BE 313

MANAGERIAL ECONOMICS
 Big Picture in Focus:
Unit Learning B
Discuss the basic analysis of demand and supply.
Metalanguage

1. Tariff. This refers to a tax imposed on imported products.

2. Quotas. This refers to a limited quantity of a particular product that
can be produced, exported, or imported under official controls.
3. Substitute goods. These are the goods that may be used in place of
another. For example: coffee and tea, Pepsi and Coca-cola, etc.
Essential Knowledge

Market
Just like what you have in mind, a
market is where we go to buy
foods and other essential needs. It
is simply a place where buyers
and sellers meet to trade goods.
Essential Knowledge
Types of Market
Dry Market. This is where people buy dry goods such as
shoes, bags, clothes, etc.
Wet Market. This is where people buy vegetables, meat,
fruit, etc.
Labor Market. This refers to an intangible domain wherein
employers and job seekers meet.
Stock Market. This is where people buy, sell, and share
stocks, which are shares of ownership in a public company.
Essential Knowledge

Demand
(Household/Consumers’ Side)
Demand pertains to the quantity of goods or services that people are
willing to buy at a given price at a given time.
Essential Knowledge
Law of Demand
The law of demand states that “If the price goes UP, the quantity
demanded will go DOWN, if the price goes DOWN, the quantity
demanded will go UP”.

If the price of rice goes down to 35.00/kilo, your mother is likely to buy more than your
family’s usual consumption, but if the price goes up to 60.00/kilo, she is likely to
reduce her purchase or find another alternative such as buying corn instead..
Essential Knowledge
Demand Schedule
Demand schedule is a table that shows the relationship between prices
and specific quantities demanded at each price.
Hypothetical Demand Schedule for Rice per Month
This table shows the various prices and quantities
Situation Price (P) Quantity (Kg) that the customer is willing to buy at each price. For
A 60.00 10 example, at 60.00, the customer is willing to buy
B 55.00 20 only 10 kilos of rice (situation A); however, at the
price of 40.00, he is willing to buy 50 kilos of rice
C 50.00 30 (situation E). As you may have noticed, the lower
D 45.00 40 the price goes, the higher the quantity the customer
E 40.00 50 is willing to buy. This is congruent with the law of
demand.
Essential Knowledge
Demand Curve
Demand curve is a graphical representation showing the relationship
between price and quantities demanded per time period. A demand
curve has a negative slope; thus, it slopes downward from left to right –
indicating the inverse relationship between price and quantity demanded.
70

60
The figure illustrates a typical demand curve. The Y-
50
axis represents the price while the X-axis represents
PRICE (P)

40
the quantity demanded. As mentioned, the demand
30
curve slopes downward which indicates the inverse
20
relationship between price and quantity demanded.
10

0
10 20 30 40 50
QUANTITY (KG)
Essential Knowledge

Demand Function
Demand function shows the relationship between demand for a
commodity and the factors that influence such demand. These factors
are the price itself, prices of other related commodities, buyers’ income,
tastes and preferences, size and composition of the population, etc. The
demand function is expressed in mathematical function, thus, Qd = f
(price, income, price of related goods, etc.)
Essential Knowledge

Change in Quantity Demanded vs. Change in Demand

These terms sound the same, but it is crucial to understand the difference
between “change in quantity demanded” and “change in demand”.

Change in Quantity Demanded: There is a change in quantity demanded if

the movement is along the same demand curve. This is caused by the
increase or decrease in the product’s price.
Essential Knowledge

Demand Function
Demand function shows the relationship between demand for a
commodity and the factors that influence such demand. These factors
are the price itself, prices of other related commodities, buyers’ income,
tastes and preferences, size and composition of the population, etc. The
demand function is expressed in mathematical function, thus, Qd = f
(price, income, price of related goods, etc.)
Essential Knowledge
Change in Quantity Demanded:
There is a change in quantity demanded if the movement is along the
same demand curve. This is caused by the increase or decrease in the
product’s price.
70

In this figure, the change in quantity 60

demanded occurs due to changes in 50

price. Hence, from 60.00 to 50.00

PRICE (P)
40
(axis Y), the quantity demanded
also changed from 10 kilos to 20 30

kilos. 20

10

0
10 20 QUANTITY
30 (KG) 40 50
Essential Knowledge
Change in Demand
There is a change in demand if the entire demand curve shifts to the right
side, resulting in an increase in demand. This is caused by other factors
aside from price.
70
In the figure (Change in Demand), there are
two different movements (notice the two lines) 60
in the demand curve. The price remains the
50
same, but the demand increases (look at the
orange line, where at the same price 60.00,

