Thursday, February 20, 2014

Demand Function.

Demand Function.

There is a functional relationship between demand and its various determinants. I.e., a change in any determinant will affect the demand. When this relationship expressed mathematically, it is called Demand Function. Demand function of a commodity can be written as follows:

D = f (P, Y, T, Ps, U)
Where, D= Quantity demanded                 P= Price of the commodity

Y= Income of the consumer           T= Taste and preference of consumers.
Ps = Price of substitutes                 U= Consumers expectations & others

f = Function of (indicates how variables are related)

Extension and Contraction of Demand.

Demand may change due to various factors. The change in demand due to change in price only, where other factors remaining constant, it is called extension and contraction of demand. A change in demand solely due to change in price is called extension and contraction. When the quantity demanded of a commodity rises due to a fall in price, it is called extension of demand. On the other hand, when the quantity demanded falls due to a rise in price, it is called contraction of demand. It can be understand from the following diagram. 



When the price of commodity is OP, quantity demanded is OQ. If the price falls to P2, quantity demanded increases to OQ2. When price rises to P1, demand decreases from OQ to OQ1. In demand curve, the area a to c is extension of demand and the area a to b is contraction of demand. As result of change in price of a commodity, the consumer moves along the same demand curve.

Shift in Demand (Increase or Decrease in demand)

When the demand changes due to changes in other factors, like taste and preferences, income, price of related goods etc... , it is called shift in demand. Due to changes in other factors, if the consumers buy more goods, it is called increase in demand or upward shift. On the other hand, if the consumers buy fewer goods due to change in other factors, it is called downward shift or decrease in demand.

Shift in demand cannot be shown in same demand curve. The increase and decrease in demand (upward shift and downward shift) can be expressed by the following diagram.
DD is the original demand curve. Demand curve shift upward due to change in income, taste & preferences etc of consumer, where price remaining the same. In the above diagram demand curve D1-D1 is showing upward shift or increase in demand and D2-D2 shows downward shift or decrease in demand.

Comparison between extension/contraction and shift in demand

SL.
Extension/Contraction of Demand
Shift in Demand
No


1
Demand is varying due to changes in
Demand   is   varying   due   to

price
changes in other factors



2
Other  factors  like  taste,  preferences,
Price  of  commodity  remain  the

income etc... remaining the same.
same



3
Consumer  moves  along  the  same
Consumer  may moves  to  higher

demand curve
or lower demand curve