Download pptx - Cornell

The Demand Function
Dr. Jennifer P. Wissink
©2011 John M. Abowd and Jennifer P. Wissink, all rights reserved.
The Demand Function


We will consider the market
for compact disc players.
Recall that we will define
the following for our market:
–
–
–
–


The type and style of CD players.
The quality of the CD players.
All other attributes of the generic CD
player.
A time frame that applies to our market
for CD players.
Demanders are the buyers of CD
players.
The CD player market is a perfectly
competitive market.
Demand Concepts
 The
demand function for X:
QxD = f(PX, Ps, Pc, I, T&P, Pop)
Where X refers to CD players and:
Qx = the number or quantity of units demanded
PX = X’s price
Ps = the prices of substitutes in consumption
Pc = the prices of complements in consumption
I = income
T&P = tastes and preferences
Pop = population in market or market size
The Demand Curve (Verbal)

The demand curve, a.k.a. demand, describes the relation between a
good’s price and the maximum quantity that buyers are willing and
able to buy at that price, ceteris paribus.
– Ceteris paribus means holding all the other demand function variables
constant at some given level.
– QXD = f(PX) given Ps, Pc, I, T&P, Pop

The Law of Demand:
– the relationship between a good’s price and the quantity demanded of that
good is negative.
– Example: suppose the price of the good falls from $25 to $10, and the
quantity demanded rises from 15 to 30.
– This is referred to as a “change in quantity demanded” and in this case an
“increase in quantity demanded.”

“Own-price” changes cause movements along a given demand curve.
The Demand Curve (Graph)
 QXD = f(PX)
– Note: The Law of
Demand implies a
negative or
downward slope
to the graph.
– Note: In the
graph we
switched the
axes.

At P = $25,
the quantity
demanded = 15.
Price
Demand
25
15
Quantity
Movements vs. Shifts
 QXD
= f(PX) given Ps, Pc, I, T&P, Pop
A
movement along the demand curve for X
would be caused by a change in Px.
– Remember this is referred to as an increase or
decrease in quantity demanded!
A
shift of the entire demand curve would be
caused by a change in one of the “ceteris
paribus” demand variables.
– This would be referred to as an increase or decrease
in demand.
Movements: Change In Quantity Demanded


A change in the
quantity
demanded is a
movement along
the demand
curve.
When price falls
to $10, the
quantity
demanded
increases to 30.
Price
Demand
25
10
15
30
Quantity
Shifts: Increase & Decrease In Demand
 When
demand increases, the quantity demanded
by buyers increases at every price.
– Example: when demand increases, the quantity
demanded at a price of $25 rises from 15 to 25 units.
 When
demand decreases, the quantity demanded
by buyers falls at every price.
– Example: when demand decreases, the quantity
demanded at a price of $25 falls from 15 to 10 units.
Increase In Demand

An increase in
demand is a
rightward shift in
the entire curve.
Price
Demand
New Demand
25

More is
demanded at
every price
15
25
Quantity
Decrease In Demand
A
decrease in
demand is a
leftward shift
in the entire
curve.
Price
Demand
25
 Less
is
demanded at
every price
New Demand
10
15
Quantity
Movements vs. Shifts: Getting It Right


Recall: QXD = f(PX) given Ps, Pc, I, T&P, Pop
Consider what happens when:
– Px changes  movement along demand based on the law of demand
» Px up  QxD falls; Px down  QxD rises
– PS changes  shift in demand
» PS up  increase in demand for X; PS down  decrease in demand for X
– PC changes  shift in demand
» PC up  decrease in demand for X; PC down  increase in demand for X
– I changes  shift in demand
» X normal: I up  increase in demand for X; I down  decrease in demand for X
» X inferior: I up  decrease in demand for X; I down  increase in demand for X
– T&P changes  shift in demand
» More favorable  increase in demand for X; less favorable  decrease in demand for X
– Pop changes  shift in demand
» Pop up  increase in demand for X; Pop down  decrease in demand for X
The Demand Curve (Equation)

A linear demand curve:
– QXD = 40 – PX
» 15 = 40 – 25
» Law of Demand?
» YES.

P
D
25
Beware: the graph we
draw is the inverse of the
equation we write (most
times).
15
Q
The Demand Curve (Equation)
 Another
example:
 QxD = 100 – 2Px
– The equation we
graph is the
inverse.
– Rearranging we
get:
P
50
D
» 2PxD = 100 – Qx
» PxD = 50 – 1/2Qx
100 Q
Final Demand Remarks
 We
have constructed the demand
function for the market for CD players.
 Notes:
– Not all demand curves are linear.
– Later in the course, we will develop the
demand function from a more basic model
of consumer behavior.
– The demand side of the market “scissors” is
only half the story. The other is the supply
function.