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70 vizualizări23 paginiA draft paper on the derivation of Demand-Price relations for comments

Jun 01, 2010

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A draft paper on the derivation of Demand-Price relations for comments

Attribution Non-Commercial (BY-NC)

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70 vizualizări23 paginiA draft paper on the derivation of Demand-Price relations for comments

Attribution Non-Commercial (BY-NC)

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V.I.G.Menon 1

Chief Consultant, Yahovan Centre for Excellence,12/403,W Block, Anna

Abstract

Matrix form ,as well as using the mean of the parameters Price,Wage ,Supply

and Demand Quantities for a community as a market. The paper thus explores

the conditions under which the standard demand/supply relations hold with

demand based on the basic equations show that for goods with –ve price

Introduction

The dependence of price on demand or supply is the most basic relation that supports

the micro economic thought everywhere. In the following we discuss why this “Natural

Law” holds.

Price-Demand Dependency

We assume a buyer with a fixed wage Wb for any given period of the wage cycle,

buying Qi amounts of a good at price Pi. Figue 1 Gives the Matrix where the rows 1

to B are the buyers and Columns 1 to S are the sellers .If all the wage/income of this

buyer for this period is spent on N goods and services, we can write

If we assume that as long as Wb , is constant for the individual “b”, then we get

Where K i = Pi *Qi /∑ Pi *Qi in equation (3) is the percentage or fraction of “b”s

income Wb spent on item “i”.This equation tells us that if individuals spend generally

fixed ratios of their wages on various goods, then demand Qi depends inversely with

price.

Price-Supply Dependency

Similarly, now consider a supplier who is supplying “M” number of goods to the

market, including the goods that are bought by the buyer above. His total wage or

Ws = ∑ PJ QJ …………………………………………… (4)

Where , QJ is the total quantity of “J” sold in the market by him at price PJ , K J

and so we have,

.Since PiQi represents the total paid by the buyer for the Quantity Qi of “ith” product

For the same item where buyer’s item i = J th item for the seller ,we write

(PiQi / PJQJ ) = K iWb/K JWs ,,we can also note K iWb/K JWs = C ,where C is the

fraction of the income generated due to product J for the supplier “s” by the buyer b”.

QJ = C* Pi …………………………………………………… (7)

profiles for the product i=J (not necessarily Pi =Pj the equillibrium price)

As the terms involving buyer or supplier are not entering here, these equations are

Generalised Results

For any buyer “b” and similarly for any supplier “s”, we can rewrite the above

Let us,for clarity,choose to write P.Q for buyer “b” as P b.Q b and for supplier

Summing for all buyers “b” from b = 1 to B and for all suppliers “s” from s = 1 to

K B*W = ∑ K bWb = ∑ P b.Q b = (∑ P b).(∑Q b) = P B*Q B,

B ……………… (11)

P B*Q B, and P S*Q S represent Matrices whose elements P ij.Q kl are as shown in

the figures 2 & 3 above. K B*W B and K S*W S are single column matrices

(13)

(14)

KB WB = P BQ B …………………………………………… (13)

KS WS = P SQ S …………………………………………… (14)

Both these look exactly like our single buyer case except that these are Matrix

Equations.

Assuming as in the previous case that Consumption Profiles will be same when the

(P -1 B )* KS WS = QB ……………………………………………

(15)

Which tells us that the demand matrix Q B is inversely dependent on the price

matrix P B.

we have

(KB WB ) -1 * KS WS =( P B Q B ) -1

* P S Q S …………………………………

(16)

ie.,

C =( P B Q B ) -1 * P S Q S …………………………………

(17)

( P B )*( Q B ) * P -1 S * C* = Q S …………………………………

(18)

The Matrix relations will enable us to study the system using linear equations and linear

programming

where Ki is the average fraction of the wage spent on the ith product .

constant and the mean fraction of the wage spent on the ith

QJ = C* Pi ………………………………… (19)

that is, the Mean Quantity QJ of item “J “ supplied is proportional to the Mean

Purchase Price Pi for the same commodity (where generally, ith commodity bought by

buyer is same as the Jth commodity supplied- pl note that for enumeration, the i th

product bought by the buyer need not be the same as the ith product supplied by the

supplier)

Relation between the individual,(or mean), wage, price and demand is seen by plotting

Ref

P = K.W/Q,with K =1,and Q on the X,W on the Y and P on the Z axes, using the

online 3D plotter .

