UNIVERSITY OF EDUCATION, WINNEBA

SCHOOL OF BUSINESS

DEPARTMENT OF APPLIED FINANCE AND POLICY MANAGEMENT

SECOND SEMESTER 2021/2022 ACADEMIC YEAR

MANAGERIAL ECONOMICS (BAF355)

EMMANUEL ATTA ANAMAN(SENIOR LECTURER)

 Presentation Outline

Market Analysis
Definition of demand
Distinction between demand and desire .
Revisiting the key determinants of Demand and the meaning of the Law of Demand
Understanding exceptional demand.

Change in demand and change in quantity demanded.

Definition of Supply

Determinants of Supply

Exceptional Supply

Change in Supply versus Change in quantity supplied

Market Equilibrium

Elasticity of Demand

FIN 721 Lecture Two

 Demand
 In ordinary usage, demand is usually confused with desire.
 Demand means the various quantities of goods that would be purchased per time
period at different prices in a given market(Prof. Hidbon)
 Demand in economics means demand backed up by enough money to pay for the
goods demanded .(Stonier and Hague)
 Demand therefore be seen as the various amounts of a commodity that
consumers are willing and able to purchase at different prices per unit of
time ,assuming other factors remain the same.
 So in effect, desire of agents backed by purchasing power is what demand is.
 And therefore, we can say that Demand minus purchasing power is desire.
FIN 721 Lecture Two
Determinants of Demand

FIN 721 Lecture Two

 Demand
 The Law of demand simply states that the higher price of a commodity, the
lower the quantity demanded and the lower the price, the higher the
quantity demanded, assuming all other things remain the same.
 Therefore the slope of the normal demand curve is negative and the
following are factors which generally account for the negative slope of the
demand curve.
 The law of diminishing marginal utility
 The principle of equi- marginal utility
 The income effect
 Substitution effect
FIN 721 Lecture Two
 Demand
 Exceptional demand is the manifestation of demand situations which do not conform to
the classical Law of Demand.
 Exceptional demand may be encountered as a result of the following phenomena
 Giffen paradox
 The Veblen effect.
 Ignorance
 Speculative effect
 Expectations of shortages in the future.
 Brand loyalty
 Necessities

FIN 721 Lecture Two

Supply

FIN 721Lecture Two

 Supply
 The Law of supply states that the higher the price the higher the quantity
supplied and the lower the price the lower the quantity supplied ,when all other
things are the same.
 This is basically explained by the profit maximizing behaviours of firms
 Exceptional supply refers to the various supply situations which are deviations
from the Law of supply. The situations below explain exceptional supply.
 Supply of commodities with production limitations .
 Supply of goods whose production require large scale technologies
 The supply of labour .
 There is change in supply which occurs as bodily shift of the supply curve and
change in quantity supplied which is usually a movement along a supply
curve.
FIN 721 Lecture Two
Market Equilibrium

FIN 721 Lecture Two

 Elasticity of Demand
 The concept of Elasticity is used in the field of Economics to measure the percentage change of a given
variable as it responds to the change in another.
 Generally elasticity of demand expresses the percentage responsiveness of quantity demanded of a
commodity to given percentage change in a given determinant of demand per unit of time , when all other
factors are assumed to remain the same.
 The most common types of elasticities which are encountered in economic analysis are price elasticity of
demand , cross price elasticity of demand and income elasticity of demand.
 Price elasticity of demand is the relative percentage responsiveness of quantity demand of a commodity to
a given percentage change in the price of the commodity, when all other determinants of demand are
assumed to remain constant.
 Cross price elasticity of demand measures the proportionate responsiveness of demanded of a given good to
a fixed percentage change in the price of another good per unit of time ,with all other factors held
constant.
 Income elasticity however captures the comparative responsiveness of quantity demanded of a commodity
FIN 721 Lecture
to a given percentage changeTwoin the income of consumers assuming per period of time when every else
 Computation of Elasticities
 In economics , there are two main ways of calculating elasticities. These the point and arc
measurement approaches.
 In the point calculation approach is usually employed when quantity demand is observed to
respond to a very small or infinitesimal change in the price /other determinant of demand
of the commodity.
 The arc computation is rather deployed when there is a consideration change in the
price/any other determinant of demand over a finite stretch of the demand curve. It is
sometimes known as the midpoint formula.
 Some economists use the Revenue/outlay method to determine elasticities.
 However, Revenue method does not yield real values which can accurately be interpreted
as the firstFIN
two.
721 Lecture Two
Interpretation of Elasticity

FIN 721Lecture Two

 Elasticity of Demand.
 There are three main outcomes in the computation of income elasticity of demand.
 A zero coefficient implies that demand for a given commodity is absolutely unresponsive to any
change in the income of consumers.
 A positive coefficient means that demand for a given good increases as incomes of consumer
also increases.
 A negative coefficient however indicates that the demand for the given commodity decreases
whenever consumers' incomes increase..
 The case of cross price elasticity of demand is similar.
 A negative coefficient indicates that the goods are complementary whereas positive coefficient
implies that the one good can be used in the place of the other.
 Lastly a zero coefficient means that the goods are not related in any way

FIN 721 Lecture Two

 How useful is elasticity of demand in
business decision making?
Price elasticity of demand can be useful in a number of respects;
It is very applicable in the determination of price and output decisions of firms.
It aids government in the formulation of its tax policies.
It assists governments in the design of policies which influence consumption
patterns.
It is applied in the distribution of rewards to the factors of production.

