Methods of Demand

Analysis

Demand can be analyzed in several ways.

The most common way to do this is through
a demand schedule, a demand curve, and a
demand function.
 Demand Schedule
• A demand schedule is a table that shows the relationship
of prices and the specific quantities demanded at each of
these prices
• Generally, the information provided by a demand
schedule can be used to construct a demand curve
showing the price-quantity demanded relationship in
graphical form
 Demand Curve
• The demand curve is a graphical representation showing
the relationship between the prices and quantities
demanded per time period
• A demand curve has a negative slope -- it slopes
downward from left to right
• The downward slope indicates the inverse relationship
between price and quantity demanded
• Most demand curves slope downward because (a) as the
price of the product falls, consumers tend to substitute
this (now relatively cheaper) product for others in their
purchases; (b) as the price of the product falls, this
increases the consumer's real income, allowing them to
buy more products.
 Demand Function
• Demand can also be analyzed mathematically through a
demand function
• A demand function shows the relationship between the
demand for a commodity and the factors that dtermine or
influence this demand
• These factors include the price of the commodity itself,
prices of related commodities, levels of income, taste and
preference, size and composition of population, and
distribution of income, among others
• A demand function is expressed as a mathematical function. Thus
we can show our mathematical function for demand as:

QD = f(product's own price, income of consumers, price of

related goods, etc)
We can therefore come up with the demand equation as:
QD = a-bP
where:
QD = quantity demanded at a particular price
a = intercept of the demand curve
b = slope of the demand curve
P = price of the good at a particular time period
Example:
Let us assume that the current price of good A is Php 5.
The intercept of the demand curve is 3 while the slope is
0.25. If we want to determine how much of good A will be
demanded by consumer X, we can simply substitute the
given values to our equation, thus:
QD = a-bP
QD = 3 - 0.25 (5)
= 3 - 1.25
QD = 1.75 units of good A
• What if the price of good A increases to Php 6? What will
be the quantity demanded by consumer X?

QD = 3 - 0.25 (6)
= 3 - 1.50
QD = 1.5 units of good A
Change in Quantity Demanded VS. Change in
Demand
 Change in Quantity Demanded
• We can say that there is a change in quantity demanded
if there is a movement from one point to another -- or from
one price-quantity combination to another -- along the
same demand curve
• A change in quantity demanded is brought about mainly
by an increase or a decrease in the product's own price
 Change in Demand
• There is a change in demand if the entire demand curve
shifts to the right (or left), resulting in an increase (or
decrease) in demand because of other factors other than
the price of the good sold
• At the same price, therefore, more (or less) amounts of a
good or service are demanded by consumers
 Methods in Supply Analysis

Just like demand, supply can also be analyzed

using a supply schedule, a supply curve, and a
supply function.
 Supply Schedule
• A supply schedule is a table listing the various prices of a
product and the specific quantities supplied at each of
these prices at a given point in time
• Generally, the information provided by a supply schedule
can be used to construct a supply curve showing the price
or quantity supply relationship in graphical form
Supply Schedule for Rice Per Month
Situation Price (php)/kg Quantity (kg)

A 65 55

B 44 40

C 33 28

D 22 15

E 10 8
 Supply Curve
• A supply curve is a graphical representation showing the
relationship between the price of the product sold or the
factor of production (e.g. labor) and the quantity supplied per
time period
• The typical market supply curve for a product slopes upward
from left to right, indicating that as price rises (or falls), more
(or less) of the product is supplie
• The upward slope indicates te positive relationship between
price and quantity supplied
 Supply Function
• A supply function is a form of mathematical notation that
links the dependent variable, quantity supplied (Qs), with
various independent variables that determine quantity
supplied
• Among the factors that influence the quantity supplied are
the price of the product, the number of sellers in the
market, the price of factor inputs, technology, business
goals, importations, weather conditions, and government
policies.
• We can transform our statement into a mathematical function
as follows:
Qs = f (product's own price, number of sellers, price of
factor input, technology, etc.)
Given our supply function, we can now derive our supply
equation:
Qs = c + dP
where:
Qs = quantity supplied at a particular price
c = intercept of the supply curve
d = slope of the supply curve
P = price of the good sold
• Suppose the price of good A is Php 5. The intercept of the
supply curve is 3 and the slope of the supply curve is 0.25.
If we want to know how much of good A will be supplied by
sellers, we can simply substitute the values in our supply
equation. Thus:

Qs = c + dP
= 3 + 0.25 (5)
= 3 + 1.25
Qs = 4. 25 units
Change in Quantity Supplied VS Change in
Supply
 Change in Quantity Supplied
• A change in quantity supplied occurs if there is a
movement from one point to another along the same
supply curve
• A change in quantity supplied is brought about by an
increase or decrease in the product's own price
 Change in Supply
• A change in supply happens when the entire supply curve
shifts letward or rightward
• At the same price, therefore, less (or more) quantities of a
good or service are supplied by producers or sellers
 Market Equilibrium: A mathematical
Approach
• You were introduced to the mathematical approach of
determining demand and supply during the discussion of
the demand and supply functions. The set equations are
as follows:
Demand equation: QD = a - b(P)
Supply equation: Qs = c + d (P)
Equilibrium condition: QD = Qs
Problem:
Given the following information, determine the PE and QE:
QD = 68 - 6P
Qs = 33 + 10P
To solve the problem, we can rephrase the equilibrium
equation as:
a-b(P) = c + d (P)
• Substituting our values, we have:

68 - 6P = 33 + 10P

To solve for the unknown (P), we then group similar terms:

68 - 33 = 10P + 6P
35 = 16P
Dividing both sides by 16, we get:

P = 2.19
• Now we have determined the price of the good. Next, we
need to determine the equilibrium quantity. Since we
already know the price, all we have to do is to substitute
its value in our previous equations, thus:

68 - 6 (2.19) = 33 + 10 (2.19)
68 - 13.14 = 33 + 21.9
54.9 = 54.9
Equilibrium quantity is equal to 55 units and the equilibrium
price is Php 2. 19
 Elasticity
• Price elasticity measures the responsiveness of the
quantity demanded or supplied of a good to a change
in its price. 
• The price elasticity of demand is the percentage
change in the quantity demanded of a good or
service divided by the percentage change in the price.
The price elasticity of supply is the percentage
change in quantity supplied divided by the percentage
change in price.
• Elasticity can be described as elastic—or very responsive—
unit elastic, or inelastic—not very responsive.
• Elastic demand or supply curves indicate that the quantity
demanded or supplied responds to price changes in a
greater than proportional manner. (> 1)
• An inelastic demand or supply curve is one where a given
percentage change in price will cause a smaller percentage
change in quantity demanded or supplied. (< 1)
• Unitary elasticity means that a given percentage change in
price leads to an equal percentage change in quantity
demanded or supplied. (= 1)
• When demand is perfectly inelastic, quantity demanded
for a good does not change in response to a change in
price.
• When the demand for a good is perfectly elastic, any
increase in the price will cause the demand to drop to
zero.
Elasticity of Demand
First, apply the formula to calculate the elasticity as price
decreases from $70 at point B to $60 at point A:

E = 2800 – 3000 70 - 60
2800 + 3000 60 + 70

= -200 10
5800 130
= 26000
58000
E = - 0.45 Inelastic
Elasticity of Supply
E = 13000 – 10000 700 - 650
(13000 + 10000)/2 (700 + 650)/2

= 3000 50
11500 675
= 2025000
575000
E = 3.52 Elastic