The Demand Curve

Supply and demand are fundamental concepts in economics. Usually, they're represented by a graph like this. So what does this mean? Well, let's start with the demand curve. In short, a demand curve shows how much of a good people will want at different prices. What happens when there's a big sale? Well, at a lower price, people buy more. More shirts, more pants, more video games, and they do stuff like this. This is what happens on Black Friday when retailers lower their prices to get people to buy stuff for Christmas.

The demand curve illustrates the intuition for why people go nuts on Black Friday. Price is shown on the vertical axis, and quantity is shown on the horizontal. Here's the normal price, and here's the Black Friday reduced price. Simply put, the quantity demanded increases as the price gets lower.

But let's delve a little deeper. There's a different demand curve for every good or service out there, but the ideas are the same. So, let's look at the demand curve for one of the most important products in the world -- oil. Oil is used in a wide variety of products, from fueling cars and planes, to heating homes and making plastic for rubber duckies. Looking at the demand curve for oil, we see a familiar relationship between price and the quantity demanded. At a high price, $55 per barrel, there's a relative low demand, let's say five million barrels. At $20 per barrel, 25 million barrels are demanded. As the price goes down, the demand for oil increases. And at $5 per barrel, 50 million barrels of oil are demanded.

But, there's more to why the demand curve looks like this. As we mentioned before, oil has many uses. Some of those are high-value uses. Uses for which oil has few substitutes. An example would be jet fuel. Right now, you can't fly jets on corn or natural gas. If you want planes that fly, you're stuck with using oil. Other uses are low-value uses like making gasoline or plastic for these guys. When oil prices are relatively low, the oil that is being demanded is used for high and low-value goods alike. As the price of oil goes up, so does the price of making plastic and gasoline. And at some point, the cost of these value used products will get high enough that some people might skip buying a rubber ducky altogether or buy a substitute like a wooden bath toy. Same goes for gasoline, as the price rises, people will economize. They'll buy more fuel efficient cars or forego that road trip completely.

For these consumers, the benefit of buying these products is too little to justify the cost. At these high prices, the demanders that are left are the ones who value oil the highest. For them, the benefit of, say, having planes that fly outweighs the increased cost. They still demand oil. So, with a simple line, the demand curve summarizes all the many and diverse ways that people respond to a change in price.