MODULE WEEK NO.

3
Pamantasan ng Lungsod ng Maynila
General Luna Street, Corner Muralla Street,
Intramuros, Manila
Trunkline: (+63 2) 8 643 2500

PLM Business School-Department of Business Economics

COURSE CODE: MANAGERIAL ECONOMICS
1st Semester of A.Y. 2020-2021

Introduction

This Module focuses on the theory of the firm – the purpose it plays and benefits it give to the owners,
the people behind it, and the society. It emphasized that this purpose has evolved from money-
making to nation-building.

Rationale

The purpose of this module is to enlighten the students and provide the basic mindset that any
COURSE MODULE

economist-to-be should have, considerations that they will always have to bear in mind in no matter
how complex the economic principles and issues they will encounter in the succeeding discussions or
as they enter the professional practice once they commence to the real-world.

Intended Learning Outcomes

Understand the workings and applications of the market forces: Demand and Supply.
Activity

Refer to the tasks provided inside the module.

Discussion

Demand Analysis

Demand is the desire to possess a commodity or make use of a service, combined with the ability to
purchase it and its negative relationship to its price. While, quantity demanded is the number of good
and service a person is willing and able to buy given a certain price level at a given point in time.

The demand schedule is a table that shows the data set from which Demand Schedule for
the demand curve is derived. It shows the price-quantity combination Product Z
PT. P Qd
by which the consumer is willing and able to buy certain quantity of
O 0 80
good at a specific price level. A 2 74
B 5 65
C 8 56
D 11 47
E 15 35

1
 MODULE WEEK NO. 3

The Law of Demand states that as prices go up, the quantity demanded goes down and vice-versa.
The law can be expressed in the Linear Demand Equation as:
Qd = a – bP
where:
“Qd“ is the quantity demanded
“P” is the demand price; a price level desired by the consumers at which
they are willing and be able to buy their desired commodity.
“a” is the maximum demand (at zero prices or no influence of price)
“b” is the slope; sometimes referred to as the elasticity of demand
(-) is the mathematical manifestation of the Law of Demand

The price and quantity combination can be interpreted as:

“…at the price of Px, the consumer is willing and able to buy Qd units of the said good”.
COURSE MODULE

Task 01:
a. Using the linear demand equation, derive the formula for: “P” “a” and “b”
b. Are you still included in demand if the good you want to consume is free?
c. Is it possible, and, will it make sense, to have the equation rewritten as Qd=a+bP when the
given b is negative i.e. Qd=a-(-b) P? Justify your answer.
d. Compute for Qd when P=3, b=-2, a=75. What is the value of Qd? Does the value make
sense? If not, why? Justify.
e. Compute for P when Qd=35, b=-3, a=50. What is the value of P? Does the value make sense?
If not, why? Justify.
f. Compute for P when Qd=500, b=-4, a=400. What is the value of P? Does the value make
sense? If not, why? Justify.

2
 MODULE WEEK NO. 3

Illustration 1. Demand Curve from Demand Schedule for Product Z

16
E Demand Curve
14

12
D
10
C
Price 8

6
B
4
A
2
O
0
0 20 40 60 80 100
Quantity Demanded
COURSE MODULE

Change in quantity demanded is a condition brought about by the changes in prices which are
reflected graphically by the movements of reference points along one demand curve.

Change in demand is a condition brought about by changes in the non-price determinants of

demand which in effect will shift the demand curve either to the left (decrease in demand) or to the
right (increase in demand).

Change in Demand
Graphical presentation
an increase in demand is
Result of an increase in the determinant
Determinant exhib ited b y shifting the 1st
(not the price of the determinant)
demand curve to the right
(2nd demand curve)

A favorable change in consumer tastes and P

Tastes and preference over a certain product increases
Preferences the demand for that product (I.e. more of the
good is consumed. D2
D1
Qd

P
An increase in the number of buyers of a
Number of
certain commodity will likewise increase the
Buyers
demand for such.
D2
D1
Qd

An increase in money income increases the P

purchasing capability of the consumer,
hence their demand - such goods whose
demand varies directly to income are called
3 D1
D2
normal goods .
Qd
Income
Conversely, a good that exhibits inverse P
variability with demand as money income
 P
An increase in the number of buyers of a
Number of
certain commodity will likewise increase the
Buyers
demand for such. MODULE WEEK NO. 3
D2
D1
Qd

An increase in money income increases the P

purchasing capability of the consumer,
hence their demand - such goods whose
demand varies directly to income are called
D2
normal goods . D1
Qd
Income
Conversely, a good that exhibits inverse P
variability with demand as money income
rises is called inferior goods . Examples are
demand for used clothing, third-hand cars
D1
and re-assemled goods. D2
Qd

If the price of the complimentary good rises, P Pc

Prices of the demand for the first good declines - as
Related Goods they are complements, both of the goods
(Compliments) are used together to render the satisfaction D1
as expected of them. D2
COURSE MODULE

Qdx

P Ps
If the price of the substitute good rises, the
Prices of
demand for the original good rises as it
Related Goods
becomes cheaper compared to the price of
(Substitutes)
the substitute good. D2
D1
Qdx

An anticipated event that would lead to Pf Qf

P
higher consumption of the good now than in
Expectations the future increases demand today.
Moreover, an expected price increase in the D2
future would increase the demand today. D1
Qd

Task 02: Write a real-world scenario that will depict each of the identified condition and graphically
illustrate the same with proper labels:
a. A rise in price.
b. A decrease in price.
c. A shift to the left for each of the determinants.
d. A shift to the right for each of the determinants

4
 MODULE WEEK NO. 3

Supply Analysis

Supply appertains to the relationship between the number of commodities that the producer/s are
willing and be able to make available in the market given a certain level of prices and at a certain
point in time.

