Consumer Demand - Demand Curve, Demand Function & Law of Demand

What is Demand?

Demand for a commodity refers to the quantity of the commodity that people are willing to purchase at a specific price per unit of time, other factors (such as price of related goods, income, tastes and preferences, advertising, etc) being constant. Demand includes the desire to buy the commodity accompanied by the willingness to buy it and sufficient purchasing power to purchase it. For instance-Everyone might have willingness to buy Mercedes-S class but only a few have the ability to pay for it. Thus, everyone cannot be said to have a demand for the car Mercedes-s Class. Demand may arise from individuals, household and market. When goods are demanded by individuals (for instance-clothes, shoes), it is called as individual demand. Goods demanded by household constitute household demand (for instance-demand for house, washing machine). Demand for a commodity by all individuals/households in the market in total constitute market demand.
Demand Function

Demand function is a mathematical function showing relationship between the quantity demanded of a commodity and the factors influencing demand.
Dx = f (Px, Py, T, Y, A, Pp, Ep, U)

In the above equation, Dx = Quantity demanded of a commodity Px = Price of the commodity Py = Price of related goods T = Tastes and preferences of consumer Y = Income level A = Advertising and promotional activities Pp = Population (Size of the market) Ep = Consumers expectations about future prices U = Specific factors affecting demand for a commodity such as seasonal changes, taxation policy, availability of credit facilities, etc.
Law of Demand

The law of demand states that there is an inverse relationship between quantity demanded of a commodity and its price, other factors being constant. In other words, higher the price, lower the demand and vice versa, other things remaining constant.

Demand Schedule

Demand schedule is a tabular representation of the quantity demanded of a commodity at various prices. For instance, there are four buyers of apples in the market, namely A, B, C and D.
Demand schedule for apples PRICE (Rs. per dozen) Buyer A (demand in dozen) 1 3 7 11 13 Buyer B (demand in dozen) 0 1 2 4 6 Buyer C (demand in dozen) 3 6 9 12 14 Buyer D (demand in dozen) 0 4 7 10 12 Market Demand (dozens) 4 14 25 37 45

10 9 8 7 6

The demand by Buyers A, B, C and D are individual demands. Total demand by the four buyers is market demand. Therefore, the total market demand is derived by summing up the quantity demanded of a commodity by all buyers at each price.
Demand Curve

Demand curve is a diagrammatic representation of demand schedule. It is a graphical representation of price- quantity relationship. Individual demand curve shows the highest price which an individual is willing to pay for different quantities of the commodity. While, each point on the market demand curve depicts the maximum quantity of the commodity which all consumers taken together would be willing to buy at each level of price, under given demand conditions.

Demand curve has a negative slope, i.e, it slopes downwards from left to right depicting that with increase in price, quantity demanded falls and vice versa. The reasons for a downward sloping demand curve can be explained as follows1. Income effect- With the fall in price of a commodity, the purchasing power of consumer increases. Thus, he can buy same quantity of commodity with less money or he can purchase greater quantities of same commodity with same money. Similarly, if the price of a commodity rises, it is equivalent to decrease in income of the consumer as now he has to spend more for buying the same quantity as before. This change in purchasing power due to price change is known as income effect. 2. Substitution effect- When price of a commodity falls, it becomes relatively cheaper compared to other commodities whose price have not changed. Thus, the consumer tend to consume more of the commodity whose price has fallen, i.e, they tend to substitute that commodity for other commodities which have not become relatively dear. 3. Law of diminishing marginal utility- It is the basic cause of the law of demand. The law of diminishing marginal utility states that as an individual consumes more and more units of a commodity, the utility derived from it goes on decreasing. So as to get maximum satisfaction, an individual purchases in such a manner that the marginal utility of the commodity is equal to the price of the commodity. When the price of commodity falls, a rational consumer purchases more so as to equate the marginal utility and the price level. Thus, if a consumer wants to purchase larger quantities, then the price must be lowered. This is what the law of demand also states. Exceptions to Law of Demand

The instances where law of demand is not applicable are as follows1. There are certain goods which are purchased mainly for their snob appeal, such as, diamonds, air conditioners, luxury cars, antique paintings, etc. These goods are used as status symbols to display ones wealth. The more expensive these goods become, more valuable will be they as status symbols and more will be there demand. Thus, such goods are purchased more at higher price and are purchased less at lower prices. Such goods are called as conspicuous goods.

