Question

What is demand function?

Hint:

The demand function shows how quantity demanded is affected by factors like price, income, and consumer preferences. It is typically represented by a downward sloping demand curve.

Answer 1

A demand function is a mathematical representation of the relationship between the quantity of a good or service demanded by consumers and the factors that influence this demand, such as the price of the good, consumer income, prices of related goods, tastes, and preferences. The demand function shows how the quantity demanded of a good changes in response to changes in these variables.
Step 1: General Form of Demand Function.
The demand function can be represented as:
\[ Q_d = f(P, I, P_r, T) \] Where:
- Q_d = Quantity demanded of the good
- P = Price of the good
- I = Consumer income
- P_r = Prices of related goods
(substitutes or complements) - T = Tastes and preferences of consumers

Step 2: Explanation of Variables.
- Price (\( P \)): The law of demand states that, all other factors remaining constant, the quantity demanded of a good decreases as its price increases, and vice versa.
- Income (\( I \)): As consumer income increases, the demand for normal goods increases, and for inferior goods, the demand decreases.
- Price of Related Goods (\( P_r \)): If the price of a substitute good increases, the demand for the good in question increases, while if the price of a complement increases, the demand for the good in question decreases.
- Tastes and Preferences (\( T \)): Changes in consumer preferences or tastes can affect the demand for a good. For example, if a good becomes fashionable, the demand for it will increase.
Step 3: Graphical Representation of Demand Curve.
The demand curve is typically downward sloping, reflecting the inverse relationship between price and quantity demanded. As the price of a good decreases, the quantity demanded increases, and vice versa. This is consistent with the law of demand.