DEMAND FUNCTION AND DEMAND CURVE Note The students

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DEMAND FUNCTION AND DEMAND CURVE Note: The students may refer to Managerial Economics by

DEMAND FUNCTION AND DEMAND CURVE Note: The students may refer to Managerial Economics by E. J. Dauglas for details

DEMAND FUNCTION REFERS TO THE RELATIONSHIP THAT EXISTS BETWEEN THE QUANTITY DEMANDED OF A

DEMAND FUNCTION REFERS TO THE RELATIONSHIP THAT EXISTS BETWEEN THE QUANTITY DEMANDED OF A PARTICULAR PRODUCT AND ALL DETERMINANTS OF DEMAND. THE DEMAND CURVE REFERS TO THE RELATIONSHIP THAT EXISTS BETWEEN THE QUANTITY DEMANDED OF A PARTICULAR PRODUCT AND THE PRICE OF THAT PRODUCT WITH ALL OTHER INFLUENCING FACTORS HELD CONSTANT. THUS, THE DEMAND CURVE IS A SUBSET OF DEMAND FUNCTION WHERE CETERIS PARIBUS APPLIES ALL THE INDEPENDENT VARIABLES EXCEPT PRICE. THE DETERMINANTS OF DEMAND FOR A PRODUCT Qx = ƒ (Px, Ax, Dx, Ox, Ic, Tc, Ec, Py, Ay, Dy, Oy, G, N, W, …. ) STRATEGIC CONSUMER COMPETITOR OTHER VARIABLES CONTROLLABLE UNCONTROLLABLE VARIABLES

WHERE Qx IS THE QUANTITY DEMANDED OF PRODUCT X, PERIOD Px IS THE PRICE

WHERE Qx IS THE QUANTITY DEMANDED OF PRODUCT X, PERIOD Px IS THE PRICE OF PRODUCT X Ax IS ADVERTISING/PROMOTION FOR PRODUCT X Dx IS DESIGN/STYLE/QUALITY OF PRODUCT X Ox IS OUTLETS FOR DISTRIBUTION OF PRODUCT X Ic IS INCOMES OF CONSUMERS/CUSTOMERS/CLIENTELE Tc IS TASTES AND PREFERE ICE PATTERNS OF CUNSUMERS Ec IS EXPECTATIONS OF CONSUMERS REGARDING FUTURE PRICES, ETC. Py IS PRICES OF RELATED GOODS (SUBSTITUTES, COMPLEMENTARIES) Ay IS ADVERTISING/PROMOTION FOR RELATED GOODS Dy IS DESIGN/STYLE/QUALITY OF RELATED GOODS Oy IS COMPETITOR DISTRIBUTION OUTLETS G IS GOVERNMENT POLICY, INDUSTRIAL STRATEGY N IS NUMBER OF PEOPLE IN THE ECONOMY W IS WEATHER CONDITIONS

FORM OF DEMAND FUNCTION COULD BE A) ADDITIVE & B) MULTIPLICATIVE A) Qx =

FORM OF DEMAND FUNCTION COULD BE A) ADDITIVE & B) MULTIPLICATIVE A) Qx = + 1 Px + 2 Py + 3 Ax + 4 Ay + 5 Ic + 6 Tc + 7 Ec + 8 N …… (1) B) Qx = Px 1 Py 2 N 3 O 4 …… (2) Log QX = Log + 1 Log Px + 2 Log Py + 3 Log N + 4 Log O …(3) EXAMPLE : SUPPOSE THE ESTIMATED DEMAND FUNCTION IS AS FOLLOWS: Qx = 5030 - 3, 806 Px + 1, 458 Py + 256. 6 Ax - 32. 3 Ay + 0. 18 Ic …(4) GIVEN THIS : PREDICT THE SALE VOLUME/LEVEL WHEN Px = 8, Py = 6, Ax = 168 (THOUSAND) Ay = 182 AND Ic = 12875 SUBSTITUTING THESE VALUES IN THE ABOVE EQUATION QUANTITY DEMANDED OF THE PRODUCT WILL BE 22, 879. 1 UNITS.

