A demand curve is a graphical representation of the relationship between the price of a good or service and the quantity of that good or service that consumers are willing and able to purchase. The demand curve is typically downward sloping, indicating that as the price of a good or service increases, the quantity demanded decreases.
The derivation of the demand curve from the price consumption curve, also known as the Engel curve, is a useful tool for understanding consumer behavior and the underlying factors that influence demand. The Engel curve represents the relationship between the price of a good or service and the quantity of that good or service consumed by an individual or household.
To derive the demand curve from the Engel curve, we must consider the income and price of other goods and services. As the price of a good or service increases, the quantity of that good or service consumed by an individual or household will decrease, all other things being equal. However, if the individual or household has a higher income, they may be able to afford a larger quantity of the good or service at a higher price. This is known as the income effect.
On the other hand, if the price of other goods or services decreases, the individual or household may be able to afford a larger quantity of the good or service in question, even if its price has increased. This is known as the substitution effect.
The demand curve can be derived by considering the combined effects of income and the prices of other goods and services on the quantity of a good or service consumed. If the income effect is stronger than the substitution effect, the demand curve will be more elastic, meaning that a change in price will result in a larger change in the quantity demanded. If the substitution effect is stronger than the income effect, the demand curve will be more inelastic, meaning that a change in price will result in a smaller change in the quantity demanded.
In summary, the demand curve is derived from the price consumption curve by considering the income and prices of other goods and services, and the relative strength of the income and substitution effects on the quantity of a good or service consumed. Understanding the demand curve is crucial for businesses and policymakers as it helps to inform pricing and production decisions, as well as the design of economic policies.