Demand Function is a behavioural relationship between quantity consumed and a person's

maximum willingness to pay for incremental increases in quantity. It is usually an inverse

relationship where at higher (lower) prices, less (more) quantity is consumed. Other factors which
influence willingness-to-pay are income, tastes and preferences, and price of substitutes. But the
exceptions are in cases of luxurious or high end products ....human tendency to believe that quality
increases with price. The quantity demanded is the amount of a product people are willing to buy at
a certain price; the relationship between price and quantity demanded is known as the demand
relationship.

A. The Law of Demand

The law of demand states that, if all other factors remain equal, the higher the price of a good, the
less people will demand that good. In other words, the higher the price, the lower the quantity
demanded. The amount of a good that buyers purchase at a higher price is less because as the price
of a good goes up, so does the opportunity cost of buying that good. The chart below shows that the
curve is a downward slope.

The Demand Curve

By convention, the demand curve displays quantity demanded as the independent variable (the x
axis) and price as the dependent variable (the y axis).

A, B and C are points on the demand curve. Each point on the curve reflects a direct correlation
between quantity demanded (Q) and price (P). So, at point A, the quantity demanded will be Q1 and
the price will be P1, and so on. The demand relationship curve illustrates the negative relationship
between price and quantity demanded. The higher the price of a good the lower the quantity
demanded (A), and the lower the price, the more the good will be in demand (C).

The law of demand states that quantity demanded moves in the opposite direction of price (all other
things held constant), and this effect is observed in the downward slope of the demand curve. For
basic analysis, the demand curve often is approximated as a straight line. A demand function can be
written to describe the demand curve. Demand functions for a straight-line demand curve take the
following form:
 Quantity = a - (b x Price) where, a and b are constants that must be determined for each particular
demand curve.

When price changes, the result is a change in quantity demanded as one moves along the demand
curve.

Shifts in the Demand Curve

When there is a change in an influencing factor other than price, there may be a shift in the demand
curve to the left or to the right, as the quantity demanded increases or decreases at a given price.
For example, if there is a positive news report about the product, the quantity demanded at each
price may increase, as demonstrated by the demand curve shifting to the right:

Determinants of Demand

The determinants of demand are also known as demand shifters. They result in the leftward
(decrease) or rightward (increase) shifts in the demand curve.

1.) Tastes or preferences of consumers

All markets are shaped by collective and individual tastes and preferences. These patterns are partly
shaped by culture and partly implanted by information and knowledge of products and services
(including the influence of advertising). Different societies use forest products differently because of
these differences in taste and preferences. For example, markets for wood products in Japan are
commonly recognized as requiring very high product quality standards, the importance of visual
attributes of wood, and other preferences not commonly found in many other markets.

 an increased taste in a product increases its demand

 a decreased taste in a product decreases its demand

2.) Number of consumers in the market

Population

Population is a key determinant of demand. Although all forest products do not necessarily enter
final consumer markets, the actual markets are largely presumed to be functionally related to
population. Growing populations are positively correlated to timber demands in the aggregate, as
well as specifically to individual forest products. Frequently, population and income estimators are
combined, as in the case of the use of Gross Domestic Product per capita.

 more consumers increases a products demand

 fewer consumers decreases a products demand

3.) The money incomes of consumers

Levels of income

A key determinant of demand is the level of income evident in the appropriate country or region
under analysis. As a generality, the higher the level of aggregate and/or personal income the higher
the demand for a typical commodity, including forest products. More of a good or service will be
chosen at a given price where income is higher. Thus determinants of demand normally utilize some
form of income measure, including Gross Domestic Product (GDP).

Superior goods or normal goods

 As income increases, a superior good's demand increases

 As income decreases, a superior good's demand decreases
 Superior goods are most common goods

Inferior Goods

 As income increases, an inferior good's demand decreases

 As income decreases, an inferior good's demand increases

4.) Prices of related goods

 Suitability of alternative goods and services is, in part, a question of knowledge as well as
availability. Market information regarding alternative products, quality, convenience, and
dependability all influence choices. Under conditions of increased scarcity and rising prices
for tropical hardwood panels, for example, users have a positive incentive to search for and
investigate the suitability of alternatives that were previously overlooked or ignored.