PRICE (P)
40
the demand increases to 20 kilos). This
happens due to the increase of other factors 30
aside from price. For example, due to an
20
increase in income, the buyer could now afford
to buy more even if the price remains the 10
same.
0
10 20 QUANTITY
30 (KG) 40 50
Essential Knowledge
Other Factors that cause the
demand curve to change
This pertains to consumers’ likes or dislikes for a
particular goods or services. Changes in tastes or preferences result in
either increase or decrease in customers’ demand. For example, when
sunflower-designed blouses became a hit, the demand for it increases as
customers want to go with the current trend. However, when the
popularity of such design faded, customers’ demand also decreases.
Essential Knowledge
Other Factors that cause the
demand curve to change
An increase in one’s income increases their buying
power and, therefore, the capacity to demand more goods or services. On
the other hand, a decrease in one's income also reduces their buying
power, thereby reducing their demand for goods and services. For
example, Harris, who receives a salary of 10,000.00/month, could only
afford to buy two shirts during payday. After six months, he was promoted
to a higher position and his salary increased to 20,000/month. Due to the
increase in his salary, he can now afford to buy more shirts per month. His
capacity to buy more is simply the result of his changing income.
Essential Knowledge
Other Factors that cause the
demand curve to change
. The various events or seasons in a
given year also cause the demand to change. For example, during
Valentine’s day, the demand for chocolates and flowers increases.
Similarly, during Christmas, demand for Christmas decors and delicacies
also rises. However, the demand reverts to the original level after the
event.
Essential Knowledge
Other Factors that cause the
demand curve to change
An increase in population leads to more demand.
Simply put, more people means more goods and services are to be
demanded. On the contrary, a decrease in population leads to a decline
in demand.
Essential Knowledge
Other Factors that cause the
demand curve to change
In situations wherein the price of particular good rises,
a consumer tends to look for alternative commodities. For example, if the
price of Coke increases, the consumer may opt to buy juice instead. Or
when the price of Nike shoes is 5,000.00, the buyer may choose to
purchase non-branded shoes instead. Substitute products are generally
offered at cheaper prices making it more attractive for the consumers to
buy.
Essential Knowledge
Other Factors that cause the
demand curve to change
If buyers expect the price of a good or
service to rise or fall in the future, it may cause the current demand to
increase or decrease. For example, if households expect the price of rice
to increase next week, their natural behavior would be to stock-up rice
before the price goes up. Thus, at some point, there will be an increase in
demand for rice due to consumers’ stockpiling because of the expected
increase in price in the future.
Essential Knowledge
Other Factors that cause the
demand curve to change
If buyers expect the price of a good or
service to rise or fall in the future, it may cause the current demand to
increase or decrease. For example, if households expect the price of rice
to increase next week, their natural behavior would be to stock-up rice
before the price goes up. Thus, at some point, there will be an increase in
demand for rice due to consumers’ stockpiling because of the expected
increase in price in the future.
Essential Knowledge

Supply
(Firms/Seller’s Side)
Supply refers to the quantity of goods or services that firms are willing
to sell at a given price at a given time, ceteris paribus. It is important
to remember that sellers normally sell more at a higher price than a
lower price.
Essential Knowledge
Law of Supply
The law of supply states that “if the price goes UP, quantity supplied also
goes UP; if the price goes down, quantity supplied also goes DOWN.

Obviously, sellers would like to sell their goods or services when the price is up to
maximize their profits.
Essential Knowledge
Supply Schedule
A supply schedule is a table that shows the relationship between prices
and specific quantities supplied at each price.
Hypothetical Supply Schedule for Rice per Month
This table shows the various prices and quantities
Situation Price (P) Quantity (Kg) that the seller is willing to sell at each price. For
A 40 48 example, at 40.00, the seller is willing to sell 48 kilos
B 35 41 of rice (situation A); however, at the price of 20.00,
he is willing to sell only 5 kilos of rice (situation E).
C 30 30 As you may have noticed, the higher the price goes,
D 25 17 the higher the quantity the seller is willing to sell.
E 20 5 This is in congruence with the law of supply
Essential Knowledge
Supply Curve
A supply curve is a graphical representation showing the relationship
between the price of the product or factor or production (such as labor),
and the quantity supplies per time period. A supply curve typically slopes
upward from left to right, indicating the positive relationship between
price and quantity supplied.
Supply Curve
45
40
The figure above illustrates a typical supply curve.
35 The Y-axis represents the price, while the X-axis
30 represents the quantity supplied. As mentioned, the
25 supply curve slopes upward, which indicates the
Price

20
positive or direct relationship between price and
15
10 quantity supplied.
5
0
0 10 20 30 40 50 60
Quantity Supplied
Essential Knowledge

Supply Function
A supply function shows the relationship between supply for a
commodity and the factors that influence such supply. These factors are
the price itself, the number of sellers in the market, price of factor inputs,
technology, business goals, importations, weather conditions, and
government policies. Thus, Qs = f (price, number of sellers, price of factor
inputs, technology, etc.)
Essential Knowledge

Change in Quantity Supplied vs. Change in Supply

Like the concept of demand, the above terms differ in terms of their
supply curve movement.
Essential Knowledge
Change in Quantity Supplied
There is a change in quantity supplied if the movement is along the same
supply curve. This is caused by the increase or decrease in the product’s
price. Change in Quantity Supplied
45