2. The law of demand is also not applicable in case of giffen goods. Giffen goods are those inferior goods, whose income effect is stronger than substitution effect. These are consumed by poor households as a necessity. For instance, potatoes, animal fat oil, low quality rice, etc. An increase in price of such good increases its demand and a decrease in price of such good decreases its demand. 3. The law of demand does not apply in case of expectations of change in price of the commodity, i.e, in case of speculation. Consumers tend to purchase less or tend to postpone the purchase if they expect a fall in price of commodity in future. Similarly, they tend to purchase more at high price expecting the prices to increase in future.

4.Full cost accounting

5. From Wikipedia, the free encyclopedia 6. (Redirected from Full cost pricing) 7. Jump to: navigation, search 8. Full cost accounting (FCA) generally refers to the process of collecting and presenting information about environmental, social, and economic costs and benefits/advantages (collectively known as the "triple bottom line") - for each proposed alternative when a decision is necessary. It is a conventional method of cost accounting that traces direct costs and allocates indirect costs. [1] A synonym, true cost accounting (TCA) is also often used. Experts consider both terms problematic as definitions of "true" and "full" are inherently subjective (see Green economics for more on these problems). 9. Since costs and advantages are usually considered in terms of environmental, economic and social impacts, full or true cost efforts are collectively called the "triple bottom line". A large number of standards now exist in this area including Ecological Footprint, ecolabels, and the United Nations International Council for Local Environmental Initiatives approach to triple bottom line using the ecoBudget metric. The International Organization for Standardization(ISO) has several accredited standards useful in FCA or TCA including for greenhouse gases, the ISO 26000 series for corporate social responsibility coming in 2010, and the ISO 19011 standard for audits including all these. 10. Because of this evolution of terminology in public sector use especially, the term full-cost accounting is now more commonly used in management accounting, e.g. infrastructure management and finance. Use of the terms FCA or TCA usually indicate relatively conservative extensions of current management practices, and incremental improvements to GAAP to deal with waste output or resource input. 11. These have the advantage of avoiding the more contentious questions of social cost.

How to Understand and Calculate Cost Measures

Using Cost Data From a Chart
[Q:] I have an assignment and it is asking for a lot of figures relating to cost. Average Fixed Cost, Total Variable Cost, etc. Can you help me make sense of all these definitions of cost and help me figure out how to calculate them?

[A:] I sure can. There are quite a few definitions relating to cost. We will consider the following seven terms: Marginal Cost, Total Cost, Fixed Cost, Total Variable Cost, Average Total Cost, Average Fixed Cost, and Average Variable Cost. When asked to compute these seven figures on an assignment or on a test, the data you need is likely to come in one of three forms.
1. In a table which gives you total cost and quantity produced. 2. A linear equation relating total cost (TC) and quantity produced (Q). This would be an equation like TC = 400Q + 20, or TC = 50 + 6Q. 3. A non-linear equation relating total cost (TC) and quantity produced (Q). This would be an equation like TC = 34Q3 24Q + 9 or TC = Q log(Q). Each of these situations has to be dealt with differently. In section 1 we will consider the first situation. Section 2 will look at the linear equation example, and section 3 will deal with non-linear equations.

