2.5. Market Demand

In the last section, we studied the choice problem of the individual consumer and derived the demand curve of the consumer. However, in the market for a good, there are many consumers. It is important to find out the market demand for the good.

Market demand is the total demand for a specific good from all consumers in the market at a given price. Instead of looking at just one consumer's choices, market demand aggregates what all consumers are willing to buy at various price points.

Consider a local market selling oranges. If one individual buys 5 oranges at a price of $1 each, that's their personal demand. If an additional 9 customers buy 5 oranges each at the same price, the market demand would be the total of all these individual demands – in this case, 5 oranges × 10 customers = 50 oranges.

The market demand for a good at a particular price is the total demand of all consumers taken together. The market demand for a good can be derived from the individual demand curves. Suppose there are only two consumers in the market for a good. Suppose at price p′, the demand of consumer 1 is q′ and that of consumer 2 is q′. Then, the market demand of the good at p′ is q′ + q′.

To derive the market demand curve, we sum the individual demands of each consumer at each price level. For example, if Consumer 1 demands 3 units at $2 and Consumer 2 demands 2 units at the same price, then the total market demand at that price would be 5 units.

Imagine a small ice cream shop that has two regular customers. If John buys 3 ice creams at $3 each and Maria buys 2 ice creams at the same price, the total market demand for ice cream at that price is the sum of their purchases: 3 + 2 = 5 ice creams.

The market demand curve of a good can also be derived from the individual demand curves graphically by adding up the individual demand curves horizontally as shown in Figure 2.18. This method of adding two curves is called horizontal summation.

When visualizing market demand, we can plot the demand curves of individual consumers on the same graph. By combining these curves horizontally, we can see how total demand changes across various price points, forming the market demand curve.

Think of a class of students polling how much soda they want for a party. Each student indicates their choice and quantity on a chart. When you combine everyone's preferences on the same chart, it visually shows how many sodas will be needed based on the preferences of all students, which represents the market demand for soda.

Consider, for example, a market where there are two consumers and the demand curves of the two consumers are given as d (p) = 10 – p and d (p) = 15 – p. The market demand can be derived by adding these equations.

To determine total market demand based on individual demand curves, you add the quantities demanded by each consumer for each price. By substituting the price into the individual demand functions, you can get a total quantity at that price.

Imagine two friends discussing how many slices of pizza they want. If Alice wants 10 slices when pizza is $5, and Bob wants 15 slices at the same price, together they want 25 slices. This illustrates how you combine individual preferences to understand the total market desire.

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