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Individual and market functions

15 二月, 2016 - 09:58

Markets are made up of many individual participants on the demand and supply side. The supply and demand functions that we have worked with in this chapter are those for the total of all participants on each side of the market. But how do we arrive at such market functions when the economy is composed of individuals? We can illustrate how, with the help of Figure 3.9.

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Figure 3.9 Summing individual demands
 

At P_1 individual A purchases Q_{A1} and B purchases Q_{B1}. The total demand is the sum of these individual demands at this price (Q_1). At P_2 individual demands are summed to Q2. Since the points Q_1 and Q_2 define the demands of the market participants it follows that market demand is the horizontal sum of these curves.

To concentrate on the essentials, imagine that there are just two buyers of gasoline in the economy. A has a bigger car than B, so his demand is greater. To simplify, let the two demands have the same intercept on the vertical axis. The curves D_A and D_Bindicate how much gasoline A and B, respectively, will buy at each price. The market demand indicates how much they buy together at any price. Accordingly, at P_1, A and B purchase the quantities Q_{A1} and Q_{B1} respectively. At a price P_2, they purchase Q_{A2} and Q_{B2}. The market demand is therefore the horizontal sum of the individual demands at these prices. In the figure this is defined by D market .

Market demand: the horizontal sum of individual demands.