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. The market or aggregate demand for a commodity gives the alternative
amounts of the commodity demanded per time period, at various alternative prices, by all the individuals in the
market. 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 Quantity Quantity Market Demand
(Rs) Demanded by “A” Demanded by “B” “A+B”
(units) (units) (units)
1 4 5 4+5=9
2 3 4 3+4=7
3 2 3 2+3=5
4 1 2 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,
Market demand schedule is a tabular statement which 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;

3
Price

DA DM=DA+DB
DB

0 1 2 3 4 5 6 7 8 9 X
Quantity Demand
Individual and market demand curves
In the fig., the individual demand curves of A and B for commodity ‘X’ are given by D A 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 refers to the curve which express graphically the relationship
between different quantities of a commodity demanded by different households or consumers at different prices
per time period. It 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’.
Movement along a Demand Curve
When the price of a commodity changes, the quantity demanded of the commodity also changes, ceteris paribus.
This changes in quantity demanded caused by the change in price of the commodity is called movement along
the demand curve. Here the movement is either extension or contraction of demand and is always along the same
demand curve i.e.no new demand curve is drawn. Movement along the demand curve is also called the “change
in quantity demanded”. Movement along the demand curve is of two types:
1. Contraction in Demand: Other things remaining the same, when quantity demanded for a commodity
decreases due to increase in price, it is known as contraction in demand. This is also called decrease in quantity
demanded.
Y

B
P2
Contraction in demand
Price

P1 A

0 Q1 Q2 X
Quantity Demand
Here, decrease in quantity demanded from Q2 to Q1 due to increase in price from P1 to P2 is called upward
movement along the demand curve or contraction in demand. The demand curve contracts from ‘A’ to ‘B’.
2. Extension in Demand: Other things remaining the same, when the quantity demanded for a commodity
increases due to decrease in price, it is known as extension in demand. This is also called increase in quantity
demanded.
Y

A
P2
Extension in demand
Price

P1 C

0 Q1 Q2 X
Quantity Demand

In fig. increase in quantity demanded from Q1 to Q2 due to the fall in the price from P2 to P1 is called downward
movement along the demand curve or extension in demand. The demand curve extends from point ‘a’ to ‘c’.
Shift in Demand curve (or Change in Demand)
If the demand curve changes its position by moving to a new position, it is called shift in demand curve. More
clearly, if there is more or less demand for a commodity at the same price, it is called the shift in demand curve.
Thus, shift in demand is caused by the change in any other determinants of demand for a commodity except its
own price. Shift in demand curve is also called the change in demand. The change in demand may occur due to
any of the following factors:
 Change in income of the consume
 Change in prices of the related goods
 Change in tastes and preferences of the consumers
 Change in population size
 Change in advertisements expenditure
 Change in seasons, climate or festivals, etc.
Shift in demand curve is of two types:

1. Rightward Shift or Increase in Demand: When demand for a commodity increases at the same price, it
called an increase in demand. It is shown by the rightward shift in the demand curve.

Y D’
D

P
Price

D D’
0 Q1 Q2 X
Quantity
The rightward shifted demand curve D’D’ indicates that consumers are ready to purchase large quantities at
Demand
constant prices due to change in other determinants of demand, say rise in income.

2. Leftward Shift or Decrease in Demand: When demand for commodity decreases at the same price, it is
called the decrease in demand. This is shown by a leftward shift of the demand curve.

Y D1 D
Price

P1

D1 D
0 Q1
Q2 X
Quantity
Demand
The leftward shifted demand curve D1D1 indicates that consumers are willing to purchase less quantity at constant
prices due to change in other determinants of demand, say fall in income.
Factors Causing Shift in Demand Curve
The change in quantity demand causes shift in demand curve. The factors that bring changes in quantity demand
other than the change in price are given below:
1. Income of the Consumer: Demand for the commodity changes with the changes in income. In case of normal
goods, when the income of the consumer increases, the demand also increases and the demand curve shift
upward and vice versa. In the case of inferior goods, demand decreases with the increase in income and
demand curve shift downward and vice versa.
2. Change in Price of Related Goods: The change in price of one good influences the consumption of other good,
depending upon the relationship between the goods. Related goods may be complementary and substitutes. In
case of substitutes goods, if the price of one good increases the demand of other good also increases and vice
versa. In case of complementary goods, if the increases in price of one good, decrease the demand for other
goods and vice versa.
3. Tastes and Preferences of the Consumers: Demand also depends on the tastes and preferences of the
consumer. Other things remain constant, as the tastes of the consumer goes up, the demand of the commodity
will also increase, the demand curve shift right side. On the other hand, demand for commodity goes down,
if the consumers have no taste of the commodity, the demand curve shift left side.
4. Change in Size of Population: Generally, when there are more consumers there will be a greater demand for
goods, everything else being equal (ceteris paribus). An increase in population generally increases the demand
for goods and services, while a decrease in population leads to decrease in demand for goods and services.
This is because an increase in population increases the number of buyers in the market.
5. Advertisement: Advertisement has become an important instrument of sales promotion/selling strategies of the
manufactures. Attractive advertisements are likely to increase the demand for goods. People can take
information about various goods from advertisements and they demand those goods. As a result, the position
of demand curve change.
6. Seasons, Climate and Festivals: Demand for goods and services also depends upon seasons, climate and
festivals. For e.g., during the winter, demand for woolen clothes increases, then demand curve for this clothes
shift rightward and vice versa. Similarly, during Dashain and Tihar, demand for clothes and meat increases,
the demand curve for such goods shifts rightward.