Question 1
0 / 1 pts

An increase in the price of a substitute will create an increase in the demand for the other
product. In effect, there will be an upward movement of the points along the demand curve.

 
Correct Answer
  
False
 
 

Question 2
0 / 1 pts
The equilibrium price of P50 implies that this is the price that has been agreed by the sellers
and buyers. As a manager , your task is to know how much is the difference in the Quantity
demanded and Quantity supplied given that price, so that you can check if there is a surplus or
a shortage.

 
Correct Answer
  
False
 
 

Question 3
1 / 1 pts
The basis for supply is profit maximization. 
Correct!
  
True
 
 

Question 4
0 / 1 pts

Utility is the basis for derived demand. Utility refers to the worth, value, happiness or satisfaction
that a product gives.

 
Correct Answer
  
False
 
 

Question 5
0 / 1 pts

Supply is affected by technology as demand is affected by cost of production.

 
Correct Answer
  
False
 
 

Question 6
1 / 1 pts
The supply curve has a positive slope because Qs increases as Price increases, and vice
versa.
Correct!
  
True
 
 

Question 7
1 / 1 pts
Ceteris paribus assumes that the other variables do not change except for price.
Correct!
  
True
 
 

Question 8
1 / 1 pts
The company determines P530 as the equilibrium price. If the company increases the price,
there will be a surplus.
Correct!
  
True
 
 
 

Question 9
1 / 1 pts
The substitution effect happens when consumers replace cheaper items with more expensive
ones when their financial conditions change.
Correct!
  
True
 
 

Question 10
1 / 1 pts

An increase in Qd and Qs will change the equilibrium price.ct!

False

 Question 4
1 / 1 pts
 A consumption point inside the budget line
a. is expensive
b. is affordable but some portion of income is not spent.
c. shows that consumer spends only on 1 good
d. shows that spending was higher than income
 
Correct!
Correct Answers
b
 
 

Question 5
1 / 1 pts
Which of the following statements is correct?
a. In the budget line, buying more of one needs buying more of another.
b. The budget line shows the direct relationship between the quantity of the two goods
bought.
c The slope of the budget line shows there is no tradeoff between the two goods
because the
consumer can buy each of them.
d. The slope of the budget line shows the opportunity cost of the good measured along
the
x-axis.
Correct!
Correct Answers
d
 
 

Question 6
1 / 1 pts
A budget line
a. has a positive slope
b. shifts only when the consumer's budget changes. 
c. shows the level of utility the goods bring
d. a and b only
 
Correct!
Correct Answers
b
 
 

Question 7
1 / 1 pts
Suppose a consumer has P10,000 to spend on two branded goods, shoes and shirts. If
the price of a pair of
shoes is P2000 per pair and the price of a shirt is P1500 each, which of the following
combinations is
unaffordable to the consumer?
a. 2 pairs of shoes and 4 shirts
b. 5 pairs of shoes and 0 shirts
c. 0 pairs of shoes and 7 shirts
d. 2 pairs of shoes and 3 shirts
Correct!
Correct Answers
c
 
 

Question 8
1 / 1 pts
Which of the following describes what happens to a consumer's budget line if that
consumer's
budget decreases? The budget line
a.becomes steeper.
b.  shifts farther away from the origin of the graph.
c. does not change.
d. shifts closer to the origin of the graph.
Correct!
Correct Answers
d
 
 

Question 9
1 / 1 pts
The figure shows Jay's budget line. Jay earns P500 per week selling baskets made out
of abaca. With this money , he buys choco mani and choco stix. Each piece of choco
stix costs P1 and
each choco mani costs P10.  Ray will be at what point on her budget line if she spends
P200 per
week on choco stix?
Choices:
a
b
c
d
e
f
 

Correct!
Correct Answers
c
 
 

Question 10
1 / 1 pts

Suppose that you consume only pizza and Diet Pepsi. The table above gives your utility
from
consuming these two goods. What is the marginal utility you get from the fifth slice of
pizza?
 
a. 16
b. 14
c. 4
d. 6
Correct!
Correct Answers
c
 
 

Question 11
1 / 1 pts
Juan's marginal utility from chocolate is 200 and his marginal utility from ice cream is
100. Juan
spends all his budget. The price of chocolate is 50 per piece and the price of ice cream
is 50 per
pint. To maximize his utility, Juan should
a. buy less icecream and buy more chocolates
b. buy less ice creass and fewer chocolates
c. buy more ice cream and chocolates since they are priced the same
d. buy more ice cream and less chocolates.
 
Correct!
Correct Answers
a
 
 

Question 12
1 / 1 pts

The marginal rate of substitution of one good for another is measured by moving along an
indifference curve.!

  True
 

Question 13
1 / 1 pts
Along an indifference curve, if the marginal rate of substitution is 3, then the consumer
is willing
to give up 3 units of the good measured along the y-axis for 1 unit of the good
measured
along the x-axis..

