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Karnataka Class 12 Commerce Economics Demand Function Complete Notes

Karnataka Class 12 Commerce Economics Demand Function : Cakart team members provides you Karnataka Class 12 Commerce Economics Demand Function Complete Notes In PDF Format. Download these Karnataka Class 12 Commerce Economics Demand Function Complete Notes in Pdf format and read well.

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Karnataka Class 12 Commerce Economics Demand Function Complete Notes

Karnataka Class 12 Commerce Economics Demand Function : On economics, demand is the quantity of a commodity or a service that people are willing or able to buy at a certain price. The relationship between price and quantity demanded is also known as demand curve. Preferences and choices, which underly demand, can be represented as functions of cost, benefit, odds and other variables.

Read this article to learn about the individual and market demand functions:

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Demand function shows the relationship between quantity demanded for a particular commodity and the factors influencing it.

Economics

It can be either with respect to one consumer (individual demand function) or to all the consumers in the market (market demand function).

Individual Demand Function:

Individual demand function refers to the functional relationship between individual demand and the factors affecting individual demand. It is expressed as: Dx = f (Px, Pr, Y, T, F) Where,

Dx = Demand for Commodity x; Px = Price of the given Commodity x;

Pr = Prices of Related Goods; Y = Income of the Consumer;

T = Tastes and Preferences; F = Expectation of Change in Price in future.

Demand function is just a short-hand way of saying that quantity demanded (Dx), which is on the left-hand side, is assumed to depend on the variables that are listed on the right-hand side.

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Market Demand Function:

Market demand function refers to the functional relationship between market demand and the factors affecting market demand. As mentioned before, market demand is affected by all factors affecting individual demand. In addition, it is also affected by size and composition of population, season and weather and distribution of income.

So, market demand function can be expressed as:

Dx = f(Px, Pr, Y, T, F, PD, S, D) Where,

Dx = Market demand of commodity x; Px = Price of given commodity x; Pr = Prices of Related Goods; Y = Income of the consumers;

T = Tastes and Preferences; F = Expectation of Change in Price in future;

P0 = Size and Composition of population; S = Season and Weather; D = Distribution of Income.

Karnataka Class 12 Commerce Economics Demand Function Complete Notes

Karnataka Class 12 Commerce Economics 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. In models of firm behavior, the demand for a firm’s product can be constructed.

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. 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.

It is important to identify the nature of the “demand function” being considered.

Individual Demand Function

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:

QX = fX(PX, Prelated goods, income (M), preferences, . . . )

  • QX = the quantity of good X
  • PX = the price of good X
  • Prelated goods = the prices of compliments or substitutes
  • Income (M) = the income of the buyers
  • Preferences = the preferences or tastes of the buyers

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 PX on the QXare shown. The other variables, (Prelated goods, M, preferences, . . . ) are held constant. Figure III.A.1 shows the graphical representation of demand. Since (Prelated goods, M, preferences, . . . ) are held constant, the demand function in the graph shows a relationship between PX and QX in a given unit of time (ut).

Figure III.A.1

The demand function can be viewed from two perspectives. The demand is usually defined as a schedule of quantities that buyers are willing and able to purchase at a schedule of prices in a given time interval (ut), ceteris paribus.

QX = f(PX), given incomes, price of related goods, preferences, etc.

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

PX = f(QX), 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. While demand is frequently stated Q = f(P), remember that the graph and calculation of total revenue (TR) and marginal revenue (MR) are calculated on the basis of a change in quantity (Q). TR = f(Q) The calculation of “elasticity” is based on a change in quantity (Q) caused by a change in the price (P). It is important to clarify which variable is independent and which is dependent in a particular concept.

Market Demand Function

When property rights are nonattenuated (exclusive, enforceable and transferable) the individual’s demand functions can be summed horizontally to obtain the market demand function.

