Demand and supply analysis in Managerial Economics

3. WORDS OF
WISDOM

4. DEMAND AND
SUPPLY
ANALYSIS
Presented by: Mrs. Anabel G. Bernal
BM 221 | Managerial Economics | University of Cebu

5. Specific Objectives
1. Discuss and explain demand estimation and its
approaches
2. Discuss and explain the law of demand and demand
function
3. Discuss supply
4. Explain the determinants of supply
5. Discuss and explain the law of supply and its
categories
6. Discuss elasticity
7. Explain the types and degrees of elasticity
8. Discuss the tax implications of elasticity

6. Outline
1. Demand Estimates
2. Law of Demand
3. Demand Function
4. Supply
5. Law of Supply
6. Elasticity Analysis
7. Types of Elasticities
8. Commodities and Degrees of Elasticity
9. Tax Implication of Elasticity

7. Demand estimation refers to predicting
how consumers will behave in relation to
products and services.

8. The following are forces that affect demand:
1. Price of the commodity
2. Consumer’s income
3. Price of related commodities (substitute or complementary)
4. Consumer’s tastes

9. Over time or across different
individuals, the demand for
the commodity shifts or differs
because of changes or
differences in tastes, incomes,
price of related commodities,
and so on.
Over time or across different
sellers or markets, the
supply curve shifts or is
different because of changes or
differences in technology,
factor prices, and weather
conditions (for agricultural
commodities).
EQUILIBRIUM
(The intersection of
the different but
unknown demand
and supply curves
generates the
different price-
quantity points
observed).

11. The different demand curves
resulted from:
the changes in tastes,
incomes, and price of
related commodities
over time.
(TIME-SERIES
ANALYSIS)
the differences in tastes,
incomes, and price of
related commodities
across different
individuals or market.
(CROSS-SECTIONAL
DATA)

12. The demand curve cannot be identified so
simply.
The process to address this is called
identification problem.

13. DIFFERENT APPROACHES TO
DEMAND ESTIMATION:
1. Regression Analysis
a. Simple Regression
b. Multiple Regression
2. Marketing Research Approaches
a. Consumer Surveys
b. Consumer Clinics
c. Market Experiments

14. SIMPLE REGRESSION ANALYSIS
- A statistical way to find the best
relationship between a dependent variable
(e.g. product demand) and one or more
independent variables, such as price or
location.

15. CONSUMER SURVEYS
- involve questioning a sample of
consumers about how they would respond
to a particular change in the price of the
commodity, incomes, the price of related
commodities, advertising expenditures,
credit incentives, and other determinants of
demand.

16. CONSUMER SURVEYS
These surveys can be conducted by simply
stopping and questioning people at a
shopping center or by administering
sophisticated questionnaires to a carefully
constructed representative sample of
consumers by trained interviewers.

17. CONSUMER CLINICS
These are laboratory experiments in which
the participants are given a sum of money
and asked to spend it in a stimulated store
to see how they react to changes in the
commodity price, product packaging,
displays, price of competing products, and
other factors affecting demand.

18. CONSUMER CLINICS
Participants in the experiment can be
selected so as to closely represent the
socioeconomic characteristics of the market
of interest.

19. CONSUMER CLINICS
Advantages:
1. Can provide useful information about the
demand for the firm’s product, particularly if
consumer clinics are supplemented with
consumer surveys.
2. More realistic than consumer surveys.

20. CONSUMER CLINICS
Disadvantages:
1. Participants know that they are in an
artificial situation and that they are being
observed, thus would not act normally, as
they would in a real market situation.
2. Sample of participants must necessarily
be small because of the high cost of
running the experiment.

21. MARKET EXPERIMENTS
- are conducted in the actual marketplace,
as opposed to consumer clinics which are
conducted under strict laboratory conditions.

22. MARKET EXPERIMENTS
Methods:
1. Select several markets with similar
socioeconomic characteristics and
change the commodity price in some
markets or stores, packaging in other
markets or stores, and the amount and
type of promotion, then record the
responses (purchases) of consumers in
the different markets.

23. MARKET EXPERIMENTS
Methods:
2. By using census data or surveys for
various markets, a firm can also determine
the effect of age, sex, level of education,
income, family size, and so forth on the
demand for the commodity.

24. MARKET EXPERIMENTS
Advantages:
1. They can be conducted on a large scale
to ensure the validity of the results and
that consumers are not aware that they
are part of an experiment.

25. MARKET EXPERIMENTS
Disadvantages:
1. The inferences about the entire market and
for a more extended period of time are
questionable.
2. Extraneous occurrences such as strike or
unusually bad weather may bias the results.
3. Competitors could try to sabotage the
experiment by also changing their prices.
4. The firm may lose customers in the process.

26. The law of demand is an
economic theory that governs
the demand for goods at a given
price.
The law of demand states that
the price of a good and the
quantity demanded have an
inverse relationship.

