The demand function is the representation of the demanded quantity of a product at the respective price. It is therefore a function of the price, since the demand is dependent on the price. Usually, when the price of a product goes down, demand increases. In contrast, demand falls when prices for certain products rise. The demand function is represented with the demand curve.
In the following lesson you will learn all about demand as a function of price. You will learn the relationship between the demand for a product and the price and at the end of the lesson you can use the exercises to check your knowledge.
- Synonyms: demand curve
- English: demand function
Why is the demand function important?
According to acronymmonster.com, the demand function is of great importance to both economists and companies. Since the demand function differs depending on the product, companies and economists can determine the extent to which demand for a product is evolving.
It is particularly important for companies to find out how a change in price affects demand. In the course of product policy, it is then possible to control the price or to modify the supply in order to be able to meet the demand perfectly.
What is the demand function?
The demand function depicts the relationship between price and demand. Usually when prices are high, demand falls, while when prices are low, it increases. However, the demand curve differs depending on the product.
The price elasticity of a product is critical to how demand evolves. While some products are very price elastic and hardly react to price changes, other products are not price elastic and react strongly to changes.
Example
Drinking water is generally considered to be very price elastic. If the prices for drinking water rise, it can be assumed that demand will remain consistently high. Changes are to be expected only marginally.
Optical representation of the function
The demand function can be represented optically. The demand function shows to what extent the demand for a product changes when the price changes. The x-axis shows the demand, while the y-axis shows the price.
Demand function
Different interpretations
In principle, different interpretations are conceivable for the demand function.
A possible subdivision is made according to:
- Horizontal interpretation
- Vertical interpretation
Horizontal demand function
The horizontal interpretation is about the extent to which demand changes when the price changes. It’s about the common understanding of the demand function. The horizontal demand function aims to represent the relationship between price and demand.
Vertical demand function
The vertical interpretation of demand, on the other hand, aims to determine how high the price must be in order to generate a certain demand.
Example
Fischer GmbH produces slippers. The aim is to generate a demand of 100,000 slippers annually in the coming financial year in order to maximize sales. Therefore, those responsible use the demand function and its vertical interpretation to determine how the price must change in order to achieve this goal.