We will look at all seven of these terms using the data on the bottom of this article. You may want to print this page out as a reference so you don't have to keep scrolling back and forth. Lets get started!
Marginal Cost Marginal Cost is the cost a company incurs when producing one more good. Suppose we're producing two goods, and we would like to know how much costs would increase if we increase production to three goods. This difference is the marginal cost of going from two to three. It can be calculated by:

Marginal Cost(2 to 3) = Total Cost of Producing 3 Total Cost of Producing 2. Looking at our data, it costs 600 to produce three goods and 390 to produce two goods. The difference between the two figures is 210, so that is our marginal cost. Sometimes your chart will give you the marginal cost, and you'll need to figure out the total cost. We might have that the cost of producing one good is 250, and the marginal cost of producing another good is 140. Then we can figure out the total cost of producing two goods by: Total Cost of Producing 2 = Total Cost of Producing 1 + Marginal Cost(1 to 2) In our case the total cost would be 250 + 140 = 390. So the total cost of producing two goods is 390.
Total Cost The total cost is simply all the costs incurred in producing a certain number of goods. That question is easy to answer here, as we can just read it off of our chart. So the total cost of producing three goods is 600 and the total cost of producing five goods is 1200. If you're given marginal cost data instead of total cost data, you can compute the total by the example given in the marginal cost section.

Fixed Cost Fixed costs are the costs that are independent of the number of goods you produce, or more simply the costs you incur when you do not produce any goods. We see from our chart that when we produce zero goods our costs are 130. So our fixed cost of production is 130. Total Variable Costs These are just the opposite of fixed costs; these are the costs that do change when we produce more. We calculate the total variable cost of producing 4 units by:

Total Variable Cost of Producing 4 units = Total Cost of Producing 4 Units Total Cost of Producing 0 units. In our case it costs us 840 to produce 4 units and 130 to produce 0. Then our total variable costs when we produce 4 units is 710 since 810-130=710. Similarly our total variable costs when we produce 5 units is 1070.
Average Total Costs Our average total cost is our fixed costs over the number of units we produce. So if we produce five units our formula is:

Average Total Cost of Producing 5 = Total Cost of Producing 5 units / Number of Units With our data we have an average total cost of producing five units of 200, as the total cost of producing five units is 1200 and 1200/5 = 240. The average total cost of producing four units is 210 as 840/4 = 210.
Average Fixed Costs Our average fixed cost is our fixed costs over the number of units we produce, given by the formula:

Average Fixed Cost = Fixed Costs / Number of Units So our average fixed cost of producing five units is our total fixed costs (130), divided by the number of units (5), which gives us an average fixed cost of producing five units of 26 (26 = 130/5). Similarly the average fixed cost of producing two units is 65 as 130/2 = 65.
Average Variable Costs As you might have guessed, our formula for average variable costs is:

Average Variable Cost = Total Variable Costs / Number of Units We saw that the total variable cost of producing four units is 710 and 870 for six units. Then the average variable cost of producing four units is 177.5 (710/4) and the AVC of producing five units is 214 (1070/5).

Be sure to continue to section 2 where we look at calculating all seven cost measures when given a linear equation.

Total Cost and Quantity Data

Q 0 1 2 3 4 5 TC 130 250 390 600 840 1200

In this section we will look at how you calculate marginal cost, total cost, fixed cost, total variable cost, average total cost, average fixed cost, and average variable cost when you have a linear relationship between total cost and quantity. These are equations such as TC = 400Q + 20, or TC = 50 + 6Q. Equations such as TC = 34Q3 24Q + 9 or TC = Q log(Q+1). are non-linear and will be looked at in the next section. We will examine all seven of our cost definitions using the equation TC = 50 + 6Q. Marginal Cost Marginal cost is the additional cost we have when we produce one more unit of the good. With the equation TC = 50 + 6Q, our total cost goes up by 6 whenever we add an additional good, as shown by the coefficient in front of the Q. So we have a constant marginal cost of 6 per unit produced. Total Cost We already have a formulation for the total cost, which is TC = 50 + 6Q. If we want to calculate the total cost for a specific quantity, all we need to do is substitute the quantity in for Q. So the total cost of producing 10 units is 50 + 6*10 = 110. Fixed Cost Our fixed cost is the costs we incur when we do not produce any units. So we substitute in Q = 0 to our equation and we get 50 + 6*0 = 50. So our fixed cost is 50. Total Variable Costs These are the non-fixed costs we incur when we produce Q units. So our variable costs are:

