Demand Function Tutorial
A demand function is the amount of a product demanded for each combination of price and the other factors.
Quantity Demanded = D(price, contributing factors)
Example: If demand of pizza is affected by its price, the price of hamburgers, the price of tacos and the consumer’s income, then the demand function will be like this:
Qd of Pizza = 5 – 3Ppizza + 5Phamburgers + 2Ptacos + .0002M
Qd is quantity demanded
P is price
M is consumer’s income
5 is the constant if all prices were zero
The price of pizza has a negative sign because as price goes up it has a negative correlation on the amount demanded. The price of hamburgers and tacos has a positive sign because as they price of the alternative products to pizza goes up, the amount of pizza demanded is higher because it is comparative price changes. Consumer’s income is positive because the more income the consumer makes, the more money they have to spend on pizza.
The demand function is one of the earliest taught concepts in economics and is utilized in near every branch and topic as well. Marketing companies also use the demand function to assist in pricing and determining the success of a product line.