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Unit-7: Recent Developments in Demand Theory

Again re-arranging, Notes

Qt = (kc) Y + (1–k) Q
t t–1
kc = a and (1 – k) = by setting b, we reach to Equation (1)
Q = aY + bQ
t t t-1
(2) Demand function for Consumer Non-durables: Hauthekar and Taylor formulated habit formation
principle in place of Nerlove’s stock adjustment rule and spread it to non-durables. In this demand
function, present demand of non-durables, in addition to other things, depends upon last purchase
of goods (Q ) which are based on habits.
t-1
Q = a + b P + b ∆ P + b Y + b ∆Y + b Q
t 1 t 2 t 3 t 4 t 5 t–1
Where, a = constant, P = present price, ∆P = change in price, Y = present income, ∆Y = change in
t
t
t
t
income and b to b are the parametric coefficients.
1 5
In reality, the demand function for non-durables is derived from durable goods, which depends upon
present price in a period, stock of durable goods, and habit of non-durable goods and level of present
income.
(3) Empirical Demand Function: Generally, demand function of a product is written in this way
Q = F (P, P , P , Y, T)
c s
Where, Q = quantity of the demanded product, P = price of the product, price of complimentary goods,
P = price of established goods, Y = income of the consumer and T = interests of the consumer.
s
This function shows that demand of a product depends on its price, price of its complimentary and
established products and income of the consumer.
But this function is so ordinary that it does not have an empirical suitability. It only tells a form without any
result of the relation between the demanded quantity of the product, dependent variable Q independent
variables P, P , P Y and T, every determinant has a function. It is important to express that how much
c
s
measurable effect does the price of one product has over the price of other products in order to estimate
an empirical demand function. If interests remain constant over time no problem arises and T can be
evaluated by estimated equation. If interests keep changing, then time is taken as a variable in the form
of a change. Secondly, for some time, interests might change due to financial and political components.
That is why a dummy variable D is used for that period. Then, at one error u is also used in the function.
To analyse statistical figures techniques like multiple regression are used which allow to use the
estimated data of demand function and its determinants.
To estimate the shape of multiple is added while joining the various independent variables with the
demanded quantity a special form of function is needed. There are two forms in general; linear demand
function and exponential demand function.
Linear demand function can be written as

Q = a + b P + b P + b P + b y + b T + b D + u
1 2 c 3 5 4 5 6
It can be estimated if figures are available for every variable and if there is sufficient observation to
apply the technique of multiple regression and then for Intercept a multiple of a and demanded quantity
over every determinant (b to b ) can show its effects. Once they are estimated, it is possible to solve the
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demanded quantity for every determinant. This is done by including these values into equations.
For exponential demand function, the estimated elasticity, i.e., own price, cross-price elasticity and elasticity
are considered to be constant at the entire range of figures. It is also assumed that the interests in function are

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