Consumer theory gives us individual demand. But markets have millions of buyers. How do individual choices combine into the demand curves we see in real markets?
Individual demand curves come directly from the consumer's optimization problem. As the price of a good falls, the budget line rotates outward, and the consumer chooses a new optimal bundle — typically buying more of the cheaper good. Tracing out these optimal quantities at each price gives the individual demand curve.
But a price change has two distinct effects. The substitution effect says that when a good becomes cheaper relative to others, consumers switch toward it. The income effect says that a lower price increases real purchasing power, allowing consumers to buy more of everything. For normal goods, both effects push in the same direction. For inferior goods, they push in opposite directions — which is why Giffen goods (where demand rises with price) are theoretically possible, though extremely rare.
Market demand aggregation is straightforward in principle: add up every consumer's quantity demanded at each price. But the result can have properties that individual curves do not — different segments of the market may respond differently to price changes, creating kinks and nonlinearities.
Understanding these mechanics is essential for predicting how markets respond to price changes, taxes, and subsidies. Interactive exercises let you decompose price changes into income and substitution effects on a graph, building the intuition you need.