Basic concepts of microeconomics and industrial organization: Demand function Giovanni Marin Department of Economics, Society, Politics Università degli Studi di Urbino ‘Carlo Bo’
Demand function • The market consists of all buyers and sellers of a good or service • The demand curve tells us the quantity of a good that buyers wish to buy at each price • Properties of the demand function – As price of a good or service goes down the quantity consumers wish to buy will increase – Therefore, the demand curve is downward-sloping • Alternative interpretation – As price of a good or service goes down , the number of individuals that purchase one unit of the good increases Spring 2018 Global Political Economy 2
Demand function • Why do buyers purchase a greater quantity at lower prices and vice-versa? – Substitution effect • Change in the quantity demanded of a good because buyers switch to other goods when the relative prices changes – Income effect • Change in the quantity demanded of a good due to the change in buyer’s purchasing power (i.e. wealth) due to the change in the price of the good Spring 2018 Global Political Economy 3
Price Demand function Quantity Spring 2018 Global Political Economy 4
Demand function • Reservation price – The reservation price is monetary value of the benefit the buyer receives from the good – If the reservation price exceeds the market price the consumer will purchase the good Spring 2018 Global Political Economy 5
Price Demand function Market price Q* Quantity Spring 2018 Global Political Economy 6
Low-elasticity demand Price Q P Elasticity P Q High-elasticity demand Quantity Spring 2018 Global Political Economy 7
Fully inelastic demand Price Fully elastic demand Quantity Spring 2018 Global Political Economy 8
Demand shifts to the right if: ➢ Income increases ➢ Price of substitute goods increases Price ➢ Price of complementary goods decreases Quantity Spring 2018 Global Political Economy 9
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