Published on June 30, 2009
Topics Linear Function Definition of Demand Definition of Demand Function Generalized Demand Function Factors Affecting Demand Function Slope Parameters
Linear Function Definition An algebraic equation in which the highest degree term in the variable or variables is of the first degree. The graph of such an equation is a straight line if there are two variables. In linear equation there are two variable names independent variable and dependent variable.
Linear Equation Cont… A common form of a linear equation in the two variables x and y is y = mx + c Where 'x' and 'y' are the coordinates of the points that satisfy the function and so lie on the straight line graph. 'm' is the gradient of the straight line graph, and 'c' is the 'y intercept' of the straight line graph.
Linear Equation Cont…
Definition of Demand Demand is the amount of goods and services that consumers in a market are willing and able to purchase during a given period of time
Definition of Demand Function A Demand Function expresses quantity demanded as a function of product price The relation between price and quantity demanded per period of time, when all other factor that affects consumer demand are held constant, is called a demand function A Demand function can be expressed in a most general form as the equation Qd = a – bP Where Qd is quantity demanded a is intercept b is slope (b = Qd/P)
Generalized Demand Function Quantity Demanded Qd= a + bP + cM + dPR+ eT + fPe + gN b, c, d, e, f and g are slope parameters P = Price of the goods or services M = Consumers Income PR = Price of related goods or services T = Taste pattern of consumers Pe = Expected price of the goods in some future period N = Number of Consumers in the market
Factors Affecting Demand Function P = Price of the goods or services Qd= a + bP + cM + dPR+ eT + fPe + gN There is an inverse relation between the Quality demanded Here the slope is negative i.e. b is negative
Factors Affecting Demand Function M = Consumers Income Qd= a + bP + cM + dPR+ eT + fPe + gN Direct for normal goods (c is +ve) Inverse for inferior goods (c is –ve)
Factors Affecting Demand Function PR = Price of related goods or services Qd= a + bP + cM + dPR+ eT + fPe + gN Direct for substitutes (d is +ve) Inverse for complements (d is -ve)
Factors Affecting Demand Function T = Taste pattern of consumers Qd= a + bP + cM + dPR+ eT + fPe + gN It has the direct relation (e is +ve)
Factors Affecting Demand Function Pe = Expected price of the goods in some future period Qd= a + bP + cM + dPR+ eT + fPe + gN It has the direct relation (f is +ve)
Factors Affecting Demand Function N = Number of Consumers in the market Qd= a + bP + cM + dPR+ eT + fPe + gN It has the direct relation (g is +ve)
Factors Affecting Demand Function
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