Demand Quantity demanded Qd Amount of a good

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 + b. P + c. M + d. PR + e. T + f. Pe + g. N • 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 P Inverse M Direct for normal goods Inverse for inferior goods PR Sign of Slope Parameter b = Qd/ P is negative c = Qd/ M is positive c = Qd/ M is negative d = Qd/ PR is positive Direct for substitutes Inverse for complements d = Qd/ PR is negative T Direct e = Qd/ T is positive Pe Direct f = Qd/ Pe is positive N 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 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 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 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