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Understanding Demand Functions with Examples

The document explains how to derive a demand function from price-quantity pairs, using the formula Qd = a - bP, where Qd is quantity demanded, P is price, a is the intercept, and b is the slope. It provides examples for calculating demand for beef and coffee at different prices, illustrating how demand changes with price variations. The final answer for the beef demand at $5/kg is 1,000,000 kg/year.

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Shayan Baloch
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376 views4 pages

Understanding Demand Functions with Examples

The document explains how to derive a demand function from price-quantity pairs, using the formula Qd = a - bP, where Qd is quantity demanded, P is price, a is the intercept, and b is the slope. It provides examples for calculating demand for beef and coffee at different prices, illustrating how demand changes with price variations. The final answer for the beef demand at $5/kg is 1,000,000 kg/year.

Uploaded by

Shayan Baloch
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Alright!

To help you figure this out, I’ll need some extra details because this kind of problem
usually comes from a demand function — something like:

Qd=a−bPQ_d = a - bPQd=a−bP

where:

 QdQ_dQd = quantity demanded (kg/year),


 PPP = price per kg,
 a,ba, ba,b = constants that describe the relationship between price and demand.

To solve:

We need either:
✅ the demand equation (if you have it),
✅ or two points (price-quantity pairs) on the demand curve so we can calculate the equation.

Example (if you don’t have more info):

Let’s say the current situation is:

 At price $10/kg, consumers buy 500,000 kg/year.


 At price $8/kg, consumers buy 700,000 kg/year.

We can calculate the demand equation:

1️⃣ Find slope bbb:

b=Q2−Q1P1−P2=700,000−500,00010−8=200,0002=100,000b = \frac{Q_2 - Q_1}{P_1 - P_2} =


\frac{700,000 - 500,000}{10 - 8} = \frac{200,000}{2} = 100,000b=P1−P2Q2−Q1
=10−8700,000−500,000=2200,000=100,000

2️⃣ Find intercept aaa:


Use one point:

500,000=a−100,000×10 ⟹ a=500,000+1,000,000=1,500,000500,000 = a - 100,000 \times 10 \


implies a = 500,000 + 1,000,000 =
1,500,000500,000=a−100,000×10⟹a=500,000+1,000,000=1,500,000

3️⃣ Equation:

Qd=1,500,000−100,000PQ_d = 1,500,000 - 100,000 PQd=1,500,000−100,000P


Now, to find price when Qd=1,000,000Q_d = 1,000,000Qd=1,000,000:

1,000,000=1,500,000−100,000P ⟹ 100,000P=1,500,000−1,000,000=500,000 ⟹
P=500,000100,000=51,000,000 = 1,500,000 - 100,000 P \implies 100,000 P = 1,500,000 -
1,000,000 = 500,000 \implies P = \frac{500,000}{100,000} =
51,000,000=1,500,000−100,000P⟹100,000P=1,500,000−1,000,000=500,000⟹P=100,000500
,000=5

✅ Answer:

 Price = $5/kg
 Quantity = 1,000,000 kg/year
🌟 What is a Demand Function?

A demand function shows the relationship between the price of a good and the quantity of that
good consumers are willing and able to buy.

It’s usually written as:

Qd=a−bP

where:

 Qd = quantity demanded
 P = price
 a = intercept (maximum demand if price were zero)
 b = slope (how much demand drops when price increases)

🛒 Example 1: Beef Demand

Let’s say the demand for beef is:

Qd=1,500,000−100,000P

This tells us:

 When price P=0, demand is 1,500,000 kg/year.


 For each $1 increase in price, demand falls by 100,000 kg/year.

✅ Calculate demand at $5/kg:

Qd=1,500,000−100,000×5=1,500,000−500,000=1,000,000 kg/year

✅ Calculate demand at $10/kg:

Qd=1,500,000−100,000×10=1,500,000−1,000,000=500,000 kg/year
🏪 Example 2: Coffee Demand

Suppose:

Qd=10,000−200P

✅ At $20 per cup (expensive luxury coffee!):

Qd=10,000−200×20=10,000−4,000=6,000 cups/day

✅ At $30 per cup:

Qd=10,000−200×30=10,000−6,000=4,000 cups/day

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