DEMAND function

LECTURE 4
BATCH 2022-24
 POLL 2 Recap 5 min
Q1) If U= , then = ?
 Q2) In order to remain in the same convex downward IC, the
consumer must:

A.Have equal units of both commodities

B.Have more units of one commodity to have more units of the
others commodity
C.Give up units of one commodity to have more units of the other
commodity.
 Q3) Which of the following is valid for linear indifference curves?

A. The goods are perfect complements

B. The goods are perfect substitutes
C. MRS for such curves is an increasing ration
D. MRS for such curves is a decreasing ratio.
Q4) Crude oil price is a demand determinants
for automobile sector

A. TRUE
B. FALSE
 Q5) Crude oil price is demand determinants for
steel products
A.TRUE
B.FALSE
 CLASS ASSIGNMENT
1. Nandan receives utility from days spent travelling on vacation domestically (D) and Days spent
travelling on vacation in foreign country(F) as given by utility function U(D,F) = 10 DF. Price of
day spend in domestically is $100 and price of day spend in foreign country is $400. total
budget he has $4000.

a. Calculate Nandan’s optimum choice days both domestically and in foreign countries.

b. Can Nandan afford a utility 800 and 1200?

 How we derived demand curve from utility
function
Consumer Preference by ranking n goods

Selecting the best two

With the help of IC Satisfaction level and budget constraints

Optimum value of X and Y and relationship with their prices

Derive demand curve for each good relate with its own price.
Determinants of demand or DEMAND FUNCTIONS

QX = f (PX , Y, PS , PC , T; EP , EY ; N, D, u)
where:
QX = demand for X
PX = price of x
Y = consumers’ income
PS = prices of substitutes of x
PC = prices of complements of x
T = measure of consumers’ tastes and preferences for x
EP = consumers’ expectations about future Price of x
EY = consumers’ expected future incomes
N = number of consumers of x
D = distribution of consumers in some specific Classification
u = ‘other’ determinants of the demand for x
Now let the demand equation can be written as
Qx= a –bPx +cY(+in case of normal good and – in case of inferior good) +dPs (+in case of
substitute – in case of complementary)+e T+ fEp+ gEy+ hN+ iD+….
 Law of Demand

 A special case of demand function which shows relation between price and demand of the
commodity
Dx = f(Px)
 Other things remaining constant, when the price of a commodity rises, the demand
for that commodity falls or when the price of a commodity falls, the demand for that
commodity rises.
 Price bears a negative relationship with demand

 Reasons
 Law of Diminishing Marginal Utility: as a person consumes successive units of a commodity, the utility
derived from every next unit (marginal unit) falls.
 Demand Schedule and Individual
Demand Curve

Point e
on Demand
Demand 35
Price (Rs (‘000 d

Price of Coffee
Curve per cup) cups)
30
a 15 50 c
b 20 40 25
b
c 25 30 20
d 30 20 a
15
e 35 10
O
10 20 30 40 50
Quantity of coffee
 Demand
Direct Demand Demand Schedule
Curve
Function
Q =f(P )
x x Px Qx A 0,25
Let, Qx=f(Px, , S) 0 125
Let, Qx= 50-5Px+.001Y+.25 Ps 5 100
Where Y=50000, Ps=Rs 100 10 75
Or, Qx= 125-5Px 15 50
20 25
25 0
125,0

Inverse Function B

When Price is depend on quantity For eg: Newspaper Ad

Let, Qx= 125-5Px

Or, Px= 25- 0.2Qx
 Exceptions to the Law of Demand
Due to any of the following reasons it is possible that law of demand does not operate:
 Giffen Goods: when the price of a necessity good increases its demand also increases as the consumer
does not have enough money to buy other luxury goods (especially applies to staple food)
 Snob Appeal: goods are not demanded for intrinsic utility but for show off. Also called as Veblen
goods. They are opposite to Giffen goods
 Demonstration Effect: Social or peer pressure
 Future Expectation of Prices: Panic buying; consumers fear that prices may rise further.
 Addiction: no consideration for price
 Neutral goods
 Life saving drugs
 Salt
 Amount of income spent is very small or insignificant
 Match box
 Salt
 Market Demand

 Market: interaction between sellers and buyers of a good (or service) at a mutually agreed
upon price.
 Market demand
 Aggregate of individual demands for a commodity at a particular price per unit of time.
 Sum total of the quantities of a commodity that all buyers in the market are willing to buy at a
given price and at a particular point of time (ceteris paribus)
 Market demand curve: horizontal summation of individual demand curves
 Derivation of Market Demand
15 (Table 1)

Quantity demanded
Market
Price Consumer 1 Consumer 2 Consumer 3
demand

$6 3 0 0 3

5 5 1 0 6

4 8 3 1 12

3 10 5 4 19

2 12 7 6 25

1 13 10 8 31
Derivation of Market Demand

Fig 10
Pages you have to read from you text book

 CHAPTER 3: 77-85,