Introduction to Linear Demand Equations

This is an update to the 2012 version of the lesson introducing how to determine an equation for demand using price and quantity data from a demand schedule or a demand curve. In parts 2 and 3 of this lesson we’ll examine how changes in price and the non-price determinants of demand will lead to movements along a demand curve or a change in the ‘a’ and ‘b’ variables and a shift in demand.

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Linear Demand Equations – Part 1

3 Responses

  1. Sudha Jatwani says:

    Hi Jason,

    Thanks for the videos. They are really insightful. I have a few doubts though. Requesting you to clarify.

    I am unable to understand why is there a demand at price zero and why is there a change in demand from 800 to 600 when there is a fall in the price of hamburger? At price zero how can the demand for pizza fall?
    Finally can you also let me know the reason why demand curve is touching the X axis? According to me, the demand for any product should be free floating in case the price is zero.

    Requesting you to clarify as soon as you can.

    Thanks & Best Regards,

    Sudha

    • Jason Welker says:

      Sudha Jatwani ยป Hi Sudha, let me respond to your questions below:

      1) Why is there a demand at price zero and why is there a change in demand from 800 to 600 when there is a fall in the price of hamburger?
      The reason demand for pizzas decreases from 800 to 600 is that hamburgers are a substitute good, therefore consumers will demand fewer pizzas at every price when hamburgers become cheaper. The decrease from 800 to 600 signifies an inward shift of the demand curve, meaning demand for pizzas decreases when hamburgers become cheaper. The demand for pizza will fall at the price of zero and at all other possible prices greater than zero, since even when pizza is free fewer people will want to consume it if hamburgers are cheaper.

      2) can you also let me know the reason why demand curve is touching the X axis?
      Of course, in most real markets the demand quantity of a good demanded will increase at and increasing rate as the price approaches zero, so demand would therefore flatten out as rational consumers would likely demand ever increasing quantities as price approaches zero. In our case, however, we study LINEAR demand equations. This is a very simple model of demand, and since every demand curve is a straight line, it must intersect the x-axis (which we call the quantity axis) at some point. The point of intersection is understood as the “autonomous level of demand” , or the quantity that would be demanded when price is zero. Presumably, there is a maximum amount of a product that consumers would demand even if it were free. In the case of pizzas, we can assume that the market above represents a small town with a few thousand people in it, and the demand above represents the demand in a certain period of time (let’s say one week). So, if pizza was free, this town will consume no more than 800 pizzas in a week. That is not an unreasonable assumption. If it were the WORLD demand for pizzas and there were billions of consumers, of course the demand would be greater. Or if we extended the time period to one month or one year, then the Q-intercept would be greater.

      I hope this answers your questions! Best of luck!
      Jason

  2. Pingback: Video Lectures – Linear Supply Equations | Economics in Plain English

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