Individual to Market Demand

We now have a theory of the individual's demand curve. The theory tells us that the individual's demand curve is identical with the individual's marginal benefit curve. But, for supply and demand analysis, we need the market demand curve.

That's actually pretty easy. At any price, the market demand is the sum of the amounts demanded by each of the individuals. That is, the market demand is the horizontal sum of the individual demands.

Figure 2. Individual and Market Demand

The diagram shows individual demand curves for Tom, Dick and Harry. The thick gray line is the demand curve for a market consisting of Tom, Dick and Harry.

In a market equilibrium, Tom, Dick and Harry will each pay the same price and adjust their purchases to the price. Each will be paying a price equal to his own marginal benefit. Thus

  1. The marginal benefit is the same for each of the consumers who buys the product.
  2. The market price measures the marginal benefit of one more unit of production, whoever may buy it.
We can see from this that the fundamental principle of consumers' demand applies to the market as a whole just as it applies to an individual consumer. For the market as for the individual consumer,

Fundamental Principle of Consumers' Demand:
The demand curve for any product or service is identical with the marginal benefit curve for that good or service.

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