Individual demand curve
The individual demand curve for a good, service, or commodity, is defined with the following in the background:
- The specific good, service, or commodity.
- A unit for measuring the quantity of that commodity.
- A unit for measuring price.
- A convention on whether sales taxes are included in the stated price.
- A certain economic actor (individual, household, or firm -- profit-making, nonprofit, or governmental)
- A time frame within which the demand is measured.
- An economic backdrop that includes all the determinants of demand other than the unit price of that commodity.
The demand curve is a curve drawn with:
- The vertical axis is the price axis, measuring the price per unit of the commodity.
- The horizontal axis is the quantity axis, measuring the quantity of the commodity demanded by the specific economic actor.
Here quantity demanded is understood to be the maximum quantity that the economic actor would be ready, willing, and able to purchase at the given price.
Note that the individual demand curve makes sense only ceteris paribus -- all other determinants of demand being kept constant.
The term individual demand is used for the entire price-quantity relationship depicted pictorially by the demand curve. Explicitly, the individual demand fuction refers to the function that outputs, at any given price, the quantity demanded at that price. A demand schedule is a discrete version of the demand curve, specifying demand values for a number of different prices.
One way of interpreting demand is as desire. Here, demand refers to what buyers want. This type of demand can exist even if the good does not exist at all, and even if the potential buyer does not have a clear idea of what the good would look like. This is the type of demand that is referred to when an entrepreneur identifies an as yet untapped market and claims that there is a "demand" for a certain good or service that does not yet exist. This type of demand as desire does not correspond to an individual demand curve.
The second interpretation of demand is the more concrete one -- quantity demanded is understood to be the maximum quantity that the economic actor would be willing and able to purchase at the given price. The individual demand curve simply plots the relationship between price and quantity demanded.
Relation with market demand curve
The market demand curve for a good within a given market is obtained by adding up the individual demand curves of all economic actors in that market.
A lot of interesting and quirky phenomena may be obtained at the level of individual demand curves but may become less visible (due to smoothing and averaging out) at the aggregate level because of the canceling out or smoothing out effects. Some examples are discussed below:
- For items where purchase quantities are discrete, individual demand curves are by nature discontinuous, while aggregate demand curves are likely to be continuous given sufficient heterogeneity among individuals. Note that individual demand quantities could be fractional even with discrete purchase quantities -- for instance, my weekly number of loaves of bread purchased could be if I purchase a loaf of bread every second day.
- Individual demand curves are more likely to exhibit sharp discontinuities for other reasons: Individuals may use threshold prices and reference prices to determine which item to purchase and how much. For instance, if, for me, and are equivalent goods (i.e., they are perfect substitute goods for each other, then I buy none of when its price exceeds that of , but I shift my entire consumption to when its price drops below that of . The price of is thus a point of discontinuity in the demand curve. In the aggregate, the heterogeneity of individuals ensures that they do not all perceive the same pairs of goods as perfect substitutes, and hence these jumps are less likely to occur.
- Various violations of the law of demand, both rational and irrational, are more likely to be seen at the individual level than at the aggregate level: For instance, the Giffen good phenomenon and the Veblen good phenomenon may play an important role in the consumption behavior of one individual or household, but because of differing incomes and differing tastes and preferences that lead individuals to value substitutes differently, the phenomena would not apply to all economic actors. Since an aggregate Giffen good phenomenon depends on the phenomenon affecting a large number of individuals, aggregate Giffen good phenomena may be much rarer than individual Giffen good phenomena. The same holds for various forms of mild irrationality and idiosyncratic behavior.