A simple equation can be used to express the relationship between the price of a good and the demand among that good’s consumers. This lesson will examine the different variables included in the typical equation for demand, expressed as Qd = a – bP.
We will use a simple equation for demand to plot a demand schedule and a demand curve for pizzas.
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Linear Demand Equations – Part 1
In-class activity: Use the linear demand function for cappuccinos, Qd = 500 – 25P to answer the questions that follow:
- Create a demand schedule for cappuccinos with the prices of $0, $1, $3, $5, $7 and $9
- Create a demand curve for cappuccinos, plotting the points from your demand schedule.
- Assume the price of latte machiatos, a close substitute for cappuccinos, decreases, and causes the a variable in the demand function to fall to 300. Create a new demand schedule, with the adjusted values for Qd.
- On your previous diagram, illustrate the new demand curve.
- Assume that due to falling incomes, cappuccino consumers become more sensitive to changes in the price of cappuccinos, and the b variable in the original demand function increases to 40. Using the same prices, create a new demand schedule.
- On the same graph as your original demand curve, illustrate the new demand for cappuccinos following the decline in consumers’ incomes.