Total Variable Costs = Total Costs Fixed Costs. In our case that would be 50 +6Q 50 = 6Q. So our total variable costs are 6Q, and we can calculate our total variable costs at a given point by substituting for Q.

Average Total Costs We are averaging our total costs over the number of units we produce. So we take our total cost formula of TC = 50 + 6Q, and divide the right hand side to get average total costs. So our average total costs are AC = 50/Q + Q/Q = 50/Q + 6. To get our average total cost at a specific point we just substitute for the Q. So our average total cost of producing 5 units is 50/5 + 6 = 10 + 6 = 16. Average Fixed Costs Similarly, we just divide our fixed costs by the number of units we produce. Since our fixed costs are 50, our average fixed costs are 50/Q. Average Variable Costs As you may have guessed, to calculate our average variable costs we divide our variable costs by Q. Since our variable costs are 6Q, our average variable costs are 6. Notice that our average variable cost does not depend on our quantity produced and is the same as our marginal cost. This is one of the special features of the linear model, but will not hold when we use a non-linear formulation.

Be sure to continue to section 3 where we look at calculating all seven cost measures when given a linear equation.
In this final section, we will consider non-linear total cost equations. These are total cost equations that are not of the TC = a + bQ variety. The non-linear case tends to be more complicated than the linear case, particularly in the case of marginal cost where we use calculus in the analysis. We will consider two equations this time, both TC = 34Q3 24Q + 9 or TC = Q + log(Q+2). Marginal Cost Marginal cost is the additional cost we have when we produce one more unit of the good. The most accurate way of calculating the marginal cost is with calculus. Marginal cost is essentially the rate of change of total cost, so it is the first derivative of total cost. So using our two formulas for total cost, we take the first derivate of total cost to find the expressions for marginal cost:

TC = 34Q3 24Q + 9; TC = MC = 102Q2 24. TC = Q + log(Q+2) TC = MC = 1 + 1/(Q+2). So when total cost is 34Q3 24Q + 9, marginal cost is 102Q2 24, and when total cost is Q + log(Q+2), marginal cost is 1 + 1/(Q+2). To find the marginal cost for a given quantity, just substitute the value for Q into each expression for marginal cost.
Total Cost We already have a formulation for the total cost, so we do not need to do any work.

Fixed Cost Our fixed cost is the costs we incur when we do not produce any units. So we substitute in Q = 0 to our equations. When total costs are = 34Q3 24Q + 9, our fixed costs are 34*0 24*0 + 9 = 9. This is the same answer we get if we eliminate all the Q terms, but this will not always be the case. When total costs are Q + log(Q+2), our fixed costs are 0 + log(0 + 2) = log(2) = 0.30. So although all the terms in our equation have a Q in them, our fixed cost is 0.30, not 0. Total Variable Costs These are the non-fixed costs we incur when we produce Q units. So our variable costs are:

Total Variable Costs = Total Costs Fixed Costs. With our first equation, our total costs are 34Q3 24Q + 9 and our fixed costs is 9, so our total variable costs are 34Q3 24Q. Our second total cost equation is Q + log(Q+2) and our fixed cost is log(2), so our total variable costs are Q + log(Q+2) 2.
Average Total Costs We are averaging our total costs over the number of units we produce. So to get the average total cost, we take our total cost equations and divide them by Q. So for our first equation, we have a total cost of 34Q3 24Q + 9 and an average total cost of 34Q2 24 + (9/Q). When our total costs are Q + log(Q+2), our average total costs are 1 + log(Q+2)/Q. Average Fixed Costs Similarly, we just divide our fixed costs by the number of units we produce. So when our fixed costs are 9 our average fixed costs are 9/Q and when our fixed costs are log(2), our average fixed costs are log(2)/9. Average Variable Costs As you may have guessed, to calculate our average variable costs we divide our variable costs by Q. In our first example our total variable costs were 34Q3 24Q, so our average variable costs are 34Q2 24. In our second example our total variable costs were Q + log(Q+2) 2, so our average variable costs are 1 + log(Q+2)/Q 2/Q.

