Derivation of an Individual Demand Curve PDF

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Derivation of an Individual Demand Curve: The various quantities of a commodity that a consumer would be willing to purchase at all possible prices in a given market at a given point in time, other things being equal is called individual demand. Individual demand curve shows the relationship between the price of a commodity and the quantity that a single consumer is willing to buy (quantity demanded) during a particular time period. Other things remain constant, as price rises, quantity demanded by an individual decreases and vice versa. This can be explained with the help of individual demand schedule. Price Quantity demanded (in Rs) (in units) 10 10 8 20 6 30 4 40 2 50 As the data given in the table, the individual demand for good increases as its price decreases. In the table, when the price of the good is Rs.10 the demand for that good is only 10 units. When price decreases from Rs. 10 to Rs.8, the demand increases from 10 units to 20 units and so on. If we plot this individual demand schedule on graph, we get the individual’s demand curve for good as shown in the following fig. Y

D

10

Price

8 6 4 2 D 0

10

20 40 30 Quantity Demand

50

X

In the fig. DD is the individual demand curve. By plotting the different units of good at various price levels as given in the schedule, we get a curve DD which is known as the individual demand curve. Individual demand curve refers to the curve which expresses graphically the relationship between different quantities of a commodity demanded by an individual at different prices per time period. It slopes downward to the right. This implies that there is inverse relationship between the price and quantity demanded for a commodity.

Derivation of the Market Demand Curve The total quantity which all the consumers of a commodity are willing to buy at different prices in the given time period is known as market demand. In other words, the market demand is the sum of individual demands by all the consumers of the commodity at different prices in the given time period, other things remain same. Suppose there are two consumers (viz. A and B) of a commodity ‘X’ and their individual demands at its different prices are as given in the following table. Price (Rs) 1 2 3 4

Quantity Demanded by “A” (units) 4 3 2 1

Quantity Demanded by “B” (units) 5 4 3 2

Market Demand “A+B” (units) 4+5=9 3+4=7 2+3=5 1+2=3

In the table, the last column presents the market demand, i.e., the aggregate of individual demands by the two consumers ‘A’ and ‘B' at different prices. It is horizontal summation of the demand of individual consumer at each unit price. The market demand at Rs. 1 is 9 units, at Rs. 2 is 7 units and at Rs. 3 it is 5 units and so on. Thus, table shows the different quantities of a commodity demanded by different households or consumers in a market at various alternate prices per time period. Geometrically, the market demand curve for a commodity is obtained by the horizontal summation of all the individuals’ demand curves for the commodity. The market demand curve can be explained with the help of following figure;

Y

Price

4

3 2

1

0

1

2

3

4

DA

DB

5

6

Individual and market demand curves

DM=DA+DB 7

9 8 Quantity Demand

X

In the fig., the individual demand curves of A and B for commodity ‘X’ are given by DA and DB respectively. The horizontal summation of these individual demand curves, results into the market demand curve, D M, for the commodity ‘X’. Thus, market demand curve shows the demand of a whole market for a commodity. The curve DM in the figure represents the market demand curve for commodity ‘X’ which slopes downward. This implies that there is inverse relationship between price and quantity demanded for good ‘X’....