Demand Function

The demand function is a functional relationship between demand for a commodity and
different determinants of demand, such as the commodity's price, the price of the other
commodities, the consumer's income, taste, and preference of the consumer, etc.
Qd =f (Px, PY, M,….)
Qd is the quantity demanded by the consumer.
Px and PY are the prices of goods X and Y respectively.
M is the income of the consumer.

Supply function
The supply function is a functional relationship between the supply of a commodity and
different determinants of supply, such as the commodity's price, the price of inputs, the level
of available technology, etc.
Qs =f (Px, PL, PK, T,…)
Qs is the quantity supplied by the producer.
Px is the price of good X.
PK and PL are the prices of capital and labor inputs, respectively.
T is the level of technology available by the producer.

❖ Suppose Q is the quantity demanded by a consumer for the good X. Px and Py are the
price of goods X and Y, respectively. And M is the income of the consumer. Then, we
have the demand function Q=12-0.5PX-4Py+0.04M. Find the price elasticity of demand,
cross-price elasticity of demand, and income elasticity of demand for the good X. Given
that PX=10, Py=15, and M=2000.

Price elasticity of demand

P.E.D = % change in quantity demanded ÷ % change in price of good X
𝝏𝑸 𝐏𝐱
= 𝝏𝐏𝐱 × 𝑸

Substituting the given values into the demand function, we will get,
Q = 12-(0.5×10) -(4×15) +(0.04×2000)
= 12-5-60+80=27
 𝜕(12−0.5PX−4Py+0.04M) Px
P.E.D = ×
𝜕Px 𝑄

10
= -0.5 × 27

= -0.185
Here |Ed | < 1, then we can conclude that demand for good X is less elastic. That is, if the price
of good X is increased by 1% (from P1 to P2) there will be only a 0.185 % decrease (from Q1
to Q2) in the quantity demanded by the consumer.

The cross-price elasticity of demand

C.E.D = % change in quantity demanded ÷ % change in price of good Y
𝝏𝑸 𝐏𝐲
= 𝝏𝐏𝐲 × 𝑸

𝜕(12−0.5PX−4Py+0.04M) Py
CED = ×
𝜕Py 𝑄

15
= -4 ×27

= -2.22
Here |Ed | >1, then we can conclude that demand for good X is highly elastic in response to the
price of good Y. That is, if the price of good Y is increased by 1% then there will be a 2.22 %
decrease in the quantity demanded by the consumer. Here, X and Y are complementary goods.
Note: The cross elasticity of demand for complementary goods is negative. As the price for one
item increases, an item closely associated with that item and necessary for its consumption
decreases because the demand for the main good has also dropped. The cross elasticity of
demand for substitute goods is always positive because the demand for one good increases
when the price for the substitute good increases.
Income elasticity of demand
I.E.D = % change in quantity demanded ÷ % change in income
𝝏𝑸 𝐌
= 𝝏𝐌 × 𝑸

𝜕(12−0.5PX−4Py+0.04M) M
I.E.D = ×
𝜕M 𝑄

2000
= 0.04× 27

= 2.96
Here |Ed | >1, then we can conclude that demand for good X is highly elastic in response to the
income M of the consumer. That is, if the income of the consumer is increased by 1% then
there will be a 2.96 % increase in the quantity demanded by the consumer.
Note: The income elasticity of demand for an Inferior good is always negative. As the income
of the consumer increases there will be a decrease in quantity demanded by the consumer.

In general, the flatter the demand curve that passes through a given point, the more elastic
the demand. When the price elasticity of demand is equal to zero, the demand is perfectly
inelastic and is a vertical line. When the price elasticity of demand is infinite, the demand is
perfectly elastic and is a horizontal line.

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