CONCEPT OF

DEMAND
 DEMAND
• Demand refers to the entire relationship between the
quantity of product that buyers wish to purchase per
period time and the price of that product.

DEMAND AND LAW OF

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DEMAND
• Demand refers to the ability and willingness of
consumer, having the desire to buy the product at a
given price and period of time.
 “Holding other factors as constant, as
the price of a particular product
increases the level of quantity
demanded of the said product
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decrease. Likewise, as its price

decrease, the level of its quantity
demanded will increase”.
 The said law implicates the negative relationship
between price and quantity demanded. This condition
can be explained by:

a. Substitution Effect
b. Income Effect
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 2. Majority of the products the mechanism of the law.

a. Veblem Goods
b. Giffen Goods
c. Consumers psychological bias or illusion about the
quality of commodity with price change.
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d. Case of life saving essential goods and also in times of

extraordinary circumstances.
e. Case of speculative demand.
 DEMAND CURVE AND
FUNCTION
• Both demand curve and function are tools which present
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the relationship of price and/or non-price factors and

quantity demanded. Demand curve illustrates the said
relationship through graphical approach.
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• Points will move along the curve when price only

affects quantity demanded. This is also termed as
movement along the demand curve
DEMAND QD = a – bP + cPS – dPC + eFEP+fI + gTP
Where:
FUNCTION • QD is the amount of goods
• Illustrates the demanded
relationship of price and • P is the products own price
quantity demanded • PS is the price of its substitute good
through mathematical • PC is the price of its complement
approach. good
• FEP is the Future Expectation of Price
• This is an example of a of the product
linear demand • I is Income which could be positively
function indicating or negatively related to QD
price and non-rice • TP is the Taste and Preference of
factors: consumer towards the product
• A is the value of OTHER DEMAND
quantity when price is
zero; this also
represents the sales
FUNCTIONS
of the firm at price EXAMPLE:
zero.
where b is the price
• b,c,d,e,f,g are elasticity coefficient
marginal effects of and P is Price.
the mentioned factor
where b is the price
elasticity coefficient, c
is income elasticity
coefficients, P is Price,
and Y is Income.
 FACTORS AFFECTING
DEMAND:
• Price of Related Goods
-This refers to the prices of its substitute or complement
products .
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• Income
-This factor affects quantity demanded in two different ways,
whether the good is normal or inferior.

• Taste and Preference

-This refers to the likes and dislikes of the consumer towards the
product.
 FACTORS AFFECTING
DEMAND:
• Future Expectation of Prices
-This refers to the anticipation of consumers with regards
to price changes of the product in the future, whether it
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would increase or decrease.

• Population Size
-This factor also determines the level of demand in the
market of a particular product.
 DEMAND
FORECASTING
• Demand Estimation
-is a process of identifying current values of demand under the
influence of various prices and other determined variables.
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• Mathematical model
a. Dependent variables (demand)
b. Independent variables (price,income,taste, preference)

Demand forecasting
-estimates the future demand of the product so that it can plan its
production activity accordingly.

FOR
EXISTING
PRODUCTS:
• QUALITATIVE METHOD
a. Survey Method
- few consumers are
selected and their response
on the probable demand is
collected.
b. Expert Opinion
-the researcher identifies the experts on
the commodity whose demand forecast is
being attempted and probes with them on
the likely demand for the product in the
forecast period.
c. Delphi Method
-a panel is chosen to give suggestions in
solving the problems in hand.Panel members
are separated from each other and give their
views in an anonymous manner.
c. Consumer Interview
-a list of potential buyers would be drawn
and each buyer will be approached and
asked about their buying plans.
 b. Regression and Correlation
FOR -these methods combine economic
theory and statistical techniques of
EXISTING estimation.

