MANAGERIAL

ECONOMICS
Lesson III - Supply and Demand Analysis and
Estimation
In this lesson we will be able to:
1. Define what a market is;
2. Describe and explain what is the law of supply and demand,
and determine the factors that affect them
Demand and Supply
Filipinos often complain about increasing prices in the market, whether these are for
petroleum, meat or electricity. Meanwhile, others view this as natural behavior of the
economy, while those who engage in stock trading await and speculate the next price
per share of a company’s stock in the Philippine Stock Exchange (PSE). These are some
of the things that could be influence by the demand and supply of the market.

There are many ways to depict how economists think, here are 3 applicable ways:
1. decision-making during scarcity
2. rational behavior
3. marginal analysis
What is a Market?
Market is a term that is relative based on the industry where one
is involved in. There is the stock market, which may either go up or
down. Global news see the price of oil in the world market as
volative, but oftentimes going up. An average reasonable individual
has a chance to buy any commodity at the nearest supermarket, wet
market and the like. Market is used in many ways, but how does
economics define the word “market”?
Market
 is a place where buyers and sellers meet. The reason why we call
stock market a “market” is because there is a buying and selling
of stock in that place. The market has two importanct elements:
the buyer and the seller. These element form the market and
these two important entities that form the demand and supply.
The buyers are the ones who determine the market demand. The
sellers, meanwhile, are the determinants of supply in the market.
What is a Demand?
 by definition, it is the quantity of goods or services buyers are
willing and able to buy. Demand can be depicted by tables,
numbers of graphs. By depicting a hypothetical table we can make
a demand schedule of the demand for a boat ride in the world-
famous Underground River in Puerto Princessa, Palawan. Say we
have a price for a boat ride per person and the quantity demand
is the number of person who are willing to ride a boat and can
pay for it as well.
What is a Demand?
Hypothetical Demand Schedule of the Demand for a
Boat Ride in the Underground River.
Year Price (in Php) Quantity Demand (QD)
2005 1,000 1,145
2006 1,250 1,120
2007 1,350 1,100
2008 1,400 1,105
2009 1,500 1,095
2010 1,800 1,065
2011 2,000 1,045

The table shows that as price increases, the quantity demand decreases, which is a natural state of the market.
In this table, our dependent variable is the quantity demand because it is the value that we would like to
know. The price is our independent variable as it is the value that is expected to affect demand. Because we
can see that whenever the price of the service increases, the quantity demand declines, we can say that the
price has a negative or inverse relationship to quantity demand,.
In a linear equation like this, it is important to consider the intercept and
slope. In this equation, 1,245 is the intercept and -0.1 is the slope. Intercept is
the value that we can get, with the absence of the independent variable
(price) or the value of QD if the independent variable is zero. Meaning, if the
boat ride is free, we can expect 1,245 people availing of the service. Slope is
the impact of the independent variable to the price. Hence, if the price is
1,000 there would be 1,145 people going to that area. This can be computed
by substituting the values below:
QD = 1,245 - 0.1P
QD = 1,245 -0.1(1,000)
QD = 1,245 -100
QD = 1,145
 Law of Demand
The demand curve shows the amount of goods consumers are willing to buy
at each market price.

A linear demand curve can be plotted using the following equation.

Qd = a – b(P)

Q = quantity demand
a = all factors affecting price other than price (e.g. income, fashion)
b = slope of the demand curve
P = Price of the good.
Qd = a – b(P)

Q = quantity demand
a = all factors affecting price other than price (e.g. income, fashion)
b = slope of the demand curve
P = Price of the good.
 Law of demand
 as price increases, quantity demand decreases.
 The law of demand states that as price increases, quantity
demand will decrease ceteris paribus (assuming all factors are
constant). The ceteris paribus is a phrase that should never be
removed from this law because the law would only be true if
these are no other factors that could affect the demand of the
people. In reality, however, there are other factors that would
affect demand.
Other Factors Affecting Demand

Currently, there are food and beverages in the market that continue to
increase their prices. However, people’s demand remaind the same or even
increases.

