Individual Demand Function

Demand Function

A demand function that represents the behavior of buyers, can be constructed for an individual or a group of buyers in a market. The market demand function is the horizontal summation of the individuals' demand functions.

The nature of the "demand function" depends on the nature of the good considered and the relationship being modeled. In most cases the demand relationship is based on an inverse or negative relationship between the price and quantity of a good purchased. BUT: The demand for purely competitive firm's output is usually depicted as horizontal (or perfectly elastic). In rare cases, under extreme conditions, a "Giffen good" may result in a positively sloped demand function. These Giffen goods rarely occur.

The behavior of a buyer is influenced by many factors: the price of the good, the prices of related goods (compliments and substitutes), incomes of the buyer, the tastes and preferences of the buyer, the period of time and a variety of other possible variables. The quantity that a buyer is willing and able to purchase is a function of these variables.

An individual's demand function for a good (Good X) might be written:

Q_X = f(P_X, P _{related goods}, income (M), preferences,...) where Q_X = the quantity of good X,

P_X = the price of good X

P _{related goods} = the prices of compliments or substitutes

Income (M) = the income of the buyers

Preferences = the preferences or tastes of the buyers

Expectations about the future prices of goods = can cause the demand in any period to shift. If buyers expect relative prices of a good will rise in future periods, the demand may increase in the present period. An expectation that the relative price of a good will fall in a future period may reduce the demand in the current period.

The demand function is a model that "explains" the change in the dependent variable (quantity of the good X purchased by the buyer) "caused" by a change in each of the independent variables. Since all the independent variable may change at the same time it is useful to isolate the effects of a change in each of the independent variables. To represent the demand relationship graphically, the effects of a change in P_X on the Q_X are shown. The other variables, (P_{related goods}, M, preferences,...) are held constant.

Demand can also be perceived as the maximum prices buyers are willing and able to pay for each unit of output, ceteris paribus.

P_X = f(Q_X), given incomes, price of related goods, preferences, etc.

It is important to remember that the demand function is usually thought of as Q = f(P) but the graph is drawn with quantity on the X-axis and price on the Y-axis.

Дата добавления: 2014-01-11