Contents
What’s it: Individual demand represents the quantity demanded by a person for a good at a given price level. Two conditions: he has the willingness to buy and has the ability to buy.
At different price levels, the quantity demanded is also different. By the law of demand, the quantity demanded increases when the price falls and vice versa.
Then, if we take individual demand for all consumers in the market, we get market demand. Therefore, individual demand and market demand have the same determinants. In addition to price, demand is also influenced by factors such as income, expectations of future prices, prices of related goods (substitutes and complements), and tastes and preferences.
What do “willing” and “able to buy” mean?
We need to keep in mind two keywords when studying demand in microeconomics: willingness and ability to pay. As consumers, willing means we want goods. For example, we want a car to facilitate our daily transportation. Or, we need food to meet energy, protein, and minerals to support daily activities. If, for example, we didn’t want a car, of course, there would be no demand.
Meanwhile, the ability to buy shows we have the resources to get things. It usually means we have money. For example, we have enough savings to buy a car.
Take a simple case. When we want a car but can’t afford it, it doesn’t generate demand. Vice versa, we can afford to buy a car because we have a lot of money. But we don’t want it. So it’s also not going to lead to demand.
How to draw the individual demand curve?
Before explaining how we describe individual demand curves, let us briefly review the law of demand. It expresses the inverse relationship between price and quantity demanded. When the price of a good rises, the quantity demanded by individuals will fall. Vice versa, when the price falls, the quantity demanded by individuals will increase.
Such a negative relationship applies to most goods. In economics, we call them normal goods. The two exceptions to the law of demand are Veblen goods and Giffen goods. The quantity of a Veblen good demanded rises as its price rises. Meanwhile, the quantity of a Giffen good demanded falls when its price falls.
Next, in describing the individual demand curve, we assume the non-price factor is constant or ceteris paribus. For example, we assume consumers’ incomes and tastes do not change. Thus, the quantity demanded by consumers only depends on price.
For any given price level, the quantity demanded is also different. As per the law above, quantity increases as price decreases. Then, we can present each price and quantity combination in a table. Suppose, below is the table:
| Price ($) | Quantity demanded (units) |
| 7 | 3 |
| 6 | 6 |
| 5 | 9 |
| 4 | 12 |
| 3 | 15 |
| 2 | 18 |
| 1 | 21 |
Say, the table above describes the relationship between the price of chocolate and its quantity demanded. In the table, we can see, for $7, a consumer is willing and able to buy three chocolate bars. When the price dropped to $4, he was willing and able to buy 12 bars. Then, if the price is $1, the quantity demanded is 21 chocolate bars.
Then, we plot each combination of price and quantity demanded onto a two-dimensional graph to draw the individual demand curve. As a note to us, economists use the X-axis to represent quantity demanded, while the Y-axis represents a price. Thus the demand curve tells us, price is a function of quantity demanded.
Each combination formed represents a point on the curve. Because there are seven combinations above, then in the graph, we also get 7 points. Then, we can draw a straight line to connect the seven points. The results are as follows:
As per the law of demand, the curve is downward sloping, showing an inverse relationship between price and quantity demanded. Thus, the lower the price, the more quantity demanded.
Is the combination of quantity and price above what consumers are really buying? The answer is no. They are just an indication. They simply explain how much they are ready to buy for each given price level. And, in reality, how many chocolates to buy and how many dollars to pay is determined through the interaction of demand with supply to form an equilibrium.
What are the determinants of individual demand?
Price is the main determinant of individual demand. At least, the reason is that economists use it to explain demand theory. But, in reality, consumers do not only consider the price.
There are various factors considered by consumers. They include:
- Income. When income rises, more dollars can be spent on a product. For normal goods, it is positively correlated with demand. I mean, demand increases when consumers have more income. In contrast, the correlation is negative for inferior goods, indicating a decrease in demand as income rises.
- Future price expectations. If buyers expect the price to increase in the future, they will buy now before it goes up. On the other hand, when the price is downward, they delay buying, waiting for it to fall further to get a cheaper price.
- Price of substitute goods. When the price of a product rises, some consumers will turn to its substitutes because they both satisfy the same need. Conversely, if the price falls, they will shift demand from substitute products to it.
- Prices of complementary goods. For example, when the price of a printer goes down, its demand goes up, and so does the demand for ink, which is its complement. Conversely, if the price of printers increases, the demand for ink will also fall following the decline in demand for printers.
- Tastes and preferences. When consumers are attracted to a product, they can spend more dollars to get more. Conversely, if they are bored or have no taste for the product, they will switch to alternative products.
- Branding. For example, a company can create consumer interest or preference for a product through promotion or advertising. That ultimately leads to higher demand.
How are individual consumer demand and market demand related?
Individual demand comes from one person. Meanwhile, market demand comes from several individuals in the market who are willing to buy and have the ability to buy.
Thus, we get market demand if we add up the individual demand for all consumers at a given price point. And, to draw it into a curve, we do the sum for each different price level.
For example, for $10, 4 people are willing and able to buy. Each bought 2 units. So, the total market demand at this price is 8 units (4 x 2 units).
Then, at $8, there are 6 people, each buying 3 units. So, the total market demand is 18 units (6 x 3 units).
From the total quantity demanded at each different price level, we can graph it. The process is similar to the one I previously described. We can then draw a line to depict the market demand curve.
Since market demand is derived from individual demands, they are both affected by the same factors. The factors can be seen again at the top. Then, in particular, market demand is also influenced by the number of consumers in the market. When the number of consumers increases, market demand also increases.