A. Income
If a person earns minimum wage, he/she naturally has a lower purchasing
power, so the demand for commodities is fewer. However, someone earning
double and who has no other responsibilities at home, there will be better
capacity to buy more commodities thereby increasing his/her demand. This
depicts that when income increases, quantity demand would generally
increase.
Other Factors Affecting Demand

Income
However, this fact is dependent on the type of goods or services that we are
considering because commodities be either normal goods or inferior goods.

Normal Goods - goods or services that have an increasing demand whenever

income increases. Whenever income decreases, we can expect these
commodities to decrease as well. Examples of which include jewelry,
expensive liquors or going to fine-dining restaurants or hotels. Why are these
commodities often seen in areas where wealthy individuals usually reside?
This is because they are the ones with high demand for these products.
Other Factors Affecting Demand

Income

Inferior Goods - goods or services that have a decreasing demand whenever

income increases. Why do we expect noodles, sardines or dried goods to
have an increased demand in times of crisis.? This is because this is the time
when people’s income is low and these are the cheaper commodities that
they can afford. Naturally, if a person’s income is high, he or she would
demand for normal goods because these are what he/she believes he/she
deserves; but if the income is low, a person whould demand for inferior
goods because these are something that he/she can afford.
Other Factors Affecting Demand

Price of Related Goods and Services

Price of related goods can be either a subsitute good or complementary

goods.
Substitute goods are goods that can replace another commodity in its
absence. An example of which is that in the absence of coffee, a tea or
chocolate drink could be a substitute. Another examples is that of chicken
beef or pork.

If the price of a commodity increases, we can expect the demand of its

subsitute good to increase and vice versa.
Other Factors Affecting Demand

Price of Related Goods and Services

Complementary goods are goods that go hand in hand with each other.
Example of complementary goods are coffee and creamer.

 Would you purchase a creamer without coffee? Let us assume that coffee
would again increase its price 10x. Can we expect the demand for creamer
to increase? As a result, we can expect to have a decreased demand for
creamer because there is no reason to buy it without coffee. Hence, if the
price of a commodity will increase, we can expect the demand of its
complementary good to decrease, and vice versa.
Other Factors Affecting Demand

Taste and Preference

Price of cigarettes also increase due to sin tax. Still, the number of smokers
with the same cigarette consumption remains the same. Even with price
increase, if buyers continue to prefer consuming this commodity, the
demand will remain high. Although there is a cheaper alternative, if
someone prefers the taste of the highly priced doughnut, then he/she is still
likely to purchase the same. Consequently, as taste and preference increase,
we can expect an increase in demand of that product, and vice versa.
Other Factors Affecting Demand

Expectation on Future Prices

In the Philippines, we often hear the term panic buying from media outlets.
This often happens when people expect prices to increase. Panic buying
means that individuals buy goods that are beyond their needs, as they expect
prices to increase in the future. The perspective is that buyers want to take
advantage of the cheap prices will be lower than the usual, people tend to
wait for that date before they buy the things they need
 Hence, we can say that as people expect prices to increase in the future,
QD at present will increase, and if prices will decrease in the future, QD at
present will decrease.
Other Factors Affecting Demand

Changes in Population

Manila is one of the most populous areas in the Philippines. This is because
most of its citizen believe that it is where opportunities can be found. We can
see many business establishments around more populated areas than in
those with fewer people. Consider the number of computer shops in Metro
Manila and Bataan. In Metro Manila, almost every barangay has one of more
computer shops nearby.
 The number of buyers of a product also influences the demand for that
product. Thus, higher population would generally increase the demand
more, or as population increases, QD is likely to increase as well, and vice
versa.
What is a Supply?
Supply is the quantity of goods or services sellers are willing and able to sell at
different prices.
Year Price (in Php) Quantity Supply (QS)
2005 1,000 1,065
2006 1,250 1,090
2007 1,350 1,100
2008 1,400 1,105
2009 1,500 1,115
2010 1,800 1,145
2011 2,000 1,165

The table shows that as price increases, the quantity supplied increases, as well. This is also a natural state of
the market. Why is it that whenever price increases, the quantity supplied normally state of the market. This is
so because higher prices entail more profit for the producer or seller.
What is Supply?

