Demand Function and Determinants of Demand

● Demand Function
● Types of Demand Function
● Individual Demand Function
● Market Demand Function
● Law of Demand
● Determinants of Demand
● Shifts in the Demand Curve
Department of Economics & Foundation Course, R.A.P.C.C.E. (Autonomous) 1
 Demand Function
Meaning of Demand

• In economics, demand signifies the desire for a good or a service backed by

the ability and the willingness to buy the good and service.

Demand Function

• The demand function shows the relation between the quantity demanded of a
commodity by the consumers and the price of the product. These functions
are probably the most important tools used by economists. While many
variables determine the quantity consumers wish to purchase in a market,
the price of the commodity is perhaps the most important one.
Department of Economics & Foundation Course, R.A.P.C.C.E. (Autonomous) 2
 Types of Demand Function

• Based on whether the demand function is in relation to an individual

consumer or to all consumers in the market, the demand function can be
categorized as

a. Individual Demand Function

b. Market Demand Function

Department of Economics & Foundation Course, R.A.P.C.C.E. (Autonomous) 3

 Individual Demand Function
• Individual demand function refers to the functional relationship between demand made
by an individual consumer and the factors affecting the individual demand. It shows
how demand made by an individual in the market is related to its determinants.

• Mathematically, individual demand function can be expressed as,

Dx= f (Px, Ps, Pc, Y, T, F) …..(1)

Where,

Dx= Demand for commodity x; Px=Price of commodity x; Ps=Price of substitute goods;

Pc=Price of complementary goods

Department of Economics & Foundation Course, R.A.P.C.C.E. (Autonomous) 4

 Linear Demand Function
Consider the following linear demand function:

Qd = a – bPx

Where a- constant; b- slope of the co-efficient

Coefficient of price being negative implies inverse relationship between quantity

demanded and price of commodity x.

Example: Qd = 70 - 5Px

In the above example, every Re. 1 fall in price causes demand to rise by 5 units
Department of Economics & Foundation Course, R.A.P.C.C.E. (Autonomous) 5
 Market Demand Function
Market demand function refers to the functional relationship between market
demand and the factors affecting market demand. Market demand is affected
by size and composition of population, season and weather conditions, and
distribution of income.
Mathematically, market demand function can be expressed as,

Dx= f (Px, Pr, Y, T, F, Po, S, D)

Where, Dx= Demand for commodity x, Px= Price of the given commodity x,
Pr= Price of related goods, Y= Income of the individual consumer, T= Tastes
and preferences, F= Expectation of change in price in the future, Po= Size and
composition of population, S= Season and weather, D= Distribution of income.

Department of Economics & Foundation Course, R.A.P.C.C.E. (Autonomous) 6

 Law of Demand
• Law of Demand: other things being equal, if the price of a commodity falls,
the quantity demanded of it will rise and, if the price of a commodity rise, the
quantity demanded of it will decline.

Price (Rs.) Quantity Demanded

12 10
10 20
8 30
6 40
4 50
2 60

Department of Economics & Foundation Course, R.A.P.C.C.E. (Autonomous) 7

 Reasons for Downward Sloping Demand Curve

1. Income Effect: When the price of the commodity rises, the real income (i.e. the
purchasing power) falls and When the price of the commodity falls, the real income
(i.e. the purchasing power) rises.

2. Substitution Effect: When the price of tea falls relative to coffee, consumers
tends to substitute coffee by tea. Thus in general the consumer substitute the
commodity whose price has fallen for other commodities which have now become
cheaper

Department of Economics & Foundation Course, R.A.P.C.C.E. (Autonomous) 8

 Exceptions to the Law of Demand

1. Goods having Prestige value:

Veblen Effect: Here higher the price, higher will be the demand for that good. Eg:
Diamond

2. Giffen Goods:

Giffen observed that when price of bread increased, the low paid British workers in the early
19th century purchased more of a bread and not less of it and this is contrary to the law of
demand. Reason for this was British workers consumed a diet of bread and price of bread
went up they were compelled to spend more on the given quantity of bread. Therefore they
couldn’t afford to purchase meat as before. Thus they even substituted bread for meat in
order to maintain their intake of food – which is against the law of demand.
Department of Economics & Foundation Course, R.A.P.C.C.E. (Autonomous) 9
Market Demand Curve

• : Panel 1 – Individual seller a; Panel 2-

Individual seller b; Panel c – Market (sum of
demand for individual seller and seller b
• Panel (a) and (b) shows Individual Demand
curves for sellers a and b product – that is
demand Curve Da and demand curve Db
• Panel (c) -market demand curve Dc, which is
the sum of individual demand curves Da and
Db.
• Market demand curve = Horizontal
summation of individual demand curves
DM = Da + Db

Department of Economics & Foundation Course, R.A.P.C.C.E. (Autonomous) 10

 Determinants of Demand
• When price changes, quantity demanded will change=> movement along the
same demand curve.
• When factors other than price changes=> demand curve will shift.
Determinants of the demand curve :
1. Income: A rise in a person’s income => increase in demand (shift demand
curve to the right)
2. Consumer Preferences: Favourable change leads to an increase in demand,
unfavorable change lead to a decrease.
3. Number of Buyers: more buyers lead to an increase in demand

Department of Economics & Foundation Course, R.A.P.C.C.E. (Autonomous) 11

 Determinants of Demand

4. Price of related goods:

a. Substitute goods (those that can be used to replace each other): price
of substitute and demand for the other good are directly related.
Example: If the price of coffee rises, the demand for tea should increase.
b. Complement goods (those that can be used together): price of
complement and demand for the other good are inversely related.
Example: if the price of ice cream rises, the demand for ice-cream
toppings will decrease.

Department of Economics & Foundation Course, R.A.P.C.C.E. (Autonomous) 12

 Determinants of Demand
5. Expectation of future:
a. Future price: consumers’ current demand will increase if they expect higher
future prices; their demand will decrease if they expect lower future prices.
b. Future income: consumers’ current demand will increase if they expect
higher future income; their demand will decrease if they expect lower future
income.

6. Advertisement Expenditure:
Advertisement Expenditure is made by the firm to promote the sales of product.
More the Advertisement Expenditure , more will be the demand for good and
vice-versa.

Department of Economics & Foundation Course, R.A.P.C.C.E. (Autonomous) 13

 Shift factors of Demand Curve
• A shift in the demand curve is when a determinant of demand other than
price changes. It
occurs when demand for goods and services changes even though the price didn’t.
• Price remains the same but at least one of the other five determinants change. Those
determinants are:
1. Income of the buyers.

2. Consumer trends and tastes.

3. Expectations of future price, supply, needs, etc.

4. The price of related goods.

5. The number of potential buyers. This determinant applies to aggregate demand only.
Department of Economics & Foundation Course, R.A.P.C.C.E. (Autonomous) 14
Factors That Cause a Demand Curve to Shift

• The curve shifts to the left if

the determinant causes demand to drop.
That happens during a recession when
buyers' incomes drop. They will buy less
of everything, even though the price is the
same.
• The curve shifts to the right if the
determinant causes demand to increase.
When the economy is booming, buyers'
incomes will rise. They'll buy more of
everything, even though the price hasn't
changed.

Department of Economics & Foundation Course, R.A.P.C.C.E. (Autonomous) 15