Factors Affecting Demand and

the Elasticity of Demand:Part 1

Lecture Series in Managerial Economics

Prepared by Elizabeth R. Bajit, Ph.D.
CBAA, CLSU

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 At the end of this lecture, the students must be able to:

❑ Understand the law of demand and the

concepts associated with the negative
relationship between price and quantity
demanded
❑ Explain the concept of own price elasticity,
cross price elasticity and income elasticity
and explain the factors affecting them
❑ Identify and explain the various determinants
of demand

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 Key Terms
 demand
 law of demand
 marginal utility
 law of diminishing marginal utility
 demand curve
 quantity demanded
 individual demand
 market demand

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 Demand
Demand indicates how much of a
product consumers are both willing
and able to buy at each possible price
during a given period, other things
remaining constant.

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 Law of Demand
The law of demand says that quantity
demanded varies inversely with price, other
things constant. Thus, the higher the price,
the smaller the quantity demanded.

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 Law of Demand
When the price of the good increases, the
quantity demanded for the good decreases
because of two effects:

a) Substitution effect

b) Income effect

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 Law of Demand
Demand, wants, and needs
Substitution effect
When the price of good “x” increases, the relative price of good “x”
increases relative to the price of a substitute “y”, thus, the consumers
shift to the cheaper substitute “y”
 If all prices changed by same margin, there would be no substitution
effect
Income effect
When the price of good “x” increases, the purchasing power of the
peso decreases, thus the consumers can buy less of good “x”.
Diminishing marginal utility
 Marginal utility – additional satisfaction you derive from each item
 Law of marginal utility states that as the unit of a commodity
consumed increases, the additional utility decreases or total
utility increases at a decreasing rate) (example: pizza slices)

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 Demand vs. Quantity demanded

 Quantity demanded - affected by the

price of the good itself
Demand – affected by factors other than
the price of the goods, for example the
income, price of substitutes, price of
complementary, number of consumers,
taste and preference, income and price
expectations

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 Demand Schedule, Demand Curve
and Demand Equation
 Demand curve- graphical representation of demand
 Demand schedule – tabular representation of
demand
 Demand equation- mathematical representation
of demand

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 Demand Schedule
Price Quantity Demanded
per Pizza per Week (millions)

a $15 8
b 12 14
c 9 20
d 6 26
e 3 32

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 Inverse Demand Curve for Pizza
a
$15
b
Price per pizza

12
c
9
d
6
e
3
D
0
8 14 20 26 32
Millions of pizzas per week
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 Demand Equation for Pizza
Price in US$, Qd in M

Qdx = 38 – 2Px
Qdx = 38 – 2(0) = 38
Qdx = 38 – 2(3) = 32
Qdx = 38 – 2(6) = 26
Qdx = 38 – 2(9) = 20
Qdx = 38 – 2(12) = 14
Qdx = 38 – 2(15) = 8

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 More Complicated Demand
Equation or Function
Qdx = f( Px, Py, Pz, I, N)
Where Qdx is the quantity demanded for x
Px is the price of x
Py is the price of substitutes,
Pz is the price of complementary good
I is the income
N is the target population

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 Individual Demand for Pizzas
(a) Hector (b) Brianna (c) Chris

$12 $12 $12

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Price

8 8
4 4 4
dH dB dC
1 2 3 Pizzas 1 2 1
(per week)

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 Market Demand for Pizzas
Horizontal summation of individual demand
(d) Market demand for pizzas

dH + dB + dC = D

$12
Price

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4

1 2 3 6 Pizzas
(per week)

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 Determinants of Demand
 Own price (-)
 Consumer Income
+ for normal goods
- for inferior goods
 The prices of related goods
-for complementary goods
+ for substitute goods
 The number and composition of consumers(+)
 Consumer expectations
income expectation (+)
price expectation (+)
 Consumer tastes and preferences (+)
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 Changes in Consumer
Income
If income ↑, consumers willing and
able to buy more which ↑ demand
Demand curve shifts to the right
Two categories of goods:
Normal goods(+) – demand increases as
money income increases
Inferior goods (-) – demand decreases as
money income increases.

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 Changes in the Prices of Related Goods

Substitutes (+)
An increase in price of pizza will increase
the demand for a taco (if they are
substitutes)
Example: Tacos and Pizza
Complements (-)
Certain goods used together
Example: airline tickets and car rentals
An increase in the price of one also
reduces the demand for the other

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 Changes in the population
and its composition
An increase in the target population will
increase the demand for the good. Change
in the composition also changes the
demand pattern
Consumer expectations- an expectation
that the income will increase in the
immediate future will increase the demand
today. An expectation that the price of the
good will increase tomorrow will increase
the demand for the good today
Changes in consumer tastes
Tastes are your likes and dislikes as a consumer
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 Movement along the demand
A change in price, causes a movement
along the demand curve, and changes
the quantity demanded
Demand shifts
A change in one of the determinants of
demand other than its own price causes
a shift of a demand curve

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 A decrease in the price of pizza increases the Qd for
pizza, a movement for example from “a” to “b”
Inverse Demand Curve for Pizza
a
$15
b
Price per pizza

12
c
9
d
6
e
3
D
0
8 14 20 26 32
Millions of pizzas per week
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 At a price of $12, consumers buy more (b1) if income
increases or buy less (b2) if income decreases
Inverse Demand Curve for Pizza
a
$15
b
Price per pizza

12 b2 b1
c
9
d
6
e
3
D D
0 D
8 14 20 26 32
Millions of pizzas per week
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 References
1. Samuelson, William F. and Stephen G. Marks ( 2012).
Managerial Economics. 7th edition. John Wiley and Sons, Inc.

2. Wilkinson, Nick. (2005). Managerial Economics: A Problem

Solving Approach. Cambridge UK: Cambridge University Press.

3. The Open University of Hongkong. Principles of Managerial

Economics.
 This is all for now. ☕
See you in the next lecture

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