DEMAND FUNCTION

BYAMIT KUMAR MBA(BUSINESS FINANCE) ROLL NO. 2

DEMAND FUNCTION
A Demand function states the dependence relationship between the demand and factors affecting it such as its own price; price of substitutes and complementary goods; income of the consumer; taste, preference and fashion; government policy, etc.

The quantity demanded is the dependent variable and the determinant factors are independent variables.
Thus demand determinants function is a function of all its

Dx = f( Px, Ps, Pc, I, T, G)

DEMAND
DEMAND

refers to a desire for a commodity supported by the ability (adequate PPP ) and willingness to pay (readiness to spend). Demand for a product must always be in relation to a price, a period of time, and a place.

DEMAND CURVE

UTILITY
It

is a basis of consumer demand. It refers to satisfaction a consumer gets from the consumption of goods and services. It is divided into two parts. 1.Total utility(MU1+MU2.MUn). 2.Marginal utility( TUn -TUn-1).

DETERMINANTS OF DEMAND
PRICE

OF THE COMMODITY. INCOME OF THE CONSUMER. 1.SUPERIOR GOODS. 2.INFERIOR GOODS.

DETERMINANTS(CONTD.)

SUPERIOR GOODS

INFERIOR GOODS

DETERMINANTS(CONTD.)
PRICE

OF RELATED COMMODITIES. 1.SUBSTITUTE GOODS. 2.COMPLEMENTARY GOODS.

DETERMINANTS(CONTD.)

SUPERIOR GOODS SUBSTITUTE GOODS

TEA & COFFEE

DETERMINANTS(CONTD.)

SUPERIOR GOODS COMPLEMENTARY GOODS

CAR & PETROL

DETERMINANTS(CONTD.)
TASTE,

PREFERENCE AND FASHION. GOVERNMENT POLICY. SIZE OF POPULATION.

LAW OF DEMAND
Tells

about inverse relationship between price and quantity demanded i.e. at high prices lower units are demanded and vice versa other things being remaining the same. It is a qualitative statement which tells us only the opposite relationship between the price and quantity demanded and does tell about the degree of change.

LAW OF DEMAND (contd.)

Assumptions-

The term other things being remaining the same indicate some assumptions of the law. 1.Their is no change in the income of the consumer. 2.The price of related goods & complementary goods remains constant. 3.Their is no change in taste, preference & fashion. 4.Their is no change in the govt. policy.

Factors responsible for downward sloping of demand curve

Law of diminishing marginal utility

When every additional unit of any commodity is consumed, the marginal utility declines because the earlier units of consumption have partly satisfied our wants. A consumer pays for a commodity acc. to amount of utility he expects to derive from its consumption. When every additional unit brings decreasing utility, one would naturally prefer to buy this additional unit only at a lower price. This causes inverse relationship between price and
demand.

Factors responsible for downward sloping of demand curve

Income effect Income effect here implies effect of change in consumers real income on his demand. As price decreases, real income increases as it would increase the purchasing power of the consumer and now hell be able to buy more quantity of a commodity by spending the same amount of money and vice versa.

Factors responsible for downward sloping of demand curve

Substitution effect It means substitution of cheaper goods for costlier ones in case of rise in prices and vice versa. For example.. when the price of a commodity increases while price of other substitute goods remain unchanged, consumer would like to prefer any one of the substitute goods.

Factors responsible for downward sloping of demand curve

Entry and exit of consumers

When the price of a commodity falls, new consumers who were unable to purchase the commodity earlier will start buying it as they find it in their reach now. Conversely in case of increase in its prices, old consumers may find it difficult to purchase. This may go beyond their purchasing power and thus they are forced to reduce its consumption.

In this way change in the no. of consumers in the market determines the law of demand.