Basic concepts of microeconomics and industrial organization: - - PowerPoint PPT Presentation

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
• r 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

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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

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Quantity Price Demand function

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

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Quantity Price Demand function Market price Q*

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Quantity Price Low-elasticity demand High-elasticity demand

Q P P Q Elasticity    

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Quantity Price Fully inelastic demand Fully elastic demand

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Quantity Price

Demand shifts to the right if: ➢Income increases ➢Price of substitute goods increases ➢Price of complementary goods decreases