Question

Explain the law of demand. Why does a demand curve slope downward? How is a market demand curve derived from individual demand curves?

Short answer

The law of demand explains that the quantity demanded for a good and its price move in the opposite directions.

The demand curve follows the negative association between the quantity demanded and the price, which makes it slope downward.

The market demand curve is derived by horizontally adding the individual demand curves at each price.

Step-by-step solution

Law of demand 

The law of demand shows how the price and quantity demanded of a good are related. It shows how the quantity demanded negatively responds to a change in the price of a good and vice versa. For example, an increase in the price of ice cream decreases its quantity demanded.

Reason for the downward sloping demand curve

The demand curve follows the demand law, which implies that a consumer will increase the consumption of a good if its price decreases and decrease the consumption if the price increases.

For example, if the price of ice cream falls from $6 to $4, the quantity demanded will increase from 10 units to 15 units. These points are shown in the below downward sloping demand curve.

Deriving market demand curve from individual demand curves

The market demand curve shows the total quantity demanded by all the Individuals present in a good or service market. It is derived by adding up the individual demand curves horizontally, showing the total quantity demanded (market demand) at different prices.

For example, at a $4 price, person A demands 10 units, and person B demands 5 units of a good. The total market demand is 15 units (=10+5) when the price is $4.

Thus, we can horizontally add the individual demand curves $D_A$and $D_B$at all prices and get the whole market demand curve $D_A+D_B$.