Managerial Economics

Demand
 Learning Outcomes
1. Define demand and supply
2. Understand the difference between demand and
quantity demanded as well as supply and
quantity supplied
3. Identify situations of surplus and shortages, as
well as price ceilings, price flooring and
conditions of market equilibrium
4. Identify determinants affecting movements along
the demand curve and supply curve
5. Identify determinants affecting causing the shift
of the demand curve and supply curve
 Learning Outcomes
6. Illustrate using graphs the effect of each
determinant to the supply and demand
curve.
Demand
 Ordinarily, demand to you would
mean your desire to buy
something, but in economic sense
it is something more than a mere
desire.
 It is interpreted as your want
backed up by your purchasing
power.
Demand
 The basic source of demand is the
need of individuals.
 Individual need products and
services and they are also willing
to pay a price to acquire those
products and services.
Direct Demand
 It is the quantity of a good or service that
customers are willing and able to purchase
during a specified period under a given set
of economic conditions
 Demand for a commodity refers to the
quantity of the commodity which an
individual household is willing and able to
purchase per unit of time at a particular
price.
Direct Demand
 According to the law of demand, the lower
the price of a good, the larger the quantity
consumers wish to purchase, all other
thinks held constant ceteris paribus.
(Inverse relationship)

Price Demand
Direct Demand
 Ceteris Paribus means “all other
things being held constant”
 This is use in economics to rule
out the possibility of other factors
changing
Direct Demand
 The prime focus of managerial
economics is market demand.
 Market demand is the aggregate of
individual, or personal, demand.
Direct Demand
 Individual demand is determined by
the value associated with acquiring
and using any good or service and the
ability to acquire it.
 Desire without purchasing power may
lead to want, but not to demand.
Direct Demand
 Two models of individual demand
1. Consumer behavior (Utility)
2. Elasticity of demand
Direct Demand
 Theory of consumer behavior, it
relates to the direct demand for
personal consumption products.
 This model is appropriate for
analyzing individual demand for
goods and services that directly
satisfy consumer desires.
Direct Demand
 Elasticity of demand deals with
the reaction of the market
demand when certain changes in
price happen.
Direct Demand
 Demand for a commodity implies:
1. Desire to acquire it,
2. Willingness to pay for it
3. Ability to pay for it.
Derived Demand
 Derived demand is when products are
demanded not for direct consumption but
rather for their use in providing other
goods and services
 Examples:
• The outputs of engineers, production
workers, sales staff, managers, lawyers,
consultants, office business machines,
production facilities and equipment, natural
resources, and commercial airplanes
Derived Demand
 Key components in the determination of
derived demand are
• The marginal benefits
• And marginal costs
Associated with using a given input or
factor of production
Market Demand Function
 The market demand function for a product
is a statement of the relation between the
aggregate quantity demanded and all
factors that affect this quantity.
Determinants of Demand
 Demand function is a comprehensive
formulation which specifies the factors
that influence the demand for the product.
 Dx = f(Px, Py, Pz, B, A, E, T, U)
Where, Dx = Demand for item x
Px = Price item x
Py = Price of substitutes
Pz = Price complements
B = income of consumer
E = Price expectation of the user
A = Advertisement Expenditure
T = Taste or preference of user
U = All other factors
Impacts of Determinants
We’ll study the following effects of:
1. Price effect
2. Substitution effect
3. Complementary effect
4. Price expectation effect
5. Income effect
6. Promotional effect
Impacts of Determinants
 PRICE EFFECT
Impacts of Determinants
 SUBSTITUTION EFFECT
• If y is a substitute of x, then as price y
increases, demand for x also increases
Impacts of Determinants
 COMPLEMENTARY EFFECT
• If z is a complement of x, then as the price of z
falls, the demand for z goes up and thus the
demand for x also tends to rise.
Impacts of Determinants
 PRICE EXPECTATION EFFECT
• The relation may not be definite as the
psychology of the consumer comes into play.
Your expectations of a price increase might be
different from your friends.
Impacts of Determinants
 INCOME EFFECT
• As income rises, consumers buy more normal
goods (positive effect) and less of inferior
goods (negative effect).
• Normal goods are t-shirts, tea, sugar, noodles,
watches etc.
• Inferior good are low quality rice, jowar,
second hand goods etc.
Impacts of Determinants
 INCOME EFFECT
• As income rises, consumers buy more normal
goods (positive effect) and less of inferior
goods (negative effect).
• Normal goods are t-shirts, tea, sugar, noodles,
watches etc.
• Inferior good are low quality rice, jowar,
second hand goods etc.
Impacts of Determinants
 PROMOTIONAL EFFECT
• Advertisement increases the sale of a firm
up to a point.
Industry versus Firm Demand
• Industry demand for example is the increase
in demand for medical service industry during
this pandemic.
• Firm demand for example is the increase in
demand for San Miguel Corporation and its
subsidiaries products due to its positive
response to the covid19 pandemic.
Demand Curve Determination
• There are two effects caused by
determinants in the demand curve:
1. Movement along the curve
2. Shift of the demand curve
Demand Curve Determination
 Movement along the curve
• Change in quantity demanded is the movement
along a given demand curve reflecting a change in
price.
• A change in the quantity demanded refers to the
effect on sales of a change in price, holding
constant the effects of all other demand-
determining factors
Demand Curve Determination
Shift in the Demand Curve
• It is a switch from one demand curve to
another demand curve, reflects a change in
one or more nonprice variables in the product
demand function.
• Tastes and Preferences of the Consumers
• Income of the People
• Changes in Prices of the Related Goods
• Advertisement Expenditures
• Number of Consumers in the Market
• Consumer’s expectation with Regard to Future Prices
Demand Curve Determination
Demand Curve Determination
 Tastes and Preferences of
Consumers
• If there is an increase in
lovers of milktea, milktea
demand will shift to the right.
If otherwise, it will shift to the
left.
Demand Curve Determination
 Income of the people
• If there is an increase in
income, households can
purchase more, shifting to the
right. If otherwise, it will shift
to the left.
Demand Curve Determination
 Changes of Prices of Related Good
• For substitute effect, if the price of the
main good increases, the demand for the
substitute product will increase and vice
versa.
• For complementary effect, if the price of
main good increases, the demand for the
complementary product will decrease, and
vice versa.
Demand Curve Determination
 Changes of Prices of Related Good
• Meaning, there will be two effects, one is
the movement along the curve of the main
product due to changes in price, while the
other one is the shift of the
complementary or substitute product’s
curve.
Demand Curve Determination
 Advertisement Expenditure
• If more efforts are put by the company
towards advertising, more people will
become aware of the product and more
will purchase such, thereby shifting the
demand curve to the right and vice versa
Demand Curve Determination
 Consumer’s Expectation of Future Prices
• Panic buying happened at the start of the
pandemic knowing that prices of face
masks and alcohol will go up. Shifting the
demand curve to the right.
Demand Curve Determination
 Consumer’s Expectation of Future Prices
• Panic buying happened at the start of the
pandemic knowing that prices of face
masks and alcohol will go up. Shifting the
demand curve to the right.
CRITICAL THINKING EXERCISE
 If you are the manager of dressmaking
shop, what will you advice the owners
of the shop to do during these
pandemic?