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? Please discuss perfect and imperfect competition and the impact of competition on the shape of the demand curve. Please give an example of a highly competitive and a highly imperfectly competitive product / industry. Please show graphically the relationship between the demand and the total revenue curves for a monopoly and perfectly competitive firms.

Answer 1

The demand curve is the graph which depicts the relationship between the price of a product and the quantity of it that consumers are willing and able to purchase at the given price. And demand function depicts that the quantity demanded is affected by many factors. Below is the demand function:-

where Q is the quantity demanded

f is the function of

P is the price

Y is the income of the person

Pt is the price of the related goods

Pe is the expectation of the price.

T is the taste and preference of the person.

So a sample equation can me

Q= 3-2P+6Y+ 4Pt + T+ E( error term)

So to forecast the sale of the product, I need to put values in independednt variables that are P, Y, Pt, T & E to get the Q that is quantity demanded.

Price elasticity of demand show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price keeping everything constant.

Revenue will change with the change in price for elastic demand. Elastic demand changes with the price. So if price increase the demand will decrease hence the revenue will decrease.

Income elasticity of demand measures the responsiveness of the quantity demanded for a good or service to a change in the income of the people demanding the good.