What this lesson teaches
I can explain that market demand adds up the demand of every buyer.
Syllabus 8843, 2.1.2(a). Demand and Supply Analysis and its Applications: Market demand as a summation of individual demand
I can explain that market supply adds up the supply of every seller.
Syllabus 8843, 2.1.2(b). Demand and Supply Analysis and its Applications: Market supply as a summation of individual supply
Make a guess
At $3 a bowl, Ali would buy 4 bowls of noodles a week and Bala would buy 2. What does the market demand curve show at $3?
- A price of $6, because each buyer pays $3.
- 6 bowls a week.
- 3 bowls a week, the average of the two buyers.
Show the answer
6 bowls a week.
A market curve adds every buyer's quantity at the same price. At $3 that is 4 + 2 = 6 bowls.
Add up quantities at each price, not the prices.
A market demand curve adds together every buyer's quantity at each price. If at $2 Amy buys 3 and Ben buys 4, market quantity demanded at $2 is 7.
Market supply works the same way: add every seller's quantity at each price.
This is called horizontal summation, because quantity is on the horizontal axis. Repeat it at several prices to trace out the whole market curve.
- Market demand
- Add every buyer's quantity at each price.
- Market supply
- Add every seller's quantity at each price.
- Never add prices
- Hold the price fixed; add quantities.
| Price | Buyer A | Buyer B | Market demand | Seller X | Seller Y | Market supply |
|---|---|---|---|---|---|---|
| $4 | 8 | 5 | 13 | 2 | 3 | 5 |
| $6 | 6 | 3 | 9 | 4 | 5 | 9 |
Worked example: Building a weekly notebook market
Two buyers and two sellers trade identical notebooks. The table shows each one's weekly quantity at $4 and at $6.
- At $4: market demand is 8 + 5 = 13; market supply is 2 + 3 = 5.
- At $6: market demand is 6 + 3 = 9; market supply is 4 + 5 = 9.
- At $6, quantity demanded equals quantity supplied, so $6 is the equilibrium price and 9 notebooks the equilibrium quantity.
- At $4 there is a shortage of 13 - 5 = 8 notebooks.
Watch out for this
To get the market price, add the prices each buyer would pay.
Prices are never added. Hold the price fixed and add the quantities.
Check your understanding
At $7 a notebook, three sellers offer 0, 4 and 9 notebooks a week. What is market quantity supplied at $7?
- 9 notebooks, from the biggest seller.
- $21.
- 13 notebooks a week.
Show the answer
13 notebooks a week.
Right. Add the quantities at the same price: 0 + 4 + 9 = 13.