Interpret the coefficient of the following demand function. Q=3P + Y + Pc
To interpret the coefficient of a demand function, we need to understand the variables in the equation.
In this case, the demand function is represented by:
Q = 3P + Y + Pc
Where:
- Q represents the quantity demanded of a product or service.
- P represents the price of the product or service.
- Y represents the income of consumers.
- Pc represents the price of complementary goods.
Now, let's focus on the coefficient, which is the number multiplying each variable in the demand function.
Coefficient of P (Price):
The coefficient of P is 3 in this demand function. This means that for every 1 unit increase in the price (P), the quantity demanded (Q) will decrease by 3 units. Similarly, for every 1 unit decrease in price (P), the quantity demanded (Q) will increase by 3 units. This indicates a negative relationship between price and quantity demanded, as higher prices typically lead to lower demand.
Coefficient of Y (Income):
The coefficient of Y in this demand function represents how changes in income affect quantity demanded. Suppose the coefficient of Y is 2. This means that for every 1 unit increase in income (Y), the quantity demanded (Q) will increase by 2 units. Conversely, for every 1 unit decrease in income, the quantity demanded (Q) will decrease by 2 units. This indicates a positive relationship between income and quantity demanded, suggesting that as income increases, people tend to demand more.
Coefficient of Pc (Price of Complementary Goods):
The coefficient of Pc represents the impact of changes in the price of complementary goods on quantity demanded. A complementary good is a product or service that is typically consumed together with the one in question. Suppose the coefficient of Pc is 4. This means that for every 1 unit increase in the price of complementary goods (Pc), the quantity demanded (Q) will decrease by 4 units. Conversely, for every 1 unit decrease in the price of complementary goods, the quantity demanded will increase by 4 units. This again shows a negative relationship, where higher prices of complementary goods lead to lower demand for the main product.
By understanding these coefficients in the demand function, we can derive insights into how changes in price, income, and the price of complementary goods affect the quantity demanded.