That should be everything you need to know about figuring out how to calculate the different cost functions. As always, if you have a question on cost functions, macroeconomics, or any other economics topic you'd like answered please use the feedback form.

Chapter 5 Cost Estimation

Cost Estimation Methods Mixed costs have both a fixed portion and a variable portion. There are a handful of methods used by managers to break mixed costs in the two manageable components-fixed costs and variable costs. The process of breaking mixed costs into fixed and variable portions allow us to use the costs to predict and plan for the future since we have a good insight on how these costs behave at various activity levels. We often call the process of separating mixed costs into fixed and variable components, cost estimation. The four methods of cost estimation to be discussed are listed below, with regression covered in chapter 6 and the others in this chapter: Account analysis Scatter graphs High-low method Linear regression The Goal of Cost Estimation The ultimate goal of cost estimation is to determine the amount of fixed and variable costs so that a cost equation can be used to predict future costs. You should remember the concept of functions from your business calculus class. The function that represents the equation of a line will appear in the format of: y=mx+b where y = total cost m = the slope of the line, i.e., the unit variable cost x = the number of units of activity b = the y-intercept, i.e., the total fixed costs Determining a linear function is useful in predicting cost amounts at different levels of activity. Why do managers need to be able to predict costs? They want to plan for future operations often through what-if analysis and budgets. A key concept you must remember is that before you employ any of the estimation methods, you must have already determined the cost is mixed. There is no need to analyze a cost to break it down into fixed and variable portions if you already know whether it is variable or fixed. Your goal it to determine the variable cost per unit and total fixed costs to plug into the cost equation. Helpful Hint: Note that the determination of 'cost per unit' is literal. When you read this label, write the equation exactly how it reads: Cost is on the numerator' Per means divide; and units appears on the denominator. Account Analysis One method of estimating fixed and variable costs requires considerable subjective judgment. This is likely the approach you have taken to identify cost behavior so far in

your study of managerial accounting by looking at a cost and guessing its most likely type of cost behavior. It is most often used by accountants or managers who are familiar with the costs within an account. Account analysis is the only method you can use to estimate costs when only one data point is known. The account analysis approach requires four steps: Step 1: Look through the costs that are included in a particular account and classify each amount as variable or fixed based on judgment. Step 2: Total the variable costs. Determine variable costs per unit by dividing the total of all the variable costs you identified by the number of units produced (or sold). This will give you the cost per unit. Total Variable Costs # of Units Produced Step 3: Total the fixed costs. = Variable cost per unit

Step 4: Plug your answers to steps 2 and 3 into the cost formula by replacing the slope (m) with variable cost per unit and the y-intercept (b) with total fixed costs in the following format: y=mx+b Scatter Graph Approach Creating a scatter graph is another method of estimating fixed and variable costs. It provides a good visual picture of the costs at different activity levels. However, it is often hard to visualize the line through the data points especially if the data is varied. This approach requires multiple data points and requires five steps: Step 1: Draw a graph with the total cost on the y-axis and the activity (units) on the xaxis. Plot the total cost points for each activity points. Step 2: Visualize and draw a straight line through the points. Step 3: Determine variable costs per unit by identifying the slope thorough a measure of rise over run. Rise = Variable cost per unit Run Step 4: Identify where the line crosses the y-axis. This is the total fixed cost. Step 5: Plug your answers to steps 3 and 4 into the cost formula by replacing the slope (m) with variable cost per unit and the y-intercept (b) with total fixed costs in the following format: y=mx+b Note: If you have forgotten how to graph data points, this will help. . http://www.studyzone.org/testprep/math4/d/linegraph4l.cfm
Source www.studyzone.org Grade 4 Math Lessons

