Demand Function

6 Key excerpts on "Demand Function"

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  eBook - ePub

  Intermediate Microeconomics: Neoclassical and Factually-oriented Models

  Neoclassical and Factually-oriented Models

  • Lester O. Bumas(Author)
  • 2015(Publication Date)
  • Routledge

    (Publisher)

    Some economic variables affect buyers and others affect producers. An increase in income allows buyers to purchase more and better products—but has no direct effect on the costs of their production and supply. Technological progress may dramatically change the way a product is made and its cost of production and supply, but that will not change the demand for it. A related matter is that demand and supply are generally, but not always, independent of each other. This creates the need to analyze each separately and in isolation from the other. There are few things as disheartening to instructors than finding students asked to confront demand-side issues slipping their analysis into the realm of supply and vice versa.

  Demand

  The Demand Function is defined as:

  Demand is the quantity of a product per unit of time, Q D willingly purchased at various prices, P , all other variables held constant.

  Note that the D in Q D is a superscript which identifies the quantity variable as associated with demand. Superscripts are used to identify variables particularly if subscripts are set aside for time tags, as P 96 for the price in 1996. If time tags are not used, subscripts are usually used for identification purposes.

  Standard Specifications of Demand and Supply Functions

  Several matters specified with regard to demand and supply functions warrant attention. (1) The variable “quantity” is generally shorthand for quantity per unit of time . Saying that 60,000 bushels of wheat will be purchased at a price of $4 per bushel just makes no sense. Will this quantity be purchased per hour, day, week, month, or year? The unit of time must be specified. (2) Demand and supply must refer to a standardized or homogeneous product or factor of production. The same supply function, for example, cannot refer to both the most rudimentary Chevy and the most sophisticated Cadillac. (3) In its basic form the quantities supplied and demanded are functions of price alone. This is because all other relevant variables are held constant—making them shift parameters . (4) Basic demand and supply functions are static. They only hold true during short durations of time; time periods during which shift parameters do not vary. (5) Supply and Demand Functions are really expectational. They cannot tell us how many cars will be bought per month, at various prices, but how many are expected

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  eBook - ePub

  Quantitative Techniques for Competition and Antitrust Analysis

  • Peter Davis, Eliana Garcés(Authors)
  • 2009(Publication Date)
  • Princeton University Press

    (Publisher)

  The analysis of demand is probably the single most important component of most empirical exercises in antitrust investigations. It is impossible to quantify the likelihood or the effect of a change in firm behavior if we do not have information about the potential response of its customers. Although every economist is familiar with the shape and meaning of the Demand Function, we will take the time to briefly review the derivation of the demand and its main properties since basic conceptual errors in its handling are not uncommon in practice. In subsequent chapters we will see that Demand Functions are critical for many results in empirical work undertaken in the competition arena.

  1.1.1 Demand Functions

  We begin this chapter by reviewing the basic characteristics of individual demand and the derivation of aggregate Demand Functions.

  Figure 1.1. (Inverse) Demand Function.

  1.1.1.1 The Anatomy of a Demand Function

  An individual’s Demand Function describes the amount of a good that a consumer would buy as a function of variables that are thought to affect this decision such as price

  Pi

  and often income y . Figure 1.1 presents an example of an individual linear Demand Function for a homogeneous product:

  Qi

  = 50 − 0.5

  Pi

  or rather for the inverse Demand Function,

  Pi

  = 100 − 2

  Qi

  . More generally, we may write

  Qi

  = D (

  Pi

  , y ).1 Inverting the demand curve to express price as a function of quantity demanded and other variables yields the “inverse demand curve”

  Pi

  = P (

  Qi

  , y ). Standard graphs of an individual’s demand curve plot the quantity demanded of the good at each level of its own price and take as a given the level of income and the level of the prices of products that could be substitutes or complements. This means that along a given plotted demand curve, those variables are fixed. The slope of the demand curve therefore indicates at any particular point by how much a consumer would reduce (increase) the quantity purchased if the price increased (decreased) while income and any other demand drivers stayed fixed.

  In the example in figure 1.1 , an increase in price, ΔP , of 10 will decrease the demand for the product by 5 units shown as ΔQ

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  eBook - ePub

  Agricultural Product Prices

  • William G. Tomek, Harry M. Kaiser(Authors)
  • 2014(Publication Date)
  • Cornell University Press

    (Publisher)

  On the other hand, the consumer has a limited income. Thus, the problem is to choose the specific goods and services that “best” satisfy these wants within the limits imposed by income. Economists define best in terms of the consumer’s attempt to maximize utility, which is a measure of well-being that depends on the consumption of goods and services. The utility approach to the theory of demand can be stated mathematically. This involves the maximization of a utility function subject to a budget constraint. The theoretical concept of utility as a function of goods consumed could be given empirical content if we knew the algebraic form and coefficients of the utility function. Then, the classical mathematics of constrained optimization could be used to derive explicit demand relations for the consumer. In practice, the utility function is used as a conceptual device to illustrate consumption theory. On the basis of such theory, we can conclude that a consumer tends to prefer more to less of a good but will buy more only at a lower price. That is, there is an inverse relationship between quantity demanded and price. Also, a number of useful general theorems about relationships among elasticities have been derived from the idea of maximizing a utility function subject to a set of constraints, and empirical analyses of demand often use this framework to obtain internally consistent estimates of elasticities of demand. These topics are discussed in Chapter 3. Consumer and Market Demand Consumer demand is defined as the various quantities of a particular good that an individual consumer is willing and able to buy as the price of that good varies, with all other factors that affect demand held constant. The consumer demand relation can be described either as a table of prices and quantities (a demand schedule) or as a graph or algebraic function of prices and quantities (a demand curve)

