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.
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.
Next: Tutorial 7 - Production