PRODUCTS: c. Extrapolation
• QUANTITATIVE METHOD – in this method the future demand
can be extrapolated by applying
a. Trend Projection
binomial expansion method.
- under this method,
demand is estimated on
the basis of analysis of d. Simultaneous Equation
past data. also called the complete system
approach to forecasting
FOR NEW
b. Substitute Approach
PRODUCTS: -The demand for the new product
is analyzed as substitute for the
a. Evolutionary Approach existing product.
-In this method, the
demand for new product is
c. Growth curve Approach
estimated on the basis of
-On the basis of the growth of an
existing product.
established product, the demand
for the new product is estimated.
FOR NEW
PRODUCTS:
d. Opinion Polling Approach
-In this approach, the
demand for the new product
is estimated by inquiring
directly from the consumers
by using sample survey.
e. Sales Experience Approach
-The demand is estimated by
supplying the new product in a
sample market and analyzing the
immediate response on that
product in the market.
f. Vicarious Approach
-Consumer’s reactions on the
new products are found out
indirectly with the help of
specialized dealers.
ELASTICITY CONCEPT
ELASTICITY
DEMAND ELASTICITY
⚪ It measures the impact or magnitude of
changes in demand-determining variables,
such as price of the good, prices of related
goods, and income.
PRICE ELASTICITY DEMAND

⚪ This measures the relationship between a

change in the quantity demanded of a
particular good and a change in its price.
Price elasticity of demand is a term in
economics often used when discussing
price sensitivity.
PRICE ELASTICITY DEMAND
FORMULA
MEASURES OF
ELASTICITY
POINT ELASTICITY
⚪ This measures elasticity at a given point on a
function or on the demand curve, and is given by:
 ARC PRICE ELASTICITY
⚪ This measures price elasticity between two points on
the demand curve, and is given by:
 TYPES OF
ELASTICITY
PRICE ELASTICITY RANGE OF
VALUES
 ELASTIC
⚪ This means that for every percentage
change in price, a greater percentage
change in quantity demanded will take
place.
⚪ Total revenue decreases when price
increases.
INELASTIC

⚪ Every percentage change in price, a

lesser percentage change in quantity
demanded will take place.
⚪ Total revenue increases when price
increases.
UNIT ELASTIC

⚪ This has the property that when price

either increases or decreases, the total
revenue remains constant.
PERFECTLY ELASTIC
⚪ When no changes in price of a certain good
or service, quantity demanded responds
infinitely or unendingly.
⚪ Total revenue increases/decreases.
PERFECTLY INELASTIC

⚪ When changes in price of a certain good or

services occur, the quantity demanded does
not respond at all and remains the same.
⚪ Total revenue increases/decreases.
 Relationship of Price Elasticity with
Revenue, Cost, and Profit
⚪ The concept of price elasticity is important for
managers in order to determine the right price to
charge and make forecast.
Some important implications:
⚪ Firms will always maximize revenue if it
charges a higher price when demand is
inelastic.
⚪ Firms will maximize sales if it cuts its
price on a product with elastic demand.
Factors Affecting the
Price Elasticity of
Demand
1. Availability of substitutes.
-The more there are close substitutes available in the market the
more elastic is its demand.

2. Proportion of income spent on the commodity.

-When an item represents a relatively small portion of the total
budget, we tend to pay little attention to its price (thus, inelastic),
other factors remaining the same.

3. Time period.
-Demand tends to be more elastic in the longer term as
consumers have enough time to look for and switch to different
products.
 INCOME ELASTICITY OF DEMAND
⚪ Defined as the measure of responsiveness or sensitivity in
the demand for a product when consumers’ and is given
by.
EXAMPLE:
 INCOME ELASTICITY AND ITS RANGE OF
VALUES
⚪ Can be positive or negative, depending on whether
the product is normal or inferior.
⚪ Normal products can be further classified into luxury
products and staple (necessity) products, according
to whether the income elasticity is more than one or
less than one(but not less than zero).
INCOME ELASTICITY OF DEMAND
RANGE OF VALUES
 CROSS-PRICE ELASTICITY OF
DEMAND
⚪ This is defined as the measure of responsiveness or
sensitivity in the demand for a product when price of
another product changes, and is given by:
 CROSS-PRICE ELASTICITY AND ITS
RANGE OF VALUES
⚪ Cross-elasticity can be positive or negative according to
whether the other product is a substitute or a
complement.