Substitute Goods

 As price of A increases, demand for B increases

 As price of A decreases, demand for B decreases
 Example: Nike's and Reeboks

Complementary Goods

 As price of A increases, demand for B decreases

 As price of B decreases, demand for A increases
 Example: computers and computer games; gasoline and motor oil

Independent Goods

 As price of good A changes, demand for good B does not change

5.) Consumer expectations about the future prices and incomes

 Expectations of a price change - a news report predicting higher prices in the future can
increase the current demand as customers increase the quantity they purchase in
anticipation of the price change.

 if consumers expect a price increase in near future, demand increases.

 if consumers expect a price decrease in the near future, demand decreases

6.) End market indicators

The use of end market indicators as determinants of demand is frequently incorporated into
demand analysis. For example, much of the final use of forest products is linked to construction
(residential and total). Indicators and trends related to construction activities, or which are
determinants of construction, provide indirect estimates of the influence of these activities as the
source of derived demand for wood. Housing starts, public investments, interest rates, etc. can be
highly correlated to timber demand.

7.) Availability of substitute goods

Consumption choices related to timber are also influenced by the alternative options facing users in
the relevant marketplace. The availability of potential substitute products, and their prices, weigh
heavily in determining the elasticity of demand, both in the short run (static) sense and over time
(long run). Fuel wood, as a dominant use of timber in the Asia Pacific Region, reflects conditions of
very limited options for energy sources at 'reasonable' prices. Rural low income or subsistence
populations simply do not have 'options' regarding energy - they use wood or go without. Demand,
at this basic level, is almost perfectly inelastic. The cost (if only implicit in terms of gathering time)
does not materially affect consumption quantity.

Characteristics of perfectly competitive market

In economic theory, perfect competition describes markets such that no participants are large
enough to have the market power to set the price of a homogeneous product. Because the
conditions for perfect competition are strict, there are few if any perfectly competitive markets.
Perfect competition serves as a benchmark against which to measure real-life and imperfectly
competitive markets.

An ideal market structure characterized by a large number of small firms, identical products sold by
all firms, freedom of entry into and exit out of the industry, and perfect knowledge of prices and
technology.

Generally, a perfectly competitive market exists when every participant is a "price taker", and no
participant influences the price of the product it buys or sells. Specific characteristics may include:

 Infinite Buyers/Infinite Sellers – Infinite consumers with the willingness and ability to buy
the product at a certain price, Infinite producers with the willingness and ability to supply
the product at a certain price.
 Zero Entry/Exit Barriers – It is relatively easy to enter or exit as a business in a perfectly
competitive market.
 Perfect Factor Mobility - In the long run factors of production are perfectly mobile allowing
free long term adjustments to changing market conditions.
 Perfect Information - Prices and quality of products are assumed to be known to all
consumers and producers.
 Zero Transaction Costs - Buyers and sellers incur no costs in making an exchange [Perfect
mobility].
 Profit Maximization - Firms aim to sell where marginal costs meet marginal revenue, where
they generate the most profit.
 Homogeneous Products – The characteristics of any given market good or service do not
vary across suppliers.
 Constant Returns to Scale - Constant returns to scale insure that there are sufficient fims in
the industry.
In the short term, perfectly-competitive markets are not productively inefficient as output will not
occur where marginal cost is equal to average cost, but allocatively efficient, as output will always
occur where marginal cost is equal to marginal revenue, and therefore where marginal cost equals
average revenue. In the long term, such markets are both allocatively and productively efficient.

These four characteristics mean that a given perfectly competitive firm is unable to exert any control
whatsoever over the market. The large number of small firms, all producing identical products,
means that a large (very, very large) number of perfect substitutes exists for the output produced by
any given firm.

