Demand Function and Equation

 

Demand Function

Demand function is an algebraic expression that shows the functional relationship between the demand for a commodity and its various determinants affecting it. This includes income and price along with other determining factors.

It can be expressed as:

Dx=f(Px, Y, Pr, T, A, P,D,E…)

Dx= Demand for commodity X

Px= Price of Commodity X

Y=Income of Consumer

Pr=Price of the related goods

T=Taste and preference of the consumer

A=Advertisement

P=Population and it’s composition

D=Distribution of Income

E=Expectation of the Consumer

Types of Demand Function:

a.      Individual Demand Function

Individual demand function refers to the functional relationship between demand made by an individual consumer and the factors affecting the individual demand. It shows how demand made by an individual in the market is related to its determinants.

Mathematically, individual demand function can be expressed as,

Dx= f (Px, Pr, Y, T, F)

Where,

Dx= Demand for commodity x;

Px= Price of the given commodity x;

Pr= Price of related goods;

Y= Income of the individual consumer;

T= Tastes and preferences;

F= Expectation of change in price in the future.

b.     Market Demand Function

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

Mathematically, market demand function can be expressed as,

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

Where,

Dx= Demand for commodity x;

Px= Price of the given commodity x;

Pr= Price of related goods;

Y= Income of the individual consumer;

T= Tastes and preferences;

F= Expectation of change in price in the future;

Po= Size and composition of population;

S= Season and weather;

D= Distribution of income.

Demand, it's Types and Determinants

 

Demand

It is an effective desire which is backed up by both willingness and ability of the consumer to pay for the goods. It is the amount of goods which is bought at the price at the given period of time. Conditions for the Effective demand:

a.      Desire for specific commodity.

b.     Sufficient resources to purchase the desired commodity.

c.      Willingness to spend the resources

Types of Demand:

1. Price demand:

Price demand refers to the different quantities of the commodity or service which consumers will purchase at a given time and at given prices, assuming other things remaining the same. It is the price demand with which people are mostly concerned and as such price demand is an important notion in economics. Price demand has inverse relation with the price. As the price of commodity increases its demand falls and as the price decreases, its demand rises.

2. Income demand:

Income demand refers to the different quantities of a commodity or service which consumers will buy at different levels of income, assuming other things remaining constant. Usually the demand for a commodity increases as the income of a person increases unless the commodity happens to be an inferior product. For example, coarse grain is a cheap or inferior commodity. The demand for such commodities decreases as the income of a person increases. Thus, the demand for inferior or cheap goods is inversely related with the income.

3. Cross demand:

When the demand for a commodity depends not on its price but on the price of other related commodities, it is called cross demand. Here we take closely connected or related goods which are substitutes for one another.

For example, tea and coffee are substitutes for one another. If the price of coffee rises, the consumer will be induced to buy more of tea and, hence, the demand of tea will increase. Thus in case of substitutes, when the price of one related commodity rises, the demand of the other related commodity increases and vice-versa.

But in case of complimentary or joint demand goods, e.g., pen and ink, horses and carriages etc. when the price of one commodity rises, the demand for it will fall and as a result of it the demand for the other joint commodity also falls (even though its price remains the same). For example, if the price of horses increases, their demand will fall and as a result of it the demand for carriages will also fall even though their price does not change.

4. Direct demand:

Commodities or services which satisfy our wants directly are said to have direct demand. For example, all consumer goods satisfy our wants directly, so they are said to have direct demand.

5. Derived demand or Indirect demand:

Commodities or services demanded for producing goods which satisfy our wants directly are said to have derived demand. For example, demand for a factor of production (say labor) is a derived demand because labor is demanded to help in the construction of houses which will directly satisfy consumers’ demand.

Thus, the demand for labor which helps us in making a house in a case of indirect or derived demand. The demand for labor is called derived demand because its demand is derived from the demand of a house.

6. Joint demand:

In finished products as in case of bread, there is need for so many things—the services of the flour mill, oven, fuel, etc. The demand for them is called joint demand. Similarly for the construction of a house we require land, labor, capital, organization and materials like cement, bricks, lime, etc. The demand for them is, thus, called a ‘joint demand.’

7. Composite demand:

A commodity is said to have a composite demand when its use is made in more than one purpose. For example the demand for coal is composite demand as coal has many uses—as fuel for a boiler of a factory, for domestic fuel, for oven for steam-making in railways engine, etc.

