The Demand Function in Managerial Economics

In managerial economics or business economics, managers apply the demand function to facilitate the supply of products or services in order to produce a profitable economic forecast.

The Law of Demand

Demand implies that somebody wants it, has the means to pay for it and is willing to acquire it for the price at which you are selling it. Without these qualifiers, demand does not exist.

The Demand Function

The function that illustrates a product's demand is the price of the good compared to a related or competitive product and the average consumer's income. Weighted together, this results in an estimate of the demand for the product or the quantity that will sell without saturating the market. When making managerial decisions, the relationship between quantity and each variable should be specified.

A Practical Example

A recent customer survey indicates 90 percent of a hotel’s guests will not return or recommend it to co-workers, because they do not like paying $9.99 for access to the hotel’s Wi-Fi; the competition provides it for free. The hotel eventually changed its policy to include free Wi-Fi access for all guests. The demand and its function were recognized; in turn, the hotel implemented a service to generate economic gain through return visits and referrals.