For, example, a company has an input of P8 on a commodity and can sell it at

P15. If the same commodity can be sold at P25 and the input and demand for
the commodity remains the same, seller is more incentivized to produce
more because he/she could gain a profit of P7 at P15, and shall be more
profitable if the price will be increased to P25. In the supply schedule above
our dependent variable is the quantity supply (QS) because it is the value that
we would like to know. Price is our independent varible as it is the value that
is exected to affect supply. Because we can see that whenever the price of
the service increases, and the quantity supplied increases, then price has a
positive or direct or direct relationship to quantity supply.
Supply

Quantity Supplied can be computed using the following mathematical

equation: QS = 965 + 0.1P
Like the earlier example on demand, this is also a linear equation. It is important to
consider the intercept and slope. In this equation, 965 is the intercept and 0.1 is the
slope. Intercept is the value that we can get, with the absence of the independent
variable (price) or the value that we can get, with the absence of the independent
variable (price) or the value of QS if the independent variable is zero. Meaning, if the
boat ride is free, we can expect 965 people to voluntariy invite quests and show them
the Tubbataha Reefs in Palawan. Slope is the impact of the independent variable to
the price. Hence, if the price of a boat ride is 1,000 there would be 1,065 people who
will provide a boat ride. QS = 965 +0.1(1,000)
=965 +100 = 1,065
Law of Supply

 states that as price increases, quantity supplied will also increase ceteris paribus
(assuming all factors are constant).

Other factors affecting supply

 Input Price- if the cost of input increases, quantity supplied is likely to decrease
and vice versa

 Price of Related Goods and Services - if the price of a substitute good of a

commodity increases, the supply of the other will increase and vice versa
 if the price of a complementary good of a commodity increases, the supply of
the other will decrease, and vice versa
Law of Supply

 Expectation on Future Prices

 we often hear about the word “hoarding” of goods by the producers. Hoarding
means that producers would refrain from selling certain commodities at certain
period because they expect their prices to go up in the future.

 Technology
 technological advancements increase the supply of a commodity. In the past,
when there were no sewing machines yet, there was a need for a number of
people to finish a dress and enough time to create any clothing line. Later, the
development of the sewing machine did not only lessen the number of people
to create a dress or other clothes, but it also increased the production of the
people owing to its ease of use. Hence, technological development increases
supply.
Law of Supply

 Government Regulations

 Before a firm can establish a business anywhere, it is required to submit

different government permits and pay different fees in line with the demands of
the city or municipality. These regulations are burdensome to a business owner,
esecially if the payment is too high. Hence, a high amount of money to be paid
due to government regulations is likely to decrease supply in an area. Just like
government regulations, taxes are also burden to suppliers. Thus, if the tax is
high, we can expect a decrease in the supply of different commodities.
Law of Supply

 Number of Suppliers
 whenever people from provinces arrive in Manila, they are often surprised with
the wide choices of food, clothing line or places to visit in the capital city. This is
because of the number of peoplewilling to sell or produce their goods or invest
in palces as big as Manila. Hence, we can say that if the number of suppliers
increases, the supply will also increase.
 Unexpected Calamities or Natural Disasters
 The Philippines has been consistently hit by typhoons and other natural
disasters such as the typhoon “Ondoy” and the earthquake in Cebu. When these
happens, we cannot expect the affected areas to produce commodities, as they
also need to cope with whatever damage a disaster has caused. Hence,
unexpected calamities or natural disasters will decrease the supply in an area.