True
 

Question 14
1 / 1 pts

As a consumer moves away from the origin onto higher indifference curves, the consumer reaches
less preferred combinations of goods.

False
 
 

Question 15
1 / 1 pts

The indifference curve is flatter at the bottom part of the curve because at this point, the MRS is
increasing.

False
 
 

Question 16
1 / 1 pts

The budget line shows the number of goods and services that can be purchased below the
stated income.

False
 
 

Question 17
1 / 1 pts

As the consumer consumes more of different products at each given moment, the additional
satisfaction diminishes.

False
 
 

Question 18
1 / 1 pts

The indifference curves never crosses because the higher curves imply higher levels of
dissatisfaction.

False
 
 

Question 19
Not yet graded / 22 pts
Suppose you have a budget of P1000 for Good X (P250) and Good Y(125). What
combinations of X and Y can fit into your budget? Write these combinations in columns
2 and 4 (highlighted in yellow). Solve for the MU/P of each identified quantity (see table
of Marginal utility).
1. (Fill up this table)

 Qty
Combination MU/P  Qty of Y MU/P
of X

               Marginal Utility Table

 Quantity X Y
0 0 0
1 270 200
2 250 180
3 210 150
4 160 125
5 135 80
6 80 65
7 40 30

8 0 0

2. Identify the combination that will maximize the utility . _______ X and _______Y   
Your Answer:

1. (Fill up this table)

 Qty  Qty
Combination MU/P MU/P
of X of Y

a 0 0 8 0

b 1 1.08 6 0.52

c 2 1 4 1

d 3 0.84 2 1.44

e 4 0.64 0 0

2. Identify the combination that will maximize the utility . ____2__ X and ___4___Y 
 

1. Engage

Economics is a science that deals with efficient and effective allocation of

scarce resources to satisfy unlimited needs and wants.  On the other
hand, Management is defined as all the activities and tasks undertaken to
achieve goals .  Planning, organizing, leading and controlling are the four
functions of management that make use of or deal with resources to achieve
certain goals, such as in a business setting. Like households, businesses – no
matter how big they are- still have limits in their resources. Hence, managerial
economics is a science that deals with the effective and efficient use of scarce
resources in a business setting. It is simply using the concepts of
economics to manage a firm.

______________________________________________________________
______________________

Have you ever done a small business as a child or a young adult? Have
you observed someone do business? Notice that people in business
always have to keep track of their cash inflows and outflows. In every decision
or business proposal, budget is taken into consideration. In activities, the
sufficiency and availability of manpower is being considered. Why? It is
because businesses, big or small, have limitations in resources.  These
resources are classified as LAND, LABOR, CAPITAL AND
ENTREPRENEURSHIP. These resources must be allocated well because
many are limited and aren’t renewable.

 Observe your parents and guardians as they budget the resources of the
house. Household, firms and the government all have to make allocation
decisions because resources are limited and needs/wants can be unlimited.
This is what economics is all about. Economics is a social science that
studies the efficient and effective allocation of scarce resources to
satisfy unlimited needs and wants of the people.

Examples of resources:

Land Labor Capital Entrepreneurs/entrepreneurship

soil teacher equipment Mr. Henry Sy
factory
trees farmer Mr. Manny Pangilinan
building
all
doctor machinery Mr. Injap Sia
animals
 construction
minerals cars Mr. Manny Villar
worker

II. Explore

In business , what do you think should a manager  be concerned about?

Pricing, finance, supply, production and advertisement are just some of the
areas that managers must look into as the firm tries to reach its goals. If we
analyze it closer, each of this area is also a concern of other fields of study.
Marketing is also concerned with pricing, competition, demand and
advertisement. Operations management deals with production and supply, as
well. Furthermore, finance can be an entirely different discipline.

As we see the connections, we conclude that indeed, economic concepts and

principles can be applied in the different aspects of life and business.   

Economics has two major branches, microeconomics and macroeconomics.

Microeconomics deals with decisions of individuals and firms in resource-
allocation. Macroeconomics, on the other hand, looks at the behavior and
performance of the economy as whole. Since Managerial Economics is used
by managers in addressing issues in a firm level, this means that this field of
study is a sub-branch of Microeconomics.

Microeconomics is a broader concept as compared to Managerial

Economics. Microeconomics forms the foundation of managerial
economics. 

