Q.Explain the demand function and its important determinants.

Speculation is buying or selling now in anticipation of a future change in price, so as to profit from the price change.

Explanation

Speculation refers to transactions undertaken in the present on the basis of expected future price changes. A speculator buys a commodity (or asset) when he expects its price to rise and sells it when he expects its price to fall, hoping to earn a profit from the difference. In the theory of demand, if consumers expect the price of a good to rise in the near future, they increase their present purchases (speculative demand rises); if they expect prices to fall, they postpone purchases and present demand falls. Thus expectations and speculation are among the determinants of demand.

A demand function states, in functional or mathematical form, how the quantity demanded of a good depends on its determinants — its own price, income, prices of related goods, tastes and other factors. The price-demand function expresses quantity demanded as a function of price alone, other things held constant.

Meaning

The demand function is the functional relationship between the quantity demanded of a commodity and the various factors that determine it. It shows how demand changes when any of its determinants changes.

Forms of demand function

• General demand function: Here the quantity demanded of a good depends on several variables together — the price of the good, the consumer's income, the prices of substitutes and complements, tastes and preferences, and expectations. In words, quantity demanded is a function of all these factors.
• Price demand function: This simpler and most common form shows the quantity demanded as a function of the price of the good alone, assuming all other factors remain unchanged. It reflects the law of demand, under which quantity demanded rises as price falls.

Thus the demand function summarises, in a compact form, the determinants of demand and is the basis of the demand schedule and the demand curve.