SOUTHERN BAPTIST COLLEGE

Mlang North Cotabato

College of Business Education Subject
(MANAGERIAL ECONOMICS)
MEMBERS:

ELLA CAMAN

ROWELLA GALLARDO

KRYSTELLE GARGARITA

CHARISE ARNAIZ

JESSA RENCE BALASA

KWEN CANCEL

KATE GALIDO
Demand
 refers to the quality of a good or service
that consumers are willing and able to
purchase at a given price and time.
Several factors influence the demand for
a product, known as determinants of
deman.
DETERMINANTS OF DEMAND
When price changes, quantity demanded will change. That is a
movement along the same demand curve. When factors other
than price changes, demand curve will shift. These are the
determinants of the demand curve.
1. Income. A rise in a person's income will lead to an increase in
demand (shift demand curve to the right), a fall will lead to a
decrease in demand for normal goods. Goods whose demand
varies inversely with income are called inferior goods .
2. Consumer Preferences: Favorable change leads to an
increase in demand, unfavorable change lead to a decrease.
3. Number of Buyers: the more buyers lead to an increase in
demand, fewer buyers lead to decrease.
4. Price of related goods:
a. Substitute goods (those that can be used to replace
each other): price of substitute and demand for the other
good are directly related.
b. Complement goods (those that can be used
together): price of complement and demand for the other
good are inversely related.
5. Expectation of future
a. Future price: consumers' current demand will increase
if they expect higher future prices, their demand will
decrease if they expect lower future prices.
b. Future income: consumers current demand will
increase if they expect higher future incomes their
demand will decrease if they expect lower future income.
DEMAND FUNCTION

Demand function is a
comprehensive formulation
which specifies the factors
that influence the demand for
the product.
For example;
Dx=D (Px, Py, Pz, B,W,A,E,T,U)
Here Dx,stands for demand for item x (say, a car)
Px, its own price (of the car)
Py, the price of its substitutes (other brands/models)
Pz, the price of its complements (like petrol)
B, the income (budget) of the purchaser (user/consumer)
W, the wealth of the purchaser
A, the advertisement for the product (car)
E, the price expectation of the user
T, taste or preferences of user
U. all other factors.
Briefly we can state the
impact of these
determinants, as we
observe
i) Demand ininversely
for X is normal related to its own price. As
circumstances:
price rises, the demand tends to fall and vice versa.
ii) The demand for X is also influenced by its rela
iii) The demand for X is also sensitive to price
expectation of the consumer; but here, much would
depend on the psychology of the consumer, there may
not be any definite relation.ted price- of goods related
to X.
iv) The income (budget position) of the consumer is
another important influence on demand. As income (real
purchasing capacity) goes up, people buy more of 'normal
goods and less of 'inferior goods.
v) Past income or accumulated savings out of that income
and expected future income, its discounted value along
with the present income-permanent and transitory-all
together determine the nominal stock of wealth of a
person.
vi) Advertisement also affects demand. It is observed that
the sales revenue of a firm increases in response to
advertisement up to a point.
vii) Tastes, preferences, and habits of individuals have a
decisive influence on their pattern of demand.
Homogeneity
 This is a simple idea with a
complicated title. If you double
the prices and the income
available for the purchase of X
and Y, then quantity demanded
won't change.
Substitution and Income Effects

