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The demand curve is a graphical illustration of
the demand schedule, with the price measured
on the vertical axis (Y) and the quantity
demanded measured on the horizontal axis (X).
The values are plotted on the graph and are
represented as connected dots to derive the
demand curve. The demand curve slopes
downward indicating the negative relationship
between the two variables which are price and
quantity.
• The downward slope of the curve
indicates that as the price of
vinegar increases, the demand
for this good decreases. The
negative slope of the demand
curve is due to income and
substitution effects.
• Income effect is felt when a change in the
price of a good changes consumer’s real
income or purchasing power, which is the
capacity to buy with a given income. In other
words, purchasing power is the volume of
goods and services one can buy with his/her
income. If a good becomes more expensive,
real income decreases and the consumer can
only buy less goods and services with the
same amount of money income. The
opposite holds with a decrease in the price of
a good and increase in real income.
• Substitution effect is felt when a change in
the price of a good changes demand due to
alternative consumption of substitute goods.
For example, lower price encourages
consumption away from higher-priced
substitutes on top of buying more with the
budget (income effect). Conversely, higher
price of a product encourages the
consumption of its cheaper substitutes further
discouraging demand for the former already
limited by less purchasing power (income
effect)
The Law of Demand
Using the assumption “ceteris paribus,” which
means all other related variables except those
that are being studied at the moment and are
held constant, there is an inverse relationship
between the price of a good and the quantity
demanded for that good. As price increases,
the quantity demanded for that product
decreases. The low price of that good
motivates the consumer to buy more. When
price increases, the quantity demanded for the
good decreases.
Non-Price Determinants of Demand (1)