Question

Please describe a demand curve and demand function. Please write an equation for a sample demand function and describe it (don’t forget to include forecast error). How would you forecast sales of your product with the demand equation you wrote above? What is price and income elasticity of demand and show the equation for these? How would you measure these from the above demand equation? How are revenues affected from an increase in price with elastic and inelastic demand?

Answer 1

Demand is a want backed by purchasing power and it can be stated with a formula :

Qd= a-bp

a= quantity horizontal intercept

b= slope of the graph and p = price charged

As shown in the graph below, Qd= 14-2p in this case, 14 is quantity at price = 0 and price is 7 when quantity is zero.

Sales forecast can be predicted by putting value of p in this equation.

If p =2 then sale will be 10 units. See image below.

Elasticity is a responsiveness to change in particular input. If it is price then price elasticity of demand (Ped) means the degree of responsiveness of demand to a change in price which is given by formula:

Ped= %change in quantity demanded/ % change in price

Generally with increase in price, demand goes down. If chocolates become expensive then demanded less.

If demand is elastic then price increase will decrease revenue and price increase will increase it. If demand is inelastic then increasing price will increase revenue.

Similarly,

Income elasticity of demand (Yed) degree of responsiveness of demand to a change in incomewhich is given by formula:

Yed= %change in quantity demanded / % change in income.

If a good is normal then with increase in income, its demand goes up, example is luxury goods like air conditioner.

If a good is inferior then with increase in income, its demand goes down, example is second hand car.