Figure III.A.2

In Figure III.A.2 and Table III.A.2, a market demand function is constructed from the behavior of three people (the participants in a very small market. At a price of P1, Ann will voluntarily buy 2 units of the good based on her preferences, income and the prices of related goods. Bob and Cathy buys 3 units each. Their demand functions are represented by DA, DB and DC in Figure III.A.2. The total amount demanded by the three individuals at P1 is 8 units (2+3+3). At a higher price each buys a smaller quantity. The demand functions can be summed horizontally if the property rights to the good are exclusive; Ann’s consumption of a unit precludes Bob or Cathy from the consumption of that good. In the case of public (or collective) goods, the consumption of national defense by one person (they are protected) does not preclude others from the same good.

The behavior of a buyer was represented by the function:

QX = fX(PX, Prelated goods, income (M), preferences, . . . ).

For the market the demand function can be represented by adding the number of buyers (#B, or population), QX = fX(PX, Prelated goods, income (M), preferences, . . . #B), where #B represents the number of buyers. Using ceteris paribus the market demand may be stated

QX = f(PX), given incomes, price of related goods, preferences, #B etc.

Change in Quantity Demand

When demand is stated Q = f(P) ceteris paribus, a change in the price of the good causes a “change in quantity demanded.” The buyers respond to a higher (lower) price by purchasing a smaller (larger) quantity. Demand is an inverse relationship between price and quantity demanded. Only in unusual circumstances (a highly inferior good, a Giffen good) may a demand function have a positive relationship.

A change in quantity demanded is a movement along a demand function caused by a change in price while other variables (incomes, prices of related goods, preferences, number of buyers, etc) are held constant. A change in quantity demanded is shown in Figure III.A.3.

Figure III.A.3

Change 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 in:

  • incomes
  • the prices of related goods
  • preferences
  • the number of buyers.
  • Etc . . .

A “change in demand” is shown in Figure III.A.4. Given the original demand (Demand), 10 units will be purchased at a price of $5. An increase in demand (DINCREASE) is to the right and at every price a larger quantity will be purchased. At $5, eighteen units are purchased. A decrease in demand is a shift to the left. At a price of $5 only 4 units are purchased. A smaller quantity will be bought at each price.

Figure III.A.4

Inferior, Normal and Superior Goods

A change in income will usually shift the demand function. When a good is a “normal” good, there is a positive relationship between the change in income and change in demand; an increase in income will increase (shift the demand to the right) demand. A decrease in income will decrease (shift the demand to the left) demand.

An inferior good is characterized by an inverse or negative relationship between the change in income and change in demand. An increase in the income will decrease demand while a decrease in income will increase demand.

A superior good is a special case of the normal good. There is a positive relationship between a change in income and the change in demand but, the percentage change in the demand is greater than the percentage change in income. In Figure III.A.2 an increase in income will shift the Demand function (“Demand”) for a normal good to the right to DINCREASE. For an inferior good, a decrease in income will shift the demand to the right. For a normal good a decrease in income will shift the demand to DDECREASE.

Figure III.A.2

Compliments and Substitutes

The demand for Xebecs (QX) is determined by the PX, income and the prices of related goods (PR). Goods may be related as substitutes (consumers perceive the goods as substitutes) or compliments (consumers use the goods together). If goods are substitutes, (shown in Figure III.A.3) a change in PY (in Panel B) will shift the demand for good X (in Panel A).

Figure III.A.3

An increase in PY (from PY1 to PY2) will reduce the quantity demanded for good Y (a move on DY). The reduced amount of Y will be replaced by purchasing more X. This is a shift of the demand for good X to the right (In Panel A, this is shown as a shift from DX to DX*, an increase in the demand for good X). At PX a larger amount (X3) is purchased.

A decrease in PY will increase the quantity demanded for good Y. This will reduce the demand for good X, the demand for good X will shift to the left (from DX to DX**, a decrease). At PX (and all prices of good X) a smaller amount of X (X1) is purchased.

In the case of compliments, there is an inverse relationship between the price of the compliment (PZ in Panel B, Figure III.A.4) and the demand for good X. An increase in the price of good Z will reduce the quantity demanded for good Z. Since less Z is purchased, less X is needed to compliment the reduced amount of Z (Z2). The demand for X in Panel A decreases for DX to DX**. An decrease in PZ will increase the quantity demanded of good Z and result in an increase in the demand for good X (from DX to DX* in Panel A).

Expectations

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.

Karnataka Class 12 Commerce Economics Demand Function Complete Notes

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