Derivation of Market Demand Curve
An individual demand curve shows the demand of only an individual. But it is necessary to have the knowledge of total demand of all the consumers in market to explain the market behavior. The market demand schedule is derived from individual demand schedule by summing up the demand of all consumers at a particular price. The market demand schedule is prepared after deriving the total demand at different prices. This schedule when converted into a figure is called market demand curve. According to R. G. Lipsey –“the market demand curve is the horizontal sum of the demand curves of all the households in the market.”
The market demand curve shows the relationship of total quantity demanded with price. The price of other commodities, total household income, distribution of income and taste of consumers are assumed to be constant.
The quantity of sugar demanded by three consumers and the total market demand at different prices has been presented in the table below:
Individual
and Market Demand Schedule
|
Price ($ per kilo)
|
Demand of A (Kilo per month)
|
Demand of B (Kilo per month)
|
Demand of C (Kilo per month)
|
Market Demand (Kilo per month)
|
|
2
4
6
8
10
12
|
40
30
24
18
14
10
|
45
35
30
20
15
13
|
18
16
13
12
11
8
|
103
81
67
50
40
31
|
A market demand curve is derived by the horizontal summation of the demand curves of all individuals in the market. The market demand curve has been presented in the figure below. It is derived on the basis of the above table.
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| Market Demand Curve |
In the figure, DM is the market demand curve. The market demand curve is derived by summing up the individual demand curves. The market demand curve of a commodity can be derived by joining the points of quantity demanded at different prices.
Shift in Demand Curve
At first, it is necessary to distinguish between shifts in the demand curve and movement along a given demand curve.
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| Shift in Demand Curve |
The distinction between these two kinds of demand change is very important. According to David Begg and others, “Movement along the demand curve represents consumer adjustment to changes in the market price. Shifts in demand, by contrast, represent adjustment to outside factors (other prices, income, tastes) and lead in turn to changes in equilibrium price and quantity”. The change in quantity demanded may occur only due to the change in the price of the commodity concerned. This makes a consumer move from one point of same demand curve. The change in quantity demanded due to the reasons other than price of the commodity causes shift in the entire demand curve.
In the figure, when demand curve is D, price is OP, the quantity demanded is OQ. Now suppose that the demand for the commodity increases. As a result of this, the demand curve shifts to the right in the form of D1. The quantity demanded increases from OQ to OQ1 at the same price. Likewise, if the demand falls, demand curve shifts to the left in the form of D2. The quantity demanded decreases from OQ to OQ2 at the same price. The change in demand leads to the change in equilibrium point. Hence, the shift in the demand curve changes the equilibrium price and quantity in the market. This can be shown only by using supply curve.
In general, when price of a commodity increases, less is demanded. But if demand increases, people buy more even if price rises. If the demand has increased due to increase in income, people buy more even at higher price. According to Watson and Getz, “A demand curve is like a still picture. Behind the price-quantity relation are always the tastes of buyers, their incomes, and the prices of substitute and complementary commodities. When they change, the demand curve changes, shifting to the right or to the left. Demand curves are thus in constant motion, motion picture would be far better than still photographs”.
Factors Causing the Shift in Demand Curve
The changes in demand causes shift in the demand curve. The changes in demand are caused by changes in income, tastes and prices of related goods such as substitutes and complements. The causes of changes in demand has been shown in the following table.
Causes of
Change in Demand
|
Demand Increase
|
Demand Decrease
|
|
1. Consumer desires become stronger
2. Consumer incomes rise
3. Price of substitutes rise
4. Price of complements fall
|
1. Consumer desires become weaker
2. Consumer incomes fall
3. Price of substitutes fall
4. Price of complements rise.
|
The factors causing the shift in demand curve are as follows:
1. Price of related goods: The demand for a commodity and the price of related goods have two types of relationships. A fall in the price of a commodity may increase or decrease the demand for other commodity. If the fall in the price of one goods leads to the fall in the demand for other commodity, those goods are called substitutes. As for example, when price of coffee falls, the demand for tea falls. When price of coffee falls, consumers buy more of coffee and buy less of its substitute, tea. In case of substitutes, the demand for a commodity varies directly with the price of substitutes.
If the fall in price of a commodity leads to the rise in demand for other commodity, those goods are called complements. Because if the price of a commodity falls, more of it is consumed and the complementary goods is also consumed more. This kind of relationship exists in the goods that should be consumed together. As for example, pen and ink, car and petrol, shoe and shoelaces.
2. Consumer Incomes: The quantity demanded of a commodity changes with the change in consumer incomes. In general, when income increases, people demand more of a commodity. If the demand increases with the increase in income, such goods are called normal goods. On the contrary if the demand decreases with the increase in income, such goods are called inferior goods. Most goods are normal goods. The inferior goods are typically cheap. As consumer incomes rise, they spend less in cheaper goods like inferior quality rice.
3. Consumer tastes and fashion: The tastes and fashion of consumers change from time to time. If the consumer taste for a particular commodity increases, the demand for that commodity increases. On the other hand, if the taste decreases for that commodity, the demand for that commodity decreases. As for example, the taste for kurta-paijama among Nepalese women has increased these days, which has increases the demand for them. Likewise, the fashion for mini-skirts has reduced the demand for textile materials.
In past, the tastes and fashion were shaped by convenience, custom, and social attitudes. But they can be changed by advertisement and increase in knowledge.
4. Technological progress: The new commodities produced due to technological progress reduce the demand for old commodities. As for example, the demand for piano has declined and that of radio, television has increased. The supply of electricity has reduced the demand for kerosene mantles.
5. Change in size and composition of population: The increase in population increase the demand for goods and services. The scarcity of water at Kathmandu, and appreciable rise in price of food grains is due to high growth of population. Likewise, the change in composition of population also changes the demand for goods. The increase in female population leads to increase in demand for saris, lipsticks, and ornaments.
6. Change in distribution of income: The change in distribution of income in favor of the poor people increases the demand for many things. If the distribution of income is concentrated on rich, the demand for luxuries will be high.
7. Taxation policy: If the taxes are levied deliberately to reduce the demand for commodity, the demand will fall. Since few years back wines, beers and tobacco have been heavily taxed so as to reduce consumption. Similarly, high import taxes are levied on luxury goods such as motorcar, television, and video deck simply to reduce demand.
8. Change in real income: The increase in quantity of money increases the price level. This reduces the real income of people. Consequently people buy less due to fall in purchasing power. The increase in real income may have little effect on necessaries like foodstuffs. But it may considerably increase the demand for luxuries and semi-luxuries.
9. Expectations: If the people feel future shortage of commodity or rise in price, the demand will increase at present.