Cambridge IGCSE Economics 0455 – Allocation of Resources: Demand
Allocation of Resources – Demand
Objective
Understand the link between individual demand and market demand.
1. Individual Demand
Individual demand shows the relationship between the price of a good and the quantity that a single consumer is willing and able to buy, ceteris paribus.
Law of Demand: As price falls, quantity demanded rises, and vice‑versa.
Determinants of individual demand:
Income
Prices of related goods (substitutes and complements)
Tastes and preferences
Expectations of future prices
Number of buyers
2. The Demand Curve
The demand curve is a graphical representation of the individual demand schedule. It is typically downward‑sloping.
Suggested diagram: Individual demand curve showing price on the vertical axis and quantity on the horizontal axis.
3. From Individual Demand to Market Demand
Market demand is the total quantity of a good that all consumers in a market are willing and able to purchase at each possible price.
It is derived by horizontally adding the individual demand schedules of all consumers.
4. Constructing a Market Demand Schedule
Consider three consumers (A, B, C) with the following individual demand schedules for Good X:
Price ($)
Quantity demanded by A
Quantity demanded by B
Quantity demanded by C
Market Quantity Demanded
10
2
1
0
3
8
3
2
1
6
6
4
3
2
9
4
5
4
3
12
2
6
5
4
15
Notice how the market quantity demanded at each price is the sum of the quantities demanded by A, B and C.
5. Market Demand Curve
Plotting the market quantities against price yields the market demand curve, which is also downward‑sloping but reflects the aggregate behaviour of all consumers.
Suggested diagram: Market demand curve derived from the table above.
6. Shifts in Market Demand
A shift in the market demand curve occurs when a determinant of demand changes for one or more consumers. The direction of the shift depends on the nature of the change.
Increase in income (for normal goods) → market demand shifts right.
Decrease in the price of a substitute → market demand shifts left.
Change in consumer preferences favouring the good → market demand shifts right.
Increase in the number of buyers → market demand shifts right.
7. Summary
Individual demand shows the price‑quantity relationship for a single consumer.
The demand curve is downward‑sloping because of the law of demand.
Market demand is the horizontal sum of all individual demand curves.
Changes in any determinant of demand for any consumer can shift the market demand curve.
8. Quick Check Questions
Explain why a fall in the price of a complementary good causes the market demand for the original good to shift left.
Given the individual demand schedules below, calculate the market quantity demanded at a price of $5:
Consumer D: 3 units
Consumer E: 2 units
Consumer F: 4 units
What would happen to the market demand curve if a new technology made the good cheaper to produce, thereby reducing its price? Explain.