Page 141 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes In dynamic demand function, after income and demanded quantity the value is included in different
forms of variable. It is based upon stock adjustment principle which says that the present demand
decisions are influenced by past behaviour. It is believed that the present demand depends upon past
income and levels of demand. For a permanent consumer the past purchase is the stock of the product,
which clearly influences its present and future purchases (like fans, sewing machines, etc.). But for
non-permanent consumer, the products like, eatables, beverages, cigarette, etc. depicts a `habit’ which
in present is accepted by purchasing and consuming and because of which the levels of the purchase
in present and in future affects the demand structure. Then, the levels of demand or income of very
near present have a greater influence on present consumption structure as compared to far off levels.
For example, compared to the income earned before 5-10 years has less effect on us as compared to the
influence of last year’s income.
Distribution and urinary distribution of income model can be presented as follows:
Q = f (P , P ....... Q , Q ....... Y , Y .......)
t t t-1 t-1 t-2 t t-1
where, Q = quantity of the purchased product
t
P = present price of the product
t
P = price in period 1
t-1
Q and Q = quantity purchased in period 1 and 2
t-1 t-2
Y = present income of the consumer
t
Y = income of the consumer in period 1
t-1
This function shows that price determining present demand, is influenced by demand and income of
past levels.
(1) Demand Function for Consumer Durables: The above demand function is based upon the Stock
Adjustment Rule of Nerlove and when it is applied to the consumer durables the following forms
come into being,
Q = aY + bQ ...(1)
t t t–1
Where, Q = present purchase Y = present income Q = quantity purchased in the last period and a and
t–1
t
t
b are the parameters.
This function can be derived by the following way.
The level of desired product is Q which is determined by present income Y .
t t
Q = cY ...(2)
t t
Where c is the parameter.
But due to their limited income, inadequate savings, credit limitations, etc. the consumers cannot
purchase the desired levels of durable foods too soon. That is why the consumers purchase a part of
their desired levels in one period. If the purchased quantity in the last period has Realistic Change
Q – Q , then this only a part k of the desired change, Q – Q therefore,
t t–1 t t–1
Q – Q = k (Q – Q ) ...(3)
t t–1 t t–1
Where Q – Q is the realistic change, Q – Q is the desired change, and k is the multiple of Stock
t–1
t-1
t
t
Adjustments; and O < k < 1.
By substituting Equations (2) and (3), we get
Q – Q = k(c Y – Q )
t t–1 t t–1

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