Aggregate Demand

Aggregate Demand:

The demand curves (or functions) discussed above could be demand curves for a single individual. But the demand curves that we can observe are aggregated demand curves, i.e., the summation of each person’s quantity demanded at each price. We call that a horizontal summation of demand curves. The intercept of the aggregate, or market demand curve, is equal to the price paid by the single individual(s) with the highest willingness to pay for one unit of the good. If we lower the price a little bit, this individual may be prepared to buy two units, and there may be another individual which is now interested in buying one unit of the good. Hence at the maximum price the aggregate demand is equal to one, but at a slightly lower price it is equal to three. As we lower the price, more and more people are prepared to buy at least one unit of the good, and the people who has already bought some, may want to buy more. This lead to the simple conclusion that the aggregate demand curve must be than the individuals’ demand curves.

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