Chapter 2 - Demand, supply, and market equilibrium. After reading chapter 2 you should be able to: Work with three different types of demand relations: general, direct, and inverse demand functions; list six principal variables that determine the quantity demanded of a good; derive a direct demand function from a general demand function;. | Chapter 2 Demand, Supply, & Market Equilibrium Demand Quantity demanded (Qd) Amount of a good or service consumers are willing & able to purchase during a given period of time 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) Expected future price of product (Pe) Number of consumers in market (N) General demand function 2- 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 2- General Demand Function Variable Relation to Qd Sign of Slope Parameter 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 = . | Chapter 2 Demand, Supply, & Market Equilibrium Demand Quantity demanded (Qd) Amount of a good or service consumers are willing & able to purchase during a given period of time 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) Expected future price of product (Pe) Number of consumers in market (N) General demand function 2- 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 2- General Demand Function Variable Relation to Qd Sign of Slope Parameter 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 Inverse for complements e = Qd/ is positive 2- 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 & Qd decreases when P rises, all else constant Qd/ P must be negative 2- 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- 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- A Demand Curve (Figure ) 2- Graphing Demand Curves Change in quantity demanded Occurs when price changes Movement along .
