Nikki Yturriaga

FIN 222

Graph 1.1
The demand curve in Graph 1.1 depicts the inverse relationship between commodity price and
the quantity purchased. We plot quantity demand on the horizontal axis and the commodity's
price on the vertical axis. The quantity demand is represented by Q1 along the demand curve D
at price point P1. A downward-sloping demand curve D illustrates an indirect link between the
price of the good and quantity demand. If the price rises to p2, the quantity demand falls to Q2.

Why is the demand curve downward sloping?

The demand curve, as previously mentioned, focuses on the relationship between the amount
demanded and the price of the item at a specific period while holding all other factors constant.
The relationship between the cost of the goods and the quantity demanded can be seen as
negative on the demand curve. In particular, as the commodity's price falls, quantity demand
rises, and as the price rises, quantity demand falls. Investigating the causes of the
downward-sloping relationship between price and quantity demand may prove to be intriguing.

First off, when a good or service's price increases, it motivates consumers to search for
alternatives that are now relatively less expensive but still fulfill the same wants or needs. This
so-called "substitution impact" always works against the item whose price has increased.
For instance, if you allocate a portion of your food budget to buying apples and pears, but the
price of apple doubles while the price of pears stays the same, you'll probably buy more pears
and fewer apples. Many facets of life offer similar opportunities for substitution for both
customers and producers.
 Why is the demand curve upward-sloping?

Macroeconomic and microeconomic theories are governed by the rules of supply and demand.
According to economists, when prices rise, demand declines, resulting in a downward-sloping
curve. Demand is anticipated to rise when prices decline, resulting in an upward-sloping curve.
Giffen items can have a significant revenue effect, as well as a significant substitution effect.
Giffen products have an upward-sloping demand curve, which indicates greater demand at
higher prices. Giffen goods are a different category of items for which the demand curve slopes
upward when a price increase results in more demand because the income effect overcomes
the substitution effect.

For example, Assume you live on two staple foods—meat and rice—and have a very low
income. Rice is the more affordable food, but meat is a luxury. Your discretionary income would
be dramatically lowered if rice prices rose, causing you to buy less meat and more rice to make
up for the lost calories. It is exceedingly unusual, and there is some doubt as to whether it
actually occurs. However, it demonstrates that demand price (substitution impact) and income
are influenced by two different causes.

In conclusion, Together, supply and demand determine the equilibrium of the market. Market
equilibrium is represented by the intersection of the supply and demand curves on a graph. The
quantity and price at this intersection are both at their equilibrium values. There are neither
shortages nor surpluses when the market for an item or service is in equilibrium.

For recommendation, The market will tend towards equilibrium quantity and pricing so buyers
and sellers need to exchange goods and services. Therefore, The consumers must achieve
equilibrium. The price at which supply and demand are balanced is known as the equilibrium
price.

References:
https://www.investopedia.com/terms/l/law-of-supply-demand.asp

https://www.investopedia.com/terms/g/giffen-good.asp