Creating a market demand from the individual demands of consumers.

Businesses do not face the demand for their products as measured at the individual level. They must respond to the sum of all consumers' demands. If a business has a particular supply relationship, they must adjust their asking price as consumers enter and leave the market, and as the mix of consumer tastes change.

Exploration: How does the demand for a product by the individual consumer and the mix of consumer types translate into the market demand faced by businesses?

The window above illustrates the horizontal summation of individual demand curves into a market demand. This is precisely analogous to Figure 5.8 in your text. In this case we have two consumers, Type-A and Type-B. Type-A consumers wish to purchase 3 widgets (a widget is an imaginary product used by economists to make a point) at a price of $6 each and 7 widgets at a price of $2 each. Type-B consumers like widgets better than Type-A consumers do and wish to purchase 6 at a price of $6 and 14 at a price of $2. These relationships are illustrated in the left two graphs. To get the market demand for widgets we need only add the individual quantities demanded at each price. In order to do this we need two more bits of information – how many Type-A and how many Type-B consumers are there in the market for widgets? In this case there are 75 Type-A and 50 Type-B consumers. The summation and the accompanying graph are at the top and right graph of the window.

To use this window, you may change the number of Type-A and Type-B consumers in the shaded boxes and you may insert the business's supply curve by clicking on the Show Supply button.

1. At the existing relationship, what is the market clearing (equilibrium) price and quantity?
   
   
2. What happens if widgets become more popular. (In this case Type-A consumers will turn into Type-B consumers.) For the purposes of this exercise, suppose 40 Type-A consumers suddenly like widgets better, becoming Type-B consumers. What is the effect on equilibrium price and quantity? (Before you begin, be sure the show supply button is on and your have reset the applet.)
   
   
3. How is an increase in the popularity of an item different from the addition of new consumers? For this example assume 40 new consumers entered the market, distributed 60% Type-A and 40% Type-B, just as the original group. (Be sure to reset the applet before beginning.)
   
   
4. Why might we expect the differences between the outcome of question 3 and question 2?
   
   
5. If the market for widgets reduces (fewer consumers), will it make any difference if they are Type-A or Type-B consumers? (Assume a reduction of 12% of the total number of consumers.)
   
   
6. From the analysis in question 5, can you make any conclusion about businesses treating Type-A and Type-B consumers differently with buyers' clubs, special mailings, etc.?

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Exercise picked up from the 2e Economics textbook.