CHAPTER • Individual and Market Demand 129 domestic demand because poorer countries that import U.S wheat turn to other grains and foodstuffs if wheat prices rise.3 To obtain the world demand for wheat, we set the left side of each demand equation equal to the quantity of wheat (the variable on the horizontal axis) We then add the right side of the equations, obtaining QDD + QDE = (1430 - 55P ) + (1470 - 70P ) = 2900 - 125P This generates the line segment EF in Figure 4.12 At all prices above point C, however, there is no export demand, so that world demand and domestic demand are identical As a result, for all prices above C, world demand is given by line segment AE (If we were to add QDE for prices above C, we would be incorrectly adding a negative export demand to a positive domestic demand.) As the figure shows, the resulting total demand for wheat, given by AEF, is kinked The kink occurs at point E, the price level above which there is no export demand Speculative Demand So far in our treatment of demand, we have assumed that consumers are “rational,” in that they allocate their income among various goods and services to maximize their overall satisfaction At times, however, the demands for some goods are based not on the satisfaction one obtains from actually consuming the good, but instead on the belief that the price of the good will rise In that case, it might be possible to profit by buying the good and then reselling it later at a higher price This speculative demand is partly to blame for the sharp increases in housing prices that occurred in the U.S., Europe, and China during the past decade Speculative demand is often (but as we will explain in Chapter 5, not always) irrational People see that the price of a good has been rising, and somehow conclude that the price will therefore keep rising But there is usually no rational E XAMPLE 4 • speculative demand Demand driven not by the direct benefits one obtains from owning or consuming a good but instead by an expectation that the price of the good will increase THE DEMAND FOR HOUSING Housing is typically the most important single expenditure in a household’s budget—on average, households spend 25 percent of their income on housing A family’s demand for housing depends on the age and status of the household making the purchasing decision One approach to the housing demand is to relate the number of rooms per house for each household (the quantity demanded) both to an estimate of the price of an additional room in a house and to the household’s family income (Prices of rooms vary because of differences in construction costs, including the price of For a survey of statistical studies of demand and supply elasticities and an analysis of the U.S wheat market, see Larry Salathe and Sudchada Langley, “An Empirical Analysis of Alternative Export Subsidy Programs for U.S Wheat,” Agricultural Economics Research 38, No (Winter 1986)