 The Substitution Effect is the effect due only to the

relative price change, controlling for the change in
real income.
For example, when the price goes up the consumer is
not able to buy as many bundles that she could
purchase before. This means that in real terms she
has become worse off. The effect is measured as the
difference between the "intermediate" consumption"
and the final consumption which I'll show in class.
Unlike the Substitution Effect, the
Income Effect can be both positive and
negative depending on whether the
product is a normal or inferior good. By
construction, the Substitution Effect plus
the Income Effect equals the total effect
of the price change.
Consumer Surplus
 Consumer surplus is all about measurement.
We want to measure the changes under the
demand curve from a change in price.
Geometrically, we can measure changes in
the area under the demand curve, and
because the demand curve measures utility
in some sense, then we can say utility has
increased or decreased.
Exceptions to the Law of
Demand
 Generally, the amount
demanded of a good increases
with a decrease in price of the
good and vice versa. In some
cases, however, this may not be
true.
A Giffen good is an inferior good where
demand increases as its price rises, due to the
income effect overpowering the substitution
effect. For example, during the Irish Potato
Famine, as potato prices rose, people could
afford fewer luxury foods and relied more on
potatoes, increasing their demand. This
doesn’t violate the law of demand but reflects
a shift in the demand curve due to changes in
the income-demand relationship.
A Veblen good is a luxury item
where higher prices increase its
appeal as a status symbol, leading to
higher demand. For items like
diamonds or luxury cars, a price
increase can make them more
desirable, so demand rises with price.
When consumers expect a price
to rise, they may buy more now,
even at a higher price, and if they
expect a price drop, they may delay
purchases. This behavior leads to a
backward-sloping demand curve,
known as an exceptional demand
curve.
EXCEPTION TO THE LAW OF
DEMAND
The price keeps fluctuating until an equilibrium is created. However, there are
some exceptions to the law of demand. These include:
 1. PRESTIGE GOODS - There are certain commodities like diamond,sports
car,etc... which are purchase as a mark of distinction is society. If the price of
these goods rise, the demand for them may increase instead of falling.
 2.PRICE EXPECTATION -If people expect a further rise in the price of a
particular commodity, they may buy more inspite of rise in price: The
violation of the law in this case is only temporary.
 3.IGNORANCE OF THE CONSUMERS -If, the consumer is ignorant about the
rise in price of goods, he may buy more at a higher price.
 4. GIFFEN GOODS -If the price of basic goods on which the poor spend a
large part of their income declines, the poor increase the demand for
superior goods, hence when the price of Giffen good falls, it's demand also
falls. There is a positive price effect in the case of Giffen goods
NATURE OF DEMAND DEMAND -The
amount of good or service that a
consumer is willing and able to buy at
various possible prices during a given
period of time.
 QUANTITY DEMAND - Amount
consumers is willing and able to buy
at each particular price during the
period.
TYPES OF DEMAND The different
type of demand are separated into
two categories:
 PRICE DEMAND - Shows a correlation
between the price of goods and the quantity
desired.
 INCOME DEMAND - reflects on the
consumers available income against the
demand of goods.
COMPETITIVE DEMAND
 Substitute goods are commodities that can replace each
other in use, meaning they serve the same purpose.
Because they compete for consumer spending, these
goods are in competitive demand. Examples include Milo
and Bournvita, and butter and margarine. A change in
the price of one affects the demand for the other. For
example, if the price of butter rises, people may buy
more margarine instead, increasing margarine's price if
its supply remains the same. Conversely, if butter’s price
falls, demand for margarine may decrease, potentially
lowering its price.
JOINT OR COMPLEMENTARY

DEMAND
Goods are in joint demand or complementary demand
when they need to be consumed together to achieve
satisfaction. Examples include cars and fuel, or CD players
and CDs. There are perfect complements, like cars and
fuel, where one is almost always needed with the other.
Imperfect complements are goods that are often
consumed together but can be used with substitutes if
needed. In complementary demand, a price change in one
good affects the demand for the other. For instance, if CD
players become more expensive, fewer people might buy
CDs, reducing CD demand if all else remains equal.
DERIVED DEMAND
 A good has derived demand when its demand
comes from the demand for a final product. For
instance, wood’s demand derives from the demand
for furniture, not for wood itself. Similarly, factors of
production like land, labor, and capital have derived
demand because they are used to produce goods. If
demand for a product rises, the demand for these
production factors also increases, which may raise
their prices, assuming other factors remain
constant.
COMPOSITE DEMAND
 Composite demand occurs when a commodity
is used for multiple purposes. For example,
wood is used to make tables, chairs, beds,
windows, and doors. A change in demand for
one of these items affects the others. If there is
a higher demand for tables, wood prices
increase. This higher wood price then raises
production costs for all other wood-based
products, like chairs and doors.
DEFINITION OF SUPPLY
 Supply is an economic concept that refers to the total
quantity of a specific good or service available to
consumers. Supply can be shown for a single price or across
a range of prices on a graph. This is linked to demand, as
producers typically increase supply if the price of a good or
service rises, aiming to maximize profits. Supply is the
amount of a product that a producer is willing and able to
supply at a specific price over a given time period. The basic
law of supply states that when the price of a product rises,
producers are more inclined to increase their supply. This
relationship is shown in a supply curve, which illustrates the
connection between price and the quantity a firm is willing
to sell.
 (Note: The terms "firm,"
"business," "producer,"
and "seller" have the
same meaning here.)
A supply curve shows the relationship
between the price of a good and the quantity
supplied, assuming ceteris paribus (all other
factors remain constant). If only the price
changes, we move along the curve; a price
rise expands supply, while a price drop
contracts it. Businesses adjust their production
based on these price signals.
Determinants of Supply (Factors Affecting
Supply) While price directly influences
supply, other factors can shift the entire
supply curve. Here are the main
determinants:
1.NUMBER OF SELLERS - More sellers in a market increase the quantity
supplied, shifting the supply curve rightward. Fewer sellers decrease
supply, shifting it leftward. For instance, new firms entering a market will
boost supply.
2.PRICES OF RESOURCES - Higher resource prices raise production costs,
lowering profits and supply (shifting the curve leftward). Lower resource
costs increase profits and supply (shifting the curve rightward).
3. TAXES AND SUBSIDIES -Higher taxes reduce profits, decreasing supply.
Lower taxes increase supply. Subsidies help reduce production costs,
increasing profits and supply, while reducing subsidies decreases supply.
These factors, when altered, shift the entire supply curve rather than
simply moving along it.
Technology
Improvement in technology
enables more efficient production
of goods and services. Thus
reducing the production costs and
increasing the profits.

Examples:
-machines
-computers
Suppliers’
Expectations
Change in expectations of
suppliers about future price of
a product or service may
affect their current supply.
Prices of Related
Products
Firms which are able to
manufacture related products will
the shift their production to a
product the price of which
increases substantially related to
other related product(s) thus
Prices of Joint Products
When two or more goods are
produced in a joint process and the
price of any of the product increases,
the supply of all the joint products will
be increased and vice versa.
DEFINITION OF 'LAW OF
SUPPLY
Law of supply states that
other factors remaining
constant, price and quantity
supplied of a good are directly
related to each other.
LAW OF SUPPLY
The law of supply can
be stated as follows:
"Ceteris paribus, the
quantity of a good
supplied will rise(expand)
with every rise in its price
and the quantity of a good
supplied will fall (contract)
with every fall in its price."
Expansion or contraction and
increase or decrease:
Changes in the quantity
supplied as a result of
movement along the same
supply curve has been described
by Marshall as rise and fall or
expansion and contraction of
quantity supplied of the
commodity. But if the supply
curve shifts left or right of the
original curve, the changes in
supply of the good are known as
ELASTICITY OF SUPPLY
 measures the responsiveness of the
quantity supplied of a good or
service to a change in its price.
Inelastic Supply:
 When the coefficient is less than one, the
supply is inelastic. This means that a
change in price leads to a proportionally
smaller change in quantity supplied.
Exp. of inelastic goods include essential
commodities like food, fuel, and medical
supplies.
Elastic Supply:
 When the coefficient is greater than one, the
supply is elastic. This indicates that a
change in price results in a proportionally
larger change in quantity supplied.
Examples of elastic goods include luxury
items, manufactured goods, and agricultural
products.
Unitary Elastic Supply:
 When the coefficient is exactly one, the supply is
unitary elastic. This means that a change in price
leads to an equal proportional change in quantity
supplied.

Fixed Supply:
 An elasticity of zero implies a fixed supply. These
goods often have no labor component or are not
produced, limiting their short-term expansion
possibilities.
DETERMINANTS
Determinants of Price Elasticity of Supply (PES)

 Availability of Raw Materials: Limited

Availability:If the supply of raw materials is limited
or difficult to increase, the PES will be inelastic.
For example, the supply of gold is relatively
inelastic because the amount of gold that can be
mined is constrained by geological factors.
 Abundant Availability:If raw materials are
abundant and easy to acquire, the PES will be
more elastic.
Length and Complexity of
Production:
 Simple Production: Products with simple production
processes and unskilled labor tend to have more elastic
PES. For example, the supply of textiles is relatively
elastic because production is straightforward.

 Complex Production: Products that require specialized

equipment, skilled labor, and extensive research and
development (R&D) typically have more inelastic PES. For
example, the supply of specific types of motor vehicles is
relatively inelastic due to the complexity of the
manufacturing process.
 Time to Respond: Short Run: In the short run, producers may
have limited options to increase production, leading to a more
inelastic PES. For example, a farmer cannot immediately switch
to growing a different crop if the price of that crop increases.
 Long Run: In the long run, producers have more time to adjust
their production capacity, leading to a more elastic PES. For
example, a farmer can invest in new equipment or land to
increase production.
 Excess Capacity: Unused Capacity: If a producer has excess
capacity, they can quickly increase production in response to
price changes, making the PES more elastic.
 Full Capacity:If a producer is operating at full capacity, they
may have limited ability to increase production, making the PES
more inelastic.
 Inventories: Existing Inventories: If a producer
has a stock of finished goods, they can quickly
increase supply to the market, making the PES
more elastic.
 No Inventories: If a producer does not have
existing inventories, they will need to ramp up
production to meet increased demand,
potentially making the PES more inelastic.
GRAPHICAL REPRESENTATION

