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3.8: Individual and market functions

  • Page ID
    45740
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    Markets are made up of many individual participants on the demand and supply side. The supply and demand functions that we have worked with in this chapter are those for the total of all participants on each side of the market. But how do we arrive at such market functions when the economy is composed of individuals? We can illustrate how, with the help of Figure 3.9.

    Figure 3.9 Summing individual demands
    img46.png
    At P1 individual A purchases img47.png and B purchases img48.png. The total demand is the sum of these individual demands at this price (Q1). At P2 individual demands are summed to Q2. Since the points Q1 and Q2 define the demands of the market participants it follows that market demand is the horizontal sum of these curves.

    To concentrate on the essentials, imagine that there are just two buyers of chocolate cookies in the economy. A has a stronger preference for cookies than B, so his demand is greater. To simplify, let the two demands have the same intercept on the vertical axis. The curves DA and DB indicate how many cookies A and B, respectively, will buy at each price. The market demand indicates how much they buy together at any price. Accordingly, at P1, A and B purchase the quantities img49.png and img50.png respectively. Thus img51.png. At a price P2, they purchase img52.png and img53.png. Thus img54.png. The market demand is therefore the horizontal sum of the individual demands at these prices. In the figure this is defined by img55.png.

    Market demand: the horizontal sum of individual demands.


    This page titled 3.8: Individual and market functions is shared under a CC BY-NC-SA license and was authored, remixed, and/or curated by Douglas Curtis and Ian Irvine (Lyryx) .