Inverse market demand refers to the relationship between the price of a good and the quantity demanded by consumers, expressed as a function of quantity. It is essentially the inverse of the standard market demand function, which expresses quantity demanded as a function of price.
Example of Inverse Market Demand
Consider a market where the demand function is given by Q = 100 – 2P. Here, Q represents the quantity demanded, and P represents the price. The inverse market demand function would be P = 50 – 0.5Q. This equation shows how the price changes as the quantity demanded changes.
Difference Between Market Demand and Inverse Market Demand
Market demand expresses the quantity demanded as a function of price (Q = f(P)), while inverse market demand expresses the price as a function of quantity demanded (P = f(Q)). In other words, market demand focuses on how much of a good consumers are willing to buy at different prices, whereas inverse market demand focuses on the price consumers are willing to pay for different quantities of the good.
How Inverse Market Demand is Calculated
To calculate the inverse market demand, you start with the standard market demand function and solve for price (P) in terms of quantity (Q). For example, if the market demand function is Q = 100 – 2P, you would rearrange the equation to solve for P:
- Start with the demand function: Q = 100 – 2P
- Subtract Q from both sides: 100 – Q = 2P
- Divide both sides by 2: P = 50 – 0.5Q
This resulting equation, P = 50 – 0.5Q, is the inverse market demand function.