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Introduction to Economics
Demand
Deriving a Market Demand Curve
Page 1 of 2
We’ve been talking about the demand for bread, and we’ve been focusing on the behavior of a single
household, showing how the relationship between price and quantity demanded varies with changes in
income, the prices of substitutes and compliments, and other factors. But you may be wondering, “What
about the overall demand for bread, the demand in the market as a whole?” In this lesson we will show
how to take the individual demand curves of households and add them together to get the market
demand curve for bread. It’s a simple, straightforward matter.
Let’s start with our schedule showing how much bread a particular household will demand at different
prices. Let’s say that we have Bob here, and these numbers represent the quantity of bread that Bob is
willing and able to purchase as the price of bread varies. So at $5.00 a loaf Bob buys one loaf, at $4.00 a
loaf he buys two loaves, and so forth. Suppose now Bob is not the only household in this market. Let’s
suppose that there is another household and that’s Ann. Ann has a different demand schedule for bread.
In fact, Ann buys more bread at every price than Bob does - perhaps she likes bread better. At $5.00 a
loaf Ann buys two loaves of bread each week. At $4.00 a loaf, Ann buys four loaves, and so forth. So
here’s Ann’s demand schedule for bread - the quantity of bread demanded as a function of the price of
bread.
Suppose now that Bob and Ann are the only buyers in this market. In order to find the market demand for
bread, we need to add together their individual demands. So to find the market demand for bread, take
the quantity of bread that Bob demands at each price and add to it the quantity of bread that Ann
demands at each price. That will give you the market demand for bread. So at a price of $5.00 Bob
wants one loaf of bread per week, Ann wants two loaves of bread per week, for a total of three loaves of
bread in the market. If we continue on down the schedule we will find the overall quantity demanded in
the market is the sum of Bob’s demand and Ann’s demand, the sum of Bob’s quantity and Ann’s quantity
at each price. So, at a price of $3.00 per loaf, Bob wants three loaves a week; Ann wants five, for a
market total of eight. Now, we’ve added together Bob’s individual demand and Ann’s individual demand
at each price. We found the quantity for each of the buyers, add them together, and wind up with the
market demand curve. So there you have it. It’s simply a matter of addition to go from the individual
demand curves to the market demand curve.
Let’s show now how the same process works in our graph. We’ll move all these numbers over to the box
where you can use them. I have here reproduced all of this information in a graph. So I have Bob’s
information represented in this first diagram. I have Ann’s information represented in the middle graph,
and over here on the far right, I’m going to sum the two together to get the market demand curve. Let me
show you how that works. The process is called “horizontal summation,” because we are adding
horizontal distances. Notice, in this first diagram we have Bob’s quantity written on the horizontal axis. At
each price the red dot tells us the quantity of bread that Bob is willing and able to purchase at that price.
In the second diagram, the horizontal axis measures Ann’s quantity, the quantity of bread that Ann is
willing and able to purchase at each price. So, for instance, suppose we wanted to know the market
demand at a price of $5.00 per loaf of bread. We take Bob’s quantity, which is one loaf of bread and add
to that Ann’s quantity, which is two loaves of bread, to get the market quantity of three loaves of bread.
We can also do that in a diagram. So, for example here, measure the distance from the axis to the red
dot. That’s one loaf of bread that Bob wants at a price of $5.00. Add that on to the amount that Ann
wants to buy, which is two loaves of bread at $5.00, and we get this horizontal distance - 2 + 1 = 3. I go
over there to $5.00 and there’s a point on my market demand curve. At a price of $5.00 per loaf, we have
a total quantity demanded in this market of two loaves from Ann plus one loaf from Bob, for a total of
three loaves of bread at a price of $5.00.
I can continue this process if I want. Bob wants two loaves at a price of $4.00, so let’s mark that on our
ruler. And then go over here and add those two loaves to the four loaves that Ann wants at a price of
$4.00. So we have two loaves plus four loaves is a total of six loaves, and go over here and put those six
loaves as a dot in the market demand curve. So if Bob wants two loaves at $4.00 and Ann wants four
Introduction to Economics
Demand
Deriving a Market Demand Curve
Page 2 of 2
loaves, two plus four is a total of six. Add them together and you get another point on the market demand
curve.
I can keep doing this horizontal sum. At each price find the quantity that Bob wants, add it to the quantity
that Ann wants to get the market quantity. I can keep doing this exercise, going and adding Bob’s
distance on to Ann’s distance to get the total. But you know that we already have the market sum from
over in the box, so I can go ahead and just plot the numbers; I’ve already done the addition.
Three was the quantity demanded in the market at a price of $5.00. Six is the quantity demanded in the
market at a price of $4.00. At a price of $3.00 I have a total of eight loaves of bread demanded. At a price
of $2.50 my total quantity demanded is 10. At a price of $2.10 a loaf I have a total quantity demanded of
12. At a price of $1.80 per loaf my total quantity demanded is 14.
These are all the points in the market demand curve. Now, just as we can connect the dots to get the
individual demand curve, we can connect the dots to get the market demand curve. If I go over and
connect these dots I get the individual demand curve for Bob. If I go next door to this diagram and
connect these dots, I get the individual demand curve for Ann. And if I connect the dots in the far
diagram; that is, the sum of these two individual demand curves, I’ll get the market demand curve, and I’ll
simply label it with a D, because it represents the sum of Bob and Ann and anyone else if we did this
exercise more generally.
So the idea here is this: if you take Bob’s demand curve and add it to Ann’s demand curve, you get the
total demand in the market. That is, for any price that we choose on the vertical axis, go over to Bob’s
demand curve to get the horizontal distance, the quantity that Bob demands, and add that to the
horizontal distance at the same price over in Ann’s demand curve, and that horizontal distance, the sum
of Bob’s plus Ann’s quantity demanded will show up over here in the market demand curve at the same
price.
So one more example. At a price of $2.10 per loaf, Bob wants five loaves of bread each week and Ann
wants seven loaves of bread each week. Five plus seven gives us a total market demand of 12 loaves of
bread at a price of $2.10.
Since the market demand curve is just a sum of the individual demand curves, anything that shifts the
individual demand curves. Anything that shifts the individual demand curves will also shift the shift the
market demand curve. That is, if household income changes, if the price of substitutes or compliments
change, if tastes and preference change, if expectations change. Anything that shifts Bob’s individual
demand curve or Ann’s individual demand curve will shift the market demand curve.
For instance, suppose we’re talking once again about the market for bread, and suppose that bread is a
normal good. If Bob’s income increases, Bob’s demand curve for bread will shift outward. And when it
shifts outwards, horizontal summation will lead to a market demand curve that’s further away from the
axes. Anything that shifts out Bob’s curve or Ann’s curve will also shift out the market demand curve,
since it is the sum of the individual demand curves.
Now that we’ve described the consumer side of the market, we’ll look now at the producer side of the
market. We’ll look at the logic of the seller, as the sellers pursue their profits and try to maximize the
money that they make from their businesses, their behavior will be summarized in a supply curve, and
that’s where we’ll go next.