In this figure, the change in quantity 40

supplied occurs due to changes in price. 35

30
As illustrated above, when price 25

Price
increases from 20.00 to 25.00 (y-axis), 20

the quantity supplied also increases from 15

10
10 to 20 kilos. 5

0
0 10 20 30 40 50 60
Quantity Supplied
Essential Knowledge
Change in Supply
There is a change in supply if the entire supply curve shifts rightward or
leftward. This is caused by other factors aside from price.
Change in Supply
In this figure, there are two different movements (notice 45

the two lines) in the supply curve. Notice also that the 40

price remains the same, but the supply increases (look 35

30
at the orange line, where at the same price 20.00, the
25

Price
supply increase to 20 kilos from 10 kilos). This happens 20
due to the increase of other factors aside from price. For 15

example, due to new technology, the seller can offer 10

more goods even if the price remains the same. 5

0
0 10 20 30 40 50 60 70

Q1 Q2
Essential Knowledge
Other Factors that cause
the supply curve to change
Optimization refers to
the process of making something more efficient and effective as possible.
Therefore, optimization of resources will result to increase in supply.
Essential Knowledge
Other Factors that cause
the supply curve to change
Technology can either increase or decrease the supply
of goods. For example, a Motor Corporation uses Machine “A” in the production
of its cars. This machine can produce 20 cars per week. After three years, they
decided to replace Machine “A” with Machine “B”, which can produce 80 cars
per week. Because of this technological change, the quantity of cars supplied by
Motor Corporation increased from 20 to 80 per week. However, if Machine "B"
malfunctions and such were not fixed immediately, the number of cars supplied
would also decrease.
Essential Knowledge
Other Factors that cause
the supply curve to change
Just as it affects the buyers, this factor also impacts the
sellers. If the sellers anticipate a rise in prices, they may choose to hold back
the current supply to take advantage of the future increase in price. As a result,
the current supply decreases. On the other hand, if sellers expect a decline in
the price, they will increase the current supply of their products.
Essential Knowledge
Other Factors that cause
the supply curve to change
Obviously, the more sellers in the market, the greater
supply of goods and services will be available. For example, if more farmers will
plant rice instead of other crops, then the supply of rice in the market will
increase, assuming the weather condition is good.
Essential Knowledge
Other Factors that cause
the supply curve to change
Weather impacts the supply of agricultural goods in the
market. For example, if a typhoon strikes the country, agriculture will be
affected. Therefore, the supply of agricultural products will decline.
Essential Knowledge
Other Factors that cause
the supply curve to change
If the government removes quotas and tariffs
on imported products, the supply of goods in the market will
increase. On the contrary, higher trade restrictions will limit the
imported products; however, it will protect local or domestic
products in the market.
Essential Knowledge

Market Equilibrium
Market equilibrium pertains to the balance between demand and
supply. It is an agreement between the seller and the buyer at a
particular price and at a particular quantity.
Essential Knowledge

The government may intervene by imposing price control. Price control is the
specification by the government of minimum and maximum prices for goods
and services.
Essential Knowledge
– is the legal minimum price imposed by the government if the
surplus condition exists in the market. This move aims to protect the sellers or
producers so they can survive in their business.

– is the legal maximum price imposed by the government if

there is a shortage in the market. The sellers cannot impose a price higher than
what is being imposed by the government. This action aims to protect
consumers from abusive sellers who take advantage of the situation.
Essential Knowledge

The Partial Equilibrium Analysis

Demand Equation:
Supply Equation:
Equilibrium condition:
Essential Knowledge
Example:
Look for the Price Equilibrium Solution:

(PE ) and Quantity Equilibrium To solve for PE, equate Quantity Demand
and Quantity Supply (use the equation for
(QE) equilibrium condition), thus:

68 – 6P = -33 + 10P
Given: 68 + 33 = 10P + 6P
101 = 16P
16 16
6.3125 = PE
Essential Knowledge
To solve for QE, substitute the value of PE to the given
equation:

Qd = 68 – 6P PE = 6.3125
To check your answer, you can use the quantity supply
(given), thus;
68 – 6P
68 – 6(6.3125) Qs = -33 + 10P PE = 6.3125
68 – 37.875
QE = 30.125
-33 + 10P
-33 + 10(6.3125)
-33 + 63.125
QE = 30.125
Essential Knowledge
To solve for QE, substitute the value of PE to the given
equation:

Qd = 68 – 6P PE = 6.3125
To check your answer, you can use the quantity supply
(given), thus;
68 – 6P
68 – 6(6.3125) Qs = -33 + 10P PE = 6.3125
68 – 37.875
QE = 30.125
-33 + 10P
-33 + 10(6.3125)
-33 + 63.125
QE = 30.125
Essential Knowledge
Determining Shortage, Surplus, and Equilibrium
Example:
Price Qd Qs Surplus/Shortage Using the given equation:
6 32 27 Shortage Qd = 68 – 6P
5 Qs = -33 + 10P
4 Price = 6
3
2
To solve for Qd To solve for Qs
Qd = 68 – 6P Qs = -33 + 10P
Qd = 68 – 6(6) Qs = -33 + 10(6)
Qd = 68 – 36 Qs = -33 + 60
Qd = 32 Qs = 27
Qd = 32 > Qs = 27 Shortage