FIN 721 Lecture Two

 The determinants of price elasticity
 Availability of substitutes for a given good
 The type of goods (Luxuries and Necessities)
 The proportion of income spent on commodity.
 The period of time
 The number of new buyers
 The definition of a given market(Narrow vrs. broad market)
 The range of uses of a given good.
 The level of income.

FIN 721 Lecture Two

 The relevance of the income elasticity of
demand
 Implications for consumers budgets.
 Assists businessmen in taking investment decisions.
 Public Investment Planning

FIN 721 Lecture Two

 ESTIMATION AND FORECASTING OF
DEMAND
 Firms need to be able to do projections and they normally do so by forecasting
the demand that faces their products.
 Apart using this as the basis for planning so as not to underproduce or
overproduce, it also helps firms in getting their pricing and promotion policies in
order to achieve optimum sales and derive maximum profits.
 Demand estimation and forecasting therefore is a process of obtaining current
values of demand given various values of prices and other explanatory variables
of demand.
 Clearly then demand estimation and forecasting means obtaining estimated
future values of demand using current values of the price of good and other
influential variables.
FIN 721 Lecture 2
 DEMAND ESTIMATION AND FORECASTING
 Since demand estimation and forecasting is a systematic process of obtaining current values of demand, it cannot be
done haphazardly. The following are thus the general steps required to be able to project demand.
 Identification of the relevant variables-
 Getting historical data on all the relevant variables.
 Creating/establishing the appropriate mathematical model between demand, the dependent variable and its related
explanatory variables.
 Estimating the parameters for the established mathematical model.
 Finding the estimated values of demand using the parameters determined above.

FIN721 Lecture Two

 STRATEGIES USED IN THE ESTIMATION
AND FORECASTING OF DEMAND

Consumer surveys
Consumer clinics and focus groups
Market Experiment
Statistical techniques.

BBAd I23 Lecture One

 LEVELS AT WHICH DEMAND ESTIMATION
IS UNDERTAKEN
 There are three levels at which demand estimation and forecasting can be done.
 Firm or Micro level forecasting which helps firm management in decision
making with regard to the firm's demand and production.
 Macro level estimation and forecasting relate to the assessing the business
conditions in the entire economy to assist firms in taking decisions which help
them in the larger scheme of the economy.
 Industry level forecasting is undertaken to help specific industries to have idea
about the demand situations for their products.

BBAd I23 Lecture One

 TYPES OF DEMAND FORECASTING
 Based on time horizon, two main types of demand forecasting can be identified. These are
Short and Long term forecasting.
 Short term forecasting is undertaken within a short period of time usually in a year or less
whereas the long term is done within a period which span over one year.
 Short term forecasting is significant for a number of reasons:
 Help keep cost of production in check and also have inventory under control.
 Formulating a suitable and realistic pricing policy to avoid escalation especially when
demand is low.
 Help set realistic sales targets
 Assist firms in deciding on their financial outlays for their planned production.
 Establish appropriate advertising and product promotion.
FIN 721 Lecture Two
 LONG TERM DEMAND FORECASTING
 Long term demand is also important to firms for the following reasons;
 Enables firms to plan the construction /establishment of new production units or
expansion of existing plants
 Assessing the firm‘s long term financial requirements.
 Identify the long term manpower needs of firms
 Forecast problems of material and energy supplies .

FIN 721 Lecture Two

 METHODS OF FORECASTING DEMAND
 There are two broad techniques employed in forecasting demand.
 These are the Survey and the Statistical methods.
 The Survey methods adopt interviews to solicits the opinions of experts and also
identify the desires of consumers. Under the Survey methods ,we have the Opinion
surveys, Expert opinions, Delphi and Consumer interviews.
 In the opinion surveys, salesmen are empowered to collect information on products
from their areas of jurisdictions and based on that provide estimates of future sales.
 The expert opinion method primarily solicits views from a range of people like
salesmen, distributors, experts and even consumers who have appropriate and relevant
information as a basis for estimating/forecasting future demand.
 The Delphi method employs internal and external experts to unearth relevant
information upon which statistical methods are applied to forecast demand.
FIN 721 Lecture two
 METHODS OF FORECASTING DEMAND
 The last survey method is the Consumer interview approach which is used to elicit
information from consumers relating to their preferences and buying plans.
 The Statistical approach is largely employed in performing long term demand
forecasting. Main methods employed under this are the Trend, Regression& Correlation,
Extrapolation and the Simultaneous equation techniques.
 In the Trend technique, a trend fitted is for time series data using a range of methods
like free hand fitting or mathematical methods like the moving averages or the least
squares.
 The regression/correlation applies statistical and econometric methods in estimating the
demand
 The next is
FINextrapolation
721 Lecture Twowhich employs mathematical principles /formulae to be able to
 METHODS OF FORECASTING DEMAND
 The other methods are the simultaneous equation and the barometric methods.
 The simultaneous equation method uses the basic mathematical principles to solve for
parameters which help define the demand

FIN 721 Lecture Two

END OF SECOND LECTURE

BBAd 123 Lecture One