The Demand Curve

What is a demand curve? A demand curve illustrates on a graph how much of a particular good or service people are willing to buy as its price changes.

When the price for a good or service goes down, demand tends to increase. That’s why stores can look a little crazy on Black Friday: retailers cut prices to ensure that they’ll be “in the black” for the year and shoppers load up on presents for Christmas.

On a graph, the demand curve slopes downward with prices indicated on the vertical axis and the quantity demanded on the horizontal axis. Every good or service has its own demand curve, but they function the same way.

Oil is a crucial good throughout the world, so let’s take a look at its demand curve. When the price for oil is high, let’s say $55 per barrel, the quantity demanded might be five million barrels. Oil has a lot of uses, but some of them are considered low-value and there are substitute goods available. So if the price of oil is on the high end, demand for these low-value uses will be lower.

However, oil has a number of high-value uses without many substitutes. For example, planes requires oil for jet fuel. At that high price of $55 per barrel, you’re still going to need to pay up in order to fly a plane. But at that same price, drivers may opt to carpool, switch to a vehicle that can use ethanol or a hybrid car, or take fewer trips to avoid the high price of gas.

Now, when oil drops to $20 or even $5 per barrel, many more barrels are demanded. Suddenly, it makes sense to use oil instead of finding substitute goods or economizing for oil’s low-value uses.

We’ll cover more details in the video and demonstrate graphing the demand curve. But demand is only one piece of the puzzle for this first section. The supply curve and the equilibrium price and quantity are up next.