Managerial Economics deals with allocating the scarce resources in a manner

that minimizes the cost. As we have already discussed, Managerial
Economics is different from microeconomics and macro-economics.
Managerial Economics has a more narrow scope - it is actually solving
managerial issues using microeconomics. Wherever there are scarce
resources, managerial economics ensures that managers make effective and
efficient decisions concerning customers, suppliers, competitors as well as
within an organization. The fact of scarcity of resources gives rise to four
fundamental questions:

 
 1. What to produce?
2. How to produce?
3. How many to produce?
4. For whom to produce?

https://youtu.be/Ywjf9GNxPpo

III. Explain

Seven important things to know AND UNDERSTAND about Managerial

Economics

1. Managerial Economics can be defined as the blending of economic

theory with business practices so as to ease decision-making and future
planning by management.
2. Managerial Economics assists the managers of a firm in a rational
solution of obstacles faced in the firm’s activities. It makes use of
economic theory and concepts. It helps in formulating logical managerial
decisions.
3. The key of Managerial Economics is the micro-economic theory of the
firm. It lessens the gap between economics in theory and economics in
practice. Managerial Economics is a science dealing with effective use
of scarce resources. It guides the managers in taking decisions relating
to the firm’s customers, competitors, suppliers as well as relating to the
internal functioning of a firm.
4. Managerial economics uses both Economic theoryas well
as Econometrics for rational managerial decision making.
Econometrics is defined as use of statistical tools for assessing
economic theories by empirically measuring relationship between
economic variables. It uses factual data for solution of economic
problems
5. The study of Managerial Economics helps in enhancement of analytical
skills, assists in rational configuration as well as solution of problems.
While microeconomics is the study of decisions made regarding the
allocation of resources and prices of goods and services,
macroeconomics is the field of economics that studies the behavior of
 the economy as a whole (i.e. entire industries and economies).
Managerial Economics applies micro-economic tools to make business
decisions. It deals with a firm.
6. The use of Managerial Economics is not limited to profit-making firms
and organizations. But it can also be used to help in decision-making
process of non-profit organizations (hospitals, educational institutions,
etc). It enables optimum utilization of scarce resources in such
organizations as well as helps in achieving the goals in most efficient
manner. Managerial Economics is of great help in price analysis,
production analysis, capital budgeting, risk analysis and determination
of demand.
7. Managerial Economics is associated with the economic theory which
constitutes “Theory of Firm”. Theory of firm states that the primary aim
of the firm is to maximize wealth. Decision making in managerial
economics generally involves establishment of firm’s objectives,
identification of problems involved in achievement of those objectives,
development of various alternative solutions, selection of best
alternative and finally implementation of the decision.

The role of managerial economist can be summarized as follows:

1. He studies the economic patterns at macro-level and analysis its

significance to the specific firm he is working in.
2. He has to consistently examine the probabilities of transforming an
ever-changing economic environment into profitable business avenues.
 3. He assists the business planning process of a firm.
4. He also carries cost-benefit analysis.
5. He assists the management in the decisions pertaining to internal
functioning of a firm such as changes in price, investment plans, type of
goods /services to be produced, inputs to be used, techniques of
production to be employed, expansion/ contraction of firm, allocation of
capital, location of new plants, quantity of output to be produced,
replacement of plant equipment, sales forecasting, inventory
forecasting, etc.
6. In addition, a managerial economist has to analyze changes in macro-
economic indicators such as national income, population, business
cycles, and their possible effect on the firm’s functioning.
7. He is also involved in advising the management on public relations,
foreign exchange, and trade. He guides the firm on the likely impact of
changes in monetary and fiscal policy on the firm’s functioning.
8. He also makes an economic analysis of the firms in competition. He has
to collect economic data and examine all crucial information about the
environment in which the firm operates.
9. The most significant function of a managerial economist is to conduct a
detailed research on industrial market.
10. In order to perform all these roles, a managerial economist has to
conduct an elaborate statistical analysis.
11. He must be vigilant and must have ability to cope up with the
pressures.
12. He also provides management with economic information such as
tax rates, competitor’s price and product, etc. They give their valuable
advice to government authorities as well.

As mentioned above, firms consider its resources  when trying to reach its
goals. What is a firm anyway?  A firm is a collection of resources that is
transformed into products demanded by consumers. Simply saying, a firm is a
business. It is an entity that converts inputs (resources - land, labor, capital ,
entrepreneurship) to outputs (products or services).

IV. Elaborate

As managerial economists, we must be one with the firm in pursuing its goal. In
most cases, the primary goal of a firm is PROFIT MAXIMIZATION. Profit
maximization is achieved when a firm produces at an output level where marginal
revenue is equal to marginal cost. 

 
Aside from profit maximization, the other economic objectives that a
firm may pursue are

1. market share
2. profit margin
3. return on investment
4. technological advancement
5. customer satisfaction
6. shareholder value

They may also pursue non-economic objectives such as:

1. workplace environment
2. product quality
3. service to community

PROFIT MAXIMIZATION HYPOTHESIS

Throughout the discussion , we will assume that the main goal of the firm is to
maximize profit? Earning a profit is different from maximizing profit.
Maximizing profit involves identifying the best price and quantity (produced) to
get the highest profit as much as possible.

 Profit Maximization Rule Definition

The Profit Maximization Rule states that if a firm chooses to maximize its
profits, it must choose that level of output where Marginal Cost (MC) is equal
to Marginal Revenue (MR) and the Marginal Cost curve is rising. In other
words, it must produce at a level where MC = MR.

