Market Demand

As someone who buys products, you form an important part of the market demand for whatever products you buy. Wondering how? Let's look at Cheetos for a moment. Cheetos are a popular household snack, and many people are willing to fill up their shopping carts with a few packs. The combined willingness and ability to fill up our shopping carts with Cheetos constitute market demand. It combines all individual demands in a market into one. But, this isn't the whole picture of market demand. So, read on to learn all about it!

Market Demand Market Demand

Create learning materials about Market Demand with our free learning app!

  • Instand access to millions of learning materials
  • Flashcards, notes, mock-exams and more
  • Everything you need to ace your exams
Create a free account
Table of contents

    Market Demand Definition

    The market demand definition is simple - it is the willingness and ability of all consumers in a market to purchase a given good. It simply combines all individual demands in a market.

    Market demand refers to the willingness and ability of all consumers in a market to purchase a given good.

    Market demand consists of price and quantity demanded, with price being the amount of money paid to purchase a given quantity of a good, and quantity demanded being the total amount of product consumers are willing and able to buy.

    Price is the amount of money paid to purchase a given quantity of a good in the market.

    Quantity demanded refers to the total amount of a product consumers are willing and able to buy.

    Individual and Market Demand Function

    To understand the individual and market demand function, let's first introduce you to the law of demand. As economic agents, consumers will increase the quantity demanded for a good as the price of that good declines.

    With $5, you are willing to buy one popsicle at Disneyland for $5. They then run a promotion where one popsicle costs $2.50. Now, you'll be willing and able to buy two popsicles with your $5.

    This concept above demonstrates the law of demand, which states that the quantity demanded of a good increases as the price of that good decreases. The individual and market demand function is, therefore, written with quantity demanded as a function of price. It is expressed mathematically as:

    \(Q=f(P)\)

    Where P represents the price of the good and Q represents the quantity demanded of the good.

    The above expression is simply the demand function, and it is the same for individual demand and market demand.

    The law of demand states that the quantity demanded of a good increases as the price of that good decreases.

    Market Demand Curve

    The market demand curve is a summation of all individual demand curves in the market. A market consists of individuals who each demand a given quantity of a good. So, the combined demand of all these individuals makes up the market demand. Anyway, what is the demand curve itself? It is the graphical illustration of the relationship between the price and quantity demanded of a good. The market demand curve is the same thing drawn for the market as a whole.

    The market demand curve is the graphical illustration of the relationship between the price of a good and the quantity demanded by the market as a whole.

    We show a simple market demand curve in Figure 1 below.

    Market demand market demand curve StudySmarterFig. 1 - Market demand curve

    We plot the market demand curve with price on the vertical axis and quantity demanded on the horizontal axis. The market demand curve (D) slopes downward from the left to the right because as the price drops, the quantity demanded increases.

    Difference between Individual Demand and Market Demand

    The difference between individual demand and market demand is that individual demand is demand for a single consumer, whereas market demand is demand for all the consumers in the market. This is the fundamental difference between the two, but we can also illustrate the difference using their demand curves.

    • The difference between individual demand and market demand is that individual demand is demand for a single consumer, whereas market demand is demand for all the consumers in the market.

    Let's use a practical example.

    The market for shoes has two consumers, and their demand schedule is presented in Table 1 below.

    Price ($)Quantity of shoes demanded per consumerQuantity of shoes demanded for both consumers
    500
    412
    324
    236
    148
    Table 1. Market demand schedule for shoes

    From the above, we can draw the following diagram (Figure 2).

    Market demand Individual and market demand curves StudySmarterFig. 2 - Individual and market demand curves

    As Figure 2 reveals, we have two individual demand curves denoted by D1, both of which combine to form the market demand curve, labeled as D2. We can also see that the market demand curve lies farther right than the individual demand curve. For clarity, Figure 3 puts both curves on the same graph.

    Market demand Individual and market demand curves StudySmarterFig. 3 - Individual and market demand curves

    • When illustrated on the same graph, the market demand curve lies to the right of the individual demand curve.

    Calculate Market Demand

    To calculate market demand, we simply sum up all the individual demands in the market. Let's explain this with a simple example.

    Table 2 below shows the market demand schedule for shirts.

    Price ($)Quantity for Consumer 1Quantity for Consumer 2Market Quantity
    4123
    3246
    2369
    148?
    Table 2. Market demand schedule for shirts

    To calculate the market demand, we simply sum up the quantity demanded for all the consumers in the market. In this case, there are two consumers. So, the market quantity demanded when the price of a shirt is $1 is:

    \(4+8=12\)

    Now, we can plot all the curves on the same graph as shown in Figure 4.

