Engineering Economy
Chapter 2
Cost Concepts and Design Economics
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Price Demand Relationship
Price Demand Relationship
Goods and services can be categorized as necessities or luxuries, though this distinction is relative and depends on individual circumstances. For example, a car may be a necessity in one location but a luxury in another with good public transport. Regardless of classification, there is a general inverse relationship between price and demand: as the price increases, demand decreases; as the price decreases, demand increases. This relationship is often represented as a linear function on a graph.
Figure 1
Price-Demand Relationship
The linear price-demand relationship can be expressed as:
a is the price-axis intercept, representing the maximum price at which demand becomes zero.
-b is the slope of the line, indicating how much the price decreases for each unit increase in demand.
- Equivalently, b represents the amount by which demand increases for each unit decrease in price.- Both a and b are positive constants.
By solving for D, we can express demand as a function of price:
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