Wouldn't it be handy to producers if they had a way of determining the demand curve for a whole market in a given area? Luckily, the market demand curve gives them precisely such a tool.
What is the Market Demand Curve?
Imagine that you are able to visit the market for every conceivable supplier of chocolate. Quite the good day you're having! So all of these chocolate suppliers are gathered here in this one market, waiting for all the people who demand chocolate to come by and purchase their treats. Now you already know your own demand curve for chocolate, with the general theory that the more each piece costs, the less you will want to buy. The thing is that you are not alone in that. Every other purchaser who walks into this hypothetical hall of happiness has the same general chart in his or her head as well. Some look different, some look similar, but everyone has roughly the same shaped chart. Now if you were able to combine everyone's charts, you'd end up with a pretty good idea of what the market demands. That is exactly what the market demand curve does - it shows the demand of all purchasers within a given market.
Shifts in the Curve
Just like any other demand curve, the market demand curve is capable of experiencing shifts. Now, these shifts can come as a result of a single consumer or subset of consumers, or as the result of a general consensus among all people demanding a given good. Think about it like this - if suddenly you decided that you preferred caramels to chocolate, you would demand less chocolate. This would mean that by whatever degree your individual demand changed for chocolate, the same quantity would apply itself to the market demand curve.
Note that I said 'quantity' and not 'percentage.' Markets are often so large that the demand of one or two consumers is not really felt. In fact, it is only in a handful of sectors, like government contracting, that, because there is only a small number of consumers (the federal government in this case), real change is felt when a small number of people change their demand. Likewise, if you suddenly decided that you needed a great deal more chocolate, then your increased demand would shift the market demand curve to the right, albeit only a small nudge in the grand scheme of things.
But what about if many people change their minds? Here too the market demand curve can shift. What if a famous celebrity declares chocolate to be disgusting? Or if the substance is linked to health risks? This could cause a much larger shift of the demand curve because it is affecting more people. In this case, because the demand is decreasing, it would shift to the left. The large shift holds true if the opposite happens, in that shifts that cause many people to buy more chocolate will shift the demand curve to the right.
Why Producers Care
Just as you'd expect, it is in a producer's best interest to know as much as possible about the market in which they are selling their goods. After all, you may produce the best bottled water in the world, but if you don't understand the demand of the market, you could well end up selling it to a town whose water supply is fed by its own artisanal spring. However, producer knowledge of a market is vital even after the company has been established as a purveyor of a good in a given market. What if market demand suddenly rose drastically? A producer with little knowledge of the market would not be able to react, whereas one who paid attention to the market demand curve would be able to make sure that increased quantities were available for sale.
Likewise, the opposite is also important for producers. If demand suddenly decreased for a given good, a smart supplier may be able to reorient his or her company in order to have fewer costs for production, and maybe even find something related to produce that is subject to higher demand.
Further, it is not only the shift that is important to producers, but also the type of shift. If the issue is of decreased demand across the board, then the company can readjust to make their good more palatable. On the other hand, if the decreased demand came from a very large chunk of consumers deciding that they didn't want it anymore, the producer can try to figure out how to lure those customers back.
In this lesson, we learned about the market demand curve. The market demand curve is the curve that results from combining every individual demand curve in a given market. Despite this, it is still subject to the same rules of any other demand curve, although on a much larger scale. We also saw how producers put the market demand curve to work in order to figure out how to best engage their consumers.
After you've reviewed this video lesson, you should be able to:
- Define market demand curve and describe what causes shifts in this curve
- Explain how producers can utilize the market demand curve