    Market demand Individual and market demand curves StudySmarterFig. 4 - Individual and market demand curves

    Types of Market Demand: Speculative Demand

    As a type of market demand, speculative demand comes from price expectations. In economics, we normally assume that consumers are rational, and they will only consume or purchase a good if it gives them a direct benefit or satisfaction. However, speculative demand does not work like that all the time. Sometimes, consumers may buy more of a good simply because they expect its price to rise in the future. This describes speculative demand.

    Speculative demand is demand motivated by an expected increase in the price of a good.

    By buying a lot of the good before its price increases, consumers expect to benefit by avoiding the high future prices. However, speculative demand is usually not supported by any substantive evidence, and consumers are often just taking a chance.

    Read our article on the Determinants of Demand to learn more.

    Example of Individual Demand and Market Demand

    Here, we will look at an example of individual demand and market demand.

    The ice cream market consists of two consumers, and their demand schedules are presented in Table 3 below. Draw a graph showing both individual and market demand.

    Price ($)Quantity for Consumer 1Quantity for Consumer 2Market Quantity
    4123
    324?
    236?
    14812

    Solution:

    First, we compute the market quantities demanded at the prices of $3 and $2.

    We have:

    \(2+4=6\)

    and

    \(3+6=9\)

    Now, we plot the individual demand curves and the market demand curve, as shown in Figure 5 below.

    Market demand Individual and market demand curves StudySmarterFig. 5 - Individual and market demand curves

    Read our article on the Demand Curve to learn more.

    Market Demand - Key takeaways

    • Market demand refers to the willingness and ability of all consumers in a market to purchase a given good.
    • The law of demand states that the quantity demanded of a good increases as the price of that good decreases.
    • The market demand curve is the graphical illustration of the relationship between the price of a good and the quantity demanded by the market as a whole.
    • The difference between individual demand and market demand is that individual demand is demand for a single consumer, whereas market demand is demand for all the consumers in the market.
    • Speculative demand is demand motivated by an expected increase in the price of a good.
    Frequently Asked Questions about Market Demand

    What is meant by individual demand and market demand?

    Individual demand is demand for a single consumer, whereas market demand is demand for all the consumers in the market.

    What is a market demand example?

    An example of market demand is the demand for computers in the USA.

    What is the function of market demand?

    The function for market demand is given as Q=f(P) where P is price and Q is quantity demanded.

    What is an example of market demand?

    An example of market demand is the demand for cars in the USA.

    What is the relationship between individual and market demand?

    They share the same demand function (Q=f(P)). However, individual demand is demand for a single consumer, whereas market demand is demand for all the consumers in the market.

    How do you find the market demand function from individual demand functions?

    Market demand is a summation of all individual demands in the market.

    What are the factors influencing individual demand and market demand?

    The factors that influence individual demand and market demand are price, the price of related goods, income, preferences, and expectations.

    Test your knowledge with multiple choice flashcards

    ___ is the amount of money paid to purchase a given quantity of a good in the market.

    The ____ is the graphical illustration of the relationship between the price of a good and the quantity demanded by the market as a whole.

    When illustrated on the same graph, the market demand curve lies to the left of the individual demand curve.

    Next
    1
    About StudySmarter

    StudySmarter is a globally recognized educational technology company, offering a holistic learning platform designed for students of all ages and educational levels. Our platform provides learning support for a wide range of subjects, including STEM, Social Sciences, and Languages and also helps students to successfully master various tests and exams worldwide, such as GCSE, A Level, SAT, ACT, Abitur, and more. We offer an extensive library of learning materials, including interactive flashcards, comprehensive textbook solutions, and detailed explanations. The cutting-edge technology and tools we provide help students create their own learning materials. StudySmarter’s content is not only expert-verified but also regularly updated to ensure accuracy and relevance.

    Learn more
    StudySmarter Editorial Team

    Team Market Demand Teachers

    • 7 minutes reading time
    • Checked by StudySmarter Editorial Team
    Save Explanation

    Study anywhere. Anytime.Across all devices.

    Sign-up for free

    Sign up to highlight and take notes. It’s 100% free.

    Join over 22 million students in learning with our StudySmarter App

    The first learning app that truly has everything you need to ace your exams in one place

    • Flashcards & Quizzes
    • AI Study Assistant
    • Study Planner
    • Mock-Exams
    • Smart Note-Taking
    Join over 22 million students in learning with our StudySmarter App