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

y = mx + c where m is +ve
14 12 Value of y 10 8 6 4 2 0 1 2 Value of x 3 4 Value of y 100 80 60 40 20 0 1 2 Value of x 3 4

y = mx + c where m is -ve

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 + dP + eT + fPe + gN
R

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 + dP + eT + fPe + gN
R

There is an inverse relation between the Quality demanded Here the slope is negative i.e. b is negative

Qd = a - bP
100 90 80 70 Quantity 60 50 40 30 20 10

0
10 20 Price 30 40

Factors Affecting Demand Function

M = Consumers Income
Qd = a + bP + cM + dP + eT + fP + gN
R

Direct for normal goods (c is +ve) Inverse for inferior goods (c is ve)
for normal goods
120 100 Quantity Quantity 80 60 40 20 0 10 20 Income 30 40 100 80 60 40 20 0 10 20 Income 30 40

for inferior goods

Factors Affecting Demand Function

PR = Price of related goods or services

Qd = a + bP + cM + dPR + eT + fP + gN
e

Direct for substitutes (d is +ve) Inverse for complements (d is -ve)

for substitutes for compliments
100 90 80 70 60 50 40 30 20 10 0 10 20 price 30 40

120 100 Quantity Quantity 10 20 price 30 40 80 60 40 20 0

Factors Affecting Demand Function

T = Taste pattern of consumers

Qd = a + bP + cM + dP + eT + fP + gN
R

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 + dP + eT + fPe + gN It has the direct relation (f is +ve)

R

Factors Affecting Demand Function

N = Number of Consumers in the market Q = a + bP + cM + dP + eT + fP + gN
d
R

It has the direct relation (g is +ve)

Factors Affecting Demand Function

Variable
P M PR T

Relation to Qd
Inverse Direct for normal goods Inverse for inferior goods Direct for substitutes Inverse for complements Direct

Sign of Slope Parameter

b = Qd/P is negative c = Qd/M is positive c = Qd/M is negative d = Qd/PR is positive d = Qd/PR is negative e = Qd/ T is positive

Pe
N

Direct
Direct

f = Qd/Pe is positive
g = Qd/N is positive

Thank You