FINC 304

MANAGERIAL ECONOMICS

Session 1 – DEMAND

Lecturer: Dr. AGYAPOMAA GYEKE-DAKO, UGBS

Contact Information: agyeke-dako@ug.edu.gh

College of Education
School of Continuing and Distance Education
2014/2015 – 2016/2017
 Session Overview
Both external and internal factors can influence the activities of
firms.
Managers can be both consumers and producers. As
consumers, managers will need to understand what
determines their willingness and ability to purchase goods.
As producers, managers need to understand what will drive
consumers to purchase their products. This will help them
develop their own competitive strategies and to respond to the
actions of other firms. They also need to understand how
public policy will influence demand for their product. Studying
demand is helpful in understanding such issues.

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 Session Outline
The key topics to be covered in the session are as follows:
• Definition of Demand
• Factors that influence Demand

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 Reading List
• Baye Michael and Prince Jeffrey: Managerial Economics and
Business Strategy 8th Edition, Chapter 2

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 What is Demand?

• Individual demand is a schedule that shows the

quantities of a commodity the consumer is willing and
able to buy at various prices in a defined period
• The market demand on the other hand shows
quantities of a commodity that all consumers in the
market are willing and able to purchase at various
prices over a given period of time
• Market demand is horizontal summation of individual demand curves
• ie. the market demand is found by adding all the quantities demanded by
all individual consumers in the market at each price
• We are interested in market demand as this is what happens in reality

Meaning, own price of a product is an important factor that influences

demand.

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 Law of Demand?

• The law of demand shows a relationship between the quantity

demand and the price of a good holding all other things constant

• The law of demand states that ceteris paribus (all other things held
constant) the higher the price of a commodity the lower the quantity
demanded, vice versa

• The ceteris paribus is an important assumption that we will return

to
• The law of demand shows a negative relationship
between price and quantity.

• Demand curves are downward-sloping.

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Agyapomaa Gyeke-Dako (PhD)
 Why does Law of demand hold?

• Why do we buy less of a good at a higher price?

• We offer 2 explanations for this

• Substitution effect: When the price of a good falls, the

good becomes cheaper compared to other goods.
Rational consumers therefore switch from other relatively
expensive goods to the now cheaper one

• Income effect: When the price of a good falls,

consumers real income (purchasing power) rises and
are therefore able to buy more goods
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 Determinants of Demand
• Apart from price, there are other determinants of demand.
These are:
• Consumers’ income
• Normal goods: we buy more when income increases and less when
income decreases. Positive relationship with demand
• inferior goods: we buy less when income increases and more when
incomes decrease. Negative relationship with demand

• Price of related goods

• substitutes: we buy less of a good if the price of its substitutes fall vice versa
– We buy less milo if this way becomes cheaper
• complements: we buy more of a good if the price of its complement
falls vice versa
– we might buy more of batteries if torchlight prices fall
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 Determinants of Demand
• Size of the market:
• If size of a market increases through increase in population, we
expect more to be purchased
• Reason why demand for most commodities are higher in China
than Ghana

• Price expectations
• We buy more of a commodity if we expect its price to increase in
future vice versa
• What do you do when you hear that fuel prices will increase soon?
• Other determinants: tastes and preferences,
advertisement, taxes
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 Change in Demand vs Change in
Quantity demanded
• A change in demand causes a shift of the demand
curve either to the left (decrease in demand) or to
the right (an increase in demand)
• A change in demand is caused by the other determinants of demand
apart from the price of the good
• Eg an increase in the price of a related product, an increase in the size of
the market, or an increase in income would all lead to an increase in
demand

• A change in quantity demanded causes movement

along the same demand curve
• A change in quantity demanded is caused only by a change in the
good’s own price
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 Demand function

Q dx = f (Px , Py , M, H)
Q dx is quantity demanded of x, Px is the price of good x, Py is price of
good y (a good related to good x), M is income and H denotes all
other determinants of quantity demanded of good x
This a general demand function

A specific example is a linear demand function

Q dx = α0 + αx Px + αy Py + αm M + αH H
the law of demand implies that αx < 0
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 Demand function
• If Py <0, goods x and y are complements
• If Py>0, goods x and y are substitutes
• M<0, good x is inferior
• M>0, good x is normal

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 Consumer Surplus
• The consumer surplus is the difference between
how much an individual would have paid and how
much he actually pays.
• Here, the consumer benefits but the firm misses
part of its profits.
• With a downward-sloping demand curve the
consumer is willing to pay more for the initial
quantities of the product
• When the consumer pays the market price, he or
she would have benefited from not paying the
actual prices of the previous quantities.

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