A demand curve is a graphical or mathematical diagram that shows the relationship between the price and quantity of a product that consumers are willing to buy. In business, demand curves are useful when testing and measuring the supply and demand of certain products within a competitive market. Graphed over time, demand curves assist businesses in determining if a certain product is actually profitable at the pricing point on the curve where it is in demand.
Graphing a demand curve begins with two perpendicular lines forming a right angle. The y-axis, or vertical line, represents “price” as the dependent variable, and the x-axis, or horizontal line, represents the “quantity demanded” as the independent variable. Price increments move up along the outside of the y-axis with the highest price nearest the top. Quantity increments move from left to right just below the x-axis line with the lowest figure nearest to the 90° point of the angle. The increment spacing at both lines is such that straight lines drawn from each price across and upwards from each quantity will form perfect graph squares on the inside of the angle; that is, there is equal spacing between the units on the x- and y-axes. The demand points (i.e., the correlative quantity for each price at which there is a buyer) are now plotted within the graph to correspond to both a price on the y-axis and a quantity on the x-axis. By connecting the points, the demand curve is formed. The points along the demand curve show how the quantity demanded depends on the price of the goods. Since price will always have a negative effect on consumer demand, all demand curves will have a downward slope.
A shift or change in the slope of the curve due to influential factors other than price is called a "change in demand." These factors, or determinants, affect the consumer’s willingness to buy and, therefore, the "quantity demanded." Obvious determinants would include fluctuating income, personal preferences, price change anticipation, a sudden boom in the market population, and price increases on complementary products or substitutes. For example, an increase in demand due to an increase in income would shift the demand curve to the right, and a decrease in demand due to a decrease in the price of a comparable substitute product would shift the demand curve to the left.
Although many factors determine consumer behavior and product demand, the most significant determinant is still price. So, with all other factors held constant, as the price of a product falls, the quantity demanded will rise, and as prices increase, the demand for a product will fall. This principle of economic behavior is better known as “the law of supply and demand."