Question

. Andrew, an enthusiastic five-year-old, has strong demand for chocolate ice cream and three dips barely satisfies that desire. Yet when it comes to adding individual demand for market demand, Andrew’s demand doesn’t count. How can this be? Is market demand an underestimation of true consumer demand?

Answer 1

Let us answer the question as below.

Conceptually demand is the desire for a commodity for which the consumer has ability and willingness to pay. There are two concepts of demand for a commodity. Those are individual demand and market demand. Individual demand means the desire of an individual consumer for a commodity for which he /she has ability to pay and willingness to pay for the commodity (example: like Andrew in the question). Market demand for a commodity refers to the sum of individual demands for the commodity.

Demand for a commodity arises because the use of the commodity gives utility to the consumer. Utility means pleasure and satisfaction derived from consumption from a commodity.

There are two approaches to the measurability of utility. Those are cardinal utility approach and ordinal utility approach. Under cardinal utility approach, utility is measured cardinally, i.e. in cardinal numbers. For example it can be measured in terms of money one is willing to pay for a unit of a commodity under the condition that marginal utility of money remains constant. Cardinal utility approach develops the law of diminishing marginal utility, i.e. the utility derived from marginal unit consumed goes on diminishing. Ordinal utility approach is based on the assumption that utility is measurable ordinally or comparatively only, i.e. in order of the importance of different goods.

According to the law of demand, change in price causes change in demand called price effect which in turn depends upon income effect and substitution effect.

As stated above, market demand refers to the sum of individual demands for a product at a given price at a point of time. Determinants of market demand for a product are price of the product, price of the substitute goods, price of the complimentary goods, consumers’ income, tastes and preferences, advertisements, expectation about future price, demonstration effect, credit facility, population of the relevant market segment.

So if we analyse the above factors, we can understand market demand dominates than individual demand in a market because determinants of market demand plays the vital role and that specifically answers the question.
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