Managerial Economics

Module 3: Demand and Supply

Analysis
Jan Patrick A. Bito-on, MBA
Learning Outcomes
1. Identify basis for demand
2. Derive the market demand function
3. Plot the demand curve
4. Identify the basis for supply
5. Derive the market supply function
6. Plot the supply curve
7. Plot and compute for the market equilibrium
Demand and Supply Analysis
1. A tool managers can use to visualize the “big
picture.”
2. A forecasting tool you can use to predict trends in
competitive markets.
Law of Demand
 Price and Quantity Demanded are inversely related
 As the price of a good increases and all other things
remain constant, the quantity demanded of the good
falls (vice versa).
 Market Demand / Demand Curve shows the total
quantity consumers are willing and able to buy at
certain prices.
The
Demand
Curve
Factors Affecting Demand
 Changes in price affect Quantity Demanded
 Changes in relevant factors shift the Demand Curve
entirely
Common Factors Affecting Demand
a) Consumer Income
b) Price of Related Goods
c) Price of Competitors
d) Advertising and Consumer Tastes
Changes in these
factors shift the
demand curve to
the left or right.
Changing the
level of Qd for
every level of P
Consumer Income
For Normal Goods, as consumer income increases,
market demand for that good increases.

For Inferior Goods, as consumer income increases,

market demand for that good decreases.
Price of Related Goods
Changes in the price of goods related to Good X,
shift the demand curve of Good X

Types of Related Goods:

 Substitutes
 Complements
Price of Related Goods
A good’s Substitutes can be used as an alternative to that
good. When the price of its Substitute increases, market
demand for the good increases.

A good’s Complements are used alongside/together with

the good. When the price of a Complement increases,
market demand for the good decreases.
Price of Competitors’ Goods
Considering Company A and B as competitors, when the
price of goods of Company B increases, the demand for
Company A goods increases.

Competitors goods can also be considered as substitute

goods as they follow the same principle.
Factors Affecting Demand
 There are many other factors that affect demand,
such as:
 Population growth
 Change in consumer expectations
 Seasonal changes, etc.
Example 1:
An economic consultant for X Corp. recently provided the firm’s marketing
manager with this estimate of the demand function for the firm’s product:

where represents the amount consumed of good X, Px is the price of good X,

is the price of good Y, M is income, and Ax represents the amount of
advertising spent on good X. Suppose good X sells for $200 per unit, good Y
sells for $15 per unit, the company utilizes 2,000 units of advertising, and
consumer income is $10,000. How much of good X do consumers
purchase? Are goods X and Y substitutes or complements? Is good X a
normal or an inferior good?
Law of Supply
 Price and Quantity Supplied are positively related
 Asthe market price of a good increases, quantity
supplied of that good increases.
 Market Supply / Supply Curve shows the total
quantity of goods that producers are willing and able
to produce and sell
Factors Affecting Supply
 Changes in price affect Quantity Supplied
 Changes in relevant factors shift the Supply Curve
entirely
Common Factors Affecting Supply
a) Cost of Production
b) Technology
c) Government Regulations and Taxes
d) Number of Competitors
Changes in these factors
shift the supply curve to
the left or right,
changing the level of Qs
for every level of P
Example 2:
Your research department estimates that the supply function for
television sets is given by

where Px is the price of TV sets, Pr represents the price of a

computer monitor, and Pw 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?
Case: Samsung and Hynix Semiconductor to Cut Chip Production
Sam Robbins, owner and CEO of PC Solutions, arrived at the office
and glanced at the front page of The Wall Street Journal waiting on
his desk. One of the articles contained statements from executives
of two of South Korea’s largest semiconductor manufacturers—
Samsung Electronic Company and Hynix Semiconductor—
indicating that they would suspend all their memory chip
production for one week. The article went on to say that another
large semiconductor manufacturer was likely to follow suit.
Collectively, these three companies produce about 30 percent of the
world’s basic semiconductor chips. PC Solutions is a small but
growing company that assembles PCs and sells them in the highly
competitive market for “clones.” PC Solutions experienced 100
percent growth last year and is in the process of interviewing recent
graduates to double its workforce. After reading the article, Sam
picked up the phone and called a few of his business contacts to
verify for himself the information contained in the Journal.
Satisfied that the information was correct, he called the director of
personnel, Jane Remak. What do you think Sam and Jane
discussed?
Market Equilibrium
 Ina competitive market, buyers and sellers are both
satisfied when price is at Equilibrium.
 Thisis the point at which the demand and supply
curves meet.
 A Surplus occurs when the market price is above
equilibrium, while a Shortage occurs when the
market price is below it.
Market
Equilibrium
Demand/Supply Factors and Equilibrium
 Changes in factors affect demand and supply also
affect the equilibrium price and quantity.
 Suppose that Wall Street reports that consumer
incomes are expected to rise by over the next year,
and the number of individuals over 25 years of age
will reach an all-time high by the end of the year.
How will this change the demand/supply of rental
cars?
Demand/Supply Factors and Equilibrium
 Wecan also predict how changes in one or more
supply shifters will affect the equilibrium price and
quantity of goods or services.
 For instance, consider a bill before Congress that
would require all employers, small and large alike, to
provide health care to their workers. How would this
bill affect the prices charged for goods at retailing
outlets?
Simultaneous Changes in Supply and Demand
 Determine the effect on EQ and EP with the ff:
changes:
a) Increase in Supply, Increase in Demand
b) Increase in Supply, Decrease in Demand
c) Decrease in Supply, Increase in Demand
d) Decrease in Supply, Decrease in Demand