2013

Market Demand Function

Rani Channamma University Department of Business Administration Belagavi

Submitted To: Prof.D.Gautam Dept. Of Business Administration Rani Channama University Be!a"avi.

Submitted By: #ahantesh Ba!e$undri Asif

12/15/2013

Market Demand Function

Demand %un&tion A demand function that represents the behaviour of buyers, can be constructed for an individual or a group of buyers in a market !he market demand function is the hori"ontal summation of the individuals# demand functions $n models of firm behaviour, the demand for a firm#s product can be constructed !he nature of the %demand function% depends on the nature of the good considered and the relationship being modelled $n most cases the demand relationship is based on an inverse or negative relationship bet&een the price and 'uantity of a good purchased !he demand for purely competitive firm#s output is usually depicted as hori"ontal (or perfectly elastic) $n rare cases, under e*treme conditions, a %+iffen good% may result in a positively sloped demand function !hese +iffen goods rarely occur $t is important to identify the nature of the %demand function% being considered '() *ndividua! Demand %un&tion !he behaviour of a buyer is influenced by many factors, the price of the good, the prices of related goods (compliments and substitutes), $ncomes of the buyer, the tastes and preferences of the buyer, the period of time and a variety of other possible variables !he 'uantity that a buyer is &illing and able to purchase is a function of these variables

Rani Channama University Belagavi Dept of MBA.

Page 2

Market Demand Function

#ar$et demand fun&tion meanin" Market demand function e*presses the relationship bet&een the market demand for a commodity and its various determinants !he market demand function for a good at a particular price is the sum total of the demands of all the consumers in a market Algebraically, it is e*pressed asM Dx . f (Px , Py , M, T, E, N, Md ) /here, M.Dx - Represents market demand for commodity 0x1 Px represents price of commodity 0x1 Py represents price of related goods M represents income of buyers T represents tastes and preferences E represents e*pectation of buyers N represents population si"e Md represents income distribution (2) 3rice of commodity (Px )- 4ther things remaining constant, at higher prices, consumers &ill demand less of commodity and vice5versa, hence confirming an inverse relationship bet&een price and market demand of a commodity (6) 3rices of related goods (Py )- A rise in the price of substitute goods &ill lead to increase in the demand of other substitute goods and vice5versa, hence confirming direct relationship bet&een the demand of a good and price of its substitutes 4n the other hand, rise in price of complementary goods &ill lead to fall in the demand of other complementary goods, hence depicts &hich indirect relationship bet&een the demand of a good and price of its complementary (7) $ncome of buyers (M)- !he demand for normal goods in the market &ill tend to increase &ith the increase in income and vice5versa 4n the other hand, the demand for inferior goods tends to decrease &ith the increase in income and vice5versa (8) !astes and preferences of buyers (T)- 4ther things remaining constant demand for those goods increases for &hich consumers develop favorable attitude 4n the contrary, the unfavorable demand for fe& goods &ill lo&er the demand for such goods

Rani Channama University Belagavi Dept of MBA.

Page 3

Market Demand Function

(9) :*pectation of buyers (E)- $f consumers e*pect prices of goods price to rise in future, then they &ill demand for that commodity leading to a rise in demand ;imilarly, e*pectation regarding prices to be lo&ered in future &ill make the consumer to postpone their consumption or demand, hence, demand &ill be less (<) 3opulation si"e (N)- !he rise (fall) in the population (in terms of no of consumers) &ill increase (decrease) the demand for goods, hence market demand (=) $ncome Distribution (Md )- !he e'ual distribution in income &ill create more demand in the market 4n the other hand, if income is not e'ually distributed, there &ill be less demand in the market
#ar$et Demand %un&tion

/hen property rights are no attenuated (e*clusive, enforceable and !ransferable) the individual#s demand functions can be summed >ori"ontally to obtain the market demand function The behaviour of a buyer +as represented by the fun&tion '() Chan"e in ,uantity Demand /hen demand is stated ? . f(3) ceteris paribus, a change in the 3rice of the good causes a -&han"e in .uantity Demanded.- !he buyers respond to a higher (lo&er) price by 3urchasing a smaller (larger) 'uantity Demand is an inverse Relationship bet&een price and 'uantity demanded 4nly in unusual Circumstances (a highly inferior good, a +iffen good) may a demand Functions have a positive relationship '/) Chan"e in Demand A change in demand is a %shift% or movement of the demand Function A shift of the demand function can be caused by a change $n, @ $ncomes @ !he prices of related goods @ 3references @ !he number of buyers
Rani Channama University Belagavi Dept of MBA. Page 4

Market Demand Function

'0) *nferior 1orma! and Superior Goods A change in income &ill usually shift the demand function /hen a +ood is a %normal% good, there is a positive relationship bet&een the change in income and change in demand, an increase in income &ill increase (shift the demand to the right) demand A decrease in income &ill decrease (shift the demand to the left) demand An inferior good is characteri"ed by an inverse or negative relationship bet&een the change in income and change in demand An increase in the income &ill decrease demand &hile a decrease in income &ill increase demand '2) Comp!iments and Substitutes !he demand for Aebecs (?A) is determined by the 3A, income and the 3rices of related goods (3R), +oods may be related as substitutes (Consumers perceive the goods as substitutes) or compliments (Consumers use the goods together) '3) 45pe&tations :*pectations about the future prices of goods can cause the demand in any period to shift $f buyers e*pect relative prices of a good &ill rise in future periods, the demand may increase in the present period An e*pectation that the relative price of a good &ill fall in a future period may reduce the demand in the current period

Rani Channama University Belagavi Dept of MBA.

Page 5