Download Market Demand Curve

MARKET DEMAND
Market demand refers to the various
quantities per unit of time that buyers are
willing and able to buy at all alternative
prices, other things being equal.
Market Demand Curves

Assume that there are only two goods
(X and Y) and two individuals (1 and 2)
• The first person’s demand for X is
X1 = dX1(PX,PY,I1)
• The second person’s demand for X is
X2 = dX2(PX,PY,I2)
Market Demand Curves

Features of these demand curves:
• Both individuals are assumed to face the
same prices
• Each buyer is assumed to be a price taker
• must accept the prices prevailing in the market
• Each person’s demand depends on his or
her own income
Market Demand Curves

The total demand for X is the sum of the
amounts demanded by the two buyers
• The demand function will depend on PX, PY,
I1, and I2
total X = X1 + X2
total X = dX1(PX,PY,I1) + dX2(PX,PY,I2)
total X = DX(PX,PY,I1,I2)
Market Demand Curves


To construct the market demand curve,
PX is allowed to vary while PY, I1, and I2
are held constant
If each individual’s demand for X is
downward sloping, the market demand
curve will also be downward sloping
Market Demand Curves
To derive the market demand curve, we sum
the quantities demanded at every price
PX
PX
Individual 1’s
demand curve
Individual 2’s
demand curve
PX
Market demand
curve
PX*
dX1
X1*
DX
dX2
X
X2*
X
X*
X1* + X2* = X*
X
Shifts in the Market
Demand Curve

The market demand summarizes the
ceteris paribus relationship between X
and PX
• Changes in PX result in movements along
the curve (change in quantity demanded)
• Changes in other determinants of the
demand for X cause the demand curve to
shift to a new position (change in demand)
Shifts in Market Demand

Suppose that individual 1’s demand for
oranges is given by
X1 = 10 – 2PX + 0.1I1 + 0.5PY
and individual 2’s demand is
X2 = 17 – PX + 0.05I2 + 0.5PY

The market demand curve is
X = X1 + X2 = 27 – 3PX + 0.1I1 + 0.05I2 + PY
Shifts in Market Demand

To graph the demand curve, we must
assume values for PY, I1, and I2

If PY = 4, I1 = 40, and I2 = 20, the market
demand curve becomes
X = 27 – 3PX + 4 + 1 + 4 = 36 – 3PX
Shifts in Market Demand

If PY rises to 6, the market demand
curve shifts outward to
X = 27 – 3PX + 4 + 1 + 6 = 38 – 3PX
• Note that X and Y are substitutes

If I1 fell to 30 while I2 rose to 30, the
market demand would shift inward to
X = 27 – 3PX + 3 + 1.5 + 4 = 35.5 – 3PX
• Note that X is a normal good for both buyers
Generalizations



Suppose that there are n goods (Xi, i = 1,n)
with prices Pi, i = 1,n.
Assume that there are m individuals in the
economy
The j th’s demand for the i th good will
depend on all prices and on Ij
Xij = dij(P1,…,Pn, Ij)
Generalizations

The market demand function for Xi is the
sum of each individual’s demand for that
good
m
X i   X ij  Di (P1,..., Pn , I1,..., Im )
j 1

The market demand function depends on
the prices of all goods and the incomes and
preferences of all buyers