Is Consumer Demand Always Linear?

Have you ever been in a classroom or attended an online session where ‘demand curve’ was central to the lesson? Did you not wonder how consumer demand was drawn linearly and yet it was called a curve? How on earth can a straight line be a curve?

First and foremost, it is crucial to unpack consumer demand and what the modality really entails. Consumer demand is the level at which an item is pursuit tangible or intangible. Moreover, consumer demand is a function of price, which means it is dependent on price. So, whatever happens to the price will affect the overall demand.

Think about where you live, have you not realized that each time a discount is applied to the price of an item, the shop gets overcrowded by consumers? So, this overcrowding tendency in this context is driven by the need to have what is being sold at a reduced price. The level at which the item is needed is what we call consumer demand. However, consumer demand is not only measured when there is a discount in pricing, it is measured at all possible times.

It is highly essential to understand that there are different functions in Mathematics. These functions include among others linear, quadratic, hyperbolic and exponential. The dividing line of all these functions is the nature of impact that the independent variable has on the dependent variable. The independent variable is an element in the system that decides the output unilaterally. It does not rely on any parameter or element to cause a change in the system. The dependent variable is an element in the system that is responsible to show the independent variable effect.

So, which of those mathematical functions represent consumer demand?

It is assumed that consumer demand is always a straight line, that is, it is a linear function. Let’s dive deep to explain why this is a problematic understanding of this modality. The law of demand states that the higher the price, the lower the demand. In other words, if the price of a specific item increases, the demand for that specific item decreases and vice versa. We do see this principle playing out quite a lot in practice.

Suppose the price of a television set was $500 in September, $1000 in October and currently is $1500. Notice there is a constant price increase of $500 from October. So, the price change of this nature will have a constant negative effect on demand, making the whole modality a linear function. However, under different circumstances it will be a different ball game altogether.

It is worth considering that the consumer demand is not always linear in real life, because of the macroeconomic fluctuations. You might be asking yourself, ‘what are macroeconomic fluctuations, and what drives them’?

Let’s explore a real life situation to provide context to this matter.

Let’s say on the fiscal side of the economy, government is planning to decrease personal income tax and on the monetary side, the central bank is planning to increase the repo rate. What impact do you think this will have on the economy?

The economy will grow to a certain degree and decline overnight, because these economic policies are mutually exclusive. So, the ups and downs of the economy are macroeconomic fluctuations and are what makes it highly unfeasible for consumer demand to always be linear.

Even if the change in policy is to arise from only one side of the economy, for instance, the central bank policy change is to be the only policy change running the economy at a given point, it still does not create a room for us to think that consumer demand will always be linear.