Trying to wrap your head around what is a market demand curve? Understanding the concept is not difficult. It just requires a bit of focus. So pay attention to this quick read, and you’ll get over the learning curve in no time.
A market demand curve is a synopsis or an aggregate outlook of all individual demand curves in a given market.
It shows the number of goods demanded by all individuals at varying price points.
Market Demand Curve Example:
Let’s illustrate this with an example.
At $5/cappuccino, the quantity demanded by all individuals in the market is 100 cappuccinos per day. In other words, it shows a series of various quantities of a product or service that consumers in a given market are willing and able to purchase at each of the series of prices per unit of the product or service.
Provided other things remain constant such as consumer disposable incomes, consumer preference, and the number of consumers etc.
How is a Market Demand Curve Plotted?
Given a large market, a representative sample of consumers is collected then their average quantities demanded are multiplied by the total number of consumers in the market in order to obtain the market demand schedule.
A market demand curve is the horizontal summation of the individual demand curves for a good. The curve slopes downwards towards the right as can be also ascertained by the law of demand, the individual demand curves generally slope downwards.
The law of demand shows an inverse proportion of the quantity demanded and the price of goods; accordingly, if the prices of goods increase, the quantity demanded decreases (elastic demand) and vice versa.
The above picture demonstrates a market demand curve in simple steps assuming that the number of buyers in a hypothetical market is 3. Their individuals demand curves are seen to be represented by d1, d2, and d3.
Here, considering these three individual demand curves at the price of p1, the individual demand of the buyers are derived as p1E1, p1E2, and p1E3 respectively. Here the market demand of the product is p1E1 + p1E2 + p1E3 = p1E. As shown in the figure above point E (d) lies on the market demand curve for the product.
Moving on at p=p2, these individual buyer demands are p2F1, p2F2, and p2F3. The aggregate demand which is the summation of the lateral demand curves is p2F1 + p2F2 + p2F3 =p2F. The point F is another point on the market demand curve for that product and depicts the law of demand accordingly. When these points are joined, the market demand curve, DD for the product is obtained.
In case of the market demand for a certain good, the law of demand is always effective, that is; when the individual demand curves slope downwards towards the right then their lateral or horizontal summation would also slope downwards towards the right.