⚪ Negative CPE means good X and good Y are

complements.
⚪ Positive CPE means good X and Good Y are
substitutes.
 SUPPLY
CONCEPT
 SUPPLY
• Is the quantity of goods and services that firms are ready
and willing to sell at a given price within a period of
time, other factors being held constant.
• It is the quantity of goods and services which a firm is
willing to sell at a given price, at a given point in time.
Like: Seller issues rice at P40.00 per kilo.
Thus the amount of kilos of rice are referred to as
supply.
 METHODS IN SUPPLY ANALYSIS
• Supply Schedule
- Is a table listing the various prices of a product and
the specific quantities supplied at each of these prices at
a given point in time.
• Supply Curve
- Is a graphical presentation showing the relationship
between the price of the product sold and the quantity
supplied per time period.
 METHODS IN SUPPLY ANALYSIS

• Supply Function
- Is a form of mathematical notation that links
the dependent variable (quantity supplied) with
various independent variables (factors affecting
quantity supplied) which determines quantity
supplied.
 FORCES THAT CAUSE THE SUPPLY CURVE TO
SHIFT

• OPTIMIZATION IN THE USE OF FACTORS OF

PRODUCTION
• TECHNOLOGICAL CHANGE
• FUTURE EXPECTATIONS
• NUMBER OF SELLERS
• WEATHER CONDITIONS
• GOVERNMENT POLICY
 CHANGE IN QUANTITY SUPPLIED VS. CHANGE
IN SUPPLY
• Change in Quantity Supplied
- It happens when there is a movement from one
point to another point along the same supply curve. It is
mainly brought about by an increase or decrease in the
products own price.
• Change in Supply
- Happens if the entire supply curve shifts to the
right or left resulting to an increase or decrease in
supply due to other factors other than price.
 MARKET
EQUILIBRIUM
CONCEPT
 MARKET EQUILIBRIUM
• Pertains to a balance that exists when quantity demanded
equals quantity supplied.
Like: QD = QS
• It also refers to the general agreement of the buyer and
seller in the exchange of goods and services at a particular
price and at a particular quantity.
• This particular price and particular quantity are referred to
as Equilibrium Price and Equilibrium Quantity respectively.
 MARKET EQUILIBRIUM ANALYSIS

• Two approach are used in analyzing market

equilibrium. Namely, Graphical Approach and
Mathematical Approach.
• Graphical Approach uses Demand and Supply Curve in
its analysis.
• Mathematical Approach uses Demand and Supply
Function in its analysis.
 MARKET EQUILIBRIUM CONCEPT

PRICE

40

35

30

25

20 Qs
Qd
15

10

5
Kg./Month
0
0 10 20 30 40 50 60
 Equilibrium Price and Quantity Adjustments

If Demand and Supply Equilibrium Price and Equilibrium

Condition
Curve Curve will Quantity will

Shifts to Left Is Constant Decrease Decrease

Case 1
Shifts to Right Is Constant Increase Increase

Is Constant Shifts to Left Increase Decrease

Case 2
Is Constant Shifts to Right Decrease Increase

Shifts to Left Shifts to Right Decrease Undetermined

Shifts to Right Shifts to Left Increase Undetermined

Case 3
Shifts to Left Shifts to Left Undetermined Decrease

Shifts to Right Shifts to Right Undetermined Increase

 MATHEMATICAL APPROACH
Consider the following demand and supply functions of a
commodity per day.
QD = 68 – 6P
QS = 33 + 10P
Compute for its equilibrium price and quantity.
Solution:
QD = QS
68 – 6P = 33 + 10P
- 6P – 10P = 33 – 68
 Continuation……
-16P = -35
-16 -16
P = 2.19
Therefore, the Equilibrium Price is P2.19

For Equilibrium Quantity (either of the Demand or Supply

Function will be used and Plug-In the value derived in
equilibrium price)
 Continuation…..
For: Demand Supply
QD = 68 – 6P QS = 33 + 10P
QD = 68 – 6(2.19) QS = 33 + 10(2.19)
QD = 68 – 13.14 QS = 33 + 21.9
QD = 54.9 QS = 54.9

Therefore, the equilibrium quantity is 54.9 units.