The demand for a commodity can be stated as the quantity which consumers are able as well as willing to buy at different prices during a particular period of time. Therefore, in order to have a demand for a commodity, the consumer should have the willingness to buy it, the means the ability to buy it, and it should be related to per unit of time, such as per day, per week, per month or per year.
The demand function refers to the algebraic expression of the relationship between the demand of a commodity in relation to the various determinants which affect the demand.
The demand functions are of two types:
Individual Demand Function: Individual’s demand function can be stated as the quantities of a commodity demanded at various prices, provided the income, prices of related goods and tastes are constant. Individual demand function can be expressed as:
D is equal to f (P)
Market Demand Function: Market demand function can also be stated as the total demand for goods or services of all the buyers. While the individual demand function forms the basis for the demand theory, market demand function is something which grabs the interests of the managers. Market demand function can be expressed as:
Dx is equal to f (Px, Py, M, T, A, U)
Dx: refers to the quantity demanded commodity x
f: refers to the functional relation
Px: refers to the price of commodity x
Pr: refers to the prices of related commodities
M: refers to the money income of the consumer
T: refers to the taste of the consumer
A: refers to the advertisement effect
U: refers to the unknown variables
Demand function states complete functional relationship. It refers to the whole range of price and quantity relationship and not only quantity demanded at a particular price per unit of time. The demand function expressed above is basically a listing of variables which affect the demand.
The basic assumption in case of the demand schedule and demand curve is that the relationship between price and quantity of a commodity represents a change in price in order to bring a change in quantity demanded, while all other variables remain constant.
However, the classical economists were aware, that the price is not the only factor which affects the sales, but instead, there are other factors as well which have a great impact on the sales. Some of these factors could be the income of the consumer, habits, tastes, preferences, etc. When the demand is said to be influenced by these factors, demand is said to shift. Shifting of demand curve creates difficulty in demand analysis.
Therefore, demand function uses of mathematical formulation in order to arrive at correct results. Recently developed methods like a simultaneous equation and mathematical programming method help in arriving at precise results.