 1. Elasticity and slope aren't directly related.

 2. Linear supply curves can have different
elasticities.
 3.Curves passing through the origin are unit
elastic.
 4.Curves cutting the y-axis are elastic.
 5.Curves cutting the x-axis are inelastic.
TYPES OF SUPPLY ELASTICITY
 1. Perfectly Elastic Supply (S,S, curve): Perfectly or infinitely
elastic supply signifies that a fall in price will completely cut off
supply and a rise in price will cause an infinite expansion of supply.
 2. Perfectly Inelastic Supply (S₂S₂): Perfectly inelastic supply
means that changes in price will not bring about any change in
supply.
 3. Unitary Elastic Supply (S3S3): When elasticity of supply is
unitary, a change in price will cause a proportionate change in
quantity supplied. Any straight-line supply curve passing through the
origin has a unitary elasticity throughout its length regardless of its
slope. Insert graph here----
 4. Relatively Elastic Supply (SS): When the
proportionate change in quantity is greater than
the proportionate change in price the supply is
relatively elastic. Any straight-line supply curve
that intersects the vertical axis has an elasticity
greater than one throughout its length.
 5. Relatively Inelastic Supply (SSS): When
the proportionate change in quantity is less
than the proportionate change in price, the
supply is relatively inelastic. Any straight line
that cuts the horizontal axis has an elasticity
less than one.
METHODS FOR MEASURING
PRICE ELASTICITY OF SUPPLY
 Price elasticity of supply can be measured by the
following methods: Percentage Method: Like
elasticity of demand, the most common method for
measuring price elasticity of supply (Es) is
percentage method. This method is also known as
'Proportionate Method'. According to this method,
elasticity is measured as the ratio of percentage
change in the quantity supplied to percentage
change in the price.
Price elasticity of supply (Es) =
Percentage Change in quantity
supplied / Percentage change in
Price
1. Percentage change in Quantity supplied=
Change in Quantity Supplied ("Q) / Initial
Quantity Supplied (Q) x 100
 2. Change in Quantity ("Q) = New Quantity
(Q₁) - Initial Quantity (Q)
 3. Percentage change in Price = Change in
Price ("P) / Initial Quantity (P) x 100
 4. Change in Price ("P) = New Price (P₁) - Initial Price (P) Proportionate Method: The percentage
method can also be converted into the proportionate method. Putting the values of 1, 2, 3 and 4 in
the formula of percentage method, we get:
 Es= "Q/Q x 100/"P/P x 100
 Es= "Q/Q/"P/P
 Elasticity of Supply (Proportionate Method) = "Q/"P x P/Q
Where:
 Q = Initial Quantity Supplied
 "Q = Change in Quantity Supplied P =Initial Price
 "P = Change in Price
Example: Suppose, at the price of Rs. 10 per unit, a firm supplies 50 units of a commodity. When the
price rises to Rs. 12 per unit, the firm increases the supply to 70 units.
The price elasticity of supply will be calculated as:
Price elasticity of supply (E) = Percentage Change in quantity supplied/ Percentage change in Price
Now, Percentage change in Quantity supplied = Change in Quantity Supplied ("Q)/ Initial Quantity
Supplied (Q) × 100 = (70 - 50) / 50 * 100 = 40%
Percentage change in Price = Change in Price ("P)/ Initial Price (P) x 100 =(12-10)/10 × 100 = 20% Es
= (40%) / (20)% = 2
 Price Elasticity of Supply is Positive: So far,
we have seen that the concept of elasticity of
supply is similar to the concept of elasticity of
demand However, there is one difference.
Elasticity of supply will always have a positive
sign as against the negative sign of elasticity of
demand. It happens because of the direct
relationship between price and quantity
supplied.
Geometric Method
According to geometric method,
elasticity is measured at a given
point on the supply curve. This
method is also known as 'Arc Method'
or 'Point Method'.
Cases of Geometric Method

1. Highly Elasctic Supply

2. Unitary Elastic Supply
3. Less Elastic Supply
Highly Elasctic Supply

Es >1) -A supply
curve, which passes
through the Y- axis and
meets the extended X-
axis ay some point,
then the supply is
highly elastic.
Unitary Elastic Supply

Es = 1) -If the
straight line
supply curve
passes
through the
origin, then
elasticity of
supply will be
equal to one
Less Elastic Supply

(Es < 1) -If a

supply curve
meets the X -
axis at some
point, then the
supply is
inelastic equal
to one.
DETERMINANTS OF PRICE
ELASTICITY OF SUPPLY
 if the cost of producing one more unit keeps rising
as output rises or Marginal Costs rises rapidly with
an increase in output, then the rate of output
production will be limited.
 Over time price elasticity of supply tends to
become more elastic, which means that producers
would increase the quantity supplied by a larger
percentage than an increase in price.
 The larger the number of firms, the
more likely supply is elastic. If factors
of production are mobile, then price
elasticity of supply tends to be more
elastic.
 If firms have spare capacity, the price
elasticity of supply is elastic. They are
able to produce more, and quickly
with a change in price.
The main factors which determine the degree of
price elasticity of supply (Determinants of price
elasticity of supply and demand)

1. Time Period
2. Ability to Store Output
3. Factor Mobility
4. Changes in Marginal Cost of Production
5. Ecxess Supply
6. Availability of Infrastracture Facilities
7. Agricultural or Industrial Products