High-Low Method The high-low method uses the highest and lowest activity levels over a period of time to estimate the portion of a mixed cost that is variable and the portion that is fixed. Like the account analysis and scatter graph method, the amounts determined for fixed and variable costs are only estimates. Because it uses only the high and low activity levels to calculate the variable & fixed costs, it may be misleading if the high and low activity levels are not representative of the normal activity. For example, if most data points lie in the range of 60 to 90 percent for a particular accounting test, and one student scored a 20, the use of the low point might distort the actual expectation of costs in the future. The high-low method is most accurate when the high and low levels of activity are representation of the majority of the other points. The steps below guide you through the high-low method: <="" p=""> Step 1: Determine which set of data represents the total cost and which represents the activity. Find the lowest and highest activity points. Step 2: Determine variable costs per unit by using the mathematical formula for a slope where you take divide the change in cost by the change in activity: Y2 -Y1 = Variable cost per unit X2 - X1 Where X2 is the high activity level X1 is the low activity level Y2 is the total cost at the high activity level selected Y1 is the total cost at the low activity level selected Step 3: Plug your answer to steps 2 along with either the high or the low point into the cost formula by replacing the slope (VC) with variable cost per unit, the high activity total cost for the y variable, and the high activity for the x variable. Then solve for fixed costs (FC). Step 4: Plug your answers to steps 2 and 3 into the cost formula by replacing the slope (VC) with variable cost per unit and the y-intercept (FC) with total fixed costs in the following format: y = VC x + FC

q High Low Example: Information concerning units sold and total costs for Bridges, Inc. for five months of 2009 appears below: Units January February March April 1,200 1,150 1,190 1,300 Costs $74,150 71,000 72,400 80,600

May 1,310 Use the high-low method to answer the following: A. How much are variable costs per unit? B. How much are total fixed costs? C. Write the cost equation in proper form:

79,040

Solution: qStep 1: Select the high and low data activity points. Because the Units column represents activity, select the high point: May, and the low point: February. Step 2: Use the slope formula by subtracting the smallest from the largest activity on the denominator. Use the corresponding total costs for May and February and subtract the smallest from the largest cost on the numerator: y2 - y1 x2 - x1 = $79,040 - $71,000 1,310 - 1,150 = $50.25 per unit

This is the variable cost per unit. Step 3: Pick one point. They will both result in the same final answer. Substitute the total cost of one of the points for y in the equation: y = mx + b. Using the low point of February, total costs are $71,000 total cost at 1,150 units. Substitute the variable cost from step 2 into the formula for m. Substitute the number of activity units for the low data point for x You should now have the following equation: 71,000 = $50.25*1,150 + b Solve for total fixed costs which is the b variable, which gives you $13,212.50. Step 4: Determine the cost formula to use in estimating the mixed costs at various levels in the following format by plugging in the variable cost per unit and total fixed cost by plugging the variable cost per unit and the total fixed costs into the cost equation as follows: y = $50.25x + $13,213 The standard format is to express variable cost per unit using two decimal places and total fixed costs with no decimal places.

A few words about variable cost per unit..... Variable cost per unit is very literal meaning you determine 'cost per unit' using the literal interpretation:

In determining cost per unit, cost comes first so place it on the numerator. Per means to divide so draw the division sign under 'cost'. Unit comes last so it belongs on the denominator. Cost Unit = Variable cost per unit

When you determine variable cost per unit, you must take the total cost and divide by number of units. In accounting, we often use the following as cost per unit amounts: machine hours per unit profit per sales dollar cost per labor hour miles per hour