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What Is Demand Function

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10 views

What Is Demand Function

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imransodangi6
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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What Is Demand Function?

A demand function is a mathematical function describing the


relationship between a variable, like the demand of quantity, and
various factors determining the demand. The purpose of this
function is to analyze the behavior of consumers in a market and to
help firms make pricing decisions.

Economists rely heavily on this function in their economic theories.


Generally, a product's demand acts as a variable affected by price.
This function can assess the market stability and market-clearing
cost. Therefore, it specifies the quantities and prices an individual
or all customers are willing to buy and pay at any given time.

The demand function definition refers to a relationship between a


product's demand and other determinants affecting it, like price.

It is basically of two types - individual function of demand and


market function of demand.

An inverse function is a process where price becomes the function


of demanded quantity. In addition, this helps determine the cost of
the product which would maximize the profits.

In addition, this function can be used to understand consumer


behavior in a market and assist firms in making informed decisions
about pricing, marketing, and resource allocation.

Demand Function Explained


The demand function, or the demand curve, describes the
relationship between the quantity demanded by customers and the
product price. Thus, the price of goods becomes vital in
determining the number of goods consumers buy in a market. The
most common form of this function is the linear demand function.
However, economists often use different functional forms apart
from the linear process, such as logarithmic and polynomial
functions, to capture different consumer behavior patterns.

Moreover, the process of demand describes the relationship


between the need for a product with that of other factors:

Commodity demand: the demand for a commodity affects the


item’s price either positively or negatively.

Commodity function: the quality of a commodity affects demand.

Goods or service prices: if the costs increase, demand decreases.

The expected price of the commodity in the future: if the customers


expect any change in their income or price change of a product, the
demand changes.

Related products and services price: if the substitute product's price


changes, then if the demand for the original product changes, one
can say the product is related to each other as complement and
substitute.

Consumer’s pattern of taste: The company makes significant


investments in advertising to change the taste and preference of
consumers to like the advertised product.

We can refer to the above as the factors that affect demand. It


occurs because various factors influence the market for any
commodity. Furthermore, income is not a determinant in the
Marshallian demand function. Economist Alfred Marshall gave his
name to the Marshallian process of purchasing power. Therefore,
the market researcher can calculate the slope and intercept of the
economic demand function by forecasting how price or
other economic factors affect the requirement for a specific
product.

Types

We can attribute the basis of these function types to either


individual customers or the entire set of consumers in the market.
Below listed are the types of functions:

#1 - Individual Demand Function

The Individual function of demand means the functional


relationship between a particular need for a product and all the
factors that affect it. Moreover, it also explains the relationship
between the market's direction and its aspects. In addition,
companies can calculate this function by using data on consumer
buying behavior, such as surveys, market research, or sales data.
Therefore, this function is derived from individual consumers'
preferences, income, and other characteristics of individual
consumers. Consequently, it helps understand consumer
behavior in response to changes in price.

#2 - Market Demand Function

The market function of demand means the existing functional


relationship between the need of the market and the factors
affecting the market demand. Besides those factors affecting the
individual demand process, the magnitude, and structure of
climatic conditions and income distribution also affect the
demand's market function.

Subsequently, evaluating this function involves using data on the


prices and quantities demanded by all buyers in the market.
Therefore, this data can be obtained from market research, surveys
of buyer behavior, and sales records. Hence, this function evaluates
the market stability price and quantity, which is the point where
demand meets supply.

Formula

This function can be calculated using two different formulas since it


indicates the relation between the demand level and other factors
influencing the demand. One can differentiate between the
individual and market demand for goods or products.

#1 - Individual Demand Function

Algebraically, the individual function of demand is described as


follows:

Dx = f (Px, I, Pr, E, T)

The Demand of Commodity x (Dx)

The function of product x (f)

Price of good or service (Px)

Incomes of buyers (I)


Prices of related goods & services (Pr)

The future expectation of the product (E)

Taste patterns of buyers (T)

#2 - Market Demand Function

Algebraically, the market function of demand is described as


follows:

Dx = f (Px, Y, Py, Ep, T, Pp, A, U)

The demand of Commodity x (Dx)

The function of commodity x (f)

Price of good or service (Px)

Incomes of buyers (Y)

Prices of related goods & services (Py)

The Expected future price of the product (Ep)

Taste patterns of users (T)

Number of buyers in the market (Pp)

Distribution of Income (A)

Government Policy (U)


Examples

Let us look at the examples to understand the basics of the topic.

Example #1

Assume John is looking to buy a new pair of shoes. He has a


$100 budget and is willing to spend up to $50 on shoes. However,
he will reduce his demand for purchasing shoes if the price rises
above $50.

He also considers the shoes' style and comfort as a demand


determinant. If the boots are comfortable, He would agree to pay
more for them. In contrast, he would refuse to pay if it did not
meet his needs.

As a result, in this example, John's demand for shoes is influenced


by several factors, including his budget, the cost of the shoes, and
his preference for style and comfort. As a result, the demand curve
that captures the relationship between the quantities of shoes
demanded and the factors influencing demand can be estimated.

Example #2

Assume that according to Amacon's market research, which


examines how consumer demand works in the luxury car market.
The study examines luxury car sales and pricing data to determine
how price changes affect consumer demand for various models.
The market researcher also assesses how brand reputation,
performance, and features influence consumer preferences and
purchasing behavior in the luxury car market. Finally, it shows an
instance of using this function to analyze consumer behavior and
purchasing decisions in a specific market.
Inverse Demand Function

Sometimes an independent variable like price defines the demand


curve, so one calls it an inverse function of demand. The inverse
function of demand helps find that additional income is created
when one extra unit gets sold. The marginal revenue function
creates the first derivative for the inverse demand process.
Moreover, price becomes the function of direction in quantity here.
Under this, price becomes the function of the commodity
demanded.

It is essential because:

It aids in calculating the impact when the quantity demanded


changes to the price.

It helps assess the amount of product that will help maximize


profit.

Frequently Asked Questions (FAQs)

What is the aggregate demand function?

The aggregate function of demand refers to an economic concept


that shows the total demand for goods and services within an
economy at a given price level for a specific period.

How to find marginal revenue from the demand function?

To find the marginal revenue from this function, one has to


differentiate the total revenue function for the quantity, which is
the product of price and quantity. The formula of marginal revenue
function is:
MR = dTR/dQ,
MR is the marginal revenue, TR is the total revenue, and dQ is the
demand derivative.

How to find consumer surplus from the demand function?

Consumer surplus is the difference between the maximum price a


consumer is willing to pay for a product and the actual price they
pay. To find the consumer surplus from this function, follow the
below steps:
Let there be a function of demand p = d(q),
A supply function is given as p= s(q),
And the equilibrium point be demoted as (q*, p*
Therefore the consumer surplus formula is as follows:


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