Which of the following statements is INCORRECT in the context of demand function?
In the demand function, the independent variable is the income of the consumer.
Understanding the Demand Function and Demand Curve
The demand function is a mathematical relationship that shows how the quantity demanded of a good or service is influenced by various factors. The most important factor usually considered is the price of the good itself. Other factors include consumer income, prices of related goods (substitutes and complements), consumer tastes and preferences, and expectations.
The demand curve is a graphical representation of the demand function, specifically showing the relationship between the price of a good and the quantity demanded, assuming all other factors remain constant (ceteris paribus).
Analyzing the Statements
Let's examine each statement in the context of the demand function and demand curve.
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Statement 1: The demand curve depicts the quantity demanded by the consumer at different prices.
This statement is correct. The demand curve plots price on one axis (usually vertical) and quantity demanded on the other axis (usually horizontal). Each point on the curve represents the quantity of the good a consumer or group of consumers is willing and able to purchase at a specific price, holding other factors constant. This is the fundamental definition and purpose of a demand curve.
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Statement 2: In the demand function, the independent variable is the income of the consumer.
This statement is incorrect. While income is a determinant of demand and appears as an independent variable in a comprehensive demand function like $Q_d = f(P, Y, P_r, T, E)$, where $Q_d$ is quantity demanded, $P$ is price, $Y$ is income, $P_r$ is price of related goods, $T$ is tastes, and $E$ is expectations, the primary independent variable in the context of the standard demand curve and the law of demand is the price of the good itself ($P$). In the most basic form of the demand function relating to the demand curve, $Q_d = f(P)$, where price ($P$) is the independent variable influencing quantity demanded ($Q_d$). Stating that income is "the" independent variable is generally inaccurate when discussing the core price-quantity relationship depicted by the demand curve.
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Statement 3: In the demand function, the dependent variable is the quantity demanded.
This statement is correct. The quantity demanded ($Q_d$) is the variable whose value is determined by the values of other variables (independent variables) in the function, such as price, income, prices of related goods, etc. It is the outcome variable that depends on the factors influencing demand.
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Statement 4: The demand curve, in general, is downward sloping.
This statement is correct. The downward slope of the demand curve reflects the law of demand, which states that, ceteris paribus, as the price of a good increases, the quantity demanded decreases, and vice versa. This inverse relationship between price and quantity demanded leads to a negatively sloped demand curve for most goods.
Identifying the INCORRECT Statement
Based on the analysis, the statement that is INCORRECT is that the independent variable in the demand function is the income of the consumer. While income is one of the independent variables in a broader demand function, the statement implies it is *the* independent variable, which is usually understood to be the price of the good when referring to the relationship depicted by the demand curve ($Q_d = f(P)$).
| Concept | Variable Type | Description |
|---|---|---|
| Quantity Demanded ($Q_d$) | Dependent | The amount of a good consumers are willing and able to buy. Its value depends on factors like price, income, etc. |
| Price ($P$) | Independent (primary) | The cost of the good. In the standard demand function $Q_d = f(P)$, price is the variable determining $Q_d$. |
| Income ($Y$) | Independent | The earnings of consumers. Affects $Q_d$, but not the sole or primary independent variable in the context of the price-quantity relationship shown by the demand curve. |
| Prices of related goods ($P_r$) | Independent | Prices of substitutes and complements. Affects $Q_d$. |
| Tastes and Preferences ($T$) | Independent | Consumer likes/dislikes. Affects $Q_d$. |
| Expectations ($E$) | Independent | Consumer beliefs about future prices, income, etc. Affects $Q_d$. |
Revision Table: Demand Function Key Concepts
| Term | Explanation | Relationship to Demand |
|---|---|---|
| Demand Function | Equation showing $Q_d$ as a function of its determinants ($P, Y, P_r, T, E, ...$) | Maps determinants to quantity demanded |
| Demand Curve | Graphical plot of $Q_d$ vs. $P$ (ceteris paribus) | Illustrates the inverse relationship between price and quantity demanded (Law of Demand) |
| Law of Demand | Inverse relationship between $P$ and $Q_d$ | Explains the downward slope of the demand curve |
| Independent Variable(s) | Factors determining $Q_d$ (e.g., $P, Y, P_r$) | Their change causes a change in $Q_d$ |
| Dependent Variable | Quantity Demanded ($Q_d$) | Its value depends on the independent variables |
Additional Information: Factors Affecting Demand
While price is the factor that causes a movement *along* the demand curve, changes in other independent variables cause a *shift* of the entire demand curve. These factors include:
- Consumer Income: For normal goods, an increase in income increases demand (shifts curve right). For inferior goods, an increase in income decreases demand (shifts curve left).
- Prices of Related Goods:
- Substitutes (e.g., coffee and tea): An increase in the price of a substitute increases demand for the original good.
- Complements (e.g., cars and petrol): An increase in the price of a complement decreases demand for the original good.
- Consumer Tastes and Preferences: Favorable changes in tastes increase demand.
- Expectations: Expectations about future price increases or income increases can increase current demand.
- Number of Buyers: An increase in the number of consumers increases market demand.
Similar Questions
The supply curve of cars is expected to shift rightwards with:
i. An increase in the price of cars
ii. A decrease in fuel prices
The supply curve of a normal good is ____________ sloping. It depicts ___________ on the x-axis and ___________ on the y-axis.
The demand curve gives the quantity demanded by the consumer at each ____________.
Marginal Product is defined as:
The cross elasticity of demand means responsiveness of the quantity demanded of a good to a change in:
In case of inferior goods, income elasticity of demand is _____________.
A perfectly elastic supply curve means:
i. A horizontal supply curve
ii. Price Elasticity of Supply = Infinity
The law of demand holds good when:
For normal goods, the demand curve has a/an ______ slope.
Which of the following is/are constant along a demand curve?
(1) Income of the consumers
(2) Price of related goods
Important Questions from Demand analysis
Tea and coffee are _______ goods.
Sweezy's kinked demand curve model to explain the price and output determination relates to which type of market structure?
Arrange the following goods in the ascending order of the underlying income elasticity of demand.
(A) Necessities
(B) Inferior goods
(C) Normal goods
(D) Luxury goods
(E) Giffen goods
Choose the correct answer from the options given below:
The steps involved in development of a project are given below. Arrange them in proper sequence:
(A) Selection of business idea for a detailed analysis from the competing ideas
(B) Project installation and initiation
(C) Feasibility analysis
(D) Identification of investment opportunity
(E) Arrangements for financing
Choose the correct answer from the options given below:
Match List I with List II
List I
List II
A.
Snob effect
I.
If firms are disproportionately powerful, the market leader makes the first move and captures two-thirds of the market.
B.
Small-world model
II.
When some people demand a smaller quantity of a commodity as more people consume it, in order to be different and exclusive
C.
Stackelberg model
III.
Oligopolistic firms seek to maximise sales after an adequate rate of profit has been earned to satisfy stockholders.
D.
Sales maximisation model
IV.
Theory that a corporate giant can be made to operate as a small firm by linking well connected individuals from each level of the organisation to one another.
Choose the correct answer from the options given below:
