MANEGERIAL ECON.

1. Demand and the Law of Demand Demand refers to the ability and willingness of consumer, having the desire to buy the product at a given price and period of time. It should be noted that demand is not synonymous to consumption. Demand can be analyze with the aid of table, graph, or function reflecting the relationship of quantity demanded and price or quantity demanded and other factors affecting it. Ceteris paribus, the relationship of price and quantity demanded is explained by the Law of Demand. The said law states that: "Holding other factors as constant, as the price of a particular product increases the level of quantity demanded of the said product decrease. Likewise, as its price decrease, the level of its quantity demanded will increase". The said law implicates the negative relationship between price and quantity demanded. This condition can be explained by: a. Substitution Effect - as the price of a particular product increases the consumer will tend to switch other substitute products which will lead to a reduction on demand of a particular product. b. Income Effect - as the price of a particular product increases the purchasing power of the income reduce which leads also to the reduction on quantity demanded of the product. 2. In reality, majority of the products follows the mechanism of the law. However, there are also cases where the said law does not apply. That is, the relationship between price and quantity demanded is positive. The said cases or goods are as follows: a. Veblem Goods - goods which satisfies aristocratic desire like diamonds, antique items, rare paintings, etc. where prices of these items increases the quantity demanded of wealthy individual will also increase. b. Giffen Goods - goods due to its essentiality that even if its price increase still consumers demand increases. C. Consumers psychological bias or illusion about the quality of commodity with price change. d. Case of life saving essential goods and also in times of extraordinary circumstances like inflation, deflation, war and other natural calamities. e. Case of speculative demand like stock markets. 3. Demand Curve and FunctionBoth demand curve and function are tools which present the relationship of price and/or non-price factors and quantity demanded. Demand curve illustrates the said relationship through graphical approach. Below is an example of demand curve derived from a linear function where price only as its factor; Price Price D D Qo/Unit/ Time Qo/Unit/Time Linear Demand Curve Non-Linear Demand Curve Figure 3. Demand Curves Points will move along the curve when price only affects quantity demanded. This is also termed as movement along the demand curve. Demand curve will shift either to the left or right if non-price factors affects quantity demanded (depending on the impact of the non-price factor) 4. On the other hand, demand function illustrates the relationship of price and quantity demanded through mathematical approach. Below is an example of a linear demand function indicating price and non-rice factors: QD = a - bP + cPs - dPc + eFErtfl + gTP where: Op is the amount of goods demanded P is the products own price Py is the price of its substitute good Pc is the price of its complement good FEp is the Future Expectation of Price of the product I is Income which could be positively or negatively related to QD I'P is the Taste and Preference of consumer towards the product ais the value of quantity when price is zero; this also represents the sales of the firm at price zero. bode f gare marginal effects of the above mentioned factor Other demand functions example: whereb is the price elasticity coefficient and P is Price Q = POYO whereb is the price elasticity coefficient, c is income elasticity coefficients, P is Price, and Y is Income5. Factors Affecting DemandI Apart from the product's own price, demand is also affected by other factors which are also termed as non-price factors. Multiple factors may affect the demand level but to name a few, the following are considered in this lesson: a. Price of Related lGoods. This refers to the prices of its substitute or complement products. Price of substitute goods affects quantity demanded of a particular product while the price of its complement goods affects quantity demanded negatively. b. Income. This factor affects quantity demanded in two different ways, whether the good is normal or inferior. If the good is normal, income affects quantity demanded positively. And when the good is inferior it affects quantity demanded negatively. c. Taste and Preference. This refers to the likes and dislikes of the consumer towards the product. Hence, this factor affects quantity demanded positively. d. Future Expectation of Prices. This refers to the anticipation of consumers with regards to price changes of the product in the future, whether it would increase or decrease. This factor affects quantity demanded negatively. e. Population Size. This factor also determines the level of demand in the market of a particular product. A larger size means more demand. Thus, this factor affects quantity demanded positively! As discussed eadier, the above factors will trigger the demand curve shifts whether to the left or right. Say, an increase in population size will lead to an increase in demand and so the demand curve will shift to the ght. [in the other hand, a reduction in income will lead also to a reduction on demand of a normal good and hence will shift the demand curve to the left. Always remember that when a factor will lead to an increase of demand then the curve will shift to the right. And when a factor will lead to a reduction in demand then the curve will shift to the left. 5. Demand Forecasting Firm's