Demand function excludes which of the followings:
a. Price of inputs b. Income of consumer c. Expectation d. Price of related goods
The correct answer and explanation is:
The correct answer is a. Price of inputs.
The demand function represents the relationship between the quantity of a good that consumers are willing to purchase and factors such as the good’s price, income of consumers, preferences, and the prices of related goods. However, the price of inputs (also known as the cost of production) is not part of the demand function. This factor is primarily related to the supply side of the market, influencing the amount of a good that producers are willing to supply at various prices, rather than affecting the demand from consumers.
Here’s a breakdown of each option:
- a. Price of inputs: This is an influence on supply, not demand. The price of inputs such as raw materials, labor, and equipment affects how much of a good producers are willing to supply at a given price. It does not directly impact how much of a good consumers are willing to purchase.
- b. Income of consumer: Income is a key factor in the demand function. Generally, as income increases, the demand for normal goods increases, because consumers have more purchasing power. A decrease in income can lead to reduced demand for many goods.
- c. Expectation: Expectations about future prices or income also affect demand. If consumers expect prices to rise in the future, they may buy more now, increasing current demand. Similarly, if they expect their income to decrease, they may reduce current spending, leading to a decrease in demand.
- d. Price of related goods: The prices of related goods, such as substitutes and complements, are crucial for the demand function. If the price of a substitute rises (like the price of tea rising, leading to increased demand for coffee), or if the price of a complement rises (like an increase in the price of printers decreasing the demand for ink), this affects the quantity demanded of the good in question.
In summary, the price of inputs is related to the supply side, and it does not directly influence the demand function. Instead, demand is shaped by consumer behavior in response to the good’s price, income, expectations, and the prices of related goods.