. Her taste or preference did not encourage her to take advantage of the decrease in price.
Income
When looking at the second determinant, income, we must consider the two types of goods:
■ Normal good—Any good that consumers purchase more of as their incomes increase. Examples: luxury cars and
gourmet meals.
■ Inferior good—Any good that consumers purchase less of as their income increases. Examples: canned food and
generic cereal.Quantity Demanded (QD)Price