2-1

Demand

• Quantity demanded (Qd)

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

2-2

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

2-3

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)

2-4

General Demand Function

• 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

Qd = a + bP + cM + dPR + eT + fPe + gN

2-5

Variable Relation to Qd Sign of Slope Parameter

General Demand Function

Inverse for complements

P

Pe

N

M

PR

Inverse

Direct

Direct

Direct

Direct for normal goods

Inverse for inferior goods

Direct for substitutes

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

f = Qd/Pe is positive

g = Qd/N is positive

e = Qd/T is positiveT

2-6

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

2-7

Direct Demand Function

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Demand for Pork

2-8

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)

2-9

Inverse Demand Function

• How much consumers are willing to pay as a function of quantity

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2-10

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

2-11

Direct Demand Function

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2-12

Demand Schedule

2-12

2-13

A Demand Curve (Figure 2.1)

2-14

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

2-15

Three Demand Shifts

2-16

2-17

Shifts in Demand (Figure 2.2)