Determinants of Demand

Price of the given commodity

Other things remaining constant, the rise in price of the commodity, the demand for the commodity contracts, and with the fall in price, its demand increases.

Price of related goods

Demand for the given commodity is affected by price of the related goods, which is called cross price demand. There are two types of related goods which are as follows:

a.      Substitute Goods

These goods are those goods which can be used in absence of another goods. In case of these goods, if the price of one rises, the demand for another rises and vice-versa. For eg: Tea and coffee are substitute goods, if the price of tea increases, assuming price of coffee as constant, the demand for coffee will increase and vice-versa.

b.     Complementary Goods

Those goods are complementary goods which are jointly used to satisfy a particular want. In case of these goods, if there is rise in price of one good assuming  price of related goods constant, the demand for the other good will fall and vice-versa. For eg: Pen and Ink, if price of pen rises, assuming price of ink constant, the demand for ink will decrease.

Income of the individual consumer

Change in consumer’s level of income also influences their demand for different commodities. Normally, the demand for certain goods increase with the increasing level of income and vice versa.

Tastes and preferences

The taste and preferences of individuals also determine the demand made for certain goods and services. Factors such as climate, fashion, advertisement, innovation, etc. affect the taste and preference of the consumers.

Expectation of change in price in the future

If the price of the commodity is expected to rise in the future, the consumer will be willing to purchase more of the commodity at the existing price. However, if the future price is expected to fall, the demand for that commodity decreases at present.

Size and composition of population

The market demand for a commodity increases with the increase in the size and composition of the total population. For instance, with the increase in total population size, there is an increase in the number of buyers. Likewise, with an increase in the male composition of the population, the demand for goods meant for male increases.

Season and weather

The market demand for a certain commodity is also affected by the current weather conditions. For instance, the demand for cold beverages increase during summer season.

Distribution of income

In case of equal distribution of income in the economy, the market demand for a commodity remains less. With an increase in the unequal distribution of income, the demand for certain goods increase as most people will have the ability to buy certain goods and commodities, especially luxury goods.
 

Some Parts are Adopted from:

a.      https://www.businesstopia.net/economics/macro/concept-demand-function-types

b.     https://www.yourarticlelibrary.com/economics/demand/7-important-kinds-of-demand-explained/38926

Economics as a Positive and Normative Science

 

a.      Economics as a Positive Science

A positive science is that which deals the things as they happen in reality. It explains what is, what was and what will be. The concept of positive economics was introduced by Classical Economists like Adam Smith, J.B Say, Ricardo and modern economists Lionel Robbins. Economics is a positive science because it studies cause and effect relationship between economic phenomena. For eg: the law of demand studies the cause and effect relationship between price and quantity demand for the commodity.

b.     Economics as a Normative Science

A normative science is that which studies things as they should be. It is related to the criteria of “what ought to be”. Economics cannot be separated from the normative aspect. Normative economics is the branch of economics that expresses value or normative judgement about economic fairness. The concept of normative economics was developed by Neo-classical economist Alfred Marshall. The main aim of economics is the explanation of the general causes on which the material welfare of human beings depend. Economists offer valuable advice to curb the economic ills from the world. It is the duty of economists to make a careful study of different economic problems and suggest ways and means to solve these problems. Normative economics has subfields that provide further scientific study including social choice theory, cooperative game theory and mechanism design.

For eg: An example of a normative economic statement is “the price of milk should be Rs 30 a gallon to give dairy farmers a higher standard and to save the family firm.” It is normative statement because it reflects value judgements and explains what should be done.

Difference between Positive Economics and Normative Economics:

Positive Economics	Normative Economics
a.It expresses what it is.	i.It expresses what should be.
b.It is based on facts.	ii.It is based on ethics.
c.It deals with actual/realistic situation.	iii.It deals about solving the actual/realistic problem.
d.It can be verified with actual data.	iv. It cannot be verified with actual data.
e.It deals with how an economic problem is solved.	v.It deals with how an economic problem should be solved.
f.In this value, judgments are not given.	vi.In this value, judgements are given.
For eg: a.What determines the price rise? b.Government has adopted policies to reduce unemployment	For eg: a.What is a fair price rise? b.Unemployment is worse than inflation.

