Demand Function

• A causal relationship between a dependent variable

(i.e., quantity demanded) and various independent
variables (i.e., factors which are believed to influence
quantity demanded)

Q = f(P)

Where Q = quantity
P = price of a good
Demand Function

Qd = a – bP

Where: Qd = quantity demanded

b = slope
= Y2 – Y1
X2 – X1

a = quantity demanded at a price of ZERO

Supply Function
• A causal relationship between a dependent variable
(i.e., quantity supplied) and various independent
variables (i.e., factors which are believed to influence
quantity supplied, such as price)

Q = f(P)

Where Q = quantity
P = price of a good
Supply Function

Qs = a + bP

Where: Qs = quantity demanded

b = slope
= Y2 – Y1
X2 – X1

a = quantity supplied at a price of ZERO

Demand and Supply
Function
Two (2) ways of deriving the demand and supply
function:
1. Algebraic Approach
2. Least Squares Method (LSM)
Least Squares Method
Steps in using the LSM approach in determining the
demand and supply equation:
1. Square all individual x values in a third column.
2. Multiply individual x values by their
corresponding y values in a fourth column.
3. Compute the sums of each column.
4. Derive the value for n, which is the number of
occurrences of x (or Price) and y (or Quantity
Demanded/Supplied).
Least Squares Method
Steps in using the LSM approach in determining the
demand and supply equation:
5. Substitute values derived in the equations
below to determine a and b in the demand and
supply equation.
𝑛(σ 𝑥𝑦) − (σ 𝑥)(σ 𝑦)
𝑏= 2
σ 2 σ
𝑛( 𝑥 ) − ( 𝑥)

σ 𝑦 − 𝑏(σ 𝑥)
𝑎=
𝑛
LSM Example
Price Quantity
x2 (x)(y)
(x) Demanded (y)
0 100 0 0
2 90 4 180
4 80 16 320
6 70 36 420
8 60 64 480
10 50 100 500
∑x = 30 ∑y = 450 ∑x2 = 220 ∑(x)(y) = 1900
N=6
LSM Example
𝑛(σ 𝑥𝑦) − (σ 𝑥)(σ 𝑦)
𝑏= 2
𝑛(σ 𝑥 2 ) − (σ 𝑥)

6 1900 − (30)(450)
𝑏=
6(220) − (30)2

−2,100
𝑏=
420

𝒃 = −𝟓
LSM Example
σ 𝑦 − 𝑏(σ 𝑥)
𝑎=
𝑛

450 − (−5)(30)
𝑎=
6

600
𝑎=
6

𝒂 = 𝟏𝟎𝟎 Demand Equation: Qd = 100 – 5P