INDIVIDUAL

AND MARKET
DEMAND
INDEX
The individual demand is the demand
of one individual or firm. It represents
the quantity of a good that a single
consumer would buy at a specific price
point at a specific point in time.

PRICE QTY
100 5
80 10
60 12
40 15
20 20
10 30
INDIVIDUAL DEMAND SCHEDULE
Engel Curves
Engel curves relate the quantity of good
consumed to income.
If the good is a normal good, the Engel
curve is upward sloping.
If the good is an inferior good, the Engel
curve is downward sloping.

Engel Curves
Market demand provides the total
quantity demanded by all consumers. It
represents the aggregate of all
individual demands.

DETERMINING THE MARKET
DEMAND CURVE
Price Individual A Individual B Individual C Market
($) (units) (units) (units) (units)
1 6 10 16 32
2 4 8 13 25
3 2 6 10 18
4 0 4 7 11
5 0 2 4 6
Summing to Obtain a
Market Demand Curve
1
2
3
4
Price
0
5
5 10 15 20 25 30
D
B
D
C
Market Demand
D
A
The market demand
curve is obtained by
summing the consumers
demand curves
INCOME & SUBSTITUTION
EFfECTS
Income Effect
Consumers experience an increase in real
purchasing power when the price of one
good falls.
Substitution Effect
Consumers will tend to buy more of the
good that has become relatively
cheaper, and less of the good that is now
relatively more expensive.
INCOME & SUBSTITUTION EFFECT :
NORMAL GOOD
Food (units
per month)
O
Clothing
(units per
month)
R
F
1
S
C
1
A
U
1
C
2
F
2
T
U
2
B
When the price of food falls,
consumption increases by F
1
F
2
as the
consumer moves from A to B.
E
Total Effect
Substitution
Effect
D
The substitution effect,F
1
E,
(from point A to D), changes the
relative prices but keeps real income
(satisfaction) constant.
The income effect, EF
2
,
( from D to B) keeps relative
prices constant but
increases purchasing power.
S
INCOME & SUBSTITUTION EFFECT :
INFERIOR GOOD
Food (units
per month)
O
R
Clothing
(units per
month)
F
1
S F
2
T
A
U
1
E
Substitution
Effect
D
Total Effect
Since food is an
inferior good, the
income effect is
negative. However,
the substitution effect
is larger than the
income effect.
B
Income Effect
U
2
Consumer Surplus
The difference between the maximum
amount a consumer is willing to pay
for a good and the amount actually
paid.

Rock Concert Tickets
Price
(Rs.per
ticket)
60
80
100
120
140
160
180
200
Market Price
1 2 3 4 5 6