1. ©2011 John M. Abowd and Jennifer P. Wissink, all rights reserved.
The Demand Function
Dr. Jennifer P. Wissink
©2011 John M. Abowd and Jennifer P. Wissink, all rights reserved.

2. The Demand Function
We will consider the market for compact disc players.
Recall that we will define the following for our market:
The type and style of CD players.
The quality of the CD players.
All other attributes of the generic CD player.
A time frame that applies to our market for CD players.
Demanders are the buyers of CD players.
The CD player market is a perfectly competitive market.

3. Demand Concepts
The demand function for X: QxD = f(PX, Ps, Pc, I, T&P, Pop) Where X refers to CD players and: Qx = the number or quantity of units demanded PX = X’s price Ps = the prices of substitutes in consumption Pc = the prices of complements in consumption I = income T&P = tastes and preferences Pop = population in market or market size

4. The Demand Curve (Verbal)
The demand curve, a.k.a. demand, describes the relation between a good’s price and the maximum quantity that buyers are willing and able to buy at that price, ceteris paribus.
Ceteris paribus means holding all the other demand function variables constant at some given level.
QXD = f(PX) given Ps, Pc, I, T&P, Pop
The Law of Demand:
the relationship between a good’s price and the quantity demanded of that good is negative.
Example: suppose the price of the good falls from $25 to $10, and the quantity demanded rises from 15 to 30.
This is referred to as a “change in quantity demanded” and in this case an “increase in quantity demanded.”
“Own-price” changes cause movements along a given demand curve.

5. The Demand Curve (Graph)
QXD = f(PX)
Note: The Law of Demand implies a negative or downward slope to the graph.
Note: In the graph we switched the axes.
Price
Quantity
Demand 25 15
At P = $25, the quantity demanded = 15.

6. Movements vs. Shifts QXD = f(PX) given Ps, Pc, I, T&P, Pop
A movement along the demand curve for X would be caused by a change in Px.
Remember this is referred to as an increase or decrease in quantity demanded!
A shift of the entire demand curve would be caused by a change in one of the “ceteris paribus” demand variables.
This would be referred to as an increase or decrease in demand.

7. Movements: Change In Quantity Demanded
A change in the quantity demanded is a movement along the demand curve.
Price 25 15
Demand
Quantity
When price falls to $10, the quantity demanded increases to 30. 10 30

8. Shifts: Increase & Decrease In Demand
When demand increases, the quantity demanded by buyers increases at every price.
Example: when demand increases, the quantity demanded at a price of $25 rises from 15 to 25 units.
When demand decreases, the quantity demanded by buyers falls at every price.
Example: when demand decreases, the quantity demanded at a price of $25 falls from 15 to 10 units.

9. Increase In Demand
Price
Demand
Quantity
An increase in demand is a rightward shift in the entire curve.
New Demand 25 15 25
More is demanded at every price

10. Decrease In Demand
Price
Demand
Quantity
A decrease in demand is a leftward shift in the entire curve.
Less is demanded at every price
New Demand 15 25 10

11. Movements vs. Shifts: Getting It Right
Recall: QXD = f(PX) given Ps, Pc, I, T&P, Pop
Consider what happens when:
Px changes  movement along demand based on the law of demand
Px up  QxD falls; Px down  QxD rises
PS changes  shift in demand
PS up  increase in demand for X; PS down  decrease in demand for X
PC changes  shift in demand
PC up  decrease in demand for X; PC down  increase in demand for X
I changes  shift in demand
X normal: I up  increase in demand for X; I down  decrease in demand for X
X inferior: I up  decrease in demand for X; I down  increase in demand for X
T&P changes  shift in demand
More favorable  increase in demand for X; less favorable  decrease in demand for X
Pop changes  shift in demand
Pop up  increase in demand for X; Pop down  decrease in demand for X

12. The Demand Curve (Equation)
A linear demand curve:
QXD = 40 – PX
15 = 40 – 25
Law of Demand?
YES.
Beware: the graph we draw is the inverse of the equation we write (most times). P D 25 15 Q

13. The Demand Curve (Equation)
Another example:
QxD = 100 – 2Px
The equation we graph is the inverse.
Rearranging we get:
2PxD = 100 – Qx
PxD = 50 – 1/2Qx P 50 D
100 Q

14. Final Demand Remarks
We have constructed the demand function for the market for CD players.
Notes:
Not all demand curves are linear.
Later in the course, we will develop the demand function from a more basic model of consumer behavior.
The demand side of the market “scissors” is only half the story. The other is the supply function.