Topic 4 - Market Forces - Demand

Managerial Economics Lecture Notes
Topic 4- Market Forces- Demand:Definition, Law of Demand, Determinants

of Demand(Demand Shifters), Demand Function, Industry and Firm Demand,
Demand Curve
What is Demand and Law of Demand?
Demand is the total quantity customers are willing and able to purchase under various
market conditions.
Law of demand states that as the price of a good rises(falls) and all other things remain
constant, the quantity demanded of the goods falls(rises).
Differentiate direct demand from derived demand and give examples?
Direct Demand is a demand for personal consumption or direct consumption such as a
demand to purchase car for personal use. While, Derived Demand is a demand for inputs
used in production such as demand for steel and aluminum to create tools and
equipment.
What are the determinants of demand(demand shifters)?
Price of the goods, availability of the goods, expectations of price change, consumer
income, consumer tastes and preferences, advertising expenditures
All of these except for the price are also known as demand shifters. Demand shifters are
explained below:
a. Income
Normal goods are goods that increases(decreases) in demand when income
increases(decreases)
Inferior goods are goods that decreases(increases) in demand when income
increases(decreases)
b. Price or related goods
Substitute goods are goods that the increase(decrease) in price will lead to an
increase(decrease) in the demand of the other goods.
Compliment goods are goods that the increase(decrease) in price will lead to a
decrease(increase) in the demand of the other goods.
c. Advertising and consumer tastes
Advertising provides information on the existence and quality of the product.
This is known as informative advertising.
Advertising that influence demand by altering taste of consumers is known as
persuasive advertising.
d. Population
Rise in population will increase demand of products.
e. Consumer Expectation
If consumer expect prices to go up next year, the demand this year is higher.
This usually happen on expensive products. This behavior is called stockpiling.
Substituting current purchases for future purchases.
f. Other Factors-example of variables that affects willingness to purchase are
known as potential demand shifters such as birth of a baby(diapers) and
health scares(cigarettes).
What is Theory of consumer behavior?
Theory of consumer behavior relates to direct demand for personal
consumption products.
What is market demand function?
 is the relation between quantity sold and factors influencing its level.
 a function that describes how much of a good will be purchased at alternative
price of the goods and related goods, alternative income levels and other
alternative values of other variables affecting demand.
Qdx = f(Px ,Py, M, H)
Where: Qdx = Quantity demanded of good X
Px=Price of good X
Py=Price of related good
M=Income
H=value of other variable such as advertising and population
What is a linear demand function?
A representation of a demand function in which the demand for a given good is a
linear function of prices, income levels and other variables affecting demand.(a0, ax are
called parameters)
Qdx = a0 + axPx + ayPy + amM +ahH

If ay is positive good X is a substitute good
If ay is negative good X is a complement good
If am is positive good X is normal good
If am is negative good X is an inferior good
Differentiate industry demand and firm demand
Industry demand considers variable such as population growth while firm
demand considers variable such as competitor’s prices and advertising expenditures.
What is consumer surplus?
Consumer surplus is the value consumers get from a good but do not have to pay
for.
Illustration: Demand Calculation

An economic consultant for X Corp, recently provided the firm’s marketing manager
with the estimate of the demand function for the firm’s product:
Qdx = 12,000 - 3Px + 4Py - 1M + 2Ax
Where Qdx represents the amount consumed of good X, Px is the price of good X, M is
income, and Ax represents the amount of advertising spent on good X. Suppose good X sells for
P200 per unit, good Y sells fro P15 per unit, the company utilizes 2,000 units of advertising and
consumer income is P10,000. How much of good X do consumers purchase? Are goods X and Y
substitutes or compliments?Is good X a normal or inferior good?
Answer:
Qdx = 12,000 - 3(200) + 4(15) - 1(10,000) + 2(2,000) = 5,460
Since the coefficient of Py in the demand equation is 4>0, an increase of P1 in the
price of Y will increase the consumption of X by 4 units. Thus, goods X and Y are
substitutes.
Since the coefficient of M in the demand equation is -1<0, an increase of P1 in
income will decrease the consumption of good X by 1 unit. Thus good X is an inferior
good.
What is Demand curve?
Demand curve is the relation between price and the quantity demanded holding
all else constant.
What is change in quantity demanded and shift in demand curve?
Change in quantity demanded is the movement along a demand curve reflecting
a change in price.
Shift in demand curve is a switch from one demand curve to another another
following a change in nonprice determinant of demand.

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Managerial Economics Lecture Notes

Topic 4- Market Forces- Demand:Definition, Law of Demand, Determinants

Qdx = a0 + axPx + ayPy + amM +ahH

Illustration: Demand Calculation

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