Lecture Managerial economics: Chapter 2 - Dr. Hasnain Naqvi

This chapter provides knowledge of demand. The contents of this chapter include all of the following: General demand function, direct demand function, inverse demand function, demand curve function, demand schedule, graphing demand curves,. | Demand Quantity demanded (Qd) Amount of a good or service consumers are willing & able to purchase during a given period of time 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 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) 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 Qd = a + bP + cM + dPR + eT + fPe + gN Variable Relation to Qd Sign of Slope Parameter General Demand Function Inverse for complements 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 e = Qd/ T is positive T 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 Direct Demand Function Demand for Pork 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) Inverse Demand Function How much consumers are willing to pay as a function of quantity 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 Direct Demand Function Demand Schedule 2- A Demand Curve (Figure ) 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 Three Demand Shifts Shifts in Demand (Figure )

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