Large Number of Small Firms

A perfectly competitive market or industry contains a large number of small firms, each of which is
relatively small compared to the overall size of the market. This ensures that no single firm can exert
market control over price or quantity. If one firm decides to double its output or stop producing
entirely, the market is unaffected. The price does not change and there is no discernible change in
the quantity exchanged.

Example is Phil's home grown zucchinis. Phil is one among gadzillions (a really large number) of
people who grow zucchinis in their backyard gardens. Phil has no control over the zucchini market
because the total zucchini market contains gadzillions of zucchini producers, each producing only a
handful of zucchinis. Should Phil decide to produce more zucchinis, fewer zucchinis, or none at all,
the zucchini market and especially the zucchini price are unaffected. Zucchini buyers continue buying
zucchinis from the remaining gadzillions of zucchini producers as if nothing changed. As far as the
market is concerned, nothing has changed.

Identical Goods
Each firm in a perfectly competitive market sells an identical product, which is also commonly
termed "homogeneous goods." The essential feature of this characteristic is not so much that the
goods themselves are exactly, perfectly the same, but that buyers are unable to discern any
difference. In particular, buyers cannot tell which firm produces a given product. There are no brand
names or distinguishing features that differentiate products by firm.

This characteristic means that every perfectly competitive firm produces a good that is a perfect
substitute for the output of every other firm in the market. As such, no firm can charge a different
price than that received by other firms. If they should try to charge a higher price, then buyers would
immediately switch to other goods that are perfect substitutes.

Once again, Phil the zucchini grower offers an example. Phil's zucchinis are no different than Becky's
zucchinis, which are no different than any of the other zucchinis produced by any of the other
gadzillions of zucchini growers. They look the same. They taste the same. And most important, they
satisfy the same zucchini need.

Perfect Resource Mobility

Perfectly competitive firms are free to enter and exit an industry. They are not restricted by
government rules and regulations, start-up cost, or other barriers to entry. While some firms incur
high start-up cost or need government permits to enter an industry, this is not the case for perfectly
competitive firms. Likewise, a perfectly competitive firm is not prevented from leaving an industry as
is the case for government-regulated public utilities.
For example, if Phil wants to leave the zucchini industry and entry the kumquat industry, he can do
that without restriction. Likewise if Becky is a kumquat producer who wants to entry the zucchini
industry, she can do so without restraint. Phil and Becky are not faced with up-front investment cost
nor brand-name recognition that might prevent them from entering a perfectly competitive
industry. When they enter an industry they can instantly compete on equal ground with existing
firms.

Perfect Knowledge
In perfect competition, buyers are completely aware of sellers' prices, such that one firm cannot sell
its good at a higher price than other firms. Each seller also has complete information about the
prices charged by other sellers so they do not inadvertently charge less than the going market price.
Perfect knowledge also extends to technology. All perfectly competitive firms have access to the
same production techniques. No firm can produce its output faster, better, or cheaper because of
special knowledge of information.

Phil, for example, has all of the information needed to grow zucchinis. This is the same information
possessed by other gadzillions of zucchini producers. Phil also knows that the going price of zucchinis
is 50 cents. All of the zucchini buyers know that the going price is fifty cents.

Examples

Perhaps the closest thing to a perfectly competitive market would be a large auction of identical
goods with all potential buyers and sellers present. By design, a stock exchange resembles this, not
as a complete description (for no markets may satisfy all requirements of the model) but as an
approximation. The flaw in considering the stock exchange as an example of Perfect Competition is
the fact that large institutional investors (e.g. investment banks) may solely influence the market
price. This, of course, violates the condition that "no one seller can influence market price".

Free software works along lines that approximate perfect competition. Anyone is free to enter and
leave the market at no cost. All code is freely accessible and modifiable, and individuals are free to
behave independently. Free software may be bought or sold at whatever price that the market may
allow.

