Demand Curve = Price and Quantity Relation
A demand curve shows the relationship between price and quantity demanded of a commodity, other things remaining the same. Such a relationship is derived generally by keeping the real income and money income constant. The demand curve derived by keeping money income constant gives us the usual or ordinary demand curve, also known as Marshellian Demand curve. Similarly, the demand curve derived by keeping the real income constant is the Hicksian or Slutsky demand curve.
By keeping
- Money Income Constant ⇒ Marshallian Demand curve, (Usual or Ordinary)
- Real Income Constant ⇒ Hicksian or Slutsky demand curve
To explain the derivation of the demand curve, consider the normal commodity X whose price declines
Here, the consumer is initially in equilibrium at E1 with OX1 quantity of X. This means initially, price Px1, the consumer demands OX1 quantity of X, is shown by point P in the lower part of the figure.
Now, assume that the price of X declines and the budget line shifts outward from AB to AC, and the consumer attains a new equilibrium at E2 with OX2 quantity of X. This means the price falls from Px1 to Px2, the consumer demands OX2 quantity, which is represented by point Q in the lower part of the figure. Now, if we join P and Q, we get Marshallian Demand of X (DxM), which is downward sloping due to the negative price effect of X, which is normal.