 

Basic Issues of Economics

 

a.      a. What to produce and in What Quantities

The first central issue of an economy is to decide what goods and services are to be produced and in what quantities. This involves allocation of scarce resources in relation to the comparison of the total output in the economy. Since resources are scarce, the society has to decide about the goods to be produced : wheat, cloth, roads, TV, power, buildings and so on. Once the nature of goods to be produced is decided then their quantities are to be decided like How many tons of wheat, how many televisions, how many millions kws of power, how many buildings, etc. Since the resources of the economy are scare, the problem of the nature of goods and their quantities has to be decided on the basis of priorities or preferences of the society. If the society gives priority to the production of more consumer goods then in future there will be less goods and resources. A higher priority on the capital goods means less consumer goods now and more in the future. But resources are scarce, if some goods are purchased in larger quantities, some goods will have to be produced in smaller quantities.

b.    b.  How to produce the Goods

The second problem is how to produce goods and services. This problem is concerned with the choice of technique of production which means more production at least cost. More than one technique can be applied to achieve it. For example:

1.     Labor intensive technique: Under this technique, labor is used more than capital.

2.     Capital Intensive Technique: Under this technique, capital is used more than labor.

 

It is always technically possible to produce a given quantity of wheat with more labor and less capital or with more capital and less of labor. An economy must decide as to  which technique is to be used in a given industry so that efficient production is obtained.

c.      c. For Whom to Produce

The third basic problem to be decided is the allocation or distribution of goods among the members of the society. The allocation of basic consumer goods or necessities and luxuries comforts and among the household takes place on the basis of among the distribution of National income. Whosoever possesses the means to buy the goods may have them. A rich person may have a large share of the luxuries goods and a poor person may have the more quantities of the basic consumer goods he needs.

d.     d. How efficiently are the resources being utilized

This is one of the important basic problems of an economy because having made the three earlier decisions, the society has to see whether the resources it own are being utilized fully or not. In case, the resources of the economy are lying idle, it has to find out the ways and means to utilize fully.

Relationship between Human Rights and Social Justice

 

Social Justice is a concept of fair and just relations between the individual and society as measured by the distribution of wealth, opportunities for personal activity and social privileges whereas human rights are the basic rights and ideas that everyone should have rights. The relationship between social justice and human rights can be explained through these points:

a.      Promotion of Equality

Social justice and human rights have a shared goal .ie. human dignity and equality for all. The issues that make social justice difficult to achieve such as poverty, exclusion and discrimination are in direct contradiction with human rights which apply to all individual indiscriminately. Human rights can help to fight indignity. For eg: Right to health should be secured for all as a part of respecting human dignity.

b.     Anti-Discrimination

Both Social justice and human rights doesn’t exist in those places where there is discrimination. Bothe social justice and human rights are anti-discrimination. Both argues that no one should be discriminated and deprived from provision irrespective of caste, gender, religion, race and other man made or biological constructions.

c.      Welfare Systems

Human Rights and Social Justice argues for the welfare of the humanity. Human rights argues that everyone should be treated equally and must have the provision like everyone. Social justice also argues that everyone should have provision of food, shelter, clothes and other provision. Social justice also argues that the benefits of the development must be reached to everyone.

d.     Participation

Both human rights and social justice talks about the participation. Human rights calls for the participation from the right to work whereas social justice calls for the participation from every class of society in order to make the better society.

e.      Government’s Accountability

Both human rights and social justice calls for the government’s accountability to make a better society. Human rights call for the government’s action to implement and protect human rights of every people whereas social justice calls the government’s for protecting and providing provision to every class of the society.

 

Human rights and social justice are inter-related to each other. They not only share some common points but they also can’t exist in the absence of another. In the absence of human rights, there will be discrimination, increase in crime and tyranny, in this case the social justice can’t exist. In the absence of social justice, the existence of human rights is a complete waste.

Economics as the Study of Scarcity, Choice and Opportunities Cost

 

1.     Economics as the Study of Scarcity

Scarcity is the condition of insufficiency where the human beings are incapable to meet or fulfill their wants in a sufficient manner. The reason behind this is human wants are unlimited and all human want to have more and superior goods than they have. On the other hand, resources that satisfy human wants are limited or scarce. Scarcity is the central problem of Economy. For example: A land can be used to construct building or to make a beautiful park or to raise an agricultural crops. So it is very essential to think how limited resources can be used alternatively to satisfy some wants of people to get maximum satisfaction as possible. Therefore, economics is concerned with the allocation and alternative uses of these resources in order to fulfill the human wants with maximum satisfaction.

