Introduction
In previous sessions, we have learnt about the concept of demand, demand function, demand curve and law of demand. We know demand is basically the quantity of a good a consumer is willing and able to buy at given market price. And the relationship between demand and price is shown by the demand function. The graphical representation of the demand function is known as Demand Curve. In this session we will discuss about linear demand curve and then we will move on to discuss about market demand.
Linear Demand Curve
Demand function shows relationship between demand for a good and price of that good keeping all other factors affecting demand unchanged. The demand function denotes quantity of a good demanded as a function of price i.e., price is the sole deciding factor for quantity demanded of that good. When the same relation or demand function is graphically represented, it becomes the demand curve. The demand curve can be linear or non-linear. Here we will discuss about the linear demand curve. Linear demand curve can be graphically represented as follows;
q(d) = a – b(p)
where the q(d) is quantity demanded, ‘a’ is the vertical intercept which in terms of equation shows factors other than price influencing the demand, ‘b’ is the slope of the demand curve and ‘p’ is the price.
Now it is very important to understand the slope of the demand curve. The slope of the demand curve shows or measure the rate at which the quantity demanded changes for a good with respect to a change in price of that good. Generally, the change in quantity demanded is measured per unit change in price.
As we know, as per law of demand, there is inverse relation between quantity demanded of a product and price of that product. Hence, the slope of the demand curve would also be negative as increase in price would lead to decrease in quantity demanded of that good and vice versa. Thus the slope of the demand curve is written as ‘-b’. So it simply means that for per unit increase in price of a good, the quantity demanded falls by b units i.e., for +1 in price, quantity demanded changes by –b.
This shows that in case of linear demand curve for a good, the change in quantity demanded for a good is constant per unit of change in price and hence we get a straight line when that demand curve is presented graphically.
Market Demand
Till now, we understood all the concepts of the demand curve keeping the perspective of a consumer i.e., the choice of the consumer and hence the demand curve derived would be exclusively for that consumer. But in reality, there are many consumers in the market and all of that consumers have different willingness and ability to demand a particular good, so there will be numerous individual demand curves for a good. The market demand for that good is the total demand of all the consumers for that particular good for particular price points, taken together. Let us take an example where there are two consumers which form the market for a particular good. And they both would have their individual demand curves, i.e., quantity demanded at different price levels. By adding both the individual demand curves, we can derive the market demand for the good.
Here at price P1, the demand from consumer 01 is Q1 and demand for consumer 02 is Q2, hence the market demand at price P1 is (Q1+Q2) as can be seen the Market Demand graph. In the same manner, at price P2, the demand from consumer 01 is Q’1 and demand from consumer 02 is Q’2, hence the market demand at price P2 is (Q’1+Q’2).
Hence the market demand for any good at a particular price can be derived by adding up the demand of individual consumers at each price points. Here we understood the same for two consumers but the market demand can be derived in similar manner for n number of consumers.
In the above graphs, the same has been graphically represented where the demand of individual consumers are added to ascertain the market demand.
Conclusion
In this session, we discussed the linear demand curve including its equation form which can presented graphically. We studied the slope of the demand curve which shows the rate of change in quantity demanded with respect to per unit change in price. Then we also discussed the derivation of the market demand through addition of individual demand curves of each consumer.
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