AE11 – Managerial Economics

Module 2: Market Forces: Demand, Supply,

and Market Equilibrium

Ian Dave B. Custodio

Instructor
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Lesson 3: Demand and Supply

Learning objectives:
a. Define demand and law of demand
b. Define supply and law of supply
c. Distinguish the various determinants of demand and supply
d. Differentiate change in demand and change in quantity demanded
e. Differentiate change in supply and change in quantity supplied
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Outline
3.1 Demand and the Law of Demand
3.2 Determinants of Demand
3.3 Change in Demand and Change in Quantity Demanded
3.4 General, Direct, and Inverse Demand Function
3.5 Exemptions to the Law of Demand
3.6 Supply and the Law of Supply
3.7 Determinants of Supply
3.8 Change in Supply and Change in Quantity Supplied
3.9 Supply Function
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3.1 Demand and the

Law of Demand
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Demand
- is an economic principle that describes a consumer's desire and willingness to pay a
price for a specific good or service.
- is the amount of a product that people are willing and able to purchase at each
possible price during a given period of time.
- willingness and ability of the consumer to purchase goods and services

Quantity Demanded
-is the amount of a product that people are willing and able to purchase at
one, specific price.
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Law of Demand
- there is an inverse relationship between price and quantity demanded, ceteris
paribus.

- As price falls, quantity demanded rises, ceteris paribus.

- As price rises, quantity demanded falls, ceteris paribus.

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Demand Schedule
- a table of the quantity demanded of a good at different price levels. Given the price
level, it is easy to determine the expected quantity demanded.

Quantity Demanded
Price/kg (Php)
(𝑸𝒅𝒑𝐨𝐫𝒌 )
0 286
200 240
250 220
280 200
300 0
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Demand Curve
- a graph showing how the demand for a commodity or service varies with changes in
its price, ceteris paribus.
300

D1, Demand curve for pork

Php per kg
280

250

200

0 200 220 240 286

Qd, kg of pork
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3.2 Determinants of Demand

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Determinants of Demand
1. Price of the good or service (P)
2. Consumer’s income (I)
3. Price of related goods or services (Pr)
4. Taste pattern/preference of the consumers (T)
5. Price expectations (Pe)
6. Number of consumers or population (N)
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3.3 Change in Demand and

Change in Quantity Demanded
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Change in Demand vs. Change in Quantity Demanded

Change in demand
- occurs when one of the other variables or determinants of demand
changes, other than price
- demand curve shifts rightward or leftward

Change in quantity demanded

- occurs when price changes
- movement along the demand curve
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A shift in the demand curve

Price (per kg) is a change in demand

A C
Php175

Php150 B

A movement
along the D2
demand curve
is a change in D1
quantity
demanded 0 50 000 60 000 70 000 Quantity (kg/month)
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Taste and Preference

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Price of Related Goods

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Types of Goods
Substitute Goods
-a good's demand is increased when the price of another (substitute) good is
increased.

Complementary Goods
-a good's demand is decreased when there’s an increase in the price of another
(complementary) good.
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Consumer’s Income
Normal Goods
-demand increases as income rises and decreases as income falls.

Inferior Goods
-demand decreases as income rises and increases as income falls.
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Normal Good
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Inferior Good
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Number of Consumers
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3.4 General, Direct, and

Inverse Demand Function
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General Demand Function

𝑸𝒅=𝒇(𝑷, 𝑰, 𝑷𝒓,𝑻,𝑷𝒆, 𝑵)
𝑸𝒅 = quantity demanded of the good or services
𝑷 = price of the good or service
𝑰 = consumer’s income
𝑷𝒓 = price of related goods or services
𝑻 = taste pattern of the consumers
𝑷𝒆 = price expectations
𝑵 = number of consumers or population
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𝑸𝒅 = 𝒂 + 𝒃𝑷 + 𝒄𝑰 + 𝒅𝑷𝒓 + 𝒆𝑻 + 𝒇𝑷𝒆 + 𝒈𝑵
a is the intercept or autonomous demand
- the quantity being demanded when price and other determinants are equals zero

b, c, d, e, f and g are the slope parameters

- measure effect on Qd of changing one of the variables while holding the others
constant
Slope =  Qd / X where X is the parameter
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Sign of a parameter shows how variable is related to Qd

- Positive sign (+) indicates direct relationship
- Negative sign (-) indicates inverse relationship
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Variable relationships
Sign of Slope
Variable Relation to Qd
Parameter
𝑷 Inverse -
𝑰 Direct for Normal Goods +
(lechon, lasagna) -
Inverse for Inferior Goods
(dried fish)
𝑷𝒓 Direct for Substitute +
Inverse for Complements -
𝑻 Direct +
𝑷𝒆 Direct +
𝑵 Direct +
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Example:
𝑸𝒅𝑨 = 𝟔𝟎𝟎−𝟒𝑷−𝟎.𝟎𝟑𝑰−𝟏𝟐𝑷𝒓+𝟏𝟓𝑻+𝟔𝑷𝒆+𝟏.𝟓𝑵
1. Interpret the intercept of the demand function.
2. What is the value of the slope parameter of the Price for good A. Does it have the
correct sign? Why?
3. Interpret the slope parameter of income. Is it a normal good or an inferior good?
Why?
4. Interpret the slope parameter of price of related goods. Is it a substitute good or a
complementary good? Why?
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Direct Demand Function

The direct demand function, or simply demand, shows how quantity demanded, 𝑄𝑑 is
related to product price P, when all other variables are held constant.

