TAYABAS WESTERN ACADEMY

Founded 1928 I Recognized by the Government I Candelaria, Quezon 4323

MANAGERIAL ECONOMICS
CHAPTER 2: BASIC ANALYSIS OF DEMAND AND SUPPLY

Demand is generally affected by the behavior of consumers, while supply is usually affected by the conduct of
producers.

DEMAND – pertains to the quantity of a good or service that people are ready to buy at given prices within a
given period, when other factors besides price are held constant. Demand, therefore, implies three things:
• Desire to possess a thing (good or service);
• The ability to pay for it or means of purchasing it; and
• Willingness in utilizing it.

MARKET – where buyers and sellers meet. It is the place where they both trade or exchange goods or services
– in other words, it is where their transactions take place.

Note: different kinds of market: Wet Market is where people usually buy vegetables, meat, fish, etc. Dry Market
is where people buy shoes, clothes, and other dry goods.
• Market can also represent an intangible domain where goods and services are traded: stock market, real
estate market, or labor market – where workers offer their services, and employers look for workers to
hire.
Method of Demand Analysis
1.) Demand Schedule - A table that shows the relationship of prices and the specific quantities demanded each
of these prices.
Note: the table shows the various prices and quantities for the demand for rice per month. For instance, at a
given price of P35 the buyer is willing to purchase only 8 kilos of rice (situation A), however, at price of P 11, he
is willing to buy 45 kilos of rice (Situation E)

o LAW OF DEMAND -states that if prices goes UP the quantity demanded of a good will go DOWN.
Conversely, if prices goes DOWN the quantity demanded of a good will go UP. (ceteris paribus)
consumers always tend to MAXIMIZE SATISFACTION.
2.) Demand Curve – the graphical representation showing the relationship between price and quantities
demanded per time period.
Note: As the price of commodities decreases (increases), more (less) goods will be bought by the consumer.

3.) Demand Function – shows the relationship between demand for a commodity and the factors that determine
or influence this demand. These factors are the price of the commodity itself, level of income, taste and
preferences, size and composition of level of population, distribution of income, etc.
Expressed by: 4Qd = f (product’s own price, income of consumers, price of related goods, etc.)
Demand Equation: Qd = a – bP
Where:
Qd = quantity demanded at a particular price
a = intercept of the demand curve
b = slope of the demand curve
P = price of the good at a particular time period.
Example: Current price of good A is P 5.00. The intercept of the demand curve is 3 while the slope is 0.25. If we
want to determine how much of good A will be demanded by consumer X, we can simply substitute the given
values to our equation. Thus:
Qd = a – bP
Qd = 3 – 0.25 (5)
Qd = 3 – 1.25
Qd = 1.75 units of good A

CHANGE IN QUANTITY DEMANDED – if the change in consumer purchases is caused by a change in the price
of the good, it is a change in quantity demanded movement along the demand curve.
• Brought by an increase (decrease) in the product’s own price. The direction of the movement however is
inverse considering the Law of Demand. We can say that there is change in quantity demanded if the
price of goods being sold changes.

Prepared by: Angelo H. Barcelona

3rd Year Bachelor of Science in Accountancy
CHANGE IN DEMAND – If the change in consumer purchases is due to a change in anything other than the
price of the good (a change in consumer income, for example) it is a change in demand – a shift in the demand
curve.
• At the same price, therefore, more (less) amounts of goods or services are demanded by consumers.
Forces that cause the demand curve to change.
1.) TASTE OR PREFERENCES – pertains to the personal likes or dislikes of consumers for certain goods
and services.
2.) CHANGING INCOMES – increasing incomes of households raise the demand for certain goods or
services or vice versa. This is because an increase in one’s income generally raises his capacity or power
to demand for goods or services which he is not able to purchase at a lower income. On the other hand,
a decrease in one’s income reduces his purchasing power, and consequently, his demand for some
goods or services ultimately declines.
3.) OCCASSIONAL OR SEASONAL PRODUCTS – the various events or seasons in a given year also
result to a movement of the demand curve with reference to particular goods.
4.) POPULATION CHANGE – an increasing population leads to an increase in the demand for some types
of good or service, and vice versa. This simply means that more goods or services are to be demanded
because of the rising population.
5.) SUBSTITUTE AND COMPLEMENTARY GOODS
• Substitute goods are goods that are interchanged with another good. In situations where prices of a
particular good increases a consumer will tend to look for closely related commodities.
• Complementary goods are goods that complement each other. In other words, one good cannot exist
without the other good.
o Changes in the price of a substitute or complement affect demand. Changes in the price of related
goods change the demand for another related good.
6.) EXPECTATIONS OF FUTURE PRICES -If buyers expect the price of a good or service to rise (fall) in
the future, it may cause the current demand to increase (or decrease).
Note: Optimism or pessimism about the future direction of the economy, including expected natural
disasters and inflation can affect the spending patterns of consumers.

