MACC 121: MANEGERIAL ECONOMICS

ALL ABOUT DEMAND

 Demand indicates how much of a product consumers are both willing and able to buy at each
possible price during a given period, ceteris paribus (all other things constant).
 Individual Demand refers to the demand for a good or service by an individual.
 Market Demand is the summation of the total individuals’ demand curve.
 Demand Function is a mathematical representation of the relation between the quantity
demanded of a product and all factors that influence this demand.
 Demand Schedule is a table that shows the quantity demanded of a good/service at different
price levels. It can be graphed as continuous demand curve on a chart where y-axis
represents price, and x-axis represents quantity.
 Three (3) independent variables are price of the product, price of related products, and
incomes of potential customers.
 The Law of Demand says that quantity demanded varies inversely with price, ceteris paribus.
Thus, the higher the price, the smaller the quantity demanded.
 Substitution Effect is the decrease in sales for a product that can be attributed to consumers
switching to cheaper alternatives when its price rises. The change in the relative price (the
price of one good relative to the prices of other goods) causes the substitution effect.
 Income Effect is the change in the demand for a good or service due to a change in the
consumer’s purchasing power.
 Real Income is the earnings of individuals or the nation after adjusting to the extent of
inflation. It measures in terms of how many goods and services an individual can buy. It has
purchasing power dependent on the economy’s health. It is inversely proportional to inflation.
 Money Income is the number of dollars or peso you receive per period.
 Marginal Utility is the added satisfaction that a consumer gets from having one more unit of
good or services.
 Law of Diminishing Marginal Utility states that satisfaction decreases as consumption
increases.
 Elasticity of Demand refers to the degree to which demand responds to a change in an
economic factor.
 If the price elasticity is ZERO, quantity demanded is UNAFFECTED by price, and demand
curve is VERTICAL.
 If the price elasticity is INFINITE, a small increase in price will lead customers to PURCHASE
NONE OF THE PRODUCT, the demand curve is HORIZONTAL.
 Demand is ELASTIC if the price elasticity is GREATER THAN 1 (>1).
 UNITARY or UNIT-ELASTIC if EQUAL TO 1 (=1)
 INELASTIC if LESS THAN 1 (<1)
 Percentage change in price will result in larger percentage in the quantity demanded.
 Demand is more elastic at higher prices and less elastic with lower prices.
 For elastic demand, take note that price and revenue are inversely proportional; goods
are luxuries and has many substitutes.

“Be strong and courageous. Do not be afraid nor discouraged for the Lord your God is with you
wherever you go.”

---Joshua 1:9---

Charlene Mae B. Avanzado, Future CPA<3

 For inelastic demand, remember that price and revenue are directly proportional,
because quantity demanded is less responsive to the change in price; goods are necessities
and has few substitutes.
 Determinants of Demand Elasticity are the following:
1. Availability of Substitutes means that the greater the availability of substitutes for a good,
the greater the goods’ elasticity of demand.
2. Share of Consumers’ Budget Spent on the Good indicates that an increase in prices
reduced the demand.
3. A Matter of Time states that the longer the adjustment period, the greater the consumers’
ability to substitute.
4. Some Elasticity Estimates means that the elasticity of demand is greater in the long run
because consumer have more time to adjust.
5. Changes in Consumer Income means that if income increases, demand increases
(demand curve shifts to the right)
a. Normal Goods (income elasticity is positive) are consumer products such as food
and clothing that exhibit a direct relationship between demand and income. As a
consumer's income rises, the demand for normal goods also increases.
b. Inferior Goods (income elasticity is negative) are goods whose demand drops when
people's incomes rise.
6. Changes in the Price of Related Goods
a. Substitutes (coefficient is >0) are goods that compete with each other. When there
is a decrease in price of one item, the demand for a substitute good will decrease.
b. Complements (coefficient is <0) are goods used and consumed together. When the
price of one decreases, the demand of the other will shift to the right (means that
demand will increase).
7. Changes in Size or Composition of the Population and demand are directly
proportional.
8. Changes in Consumer Expectations and demand have an indeterminate relationship
(means that demand curve may shift either to the left (decreases) /right (increases))
9. Changes in Consumer Tastes is also indeterminate to the demand.
 Income Elasticity of Demand measures the change in quantity demanded of a product given
a change in income.
 Cross-Elasticity of Demand measures the change in demand for a good when the price of a
related or competing product is changed.
 Marginal Propensity to Consume is the proportion of an increase in income that gets spent
on consumption. MPC varies by income level. MPC is typically lower at higher incomes.
 Marginal Propensity to Save is the proportion of an increase in income that gets saved
instead of spent on consumption. MPS varies by income level and is typically higher at higher
incomes.

“Be strong and courageous. Do not be afraid nor discouraged for the Lord your God is with you
wherever you go.”

---Joshua 1:9---

Charlene Mae B. Avanzado, Future CPA<3

 Formulas are the following:
a. Elasticity of Demand

% Change∈Quantity Demanded
% Change∈ Price

b. Income Elasticity of Demand

% Change∈Quantity Demanded
% Change∈ Income

c. Cross-Elasticity of Demand

% Change∈Quantity Demanded of Product X

% Change∈Price of Product Y

d. ARC Method

Change∈Quantity Demanded Change∈Price

÷
Average Quantity Average Price

e. Marginal Propensity to Consume

Change∈Consumption
Change∈ Income

f. Marginal Propensity to Save

Change∈Savings
Change∈Income

g. MPC + MPS = 1

“Be strong and courageous. Do not be afraid nor discouraged for the Lord your God is with you
wherever you go.”

---Joshua 1:9---

Charlene Mae B. Avanzado, Future CPA<3