Another very near example of perfect competition would be the fish market and the vegetable or
fruit vendors who sell at the same place. 1)There are large number of buyers and sellers. 2)There are
no entry or exit barriers. 3)There is perfect mobility of the factors, i.e. buyers can easily switch from
one seller to the other. 4)The products are homogenous.

Functions of Money--

Money is a matter of functions four, a medium, a measure, a standard, a store." That is, money
functions as a medium of exchange, a unit of account, a standard of deferred payment, and a store
of value.

Medium of exchange

When money is used to intermediate the exchange of goods and services, it is performing a function
as a medium of exchange. It thereby avoids the inefficiencies of a barter system, such as the 'double
coincidence of wants' problem. Money acts as a medium of exchange or as a medium of payments.
This function of money is served by anything that is generally accepted by people in exchange for
goods and services. Money will then reduce the time and energy spent in barter. Ultimately, all trade
may be considered barter - one good or service is traded for another good or service -either directly,
or indirectly with money acting as the intermediary. However, by acting as an intermediary, money
increases the ease of trade. Money is also called a bearer of options or generalised purchasing
power. This indicates the freedom of choice that the use of money offers

The function of money as a medium of exchange solves all the difficulties of barter system. There is
no necessity for a double coincidence of wants in the money economy. The man with cow who
wants to purchase cloth need not seek a cloth seller who wants a cow. He can sell his cow in the
market for money and then purchase cloth with the money obtained.

Unit of account

A unit of account is a standard numerical unit of measurement of the market value of goods,
services, and other transactions. Also known as a "measure" or "standard" of relative worth and
deferred payment, a unit of account is a necessary prerequisite for the formulation of commercial
agreements that involve debt. To function as a 'unit of account', whatever is being used as money
must be:

 Divisible into smaller units without loss of value; precious metals can be coined from bars, or
melted down into bars again.
 Fungible: that is, one unit or piece must be perceived as equivalent to any other, which is
why diamonds, works of art or real estate are not suitable as money.
 A specific weight, or measure, or size to be verifiably countable. For instance, coins are often
milled with a reeded edge, so that any removal of material from the coin (lowering its
commodity value) will be easy to detect.

Store of value

To act as a store of value, a money must be able to be reliably saved, stored, and retrieved – and be
predictably usable as a medium of exchange when it is retrieved. The value of the money must also
remain stable over time. In that sense, inflation by reducing the value of money, diminishes the
ability of the money to function as a store of value.

If money becomes a unit of value and a means of payment then it may also perform the function of
serving as a store of value. The holders of money are holders of generalised purchasing power that
can be spent through time. They know that it will be accepted at any time for any good or service
and is thus a store of value. This function will be performed well as long as money retains a constant
purchasing power.

Goods cannot be stored because they are perishable. People receive their incomes in money form
and keep their savings in money form in banks. In this way, money is used to store value of
commodities.

(1) they may involve storage costs,

(2) they may not be liquid in the sense that they could not be quickly converted into money without
loss of value, and

(3) they may depreciate in value. A person may choose to store value in any form depending on
considerations of income, safety and liquidity.
Standard of deferred payment

A "standard of deferred payment" is an accepted way to settle a debt – a unit in which debts are
denominated, and the status of money as legal tender, in those jurisdictions which have this
concept, states that it may function for the discharge of debts. When debts are denominated in
money, the real value of debts may change due to inflation and deflation, and for sovereign and
international debts via debasement and devaluation.

In a money economy the contracts are made for future payments terms of money instead of goods
and promise to repay the loan in money. In this way money is the standard of deferred payments.
This function stimulates all kinds of economic activities which depend on borrowed money.

If money performs the previous two functions then it may also perform the function of being the
unit in terms of which deferred or future payments are stated. Examples of situations where future
payments are to be made are pensions, principal and interest on debt, salaries etc. As long as money
maintains a constant value through time, it will overcome the problems associated with making
future payments with specific commodities.