SUPPLY – pertains to the quantity of a good or service 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.

Method of Supply Analysis

1.) Supply Schedule - 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.
Note: the table shows the various prices and quantities for the supply for rice per month. For instance, at a given
price of P35 the seller is willing to sell 48 kilograms of rice (situation A), however, at price of P 11, he is willing to
sell 5 kilograms of rice (Situation E).

2.) Supply Curve – the graphical representation showing the relationship between price of the product sold
or factor of production (e.g., labor) and the quantity supplied per time period.
Note: As the price of commodities increases (decreases), more (less) goods will be offered for sale by the
producers.

3.) Supply Function – form of mathematical notation that links the dependent variable, quantity supplied
(QS), with various independent variables which determine the quantity supplied. Among the factors that
influence the quantity supplied are price of the product, number of sellers in the market, price of factor
inputs, technology, business goals, importations, weather conditions, and government policies.

Expressed by: Qs = f (product’s own price, number of sellers, price of factor input, technology, etc.)
Demand Equation: Qs = a + bP

Where:
Qs = quantity supplied at a particular price
a = intercept of the supply curve
b = slope of the supply curve
P = price of the good sold

Example: Suppose the price of good A is P 5.00. The intercept of the supply curve is 3 and the slope of the
supply curve is 0.25. If we want to know how much of good A will be supplied by sellers, we can simply substitute
the given values to our equation. Thus:

Prepared by: Angelo H. Barcelona

3rd Year Bachelor of Science in Accountancy
Qd = a + bP
Qd = 3 + 0.25 (5)
Qd = 3 +1.25
Qd = 4.75 units
CHANGE IN QUANTITY SUPPLIED – A change in quantity supplied is brought about by an increase or
decrease in the product’s own price. The direction of the movement is positive considering the Law of Supply.

CHANGE IN SUPPLY– happens when the entire supply curve shifts leftward or rightward.

a.) Increases in supply: At the same price, therefore, more (less) amounts of goods or service is supplied
by producers or sellers. At the same price P0, more goods will be offered for sale by producers (from Q0
to Q1)
a) Decreases in supply: At the same price fewer amounts of a good or service are sold by producers. At
the same price P0, supply for the product will decrease (from Q0 to Q1)

Increase (decrease) in supply is caused by factors other than the price of the good itself such as change in
technology, business goals, etc., resulting to the movement of the entire supply curve (leftward).

Forces that cause the supply curve to change.