Profit Maximization Formula

The profit maximization rule formula is

MC = MR

Marginal Cost is the increase in cost by producing one more unit of the good.
Marginal Revenue is the change in total revenue as a result of changing the
rate of sales by one unit. Marginal Revenue is also the slope of Total
Revenue. This means that this is the amount to which we expect the Total
Revenue to change as the quantity being sold or demanded changes.

Total Revenue (TR) = Price x Quantity Sold

Profit = Total Revenue (TR)– Total Costs (TC) 

or

Net Income = Sales - Expenses (Accounting term)

Therefore, profit maximization occurs at the most significant gap or the

biggest difference between the total revenue and the total cost.

Why is the output chosen at MC = MR?

At A, Marginal Cost < Marginal Revenue, then for each additional unit
produced, revenue will be higher than the cost so that you will generate more.
Why generate more ? This is because you can still produce more while still
having a an additional cost that is lower than the additional revenue. Sellers
have this mindset that they will keep on producing or selling as long the
additional cost is lower than the additional benefit (Cost-Benefit analysis).
At B, Marginal Cost > Marginal Revenue, then for each extra unit produced,
the cost will be higher than revenue so that you will create less.

Thus, optimal quantity produced should be at MC = MR.

You might ask why go for “Q’ to optimize profit when the MR=MC. Why not go
for A when MR is greater than  MC? If we are to put values in this discussion,
you will realize that even though point A allows the firm to enjoy higher
marginal ( additional) revenue than its additional cost, the profit is still lower
compared to when they operate at point Q. This is the point of PROFIT
MAXIMIZATION .  

Application of Marginal Cost = Marginal Revenue

The MC = MR rule is quite versatile so that firms can apply the rule to many
other decisions.

For example, you can apply it to hours of operation. You decide to stay open
as long as the added revenue from the additional hour exceeds the cost of
remaining open another hour.

It can also be applied to advertising. You should increase the number of times

you run your TV commercial as long as the added revenue from running it one
more time outweighs the added cost of running it one more time.

Profit Maximization Example

In the early 1960s and before, airlines typically decided to fly additional routes
by asking whether the extra revenue from a flight (the Marginal Revenue) was
higher than the per-flight cost of the flight.

In other words, they used the rule Marginal Revenue = Total Cost/quantity

Then Continental Airlines broke from the norm and started running flights
even when the added revenues were below average cost. The other airlines
thought Continental was crazy – but Continental made huge profits.

Eventually, the other carriers followed suit. The per-flight cost consists of
variable costs, including jet fuel and pilot salaries, and those are very relevant
to the decision about whether to run another flight.
However, the per-flight cost also includes expenditures like rental of terminal
space, general and administrative costs, and so on. These costs do not
change with an increase in the number of flights, and therefore are irrelevant
to that decision.

 
Limitations of the Profit Maximization Rule (MC = MR)

Before we discuss the limitations, please remember that  Profit is TR less TC

and TR is Price X Quantity.

Further, changing the price can change the quantity being demanded, thus
changing the TR, the MR and the profit.  

(As early as now, please do know that Demand and Quantity Demanded are
different.)

Limitations of MR=MC rule

1. Real World Data

In the real world, it is not so easy to know exactly your Marginal Revenue and
Marginal Cost of the last products sold. For example, it is difficult for firms to
know the price elasticity of demand ( degree of sensitivity of Demand brought
by a change in price) for their goods – which determines the MR.

2. Competition

The use of the profit maximization rule also depends on how other firms react.
If you increase your price, and other firms may follow, demand may be
inelastic (not sensitive to the change in price). But, if you are the only firm to
increase the price, demand will be elastic (sensitive to the change in price).

3. Demand Factors

It is difficult to isolate the effect of changing the price on demand. Demand

may change due to many other factors apart from price.
4. Barriers to Entry

Increasing prices to maximize profits in the short run could encourage more
firms to enter the market. Therefore firms may decide to make less than
maximum profits and pursue a higher market share.

 The profit maximizing tactics Starbucks implements in their pricing strategy

are vital components of a process anyone can use. Here are some of the
takeaways you can apply to your own business:

3. Study your customer personas. Starbucks understands that the

majority of their customer base is fairly insensitive to price, and uses
small price increases that everyday consumers barely notice to boost
margins. Quantify your buyer personas and the demand for your
product or service will help you choose a price that captures the
maximum amount your customers are willing to pay.
4. Justify the exchange rate for your product. Communicating price
increases effectively is crucial to a successful price hike, and managing
customer perception is a key part of the Starbucks strategy. Support
your price increases using changes in the market such as higher
commodity costs and ease the pain on the consumer by finding an
attractive way to publicize the new prices. Starbucks said their beverage
prices were increasing by an average of 1%, but that low average
probably stemmed from including all of their beverages in the equation,
including ones that remained at the same prices.
5. Use product differentiationto put your company in the lead. You can
justify maximizing your profits using the fairest of reasons, but if the
customers don’t value your service the way they value a delicious cup of
coffee, then a decrease in demand is inevitable. Build a service or
product that consumers can’t live without, and you’ll be able to
implement price hikes without turning off your customers.
6. Don’t increase the prices of the products with the highest
margins.Raise the prices of the products surrounding them. As
mentioned earlier, Starbucks raised the price of the tall size brew
exclusively in order to persuade customers to purchase larger sizes
(with slightly higher margins). Price hikes for your lower margin products
can entice customers to upgrade to more expensive options, especially
with respect to products and services that are tiered based on time
usage and features. The goal is to use the price increases to guide the
customer towards your most profitable product.