27. QUANTITY
DEMANDED
PRICE
DEMANDED

29. The inverse relationship
between the price and
quantity demanded of the
commodity per time period is
then the individual’s
demand schedule.

30. Substitution effect
A change in price changes
the relative price of substitute
goods.
Income effect
A change in the price of
goods changes the
purchasing power of a
person’s income.

31. The demand function is
an equation that showcases
the demand for a product or
services as a function of its
price, and other variables
including income,
preferences, and prices of
substitutes and
complements.

32. Dx = f (Px)
Where:
Dx = Quantity demanded
Px = Price

34. Supply is an economic principle that is
defined as the quantity of a product that a
seller is willing to offer in the market at a
particular price within specific time.

36. Supply can be classified into two
categories, as follows:
1.Individual supply is the quantity of goods
a single producer is willing to supply at a
particular price and time in the market. In
economics, a single producer is known as
a firm.
2.Market supply is the quantity of goods
supplied by all firms in the market during a
specific time period and at a particular price.
Market supply is also known as industry
supply as firms collectively constitute an

37. The microeconomic law that states that,
all other factors being equal, as the price
of a good or service increases, the
quantity of goods or services that
suppliers offer will increase, and vice
versa.

39. • Elasticity analysis helps managers in
making decisions.
• Through the use of elasticity analysis,
managers have been able to make
decisions that increase profitability and
growth of their organization.
• Elasticity is a measure of
responsiveness of a variable due to

40. • Elasticity refers to the degree of
change, to which individuals,
customers, producers, and
suppliers alter demand and supply
when variables like income is
changed.

41. • An elastic variable (with an
absolute elasticity value greater
than 1) is one that responds more
than proportionally to changes in
other valuables.
• This means that the demand for the
good or service is affected by the
price.

42. • An inelastic variable (with an
absolute elasticity value less than
1) is one which changes less than
proportionally in response to
changes in other variables.
• This means that the demand for
goods or services remains
unaffected by the change in price.

43. Four Types of Elasticity
1. Price Elasticity of Demand
2. Income Elasticity of Demand
3. Cross-Price Elasticity of Demand
4. Price Elasticity of Supply

44. Price Elasticity of
Demand
demonstrates how a change in price
affects the quantity demanded.

45. Income Elasticity of
Demand
is defined as the measure of the
percentage of the quantity demanded
of a good in reference to changes in
the consumer’s income.

46. Cross-Price Elasticity of
Demand
measures how the demand for one
good is impacted by a change in the
price of another good.

47. Price Elasticity of Supply
measures the responsiveness to the
supply of a good or service after a
change in its market price.
Price elasticity of supply = Change in quantity supplied ÷ Change
in price

48. If demand is inelastic, a higher
tax will cause only a small fall in
demand. Most of the tax will be
passed onto consumers.

50. If demand is elastic, then an
increase in price will lead to a
bigger percentage fall in demand.

52. Degrees of Elasticity
1. Perfectly elastic demand
2. Perfectly inelastic demand
3. Unitary elastic demand
4. Relatively elastic demand
5. Relatively inelastic demand

53. DEGREES OF ELASTICITY PRICE DEMAND
1. Perfectly elastic demand Little change in price
Leads to an infinite change
in quantity demanded
2. Perfectly inelastic demand Rise or fall in price
Quantity demanded
remains the same
3. Unitary elastic demand
Proportionate change
in price
Proportionate change in
quantity demanded
4. Relatively elastic demand Small change in price
Big change in quantity
demanded
5. Relatively inelastic demand
Given percentage
change in price
Relatively less percentage
change in quantity
demanded

54. Perfectly elastic demand
Perfectly inelastic demand
Unitary elastic demand
Relatively elastic demand
Relatively inelastic demand

55. Wrap Up
1. Discuss and explain demand estimation and its approaches
2. Discuss and explain the law of demand and demand function
3. Discuss supply
4. Explain the determinants of supply
5. Discuss and explain the law of supply and its categories
6. Discuss elasticity
7. Explain the types and degrees of elasticity
8. Discuss the tax implications of elasticity

56. REFERENCES
BOOK/INTERNET SOURCES AUTHOR/LINKS
Managerial Economics in Global Economy Salvatorre, D. (2001)
Demand And Supply Analysis (slideshare.net) https://tinyurl.com/yshjjeb7
4 types of Elasticity in Economics | Analytics
Steps
https://tinyurl.com/y2wbpmh8
What Is Supply? Definition, Determinants,
Types, Function (geektonight.com)
https://tinyurl.com/2s49u7vr
The Law of Supply Explained, With the Curve,
Types, and Examples (investopedia.com)
https://tinyurl.com/yc5sw9d9
Effect of tax - depending on elasticity -
Economics Help
https://tinyurl.com/3kw8u9ak
Elasticity Analysis - PHDessay.com https://tinyurl.com/yc44ydvk