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  Social Valuation in Agricultural Policy Analysis

  Its Significance for Sub-Saharan Africa

  • Matthew Okai(Author)
  • 2019(Publication Date)
  • Routledge

    (Publisher)

  41 ). The horizontal axis is the time in years, while the vertical axis is the tonnage of rice demanded. The projected dotted line is one possible way in which the market in future will behave. The analysis is usually concerned with explaining whether the projection represents a realistic amount of rice that will be consumed in future, represented by years 5 and 6 that lie in the future. The numbers −3, −2, −1, −0 beside lack coordinates for each combination of a year and the quantity of rice consumed each representing a year. The year 0 is the present time.

  In demand analysis it is recognized that the demand for a commodity is determined by the interaction of many factors apart from its price. The most important of these factors that affect a consumer’s demand include the prices of related goods, consumer’s income, consumer’s tastes and preferences, total population, range of goods available to the consumer, and consumer expectations. When all factors that affect the demand of a commodity are taken together, a demand relationship can be established in quantitative terms. This relationship can be expressed in a functional form as:

  Figure 40

  Trends in consumption of rice

  Figure 41

  General market behaviour in response to price changes

  X t

  =   f  

  (P x

  ,  

  P n

  ,   Y,   N,   R,   E)

  where

  Xt	is the quantity of commodity X demanded;
  Px	is the price of X;
  Pn	represents the prices of related goods;
  Y	represents total consumers income and its distribution;
  T	represents consumers’ tastes and preferences;
  N	is the number of consumers under consideration (population);
  R	represents the range of goods and services available to consumers; and
  E	represents consumers’ expectations.

  The demand analysis centres around the estimation of the above relationships using various functional forms depending on the specific circumstances and issues under investigation. The most important three variables are: i) the price of the commodity (Px ); ii) the price of related goods (Pn ); iii) population (N) and consumer income (Y).

  Quantitative demand analysis is usually performed through correlation analysis and regression, a technique used in investigating the relationship or association between two variables. In the analysis there are usually two types of variables employed: endogenous and exogenous. An endogenous (dependent) variable, usually denoted as Y, is one whose values are explained by the exogenous (usually denoted by X) variables (independent variables). The exogenous variables are also known as explanatory variables. To investigate the degree to which the demand determinants influence endogenous variables one can apply the concept of elasticity and regression.

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  Price Theory

  • Milton Friedman(Author)
  • 2017(Publication Date)
  • Routledge

    (Publisher)

  equation 1 . It is clear, however, that its value is for a very different purpose. It is an extremely useful abstract conception to bring out the logic of the interrelation of the price system; it cannot be used to analyze a concrete problem.

  To return to the demand curve with which we are primarily concerned, let us concentrate attention on the variables whose precise treatment raises the most difficult problems: the price of the commodity in question, the average price of all other commodities, and money income. If we concentrate on these variables, we can write equation 1 as:

  remembering that the variables we have omitted are to have given values.

  Equation 3 gives the impression that the quantity of x demanded is to be regarded as a function of three separate and independent variables. However, this is not the case. The demand curve is primarily used to analyze relations among parts of the economic system, to analyze the influence of changes in the “real” underlying circumstances. If all of the variables in the parenthesis (px , I, P0 ) were multiplied by a common factor, this would not change any of the “real” possibilities open to the consumer; it would simply involve a change in units, e.g., the substitution of “penny” for “dollar.” Consequently, it seems appropriate to regard the right-hand side of equation 3 as a homogeneous function of zero degree in px , I, and P0 ; i.e., a function that has the property that

  where λ is any arbitrary number. This is equivalent to saying that px

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  eBook - ePub

  Health Economics For Nurses

  Intro Guide

  • Stephen Morris(Author)
  • 2014(Publication Date)
  • Routledge

    (Publisher)

  2     Basic theory of economics: demand, supply and the market solution

  In this chapter we examine the basic aspects of economic theory which lay the foundation for the analysis of the following chapters. The discussion concentrates on the development and explanation of the basic tools of economics: demand, supply and markets, and how they may be used in response to the problem of scarcity. The discussion is general in nature, and is not specifically related to health care or nursing at this stage. These issues will be examined in following chapters.

  Summary

  1. The basic problem which economics attempts to address is that of scarce resources. Because of scarcity, all economic decisions necessarily involve a choice in terms of what goods to produce, how to produce them and who shall receive them.

  2. One way of addressing these issues is to use the notion of a market, in which resource allocation decisions are determined by the independent decisions of consumers and producers, and signals in the form of prices are used to allocate resources.

  3. There are two components of a market: demand and supply.

  4. The quantity of a good that consumers are willing and able to buy in a specific time period is called the demand for a good, and is influenced by many variables including the price of the good, income, the prices of other goods and tastes.

  5. There is, in general, an inverse relationship between the price of a good and the quantity demanded of that good. 6. The demand curve may be derived using the Law of Diminishing Marginal Utility and the assumption that consumers wish to maximise their utility. 7. By supply we mean the quantity of a good that producers will wish to offer for sale at a particular price per time period. 8. The quantity supplied of a good is also influenced by a number of variables, such as the price of the good, the prices of other goods and the costs of production. 9. There is, in general, a positive relationship between the price of a good and the quantity supplied of that good.

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