 
Demand and supply are two concepts we often hear especially in the world
of business. Oftentimes, market prices are determined by the forces of
these two. As business managers, it is very important for you to know what
they are and what affects them.

(These will be discussed next week. Please do a preview.)

I. Engage

Demand and supply are two concepts we often hear especially in the world
of business. Oftentimes, market prices are determined by the forces of
these two. As business managers, it is very important for you to know what
they are and what affects them.

II. Explore

The video you just watched is one of the simplest there is that explains how
demand and supply works. As mentioned, demand is the quantity of
goods/services that buyers are willing and able to buy at different price
levels. On the other hand, supply is the number of goods and services that
sellers are willing and able to sell at different price levels. Below is table
showing the Demand and Supply Schedule.

Table 1. Demand and Supply Schedule for Bananas

Quantity Demanded Quantitiy Supplied
Price
(Qd) (Qs)
50 6 0
75 4 4
100 2 8
125 0 12

 Demand is different from Quantity demanded (Qd); as supply is not

synonymous to quantity supplied (Qs). Demand refers to the different
combinations of price and Qd. When plotted on a graph, they form a
demand curve. Quantity demanded (Qd) is just a single point along that
curve representing the quantity being demanded at a certain price. The
same goes for supply and quantity supplied. When p and Qs are plotted on
the graph, they form the supply curve. The table above shows the Qd in the
2nd column. Taken individually, these are just quantities demanded. At 75 ,
the Qd is 4. While at 50 , the Qd is 6. Taken as a whole (all prices with
corresponding Qd), they form the demand.   This is the same with supply.
The 3rd column shows the different Qs at a certain price level. Say at 100 ,
the Qs is 8. Taken as a whole (different prices and their corresponding Qs),
they form  the supply.

As we plot the points of the demand and supply schedule, we notice that
the demand curve has a downward slope, while the supply curve has an
upward slope.  This will be discussed thoroughly in the Explain section of
this module.
 
 

 Figure 1 shows the demand curve while figure 2 shows the supply curve.
Putting the two curves together will let you see the point in which they
intersect. This is called the market equilibrium. It is a situation wherein
demand = supply because the buyer and the seller have agreed to buy and
sell at a certain price and quantity.

  Is there a chance that both sellers and buyers don’t agree in a certain
price ? The answer is yes.  Imagine your mom or your guardian going to
the market to buy fish. Most of the time, you will find her hopping from one
vendor to another to inquire on the price of a certain fish. She does that
because she is trying to find the one who can sell her the fish at a certain
volume and price (assuming that all those fishes in that market are of the
same kind, quality and size - ceteris paribus ). Sometimes she would
haggle with the vendor until both of them agrees to buy and sell 4 kilos of
fish at 75 pesos per kilo.  Once they reach that point, that is what you call
“equilibrium”.

 Ceteris paribus means all other factors are assumed to remain

constant.
  Equilibrium priceis the amount or price that has been agreed on by
both sellers and buyers at a certain quantity. In the graph above, the
PE  is 75..
 Equilibrium quantityis the number of goods/services that buyers
and sellers have agreed to transact (buy and sell) at a certain price.
In the graph above, the QE  is 4.

If Qd is greater than Qs at a certain price , there is a shortage. If Qd is

lesser than Qs at a certain price, there is a surplus. Technically, all points
above the equilibrium show consumer surpluses; while those below the
equilibrium show shortages.  

(Please answer the activity on plotting demand and supply curves

before proceeding to the next part.)

III. Explain and Elaborate

BASIS FOR DEMAND

For managerial decision making, a prime focus is on market demand. Market

demand is the aggregate or the total of individual or personal demand. Desire
without purchasing power may lead to want, but not demand. Demand is the
number of goods and services that people are willing and able to buy at different
price levels at certain period under economic conditions.

Two basic models of individual demand:

1) Direct demand - acquired since these individual goods and services

satisfy consumers. Utility (or satisfaction/value) is the prime determinant of
direct demand. Consumers tend to maximize the value of the goods or
services by focusing on the marginal utility or additional gain from acquiring
additional units of a product.  

        *margin - change/additional
       *utility - satisfaction/happiness/worth/value

2.) Derived demand - acquired since they are inputs for production. This is
also called input demand.  In the  construction of  a house, the house
maybe a direct demand but the steel, materials, labor, equipment and
energy are all derived demand. None of them are mainly acquired because
they satisfy consumers, but because they are needed in the production.