𝑸𝒅 = 𝒇(𝑷)
𝑸𝒅 = 𝒂 − 𝒃𝑷
Law of Demand
- Qd increases when P falls & Qd decreases when P rises, all else constant
- The slope, Change in Qd / Change in P = (-b) must be negative
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Inverse Demand Function

- express price as a function of quantity demanded:

From Direct Demand: 𝑸𝒅 = 𝒇 𝑷

𝑸𝒅 = 𝒂 − 𝒃𝑷

To: 𝑷 = 𝒇(𝑸𝒅 )

𝒂 − 𝑸𝒅
𝑷=
𝒃
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3.5 Exemptions to the

Law of Demand
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Any exceptional case against Law of Demand

Giffen goods (of Robert Giffen)
- are non-luxury items which generate higher demand when prices rise (e.g., essential
goods such as rice, bread, etc.)

Luxury Brand goods (Veblen goods, of Thorstein Veblen)

- superior and luxury goods
- Example: Armani, Chanel, Pierre Cardin, Christian Dior, Michael Kors, Gucci
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Problem Exercise
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Quantity 1. Graph the demand schedule.

Price/kg
Demanded 2. How much is the autonomous demand
(Php)
(Qdmango)
0 500 (intercept)?
3. What is the slope of the demand curve?
10 400
4. Find the linear demand equation of the
20 300 demand schedule.

30 200 5. What is the demand at price 50?

6. What is the inverse demand equation?
40 100
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1. Graph the demand schedule. Y-axis X-axis

X,Y
(100,40)

X,Y
(200,30)

X,Y
(300,20)

X,Y
(400,10)

X,Y
(500,0)
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2. How much is the autonomous demand (intercept)?

Linear or Direct Demand Function

𝑸𝒅=𝒇(𝑷)
𝑸𝒅=𝒂−𝒃𝑷
𝒂 = intercept or autonomous demand or the
amount of 𝑸𝒅 when the price is zero.
𝑸𝒅=500−𝒃𝑷
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3. What is the slope of the demand curve?

Slope =  Qd / X where X is the parameter

The Price is the parameter that we are analyzing

since it is the only given parameter.

Slope =  Qd / P
𝟒𝟎𝟎 −𝟓𝟎𝟎 −𝟏𝟎𝟎
Slope = 𝟏𝟎 − 𝟎
= 𝟏𝟎
= -10
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4. Find the linear demand equation of the demand schedule.

Linear or Direct Demand Function
𝑸𝒅 = 𝒇(𝑷)
𝑸𝒅 = 𝒂−𝒃𝑷
𝒂 = intercept or autonomous demand or the amount of 𝑸𝒅 when the
price is zero.
𝒃 = slope of the parameter (Price)
𝒂 = 500 𝒃 = 10
𝑸𝒅 = 500−10𝑷

5. What is the demand at price 50?

𝑸𝒅 = 500−10𝑷
𝑸𝒅 = 500−10(50)
𝑸𝒅 = 500− 500 = 0
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6. What is the inverse demand equation?

Inverse Demand Function
Express price as a function of quantity demanded:
𝑷=𝒇(𝑸𝒅)

𝑷=(𝒂−𝑸𝒅)/𝒃

𝑷=(𝟓𝟎𝟎−𝑸𝒅)/𝟏𝟎
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Try this!
Quantity 1. Graph the demand schedule.
Price/kg (Php) Demanded
(Qdbanana) 2. What is the slope of the demand curve?
2 80
3. How much is the autonomous demand
4 60 (intercept)?
4. Find the linear demand equation of the
6 40
demand schedule.
8 20
5. What is the demand at price 20?
10 0 6. What is the inverse demand equation?
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3.6 Supply and the

Law of Supply
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Supply
- the relationship that exists between the price of a good and the quantity supplied in
a given time period, ceteris paribus.
- defined as quantities of a good or service that people (firms, consumers) are willing
and able to sell at various prices within some given time period, cet. par.
- the quantity of a good or service available in a market at a specific time

Quantity Supplied
-is the amount of a product that producers are willing and able to supply at
one, specific price.
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Law of Supply
- there is a direct (positive) relationship exists between the price of a good and the
quantity supplied in a given time period, ceteris paribus.

- As price rises, quantity supplied rises, ceteris paribus.

- As price decreases, quantity supplied falls, ceteris paribus.

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Supply Schedule
- a table of the quantity supplied of a good at different price levels. Given the price
level, it is easy to determine the expected quantity supplied.