2.     Economics as the Study of Choice

Choice is the process of satisfaction from available limited resources. It emerges because of the following reasons:

a.      Resources are limited.

b.     Human wants are unlimited.

c.      Resources can be allocated to alternative uses.

For example: The economy has to decide how much of the resources are to be used for the development of industries and how much for the development of agriculture.

The problem concerning efficient allocation of resources to different uses is called economic problem or the problem of choice. Choice may lead to maximum satisfaction of the member of the society. In the choice making process, we assume that the decision taker is rational. A rational decision taker tries to attain the maximum satisfaction from the available resources. For this, he ranks all the possible alternatives in order of preferences by evaluating cost and benefit and choses the alternative highest in the ranking.

1.     Economics as the Study of Opportunity Cost

Resources being scare we cannot produce everything we want. Therefore, we are forced to make a choice. If we choose to produce more of one thing, it will be necessary to produce less of other thing. The commodity that is sacrificed is the real cost of the commodity that is produced and it is opportunity cost. For eg: Suppose a producer can produce a TV set or a computer with the resources at this disposal. If he decides to produce a TV set and not computer then the opportunity cost of producing TV set is the computer sacrifice as a result. If a several opportunities are giving up for producing a particular commodity then opportunity cost is the value of the next best opportunity foregone. Thus, opportunity cost is not the sum total of all the alternatives but the next best alternative forgone. The concept of opportunity cost has become very popular in the recent years. The modern analysis of the cost-benefit analysis is based on the theory of cost opportunity only.

Economics and it's Classification

 

Economics

Economics is a subject which aims at utilizing the scare resources in the scientific way so that human beings can achieve maximum satisfaction from the use of the limited resources. Economics is a social science that deals with the study of how individuals, governmental bodies, firms, and nations make decisions in allocating scarce resources in order to satisfy their unlimited wants and desires. It is a study of production and consumption of goods and services, and the transfer of wealth to produce and obtain those goods and services.

Economics is generally classified into two major categories, microeconomics and macroeconomics.

1.     Microeconomics

Microeconomics is the study of the economic action of individuals and small group of individuals and explains how and why these units make decision. The small groups of individuals may be households, firms and industries consisting several firms.  The term microeconomics was first coined by a Norwegian economist, Ragner Frich in 1993. Microeconomics is composed of two words- micro and economics. Micro has been derived from a Greek word ‘mikros’ which means small.

It analyzes certain aspects of human behavior, and shows how individuals and firms respond to changes in factor pricing as a result of interaction between demand and supply.

Features of Microeconomics:

a.      It is individualistic economics.

b.     It is concerned with the behavior of the individual economic entities such as households, firms, market, etc.

c.      It pre-supposes the existence of full employment in the economy.

d.     It analyses the economic phenomena under the cetersis parbus assumption.

e.      It is applicable under market economy where prices play a certain role/

f.       It is also called “price theory” or “value theory”.

g.     It’s objective is to analyze the process by which scarce resources are allocated among alternative uses.

Importance of Macroeconomics:

a.      It explains how the consumers and producers in an economy take decision about the allocation of productive resources among millions of goods and services.

b.     It’s tools are useful in designing price policy, taxation policy.

c.      It is helpful in the efficient allocation of resources.

d.     It is useful in making production and pricing decisions.

2.     Macroeconomics

Macroeconomics is the branch of economics that studies the behavior of an economy as a whole. It focuses on the aggregate changes that occur in the economy by analyzing the factors that influence the whole economy.

Macroeconomics studies the overall economic phenomena, such as inflation, GNP, problem of unemployment, aggregate consumption, economic growth, investment, etc.

Macroeconomics attempts to understand the causes and consequences of short-run fluctuations in national income, and helps to determine the reasons for long-term economic growth i.e. increase in national income.

Features of Macroeconomics

1.     Study of aggregate economy

Macroeconomics is concerned with the study of economic behavior of the entire economy rather than individual units.

2.     Analysis of aggregate demand and supply

Microeconomics studies the aggregate demand and supply model in order to explain the overall economic phenomena such as the GDP of a nation based on various components.

3.     Assist in overall economic growth

An increase in total output of goods and services is termed as economic growth. The study of macroeconomic components like GDP, GNP, inflation rate, and unemployment rate helps to determine the overall economic growth of a state or country.

4.     Formulation of rules and regulations

The study of macroeconomic variables provide a proper analysis for formulating and implementing polices that help to develop an economy in the best interest of all the participants in a given economy.

Some parts are adopted from: www.businesstopia.com