Question

Three people have the following individual demand schedules for Count Chocula cereal that show how many boxes each would purchase monthly at different prices: $$\begin{array}{cccc} \text { Price } & \text { Person 1 } & \text { Person 2 } & \text { Person 3 } \\\ \hline \$ 5.00 & 0 & 1 & 2 \\ \$ 4.50 & 0 & 2 & 3 \\ \$ 4.00 & 0 & 3 & 4 \\ \$ 3.50 & 1 & 3 & 5 \end{array}$$ a. What is the market demand schedule for this cereal? (Assume that these three people are the only buyers.) Draw the market demand curve. b. Why might the three people have different demand schedules?

Short answer

The market demand schedule can be obtained by summing the individual demands at each price level. The market demand curve is a line beginning from the highest price and highest quantity demanded, extending downwards as price decreases and quantity demanded increases. The different individual demands could be explained by each person's perception of the product's quality, taste, nutritional value, or their dietary constraints. Income level and economic perspectives might also contribute to individual variations.

Step-by-step solution

Creating Market Demand Schedule

To create the market demand schedule, sum up the number of boxes each person buys at each price level. This will become the quantity demanded on the market at these price levels.

Drawing Market Demand Curve

The y-axis of the market demand curve is the price level, and the x-axis is the quantity of cereal demanded (sum of individual demands). Plot the points from the market demand schedule (price vs quantity demanded). Starting from the highest price and highest quantity demanded, connect each point with a line extending downwards, representing the law of demand that quantity demanded decreases as price increases.

Discussing Different Individual Demand Schedules

The two basic variables affecting demand for a product are its price and the income level of the buyer. Other factors like personal preferences and tastes, or desirability of a product can affect it dramatically as well. For instance, Person 1 is willing to start buying cereal only if its price drops to $3.50, while Person 2 and Person 3 are ready to buy it at higher prices. There might be different perceptions about the product, like its quality, nutritional value, taste preferences, dietary constraints, or simple liking or disliking of the cereal. Different income levels and economic perspectives can also differ the individual demands.

Key concepts

Demand Curve

The demand curve is a graphical representation that shows the relationship between the price of a good or service and the quantity of that good or service that consumers are willing and able to purchase at various prices. It is typically downward-sloping from left to right, which indicates that as the price of a product decreases, the quantity demanded increases, and vice versa.

For example, in the case of Count Chocula cereal, the market demand curve would be derived by plotting the aggregated individual demands at different prices. In practice, this means adding up the number of boxes all three individuals are willing to buy at each price level, then graphing those points on a coordinate system where the y-axis represents price and the x-axis represents quantity demanded. Joining these points will give us a curve that reflects the total market demand. The steepness or flatness of this curve can vary greatly and is affected by factors like the availability of substitutes, the necessity of the product, and income levels.

Law of Demand

The law of demand is a fundamental principle of economics that states that, ceteris paribus (all other factors being equal), there is an inverse relationship between the price of a good or service and the quantity of that good or service that consumers are willing to buy. In other words, as the price of a product goes down, the demand for it generally increases, and as the price rises, the demand tends to decrease.

This principle can be vividly seen on the demand curve. The slope of the curve embodies the law of demand—showing that with each incremental decrease in price, there is a corresponding increase in the quantity demanded. The law explains consumer purchasing behavior based on individual self-interest, where consumers aim to maximize utility (satisfaction) while spending less money.

Individual Demand

Individual demand refers to the quantity of a good or service that a single consumer is willing and able to purchase at various prices, holding all other factors constant. Every person has their own unique demand schedule that is influenced by their personal preferences, income, and the perceived value of the product to them.

In the case of the Count Chocula cereal exercise, Person 1 does not demand any cereal until the price drops to $3.50, indicating a lower individual demand compared to Persons 2 and 3, who start buying at higher prices. This variation among individual demands can be due to a multitude of reasons such as differences in income, taste, dietary restrictions, brand loyalty, or price sensitivity. Each individual demand schedule is critical to compile a market demand schedule through aggregation, which is the sum of all individual demands for a product at each price level.