Hi,
This is with reference to CFA book,
Section 3.1 : The demand Function and the Demand Curve
I am not able to understand the formula for a demand function
Equation 1: Qxd - Function (Px,I,Py…) - I understand this, but the first example on the same page
Marked as Equation 2 says: 8.4- 04.Px+0.06 I- 0.01 Py.
Can some on explain me or point to very basics of above formula. From where does 8.4, 0.4 came in
Regards,
Pavas
Those numbers are simply made up, to provide a numerical example to help illustrate the concept. Those numbers don’t apply to all demand functions Please take a look at the sentence right above the equation.
Equation 1 is stating that the demand function can be a function of any number of variables.
Equation 2 is just a simple hypothetical scenario where a linear demand function is presented.
The numbers can also be thought of as sensitvities. -0.4 means that a change of +1 in price will result in a decrease of 0.4 in quantity demanded, all else equal.
Really helpful and thank you for the response!