Often, economists use simple [...] to approximate real-world demand and supply functions in relevant ranges.
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linear equations
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Open it Often, economists use simple linear equations to approximate real-world demand and supply functions in relevant ranges.
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3.1. The Demand Function and the Demand Curve y other goods, not just one, and they can be complements or substitutes.) Equation 1 may be read, “Quantity demanded of good X depends on (is a function of) the price of good X, consumers’ income, the price of good Y, and so on.”
<span>Often, economists use simple linear equations to approximate real-world demand and supply functions in relevant ranges. A hypothetical example of a specific demand function could be the following linear equation for a small town’s per-household gasoline consumption per week, where P y might be the average price of an automobile in $1,000s:
Equation (2)
Qdx=8.4−0.4Px+0.06I−0.01Py
The signs of the coefficients on gasoline price (negative) and consumer’s income (positive) are intuitive, reflecting, respectively, an inverse and a positive relationship between those variables and quantity of gasoline consumed. The negative sign on average automobile price may indicate that if automobiles go up in price, fewer will be purchased and driven; hence less gasoline will be consumed. As will be discussed later, such a relationship would indicate that gasoline and automobiles have a negative cross-price elasticity of demand and are thus complements.
To continue our example, suppose that the price of gasoline (P x ) is $3 per gallon, per household income (I) is $50,000, and the price of the average automobile (P y ) is
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