Quantity supplied is the number of commodities that the producer/s Supply Schedule for
are willing and be able to make available in the market given a certain Product Z
PT. P Qs
level of prices and at a certain point in time.
O 0 55
A 2 59
The supply schedule is a table that shows the data set from which the B 5 65
demand curve is derived. It shows the price-quantity combination by C 8 71
D 11 77
which the consumer is willing and able to buy certain quantity of good
E 15 85
at a specific price level.
COURSE MODULE

The Law of Supply states that as prices go up, the quantity supplied also increase. The law can be
expressed in the Linear Supply Equation:
Qs = c + dP
where:
“Qs” is the quantity supplied
“P” is the price of supply; a price level desired by the producers at which
they are willing and be able to buy their desired commodity.
“c” is the minimum supply (at zero prices or no influence of price)
“d” is the slope; sometimes referred to as the elasticity of supply
(+) is the mathematical manifestation of the Law of Supply

The price and quantity combination can be interpreted as:

“…at the price of Px, the producer is willing and able to sell or offer in the market
Qs units of the said good”.

Task 03:
a. Using the linear supply equation, derive the formula for: “P” “c” and “d”
b. What is the difference between the terms “supplier” as referred to in demand and supply
analysis vs “producers” and “sellers”? Are all these three the same? If not, provide difference
in table form.
c. Are you still included in supply if the good you produce and provide free?

5
 MODULE WEEK NO. 3

d. Is it possible, and, will it make sense, to have the equation rewritten as Qs=c-dP when the
given d is negative i.e. Qs=c+(-d) P? Justify your answer.
e. Compute for Qs when P=10, d=2, c=200. What is the value of Qs? Does the value make
sense? If not, why? Justify.
f. Compute for Qs when P=15, b=3, a=500. What is the value of Qs? Does the value make
sense? If not, why? Justify.

Illustration 2. Supply Curve from Supply Schedule for Product Z

16
E
14

12
Supply Curve D
10
C
Price
COURSE MODULE

6
B
4
A
2
O
0
0 20 40 60 80 100
Quantity Supplied

Change in quantity supplied is a condition brought about by the changes in prices which are
reflected graphically by the movements of reference points along one supply curve.

Change in supply is a condition brought about by changes in the non-price determinants of supply
which in effect will shift the supply curve either to the left (decrease in supply) or to the right (increase
in supply).

Change in Supply
Graphical presentation
an increase in supply is
Result of an increase in the determinant
Determinant exhib ited b y shifting the 1st
(not the price of the determinant)
supply curve to the right
(2nd supply curve)

P S2
Resource
An increase in the cost of production S1
Prices / Cost
depletes the ability of suppliers to produce
of the Factors
more output.
of Production
Qs
6
 MODULE WEEK NO. 3

P S1
An increase in the technological
S2
advancement that is favorably integrated in
Technology
the production process would lead to an
increase in the number of output.
Qs
Taxes can be treated as an additional cost
P St
of the business levied by the government S1 Ss
Taxes and and has a negative effect on supply.
Subsidies Subsidies on the other hand are incentives
given by the government to entice more
investors and increase output. Qs

P S1
The larger the number of suppliers in a S2
Number of
certain industry, the more output will be
Sellers
made available in the market.
COURSE MODULE

Qs

P S2
If the price of a good which is S1
Prices of Other
complementary to the good being produced
Goods
goes up, the number of output of the good Pc
(Complements)
will also decline.
Qs

P S1
If the price of a substitute to the good being
Prices of Other S2
produced goes up or if there would be a
Goods
substitute good to the factor of production Ps
(Substitutes)
which is cheaper, supply also goes up
Qs

P S2
If the expected price level in the future would
S1
Price go up, it may negatively affect the producer's
Expectations willingness to supply goods in the market Pf
today.
Qs

Task 04: Write a real-world scenario that will depict each of the identified condition and graphically
illustrate the same with proper labels:
a. A rise in price.
b. A decrease in price.
c. A shift to the left for each of the determinants.
d. A shift to the right for each of the determinants

7
 MODULE WEEK NO. 3

Exercise

Refer to the tasks provided inside the module.

Assessment
No assessment quiz for now. It shall be included in the integrated unit exam.

Reflection

Do firms create their own demand by way of their products? Or, is it demand which creates the firms
to supply as such?

Resources and Additional Resources

COURSE MODULE

• E-books:
Principles of Microeconomics, Eighth Edition, N. Gregory Mankiw
Microeconomics, 19th edition, C. Mc Connell, S. Brue, S. Flynn