The determinant for derived demand is associated with profitability. In the

previous example, the value of steel, labor, materials and equipment will
rise if the marginal benefit of selling the house (output) is  higher than than
the marginal cost (wages, interest, cost of materials, depreciation of
equipment). 

Whether it is direct or derived demand, the fundamentals of economic

analysis offer a basis for investigating demand characteristics. 

Utility maximization (theory of consumer behavior) is the basis for direct

demand on final consumption products .

Profit maximization , on the other hand, is the underlying rationale

for derived demand.

Market Demand Function

As discussed, a change in price can increase or decrease quantity

demanded. Other non - price determinants of demand are
expectations, prices of related goods , population, advertising,
income, taste, preferences and income. 

The market demand function is the a statement of relation between

aggregate quantity demanded and all factors that affect this quantity. In this
example, we will include price and non-price determinants to estimate
demand using a function.

 
In a functional form, a demand function may be expressed as:

Qd of Y = f(Price of Y, Price of related product X, income, advertising and

so on.)

To illustrate how the different independent variables related to quantity

demanded, the following is the demand function for the automobile
industry:

  Q = a1P + a2Px +a3I + a4Pop + a5i + a6A

  Replacing the parameters (a) with values, our demand function will now
be:

  Q = -500P + 250Px + 125I + 20,000Pop + 1,000,000i + 600A

Using the demand function to estimate demand, we replace the

independent variables ( P,Px, I, Pop,i, A) with real values.

  Q = -500 (30,000) + 250(60,000) + 125(56,000)  + 20,000 (300) +

1,000,000 (8) + 600 (5,000)

 Q = 8,000,000

Here, given the parameters and the values of independent variables, the
quantity demanded for automobiles is 8,000,000.

 *In real life, the values of these variables are taken from your market
study. In this example, the values are given.

Table 1. Estimating Industry Demand for New Automobiles

Independent Parameter Estimated Estimated

variables (1) estimate value for demand 
(2) independent
variable (4)=(2) x(3)
during the
 coming
year(3)
Average price
for new cars -500 30,000 -15,000,000
(P) ($)
Average price
for new import
250 60,000 15,000,000
luxury cars
(PX) ($)
Disposable
income per
125 56,000 7,000,000
household (I)
($)
Population
20000 300 6,000,000
(pop) (millions)
Average
interest rate (i) -1,000,000 8 -8,000,000
(%)
Industry
advertising
600 5,000 3,000,000
expenditures
(A) ($million)
Total demand
8,000,000
(cars)

In the previous example, we used the industry demand. Can we make a

firm demand estimation ? Yes, we can. However, there may be variables to
further consider. For example, if Toyota is deriving its firm demand function,
it must include the price of its competitor and maybe the advertising
expense of its competitor. In other words, when deriving a demand
function, one must consider the important independent variables that may
have a significant influence on the Qd. 
Demand Curve 

The demand curve expresses the relation between the price charged
for a product and the quantity demanded, holding all factors constant
(ceteris paribus).

A demand curve is shown in the form of a graph , and all the variables in
the demand curve are held fixed EXCEPT FOR PRICE.

Earlier, we were able to derive this :

  Q= -500 P + 250(60,000) + 125(56,000)  + 20,000 (300) + 1,000,000 (8) +

600 (5,000)

      Q  = 23,000,000-500P ---> P remains as a variable 

  It can also be written as P = 46,000 - 0.002Q

     How?  

       Q = 23,000,000-500P

      500P = 23,000,000 -Q

      P =  (23,000,000 - Q )/ 500

      P = 46,000 - 0.002Q

To draw the demand curve for this equation. Compute for P if Q is

zero; and compute for Q if P is zero. You will be able to get both ends
of the curve. Use the demand function (   P = 46,000 - 0.002Q)  to do
that, substitute P or Q with 0 .

 Q = 0, P =46,000

  P =0,   Q = 23,000,000

     How ?
If Q = 0
P=46,000-0.002Q
P = 46,000- 0.002(0)
P=46,0000
If P=0
0=46,000 -.002Q
.002Q=46,000
Q=46,000/.002
 23,000,000.00 

BASIS FOR SUPPLY

Supply is the total quantity offered for sale at various conditions. The
supply of a product arises from their ability to enhance the firm's value
maximization objective. Sellers will sell more if the marginal benefit of the
output is greater than the marginal cost of production. If the marginal cost is
greater than marginal benefit, then the amount of good or service supplied
will fall. 

Price can influence quantity supplied. If price increase, sellers will sell
more, As price decreases, they will sell less. 

Other non-price determinants of supply will include: price of related goods,

technology, changes in input prices, maybe temperature for agriculture
products

 
Market Supply Function

In a functional form, a supply function can be expressed as:

Quantity Supplied of Y= f (price of Y , price of related product X,

technology, input prices, weather...)

