Demand

Quantity demanded (Qd)

Amount of a good or service consumers are
willing & able to purchase during a given
period of time

2-1

Definitions
Demand function
Quantity demand as a function of the independent
variables that influence the quantity demanded

Direct demand
The direct relationship between the quantity demanded
and price (other independent variables held constant)

Inverse demand
The direct relationship between price and quantity
demanded

Demand curve
A graphical presentation of inverse demand

2-2

General Demand Function

Six variables that influence Qd
Price of good or service (P)
Incomes of consumers (M)
Prices of related goods & services (PR)
Taste patterns of consumers (T)

Expected future price of product (Pe)

Number of consumers in market (N)

General demand function

Qd = f(P, M, PR, T, Pe , N)
2-3

General Demand Function

Qd = a + bP + cM + dPR + eT + fPe + gN
b, c, d, e, f, & g are slope parameters
Measure effect on Qd of changing one of the
variables while holding the others constant

Sign of parameter shows how variable is

related to Qd
Positive sign indicates direct relationship
Negative sign indicates inverse relationship
2-4

General Demand Function

Variable

Relation to Qd

Inverse

Direct for normal goods

Inverse for inferior goods

PR

Sign of Slope Parameter

b = Qd/ P is negative

c = Qd/ M
c = Qd/ M
d = Qd/ PR
Direct for substitutes
Inverse for complements d = Qd/ PR

is positive
is negative
is positive
is negative

Direct

e = Qd/ T is positive

Pe

Direct

f = Qd/ Pe is positive

Direct

g = Qd/ N is positive

2-5

Direct Demand Function

The direct demand function, or simply
demand, shows how quantity demanded,
Qd , is related to product price, P, when all
other variables are held constant
Qd = f(P)

Law of Demand
Qd increases when P falls, all else constant
Qd decreases when P rises, all else constant
Qd/ P must be negative
2-6

Direct Demand Function

Demand for Pork

Qd f ( p, pb, pc, Y )
Qd 171 20 p 20 pb 3 pc 2 y
Qd / pb 20, q / pc 3, q / y 2
pb 4, pc 3, y 13
Qd 286 20 p
2-7

Inverse Demand Function

Traditionally, price (P) is plotted on the
vertical axis & quantity demanded (Qd) is
plotted on the horizontal axis
The equation plotted is the inverse demand
function, P = f(Qd)

2-8

Inverse Demand Function

How much consumers are willing to pay
as a function of quantity
Q 286 20 p
p 14.30 0.05Q
p / Q .05

2-9

Graphing Demand Curves

A point on a direct demand curve shows
either:
Maximum amount of a good that will be
purchased for a given price
Maximum price consumers will pay for a
specific amount of the good

2-10

Direct Demand Function

Q D ( p, M , PR )
Qd 3,200 10 p .05M 24 PR
M 60,000, PR 200
Qd 1,400 10 P
Qd / M .05
Inverse demand function
P 140-1/ 10Qd
2-11

Demand Schedule

2-12

A Demand Curve

(Figure 2.1)

2-13

Graphing Demand Curves

Change in quantity demanded
Occurs when only price changes
Movement along demand curve

Change in demand
Occurs when one of the other variables, or
determinants of demand, changes
Demand curve shifts rightward or leftward

2-14

Three Demand Shifts

2-15

2-16

Shifts in Demand

(Figure 2.2)

2-17