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Tutorial 6: Consumer and Market Demand (cont.)

 

Deriving the Market Demand Curve

The consumer choice model allows us to determine the demand curve for a good faced by a single individual. But the analysis in Tutorials 3 and 4 is not based on a single buyer's demand curve, but on a market demand curve. How is one derived from the other?

The market demand for goods is determined by the sum of all the individual consumers' demand curves. That is, for any given price, we add up the quantity each individual consumer is willing and able to buy. The sum of those quantities tells us how much all demanders in a market are willing and able to buy at that price. Technically, this summation is referred to as a horizontal summation because we are keeping price constant (on the vertical axis) and summing along the horizontal axis the quantities for all buyers. This is illustrated in Figure 8 below.

 

Figure 8

Graph showing derivation of market demand as horizontal summation of individual consumers's demand.

 

The first three demand curves belong to individual buyers in this market. Buyer 1 (see d1) is willing and able to purchase 0 units at a price of $225 each, Buyer 2 (d2) is willing and able to purchase 25 units at that price, and Buyer 3 (d3) is willing and able to purchase 50 units. Because all three buyers are in the market for this good, the quantity demanded in this market at a price of $225 each is (0 + 25 + 50) = 75 units per period.

If we continue this process for all the prices, we can derive the market demand curve Mkt D.

 

Time to Review

This is a good time for you to review the concepts of reservation price and consumer surplus first introduced in Tutorial 2 and to answer again the questions found in the Reservation Price Workbook (Reserv.xls).

This is also a good time for you to review what you learned about price elasticity of demand by reviewing Tutorial 4 and answering again the Questions in the Price Elasticity Workbook (PElas.xls).

 

Now we turn our attention to the supply side of the market. We start our exploration by studying the technical side of how firm's produce goods.