Qs= b1P + b2PSUV + b3W + b4S + b5E + b6i   (based on Table 2)

Replacing the parameters (b) with values, our supply function will
now be:

Q= 2,000P -500PSUV -100,000W -15,000S -125,000E + 1,000,000i

Replacing the variables ( P, PSUV, W, S, E,i) with real values, our Qs will
be: 

Q= 2,000 (30,000) -500(42,5000)-100,000(100) -15,000(800)  -125,000(6)

+ 1,000,000(8)

  Q=8,000,000

Table 2. Estimating Industry Supply for New Automobiles

Estimated
value for
Parameter independent Estimated
Independent supply
estimate variable
variables (1)
(2) during the
(4)=(2) x(3)
coming
year(3)
Average price
for new cars 2000 30,000 60,000,000
(P) ($)
Average price -500 42,500 -21,250,000
for SUV
(Psuv) ($)
Ave. hourly
rate & fringe
-100,000 100 -10,000,000
benefits (W)
($)
Ave. cost of
steel per ton -15,000 800 -12,000,000
(S) (millions)
Ave. cost of
energy input -125,000 6 -750,000
(E) ($)
Ave. interest
-1,000,000 8 -8,000,000
rate (i) (%)
Total supply
8,000,000
(cars)

Though the industry and firm supply function maybe closely related,
at times, there may be differences in the parameters. For example,
Chinese automakers are able to enjoy lower costs compared to their
American counter part. As we know, cost is one of the determinants
of supply. Hence, there may be differences in the supply function in
this case. 

Supply Curve

The supply curve expresses the relation between the price charged
for a product and the quantity supplied, holding all factors constant
(ceteris paribus).

A supply curve is shown in the form of a graph , and all the variables in the 
supply curve are held fixed EXCEPT FOR PRICE.
Earlier, our supply function was:

Q= 2,000P -500(42,5000)-100,000(100) -15,000(800)  -125,000(6) +

1,000,000(8)

  Q= -52,000+2,000P ----> Price is still a variable (all others were

constant or at a fixed value)

It can also be written as : P = 26,000 + 0.0005Q

How ? Simply transpose.

         Q= -52,000 + 2000P

     -2000P = -52,000 - Q

        P = (-52,000 - Q) / -2000

         P = 26,000 + 0.0005Q

To draw the supply curve for this equation. Compute for P if Q is zero;
and compute for Q if P is zero. You will be able to get both ends of the
curve. Use the supply function (   P = 26,000 + 0.005Q)  to do that,
substitute P or Q with 0 .

 How ?

If Q = 0
P = 26,000 + 0.005Q)
P = 26,000 + 0.005 (0)
P =26,000
If P=0
0 = 26,000 + 0.005Q
transpose, -0.005Q= 26,000
Q = 26,000/0.005
 Q= 52,000 
Surplus, shortage and equilibrium

Surplus - excess supply  

Shortage - Excess demand

Equilibrium - perfect balance in demand and supply 

Using the demand and supply equations, the following Quantity

demanded and Quantity supplied are computed at different price
levels.

Demand function                                                 Supply Function

 P = 46,000 - 0.002Q                                  P = 26,000 + 0.0005Q

At a price P30,000 the market is in equilibrium. Above it, there is

surplus, Below it, there is shortage.

Table 3. Surplus, Shortage and Equilibrium in the New Automobile

Market

To prove, remember that equilibrium is when Demand = Supply

Then, demand function = supply function  OR

To find equilibrium quantity, equate  the two functions.

    D     =      S

(46,000 - 0.002Q ) = (26,000 + 0.0005Q)

-0.002Q-0.0005Q = 26,000-46,000

-0.0025Q = -20,000

Q = -20,000/-0.0025

Q= 8,000,000  Equilibrium Quantity 

To get the equilibrium price:

46,000-0.002(8,000,000) = 26,000 + 0.0005(8,000,000)

30,000=30,0000  Equilibrium Price

As business decision makers or managers, you must know what

makes consumer tick. Understand the principles behind. Today, we
look into Utility Maximization and the  Indifference curve.

UTILITY THEORY
Remember that in the 2nd module, we said that
utility/satisfaction/happiness from a good or service is the basis for
consumer demand. 

Definition of terms:

Utility = satisfaction tied to consumption

Nonsatiation principle = More is better

Utils = unit of satisfaction

marginal utility = additional satisfaction from each additional unit of

consumption

Law of diminishing marginal Utility - the additional satisfaction from each

additional consumption of a good eventually diminishes as more is
consumed.

Utility maximization is a strategic scheme whereby individuals and

companies seek to achieve the highest level of satisfaction from their
economic decisions. For example, when a company’s resources are
limited, management will implement a plan of purchasing goods or
services that provides the maximum benefit.

Understanding Utility Maximization

The combination of goods or services that maximize utility is determined by

comparing the marginal utility of two choices and finding the alternative with
the highest total utility within the budget limit. The decision is influenced by the
option that produces a higher level of satisfaction. This explains how
companies and individuals develop consumption habits.

The consumer may consider purchasing more of one item and less of another.
Through maximizing utility, the consumer will buy an item that produces the
greatest marginal utility with the least amount of spending.

