Inverse Demand

Function
 While a regular demand curve puts quantity
demanded in terms of price, the inverse
demand curve puts price in terms of
quantity demanded.
 If we're given some quantity demanded, we

can use the inverse demand curve to say

what price we would have to see in the
market for that to happen.
 When considering the inverse demand

curve, we hold income and the price of all

other goods constant.
 In economics, an 'inverse demand function, P =
f−1(Q),is a function that maps the quantity of
output demanded to the market price
(dependent variable) for that output.
 Quantity demanded, Q, is a function of price; the
inverse demand function treats price as a
function of quantity demanded, and is also
called the PRICE FUNCTION.
 To obtain the inverse demand function, we just
solve the demand function for P as a function of
Q.
 The slope of an inverse demand curve is given
by
 the change in P divided by the change in Q
 Slope = P/  Q
 In mathematical terms,
 if the demand function is f(P),

 then the inverse demand function is f−1(Q).

 This is to say that the inverse demand function is

the demand function with the axes switched. This

is useful because economists typically place price
(P) on the vertical axis and quantity (Q) on the
horizontal axis.
 The inverse demand function is the same as the

average revenue function, since P = AR.

 To compute the inverse demand function, simply

solve for P from the demand function. For

example, if the demand function has the form Q
= 240 - 2P then the inverse demand function
would be P = 120 - 0.5Q.
Application:

 The inverse demand function can be used to derive

the total and marginal revenue functions.
 Total revenue equals price, P, times quantity, Q, or
TR = P×Q.
 Multiply the inverse demand function by Q to
derive the total revenue function:
 TR = (120 - .5Q) × Q = 120Q - 0.5Q²
 The marginal revenue function is the first
derivative of the total revenue function or
 MR = 120 – Q
 MR is the profit-maximizing condition for firms
regardless of market structure is to produce where
marginal revenue equals marginal cost (MC).
 To derive MC the first derivative of the total cost
function is taken.
 For example assume cost, C, equals 420 + 60Q
+ Q2
 Then MC = 60 + 2Q.
 Equating MR to MC and solving for Q gives Q =
20.
 So 20 is the profit maximizing quantity: to find
the profit-maximizing price simply plug the value
of Q into the inverse demand equation and solve
for P.
 The function appears in this form because
economists place the independent variable on
the y-axis and the dependent variable on the x-
axis.
Why do economists put price on
the vertical axis?
 The axis reversal — now enshrined by nearly a century of
usage — arose as follows.
 The analysis of the competitive market that we use today
stems from Leon Walras, in whose theory quantity was the
dependent variable.
 Graphical analysis in economics, however, was popularized by
Alfred Marshall, in whose theory price was the dependent
variable.
 Economists continue to use Walras' theory and Marshall's
graphical representation and thus draw the diagram with the
independent and dependent variables reversed — to the
everlasting confusion of readers trained in other disciplines.
 In virtually every other graph in economics the axes are
labelled conventionally, with the dependent variable on the
vertical axis.
Historic Convention:
 One of the first economists to to draw Supply and Demand
graphs was Alfred Marshall (26 July 1842 – 13 July 1924). His
1890 book, Principles of Economics, was the dominant
textbook of its time. In his Supply and Demand graphs,
Marshall put Quantity on the x-axis. Why?
 It probably has to do with the way he and other economists
thought about price at that time, which was in terms of a
demand price and a supply price at some quantity. They
thought in term of agriculture, where some quantity of crops
was produced, and that the price depended on the quantity.
 A French economist, Léon Walras (1834-1910 developed
general equilibrium theory which involved solving
simultaneous equations which sounds more like current
thinking.
Monopoly Demand Curve:
Downward Sloping Curve.
 In case of a competitive firm, price is given and fixed.
 Demand or Average Revenue curve is perfectly
flexible and is a horizontal straight line.
 A monopolist has the freedom to charge a higher or
lower price.
 With a change in the price, the quantity demanded
also alters.
 Again a monopolist is a single seller. He himself is a
firm as well as an industry. Hence market demand
curve is in itself the demand curve of the monopolist.
 As a result of this the demand curve of a monopolist
is downward sloping.
AR-MR Relationship:
 The relation between Average and Marginal Revenue
is similar to that of the behavior of average and
marginal quantities in general, such as costs, wages
etc.
 When the marginal quantity is constant, average
quantity is also constant and the two values are
identical.
 When the marginal quantity increases, the average
quantity likewise increases and is lower than the
marginal quantity.
 On the other hand, when the marginal quantity
decreases the average quantity falls but is above or
greater than the marginal value.
Quadratic Revenue Function:

 Suppose that the demand function for the product is

q= f(p)
 Here q is the quantity demanded and p is the price in
dollars.
 The total revenue from selling units of price is
stated as the product of p and q or R=p.q


 Since the demand function q is stated in terms of

price p , total revenue can be stated as a function of
price,

 If we let q = 1500 – 5P
 Then, R = 1500 P – 50 P2