The results are very encouraging .Apart from showing the expected price-demand

dependence,on its red edge,the green edge of the 3D “sheet” shows that as wage level

http://www.livephysics.com/ptools/online-3d-function-grapher.php?

ymin=1&xmin=0&zmin=0&ymax=5&xmax=5&zmax=15&f=y*x^-1

ED = (∆P/P) = dlnP

for infinitesimal changes in Q & P .

( dlnQ/dlnP) + 1 = (dlnW/dlP)

α + 1/β = 1

( dlnW/dlnQ) = 1 - [1/(dlnQ/dlnP)] ……………………………… (23)

ie,

between price elasticity of demand and income elasticity of demand are explored in

the graph ref,showing that for goods with –ve price elasticities of demand ,income

elasticities of demand is positive, such that as wage increases, the demand increases for

Under the assumptions of constant income for the buyer and the supplier, as well as

constant consumption and supply profiles for the buyer and the supplier respectively,

it is found that the Classical price-demand as well as the price-supply relations hold

expressed in Matrix form as well as through Mean of Price, Quantity Wage and the

associated Constants.

Graphical analysis of the equations in 2D shows the expected pattern, and the 3D

graph involving, wage, price and demand equation shows that the Quantity demanded

increases with wage. Analysis of price elasticities show that for goods with –ve price

Fig.1:The Matrix Shows Suppliers 1 to S ,each supplying products 1 to S for the Market

comprising Of Buyers 1 to B. The Column total for ,say buyer “i” ∑PiQJ for any product “i” for

all “J” ,gives his total budget to spend which may be a fraction Ki of his wage Wi,as given by KiWi.

Along the column, Pi remains same,but QJ varies for all buyers for the same product at the same

price Pi .The Row total Gives the income or revenue for each product to Supplier, where CJWJ is

income of Supplier from all buyers for product J sold in this market =∑PiQJ for any J for all “i” .

Products are assumed to be numbered from “I” =1 to N

matrix

for i ≠ J.

b

P1 Represents the price of “item” “1” bought by any buyer “b”

S

Q1b Represents the Quantity of “item” “1” bought by any buyer “b” from

supplier “S”.

b

PS1 *SQ1b This product of bP1 with SQ1b represents the total amount

transacted by any buyer “b” for “item” “1” supplied by any supplier “S”

at price bP1 for quantity SQ1b

b

PSn *SQnb This product of bP1 with SQ1b represents the total amount

transacted by any buyer “b” for “item” “n” supplied by any supplier “S”

at price bPn for quantity SQnb

b

K represents the fraction of the budget allocation by “b”

bWS represents the fraction of the revenue of any supplier S due to any buyer “b”

b

KS represents the fraction of the budget allocation by “b” for supplier “S”.

b

KSn represents the fraction of the budget allocation by “b” for supplier “S”

b

KSn * bWS gives budget allocation of “any” buyer “b” for “any” product

“n” offered by “any” supplier “S” obtained by multiplying bKSn with bWS

∑ bKSn * bWS = bKS * bWS gives total budget allocation of “any” buyer “b” for all

n=1 to N

products 1 to N offered by “any” supplier “S”.

∑ bKS * bWS = KS * WS gives total budget allocation of all buyers “1 to B” for all

b=1 to B

products 1 to N offered by “any” supplier “S”.

S=1 to S

products 1 to N offered by suppliers 1 to “S”.

∑ bKS * bWS = bK * bW gives total income of all suppliers “1 to S ” for all products

S=1 to S

1 to N bought by any buyer “b” .

De

ma

nd

Quantity

Fig 2:Sample Price-Deamand graph calculated from Equation (3) using online graph

Quantity , K=5,W = 1000, and X (that is ,Price) set to change from 100 to 500 units

Su

ppl

y

Price

Fig3.Sample Price-supply graph calculated from Equation (7) using online graph plotter (http://graph-

plotter.cours-de-math.eu/) setting X axis for Price and Y-axis for Quantity , K=5,W = 1000, and X (that is

Fig.4.Apart from showing the expected price-demand dependence,the 3D “sheet”

plotted based on equation (3) shows that as wage level increases ,price level also

ymin=1&xmin=0&zmin=0&ymax=5&xmax=5&zmax=15&f=y*x^-1

α

plotter at (http://graph-plotter.cours-de-math.eu/)