For example, if product ‘A’ comes with twice more marginal utility than product
‘B,’ that means product ‘A’ is providing more marginal utility per dollar than ‘B.’
As a result, the consumer may decide to buy more of product ‘A.’

The utility-maximizing rule is expressed as follows:

 
 

Total Utility Maximization

Total utility refers to the total amount of satisfaction that a person obtains by
consuming a specific quantity of units of a product at a given time. The greater
the consumer’s total utility, the higher the measure of satisfaction acquired.

Total utility is used to determine a consumer’s decision based on utility

maximization in the economic setting. A company’s management should
make production changes by analyzing the marginal utility increase or
decrease.

Consumers try to maximize their utility with every item consumed based on
rational choice theory. Their decisions are geared toward acquiring the most
affordable items with the highest level of satisfaction.

Generally, consumer behavior is based on maximizing total utility by acquiring

units that enable them to gain maximum utility for the amount they spend. This
is partially due to the budget constraints and the desire to achieve as much
satisfaction as possible from the consumption of a product.

Calculating Total Utility Maximization

Each unit of a product or service has its utility, while every additional unit of
consumption has its marginal utility. The total utility equation assigns base
values called utils. Economists examine utils over a broad range and
determine the level of satisfaction gained from a particular unit of
consumption. An allocated constant unit for utils is set since there is no actual
figure for utility satisfaction.

The formula below is used in calculating total utility maximization:

 
TU = U1 + MU2 + MU3…

Where:

 TU is Total Utility

 U is Utility
 MU is Marginal Utility

The total utility is equivalent to the number of utils realized from each unit of
consumption. However, the theory assumes that every additional unit of
consumption generates less marginal utility, which is the law of diminishing
marginal utility.

Maximizing Utility Video -->

https://youtu.be/1exopHOl1jo

Practice problem with solution-->

https://drive.google.com/file/d/1GFGW9yjZp0JbW8T5ds1YzNJ2qvn4fBIJ/vi
ew

Indifference curve
An indifference curve is a contour line where utility remains constant across
all points on the line. In economics, an indifference curve is a line drawn
between different consumption bundles, on a graph charting the quantity of
good A consumed versus the quantity of good B consumed. At each of the
consumption bundles, the individual is said to be indifferent.

Properties of Indifference Curves

If a good satisfies all four properties of indifference curves, the goods are
referred to as ordinary goods. They can be summarized as the consumer
requires more of one good to compensate for less consumption of another
good, and the consumer experiences a diminishing marginal rate of
substitution when deciding between two goods.

4. Indifference curves never cross. If they could cross, it would create

large amounts of ambiguity as to what the true utility is.
5. The farther out an indifference curve lies, the farther it is from the origin,
and the higher the level of utility it indicates. As illustrated above on the
indifference curve map, the farther out from the origin, the more utility
the individual generates while consuming.
6. Indifference curves slope downwards. The only way an individual can
increase consumption in one good without gaining utility is to consume
another good and generate the same amount of utility. Therefore, the
slope is downwards sloping.
7. Indifference curves assume a convex shape. As illustrated above in the
indifference curve map, the curve gets flatter as you move down the
curve to the right. It illustrates that all individuals experience diminishing
marginal utility, where additional consumption of another good will
generate a lesser amount of utility than the prior.

What Defines the Convexity of Indifference Curves?

As you go down the curve of an indifference curve, the curve becomes flatter
as one good is substituted for the other. It is the individual’s marginal rate of
substitution, which is defined as the more an individual consumes good A in
proportion to good B, the less of good B the individual will substitute for
another unit of good A.

The Optimal Consumption Bundle

In the graph below, point A illustrates the tangency condition the utility curve
has with the budget line constraint.

 
 

The tangency condition between the indifference curve and the budget line
indicates the optimal consumption bundle when indifference curves exhibit
typical convexity.

Slope of the Budget Line

The slope of the budget line is the relative price of good A in terms of good B,
equal to the price of good A as a ratio of the market price of good B.
Moreover, the slope of the budget line subtracted by relative price represents
the opportunity cost of consumption. There is an opportunity cost because of
the consumer’s limited budget. The budget line is shifted outwards by the
price of goods becoming proportionally cheaper.

 
Slope of the Indifference Curve

The slope of the indifference curve at any point is the negative marginal utility
of good A as a proportion of the marginal utility of good B. It indicates that the
optimal consumption bundle – the marginal rate of substitution between goods
A and B – is the ratio of their prices.

Video link --> https://www.youtube.com/watch?v=iOmDo5jLFw8

Sources:

Hirschey, M. (2012). Managerial Economics, 12th ed. Pasig City: Cengage Learning
Asia Pte Ltd.

Indifference curve (nd). Retrieved

from https://corporatefinanceinstitute.com/resources/knowledge/economics/indifference-
curve/

Utility maximization (nd). Retrieved

from https://corporatefinanceinstitute.com/resources/knowledge/economics/utility-
maximization/