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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 + bP + cM + dPR + eT + fPe + gN • 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 Sign of Slope Parameter b = Qd/P is negative P Inverse M c = Qd/M is positive Direct for normal goods Inverse for inferior goods c = Qd/M is negative PR Direct for substitutes Inverse for complements d = Qd/PR is positive 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 Qd f ( p, pb, pc, Y ) Qd 171 20 p 20 pb 3 pc 2 y Qd / pb 20, q / pc 3, q / y 2 pb 4, pc 3, y 13 Qd 286 20 p 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 Q 286 20 p p 14.30 0.05Q p / Q .05 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 Q D( p, M , PR ) Qd 3,200 10 p .05M 24 PR M 60,000, PR 200 Qd 1,400 10 P Qd / M .05 Inverse demand function P 140-1/ 10Qd 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