What is the market demand curve, and how is it derived? This lesson will explain the concept of a market demand curve and show you how one would go about creating the curve.
Market Demand Curve Definition
The market demand curve is the summation of all the individual demand curves in a given market. It shows the quantity demanded of the good by all individuals at varying price points. For example, at $10/latte, the quantity demanded by everyone in the market is 150 lattes per day. At $4/latte, the quantity demanded by everyone in the market is 1,000 lattes per day. The market demand curve gives the quantity demanded by everyone in the market for every price point. The market demand curve is typically graphed and downward sloping because as price increases, the quantity demanded decreases. It can also be provided as a schedule, which is in table format.
To determine the market demand curve of a given good, you have to sum all the individual demand curves for the good in the market. Here is the algebraic equation for market demand. The quantity demanded (Q) is a function of price (P), and it is summing all the individual demand curves (q), which are also a function of price. The subscripts one through n represent all the individuals in the market.
Examples of Market Demand Curves
To make things easy, let's assume we have two people in the market for lattes (we all know this is extremely simplified!), Jack and Jill. This table shows the individual demand schedules for lattes. The column on the far right is the summation of the individual demand curves, which becomes the market demand curve.
Market demand schedules
At $3 per latte, Jill would buy 24 lattes a month and Jack would buy 15. Therefore, the market demand at $3 per latte is 39 per month. You can also graph the market demand curve, which is the most common method of presenting a demand curve. This graph shows the same market demand curve as the table.
Market demand curve graph
Again, the market demand curve is simply the horizontal summation of the individual demand curves of everyone in the market for lattes. Horizontal summation means you are summing quantity demanded, not price. At each price point, you add the quantity demanded by everyone in the market at that price. For example, at $4.50, Jill's quantity demanded is 18 and Jack's 12. Therefore, the market quantity demand at $4.50 is 30 lattes. Do this summation for every price point and you will generate the market demand curve.
The market demand curve, whether in table or graph format, has a negative slope. In other words, as price increases, the quantity demanded decreases.
The market demand curve is the summation of all the individual demand curves in the market for a particular good. It shows the quantity demanded of the good at varying price points. Because quantity demanded decreases as price increases, the market demand curve has a negative, or downward, slope.
After you've completed this lesson, you should have the ability to:
- Explain what the market demand curve is
- Identify the equation for the market demand curve
- Define horizontal summation
- Describe the market demand curve in table and graph formats
- Recall why the market demand curve has a negative slope