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BSA CORE 1
MANAGERIAL ECONOMICS

MODULE 4 (Wednesday)

Modeling Consumer Demand

 Consumer demand theory postulates that quantity demanded of a commodity is
a function (or depends on) of price of a commodity (Px), consumer’s income (Y),
price of related commodity (Pxy), and tastes and preferences (T&P)

 Function form = QDx = f(Px, Y, Pxy, T&P)

o Where:
 QDx = demand for commodity X
 f = function of or depends on
 Px = price of commidty X
 Y = consumer’s income
 Pxy = price of related commodity
 T&P = tastes and preferences

Example: Demand for sweet potatoes in the US for 1949 to 1972

QDs = 7609 – 1606Ps + 59N + 947Y + 479Pw – 271t
Where:
QDs = demand for sweet potatoes (kg)
Ps = price of sweet potato ($/kg)
N = population
Y = disposable income ($)
Pw = price of white potato ($/kg)
t = time period (t1 is for 1949; t2 = 1950 up to t24 for 1972)
Suppose N = 150.73, Y = 1.76, Pw = 2.94 and t = 1, demand for sweet potatoes (QDs)
in the US in 1949
QDs = 7609 – 1606Ps + 59N + 947Y + 479Pw – 271t
QDs = 7609 – 1606Ps + 59(150.73) + 947(1.76) + 479(2.94) – 271(1)
QDs = 7609 – 1606Ps + 8893.07 + 1666.72 + 1408.26 – 271

Source: Principles of Managerial Economics. The Open University of Hongkong. The Saylor Foundation.
http://www.saylor.org/site/textbooks/Principles%20of%20Managerial%20Economics.pdf
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QDs = 19306.05 – 1606Ps = demand function of sweet potato

Example
at Ps = $2.00; QDs = 19306.05 – 1606Ps
QDs = 19306.05 – 1606(2)
QDs = 16,094 kg
at Ps = $3.00; QDs = QDs = 19306.05 – 1606Ps
QDs = 19306.05 – 1606(3)
QDs = 14,488 kg
at Ps = $4.00; Ds = QDs = 19306.05 – 1606Ps
QDs = 19306.05 – 1606(4)
QDs = 12,882 kg
at Ps = $5.00; QDs = QDs = 19306.05 – 1606Ps
QDs = 19306.05 – 1606(5)
QDs = 11,276 kg
at Ps = $6.00; QDs = QDs = 19306.05 – 1606Ps
QDs = 19306.05 – 1606(5)
QDs = 9,670 kg
P($)

QDs

Q(kg)

Source: Principles of Managerial Economics. The Open University of Hongkong. The Saylor Foundation.
http://www.saylor.org/site/textbooks/Principles%20of%20Managerial%20Economics.pdf
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ASSIGNMENT
Suppose Mr. Smith, the manager of the marketing division of Chevrolet at General Motors
estimated the following demand function of Chevrolet automobiles:
Qc = 100,000 – 100Pc + 2000N + 50Y + 30PF – 1000PG + 3A + 40,000 PI
Where:
Qc = quantity demand for Chevrolet automobiles
Pc = price of Chevrolet ($)
N = population
Y = disposable income ($)
PF = price of Ford ($)
PG = price of gasoline ($/gal)
A = ads expenditures
PI = credit incentives
a) Find the value of Qc if N = 200; Y = $10,000; PF = $8000; PG = 80; A = $200,000; PI = 1
b) Determine the demand schedule for Chevrolet Pc = $7000, 8000, 9000, 10,000 and
11,000.
c) Plot the demand curve of Chevrolet.
d) Show your solutions.

Source: Principles of Managerial Economics. The Open University of Hongkong. The Saylor Foundation.
http://www.saylor.org/site/textbooks/Principles%20of%20Managerial%20Economics.pdf