pricing mechanism as well as promotion policies will base on the current demand in the market. Unfortunately, those will not be realized if rm will not undergo into demand estimation. Demand estimation is a process of identifying current values of demand under the influence of various prices and other determined variables. The main goal of demand estimation is to come up a mathematical model that would reect the relationship between its dependent variable [demand] and independent variables (prices, income, taste and preferences, etc} to forecast demand. Demand forecasting estimates the future demand of the product. it helps the rm to determine the estimated demand for its products so that it can plan its production activityr accordingly. It is undertaken either in a macro, industry, or rm level. There are different methods on demand forecasting, namely:l For Existing Products > Qualitative Method a. Survey Method - under this method few consumers are selected and their response on the probable demand is collected. The demand of the sample so ascertained is then magnified to generate the total demand of all the consumers for that commodity in the forecast period. b. Expert Opinion - under this method the researcher identifies the experts on the commodity whose demand forecast is being attempted and probes with them on the likely demand for the product in the forecast period. c. Delphi Method - under this method, a panel is chosen to give suggestions in solving the problems in hand. Panel members are separated from each other and give their views in an anonymous manner. d. Consumer Interview - under this method a list of potential buyers would be drawn and each buyer will be approached and asked about their buying plans. This may be conducted in a: complete enumeration, sample survey, or end- use method. > Quantitative Method a. Trend Projection - under this method, demand is estimated on the basis of analysis of past data. This method makes use of time series (data over a period of time). Trend in the time series can be estimated by using least square method or free hand method or moving average method or semi- average method. b. Regression and Correlation - these methods combine economic theory and statistical techniques of estimation. in this method, the relationship between dependant variables(sales) and independent variables(price of related goods, income, advertisement etc..) is ascertained. C. Extrapolation - in this method the future demand can be extrapolated by applying binomial expansion method. This is based on the assumption that the rate of change in demand in the past has been uniform. d. Simultaneous Equation - also called the complete system approach to forecasting. This is the most sophisticated econometric method of forecasting. It explains the behavior of all variables which the firm can control. For New Products a. Evolutionary Approach. In this method, the demand for new product is estimated on the basis of existing product. E.g. Demand forecasting of colored TV on the basis of demand for black & white TV. b. Substitute Approach. The demand for the new product is analyzed as substitute for the existing product. c. Growth curve Approach. On the basis of the growth of an established product, the demand for the new product is estimated.d. Opinion Polling Approach. In this approach, the demand for the new product is estimated by inquiring directly from the consumers by using sample survey. e. Sales Experience Approach. The demand is estimated by supplying the new product in a sample market and analyzing the immediate response on that product in the market. f. Vicarious Approach. Consumer's reactions on the new products are found out indirectly with the help of specialized dealers. 7. Supply and the Law of Supply Supply refers to the ability and willingness of the producer to sell at a given price on a particular period of time. It reflects the seller's decision in dealing the market with respect on its selling activities. Supply is not synonymous to stock as the latter refers to the amount or volume of goods stored and is not yet intended for sale. Similar to demand, supply can also be analyze with the aid of table, graph, or functions. The relationship of price and quantity supplied can be explained with the use of the Law of Supply. The law simply states that: "Holding other factors as constant, as the price of the product increase the level of its quantity supplied also increases. Likewise, as the price of the product decrease the level of its quantity supplied will also decrease". The said condition tells us that there is a positive relationship between price and quantity supplied and this is due to the profit motive of the seller. Note that the summation of the entire supply of each seller would reflect the supply of the market. 8. Supply Curve and Function Supply curve is a tool in supply analysis that shows the relationship of price and quantity supplied in a graphical form. Since there is a positive relationship established between the two factors (base on the Law of Supply) the structure of its curve is upward sloping. Below is the graph showing the supply curve. Price Price S Qs/Unit/ Q./Unit/ Time Time Linear Supply Curve Non-Linear Supply Curve Figure 4. Supply CurvesUnder the supply analysis, points will just move along its curve if only price affects quantity supplied. This is also termed as movement along the supply curve. However, if non-price factors affects quantity supplied then the entire curve will shift either upward or downward depending on the impact of the said factors to quantity supplied. Supply function, on the other hand, is another tool which reflects the relationship between price and quantity supplied in a mathematical form