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184 CHAPTER 5 THE THEORY OF DEMAND
The discussion demonstrates that you must be careful when you add segment
demands to get a market demand curve. First, since the construction of a market demand
curve involves adding quantities, you must write the demand curves in the normal form
(with Q expressed as a function of P ) before adding them, rather than using the in-
verse form of the demand (with P written as a function of Q).
Second, you must pay attention to how the underlying individual demands vary
across the range of prices. In the example above, if you simply add the equations for
the individual demands to get the market demand Q Q (P) Q (P) 21 5P, this
h
c
m
expression is not valid for a price above $3. For example, if the price is $4, the expres-
sion Q 21 5P would tell you that the quantity demanded in the market would be
m
1 liter. Yet, as we can see by Table 5.1, the actual quantity demanded in the market at
that price is 3 liters. See if you can figure out why this approach leads to an error. (If
you give up, look at the footnote.) 16
MARKET DEMAND WITH NETWORK EXTERNALITIES
Thus far we have been assuming that each person’s demand for a good is independent
of everyone else’s demand. For example, the amount of chocolate a consumer wants
to purchase depends on that consumer’s income, the price of chocolate, and possibly
other prices, but not on anyone else’s demand for chocolate. This assumption enables
us to find the market demand curve for a good by adding up the demand curves of all
of the consumers in the market.
For some goods, however, a consumer’s demand does depend on how many other
network externalities people purchase the good. In that case, we say there are network externalities. If one
A demand characteristic consumer’s demand for a good increases with the number of other consumers who buy
present when the amount the good, the externality is positive. If the amount a consumer demands increases when
of a good demanded by one fewer other consumers have the good, the externality is negative. Many goods and
consumer depends on the services have network externalities.
number of other consumers
who purchase the good. Although we can often find network externalities related to physical networks (like
telephone networks), we may also see them in other settings (sometimes called virtual
networks because there is no physical connection among consumers). For example, the
computer software Microsoft Word would have some value in preparing written doc-
uments even if that software had only one user. However, the product becomes more
valuable to each user when it has many users. The virtual network of users makes it
possible for each user to exchange and process documents with many other users.
A virtual network may also be present if a good or service requires two comple-
mentary components to have value. For example, a computer operating system, such
as Microsoft Windows, has value only if software applications exist that can run on
the operating system. The operating system becomes more valuable as the number of
applications that can run on it increases. A software application also has a higher value
if it runs on a widely accepted operating system. Thus, more people using an operating
system leads to more software applications, raising the demand for the operating system,
and so on.

16 The error arises because we derived the market demand equation Q m 21 5P by adding Q h (P)
15 3P and Q c (P) 6 2P. According to these individual demand equations, when P 4, Q h (P) 3
and Q c (P) 2. Sure enough, the sum is 1. But you are assuming that the casual consumer demands a
negative quantity of orange juice ( 2 liters) when the price is $4, and this is economic nonsense! The
expression for the demand of the casual consumer Q c (P) 6 2P is not valid at a price of $4. At this
price, Q c (P) 0, not 2.