What Is a Growth Curve?
A growth curve is a graphical representation that shows the course of a phenomenon over time. An example of a growth curve might be a chart showing a country's population increase over time.
Growth curves are widely used in statistics to determine patterns of growth over time of a quantity—be it linear, exponential, or cubic. Businesses use growth curves to track or predict many factors, including future sales.
- A growth curve shows the direction of some phenomena over time, in the past or into the future or both.
- Growth curves are typically displayed on a set of axes where the x-axis is time and the y-axis shows an amount of growth.
- Growth curves are used in a variety of applications from population biology and ecology to finance and economics.
Understanding the Growth Curve
The shape of a growth curve can make a big difference when a business determines whether to launch a new product or enter a new market. Slow growth markets are less likely to be appealing because there is less room for profit. Exponential growth is generally positive but it also could mean that the market could see a lot of competitors.
Growth curves were initially used in the physical sciences such as biology. Today, they're a common component of social sciences as well.
Advancements in digital technologies and business models now require analysts to account for growth patterns unique to the modern economy. For example, the winner-take-all phenomenon is a fairly recent development brought on by companies such as Amazon, Google, and Apple. Researchers are scrambling to make sense of growth curves that are unique to new2 business models and platforms.
Shifts in demographics, the nature of work, and artificial intelligence will further strain conventional ways of analyzing growth curves or trends.
Analysis of growth curves plays an essential role in determining the future success of products, markets, and societies, both at the micro and macro levels.
Example: Exponential Growth of Populations
In the image below, the growth curve displayed represents the growth of a population in millions over a span of decades. The shape of this growth curve indicates exponential growth. That is, the growth curve starts slowly, remains nearly flat for some time, and then curves sharply upwards, appearing almost vertical.
This curve follows the general formula: V = S * (1 + R)t
The current value, V, of an initial starting point subject to exponential growth can be determined by multiplying the starting value, S, by the sum of one plus the rate of interest, R, raised to the power of t, or the number of periods that have elapsed.
In finance, exponential growth appears most commonly in the context of compound interest.
The power of compounding is one of the most powerful forces in finance. This concept allows investors to create large sums with little initial capital. Savings accounts that carry a compounding interest rate are common examples.