Quantity Supplied
Price/kg (Php)
(𝑸𝒔𝒑𝒌 )
0 0
200 200
250 220
280 240
300 286
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Supply Curve
- a graph showing how the supply for a commodity or service varies with changes in
its price, ceteris paribus.
300
Php per kg

S1, Supply curve for pork

280

250

200

0 200 220 240 286

Q, Million kg of pork per year

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3.7 Determinants of Supply

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Determinants of Supply
1. Price of good or service (P)
2. Input prices (Pi)
3. Prices of goods related in production (Pr)
4. Technological advances (T)
5. Expected future price of product (Pe)
6. Number of firms producing product (Nf)
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3.8 Change in Supply and

Change in Quantity Supplied
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Change in Supply vs. Change in Quantity Supplied

Change in supply
- occurs when one of the other variables, or determinants of supply,
changes
- supply curve shifts rightward or leftward

Change in quantity supplied

- occurs when price changes
- movement along the supply curve
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Change in Supply vs. Change in Quantity Supplied

Price (dollars A shift in the supply curve is S1
per printer) a change in supply
S2
A movement $175 C
B
along the
supply curve $150 A
is a change
in quantity
supplied

0 50 000 60 000 70 000 Quantity (printers/month)

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Change in Supply vs. Change in Quantity Supplied

Change in supply Change in quantity supplied

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Price of Resource / Inputs

As the price of a resource rises, profitability declines, leading to a reduction in the
supply at any price.
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Technological Improvements
Technological improvements (and any changes that raise the productivity of labor)
lower production costs and increase profitability.
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Price Expectations
An increase in the expected future price of a good or service results in a reduction in
current supply.
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Increase in Number of Sellers

An increase in the number of seller/producer of goods or services results in an
increase in supply.
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3.9 Supply Function

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General Supply Function

𝑸𝑠=𝒇(𝑷, 𝑃𝑖, 𝑷𝒓,𝑻,𝑷𝒆, 𝑵𝑓)
𝑸𝑠 = quantity supplied of the good or services
𝑷 = price of the good or service
𝑃𝑖 = input prices
𝑷𝒓 = price of related goods in production
𝑻 = Technological advances
𝑷𝒆 = Expected future price of product
𝑵f = Number of firms producing product
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𝑸𝒔 = 𝒉 + 𝒊𝑷 + 𝒋𝑷𝒊 + 𝒌𝑷𝒓 + 𝒍𝑻 + 𝒎𝑷𝒆 + 𝒏𝑵𝒇

h is the intercept or autonomous supply
- the quantity being supplied when price and other determinants is equals zero.

i, j, k, l, m and n are the slope parameters

- measure effect on Qs of changing one of the variables while holding the others
constant
Slope =  Qs / X where X is the parameter
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Sign of a parameter shows how variable is related to Qs

- Positive sign (+) indicates direct relationship
- Negative sign (-) indicates inverse relationship
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Variable relationships

Sign of Slope
Variable Relation to Qs
Parameter
𝑷 Direct +
𝑷𝒊 Inverse -
𝑷𝒓 Inverse for Substitutes -
(wheat and corn)
Direct for Complements +
(pen and ink)
𝑻 Direct +
𝑷𝒆 Inverse -
𝑵f Direct +
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Example:
A research company estimates that the supply function for television sets is given by:

𝑸𝒔 = 𝟐𝟎𝟎𝟎 + 𝟑𝑷 − 𝟒𝑷𝒓 − 𝑷𝒊
where P is the price of TV sets, Pr represents the price of a computer monitor, and Pi is
the price of an input used to make television sets.

Suppose TVs are sold for $400 per unit, computer monitors are sold for $100 per unit,
and the price of an input is $2,000. How many television sets are produced?
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𝑸𝒔 = 𝟐𝟎𝟎𝟎 + 𝟑𝑷 − 𝟒𝑷𝒓 − 𝑷𝒊
𝑸𝒔 = 𝟐𝟎𝟎𝟎 + 𝟏𝟐𝟎𝟎 − 𝟒𝟎𝟎 − 𝟐𝟎𝟎𝟎
𝑸𝒔 = 𝟐𝟎𝟎𝟎 + 𝟑(𝟒𝟎𝟎) − 𝟒(𝟏𝟎𝟎) − 𝟐𝟎𝟎𝟎
𝑸𝒔 = 𝟖𝟎𝟎
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References:
Baye, M. and Prince, J. (2022). Managerial Economics and Business Strategy 10th Edition. McGraw Hill
Greenlaw, S. A., Shapiro D., (2017). Principles of Economics, 2nd Edition. OpenStax – Rice University
Principles of Economics (2016). University of Minnesota Libraries Publishing Edition
Thomas, C. and Maurice, C. (2016). Managerial Economics: Foundations of Business Analysis and Strategy 12 th
Edition. McGraw-Hill
 THANK YOU!

Ian Dave B. Custodio Western Leyte College

Part-time Instructor College of Accountancy and Business
Western Leyte College A. Bonifacio St., Ormoc City, Leyte
E-mail: [email protected] E-mail: [email protected]
Website: iandavecustodio.github.io Website: wlcormoc.edu.ph
Telephone (Office): (053) 563 7064 local 1121 Telephone: (053) 561 5310 / 255-8549