THE DEMAND CURVE FOR THE MARKET CAN BE DERIVED FROM THE DEMAND FUNCTION. •

THE DEMAND CURVE FOR THE MARKET CAN BE DERIVED FROM THE DEMAND FUNCTION. • DEMAND CURVE IS A SPECIAL SUBCASE OF THE DEMAND FUNCTION. • CETERIS PARIBUS APPLIES TO ALL INDEPENDENT VARIABLES EXCEPT THE PRICE OF THE PRODUCT IN QUESTION. CONSIDER THE EARLIER DEMAND FUNCTION i. e. . Qx = + 1 Px + 2 Py + 3 Ax + 4 Ay + 5 Ic + 6 Tc + 7 Ec + 8 N …… (5) LET ALL OTHER VALUES INCLUDING THE REMAIN CONSTANT AND WE AGGREGATE THEM TO A SINGLE TERM i. e. A AND EXPRESS THE DEMAND FUNCTION AS : Qx = A + 1 Px Where A = + 2 Py + 3 Ax + 4 Ay + 5 Ic + 6 Tc + 7 Ec + 8 N IN SUCH A SITUATION Qx = A + 1 Px IS THE DEMAND CURVE …… (6)

CONVENTIONAL USE OF DEPENDENT AND INDEPENDENT VARIABLES IN GRAPHICAL ANALYSIS IS TO REPRESENT THE

CONVENTIONAL USE OF DEPENDENT AND INDEPENDENT VARIABLES IN GRAPHICAL ANALYSIS IS TO REPRESENT THE DEPENDENT VRIABLE (Y) ALONG THE VERTICAL AXIS AND THE INDEPENDENT VARIABLE (X) ALONG THE BORIZONTAL AXIS. BUT IN ALL GRAPHICAL ANALYSIS RELATING TO Px AND Qx, THE ORDER IS REVERSED i. e. PRICE IS PRESENTED ALONG THE VERTICAL AXIS AND Qx ALONG THE HORIZONTAL AXIS. (AFTER ALFRED MARSHALL) LET Px = a + b 1 Qx …… (7) WE HAD THE DEMAND CURVE AS Qx = A + 1 Px …… (8) OR Px = - A/ 1 + 1/ 1 Qx a = - A/ 1 AND 1 = 1/ 1

CONSIDERING THE INVERSE RELATIONSHIP BETWEEN Qx AND Px IN 8, THE SIGN OF a

CONSIDERING THE INVERSE RELATIONSHIP BETWEEN Qx AND Px IN 8, THE SIGN OF a INEqn 7 WILL BE A POSITIVE ONE AND THAT OF b, WILL BE A NEGATIVE ONE. EXAMPLE : THE NUMERICAL EXAMPLE Eqn (4) WITH VALUES OF THE INDEPENDENT VARIABLES : (5030) + OTHER TERMS EXCEPT Px WILL GIVE A = 53, 328. 7 THUS, THE DEMAND CURVE WILL BE Qx = 53, 328. 7 - 3, 806. 2 Px OR CONVERTING THE UNITS IN TO- '000 Qx = 53. 3287 - 3. 8062 Px TO GET Px = a + b. Qx WE HAVE Px = 14. 011 - 0. 26273 Qx

THE DEMAND CURVE FOR X CAN BE REPRESENTED IN A DIAGRAM AS FOLLOWS; Y

THE DEMAND CURVE FOR X CAN BE REPRESENTED IN A DIAGRAM AS FOLLOWS; Y D P R I C E D O X DEMAND LAW OF DEMAND STATES THAT AS PRICE IS RAISED THE CONSUMER DEMANDS PROGRESSIVELY LESS OF A PRODUCT, AND CONVERSELY, AS PRICE IS REDUCED THE CONSUMER DEMANDS PROGRESSIVELY MORE OF A PRODUCT, CETERIS PARIBUS.

 THE LAW OF DEMAND IS AN EMPIRICAL LAW, MEANING THAT IT IS COMMONLY

THE LAW OF DEMAND IS AN EMPIRICAL LAW, MEANING THAT IT IS COMMONLY OBSERVED IN PRACTIVE. LINE RELATING PRICE TO UNITS OF QUANTITY DEMANDED. DEPENDS ON INDIVIDUALS REACTION TO CHANGE IN PRICE. • INDIVIDUAL DEMAND CURVE MAY NOT BE THE SAME • DEPENDS ON SEVERAL FACTORS FOR INDIVIDUAL REACTION. (CURVATURE OF I. C. s. ) MOVEMENT ALONG A DEMAND CURVE AND SHIFT IN THE DEMAND CURVE CAN BE SHOWN IN THE FOLLOWING DIAGRAMS.

MOVEMENT ALONG THE DEMAND CURVE PX PX D P R I C E P

MOVEMENT ALONG THE DEMAND CURVE PX PX D P R I C E P 2 P 1 D Q 2 SHIFT IN THE DEMAND CURVE Q 1 DEMAND QX P R I C E D D Q 2 Q 1 DEMAND QX