Overview
The demand curve describes the amount of product demanded by customers at different price points. As a general rule, the quantity demanded goes down as the price in increased. However, when the price gets high enough, some products may experience a luxury effect, that is, the higher price makes the product more demanded because it is viewed as a luxury good.
The Demand Curve
The Demand curve that a firm faces is different from the demand curve that the market faces.
The demand curve modeled as a function of price.
{% demand = q(p) %}
The demand curve that a firm faces will depend on the market that firm resides within.
- Price Takers - a price taking firm is a small firm within a large competitive market. Under the assumption that the firm is a price taker, the firm cannot charge more than the market price of their product. If the firm charges more than the market price, it sells nothing. If it sells at the market price, it receives a fixed amount of the market demand. If it charges less than the market price, it will likely increase the demand for its product, however, it is generally assumed that a price taker simply takes the market price.
- Monopoly - a monopoly is the only firm within a given market. As such, the demand that the firm faces is the same as the market demand.
Modeling the Demand Curve
There is no universally accepted function that is thought to represent demand in general, and in fact, it is probably specific to each product. Demand as a function of price is also very hard to measure, as this would require changing the price to multiple price points, and then observing the demand at that price.
However, economists and marketers will often talk about and measure the sensitivity of the demand curve to price, at the current point of the curve.