1. OPTIMIZATION IN THE USE OF FACTORS OF PRODUCTION – an optimization in the utilization of
resources will increase supply, while a failure to achieve such will result to a decrease in supply.
Optimization in this sense refers to the process or methodology of making or creating something as fully
perfect, functional, or effective as possible…maximum production of output at minimum cost. Thus, the
optimization of the various factors of production (i.e., land, labor, capital, and entrepreneurship) results
to an increase in supply, and vice versa.
2. TECHNOLOGICAL CHANGE – the introduction of cost-reducing innovations in production technology
increases supply on one hand.
3. FUTURE EXPECTATIONS – this factors impacts sellers as much as buyers. If sellers anticipate a rise in
prices, they may choose to hold back the current supply to take advantage of the future increase in price
thus, decreasing market supply. If sellers however, expect a decline in the price for their products, they
will increase present supply.
4. NUMBER OF SELLERS – more sellers there are in the market the greater supply of goods and services
will be available.
5. WEATHER CONDITIONS – bad weather such as typhoons, drought or other natural disasters, reduces
supply for agricultural commodities while good weather has an opposite impact. For instance, If a typhoon
destroys the vegetables farm in Benguet Province, the supply for vegetables particularly in markets of
Metro Manila will decline.
6. GOVERNMENT POLICY – removing quotas and tariffs on imported products also affect supply. Lower
trade restrictions and lower quotas or tariffs boost imports, thereby adding more supply of goods in the
markets. (E.O. 890)
o Quotas – are limitation on the number of quantities of imported goods which could enter a country.
This is used in order to protect domestic or local products. It is the general agreement of the buyer
and the seller in the exchange of goods and services at a particular price and at a particular
quantity.
7. MARKET EQUILIBRIUM – the meeting of supply and demand
o Market (where buyer and seller meet)
o Equilibrium (state of balance)
• Equilibrium – generally pertains to a balance that exists when quantity demanded equals quantity
supplied.
o Equilibrium market price – is the price agreed by the seller to offer its good or service for sale
and for the buyer to pay for it
When market disequilibrium happens:
• SURPLUS – a condition in the market where the quantity supplied is more than the quantity demanded.
When there is a surplus, the tendency is for sellers to lower market prices in order for the goods and
services to be easily disposed from the market. This means that there is downward pressure to price
when there is a surplus in order to restore equilibrium in the market.

• SHORTAGE – a condition on the market in which quantity demanded is higher than quantity supplied at
a given price. In this particular situation, buyers are willing to buy more at the lowest price but sellers
will only be willing to sell less since at lower price they will only gain less profit. When there is shortage
of goods and services in the market, what happens is that there is an upward pressure on prices to
restore equilibrium in the market.

Prepared by: Angelo H. Barcelona

3rd Year Bachelor of Science in Accountancy
CHANGES IN DEMAND
• An increase in demand with supply remaining constant raises both equilibrium price and quantity.
Conversely, a decrease in demand with supply remaining unchanged lowers both equilibrium price and
quantity.

CHANGES IN SUPPLY
• An increase in supply results to a decrease in price but an increase in the quantity of goods sold in the
market. In contrast, if supply decreases while demand remains constant, the equilibrium price increases
but the equilibrium quantity declines.

Complex cases
Case #1: Supply increase, demand decrease
• Both changes decrease equilibrium price, so that the net result is a price decrease greater than that of
the resulting decrease from either change alone.

Case #2: Supply decrease, demand increase

• A decrease in supply and an increase in demand both increase price. If the decrease in supply is
greater than the increase in demand, the equilibrium quantity will decline. In contrast, if the increase in
demand is larger than the decrease in supply, the equilibrium quantity will increase.

Case #3: Supply increase, demand increase

• A supply increase lowers the equilibrium price, while a demand increase boosts it. If the increase in
supply is larger than the increase in demand, the equilibrium price will fall. However, if the opposite
holds, the equilibrium price will rise.

Case #4: Supply decrease, demand decrease

• If the decrease in supply is larger than the change in demand equilibrium price will rise. However, the
opposite is true if the decrease in demand is greater than the increase in supply.

Price control – the specification by the government of minimum and maximum prices for certain goods and
services, when the government considers it disadvantageous to the producer or consumer.

A.) Floor price – is the legal minimum price imposed by the government on certain goods and
services. A price at or above price floor is legal; a price below it is not.
o A price floor will be a price set above equilibrium – this creates a surplus.

B.) Price ceiling – is the legal maximum price imposed by the government. A price ceiling is usually
below the equilibrium price.
o A price ceiling causes a shortage as the price will be below equilibrium and demand will exceed
supply.

Market equilibrium equation:

a – b (P) = a + b (P)

Prepared by: Angelo H. Barcelona

3rd Year Bachelor of Science in Accountancy