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MARKET DEMAND

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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.

- 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)

- The first person’s demand for X is

- 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

- 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)

- The demand function will depend on PX, PY, I1, and I2

- 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

PX*

DX

X2*

X*

X1*

X1* + X2* = X*

To derive the market demand curve, we sum the quantities demanded at every price

PX

PX

PX

Individual 1’s

demand curve

Individual 2’s

demand curve

Market demand

curve

dX1

dX2

X

X

X

- 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)

- 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

- 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

- 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

- 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)

- The market demand function for Xi is the sum of each individual’s demand for that good

- The market demand function depends on the prices of all goods and the incomes and preferences of all buyers