MANAGERIAL ECONOMICS 133 • Enough buyers and sellers so that no participant

can influence the market price – everyone is a

ECONOMIC CIRCULAR FLOW
price taker
Factors of Production:

- Land (i.e. Rent)

DEMAND
- Labor (i.e. Wages)
- Capital (i.e. Interest) - The quantity of goods or services buyers are
- Entrepreneurial Ability (i.e. Profit) willing and able to buy.

Basic Circular Flow: Law of Demand – as price increases, quantity

demanded decrease (assuming all other factors are
constant)

Quantity Demanded – the quantity of a commodity that

people are willing to buy at a particular price at a
particular point of time.

Demand Schedule – a table that shows the quantity

demanded of a good or service at different price levels.
A demand schedule can be graphed as a continuous
demand curve on a chart where the Y-axis represents
price and the X-axis represents quantity.

Demand Curve – a graphic representation of the

relationship between product price and the quantity of
the product demanded. It is drawn with price on the
vertical axis of the graph and quantity demanded on the
horizontal axis.

Determinants of Demand – factors that either positively

or negatively affect demand in the market.

DETERMINANTS OF DEMAND

Income – When income increase, it is expected that

demand would also increase. However, this fact is
dependent on the type of goods or service:

- Normal goods are goods or services that have

The Circular Flow Model Reflecting Outflows and an increasing demand whenever income
Inflows increases.
- Inferior goods are goods or services that have a
decreasing demand whenever income
increases.

DEMAND AND SUPPLY ANALYSIS Price of related goods and services

Market - Substitute goods are goods that can replace

another commodity in its absence.
- a term that is relative based on the industry - Complementary goods that go hand in hand
where one is involved in. with each other.
- a place where buyers and sellers meet.
- facilitates the interaction of a buyer and a seller Tastes and Preferences – Even with price increase, if
as they complete a transaction buyers continue to prefer consuming this commodity,
the demand will remain high. Consequently, as taste
Buyers, as a group, determine the demand and preference increase, we can expect an increase in
Sellers, as a group, determine the supply the demand of the product, and vice versa.

Expectations on Future Prices – The perspective is that

buyers want to take advantage of the cheap prices on a
Characteristics of Competitive Markets certain period. For example, because a sale means that
• Identical goods or services prices will be lower than usual, people tend to wait for
that date before they buy the things they need. Hence, Price of related goods and services – If the price of a
we can say that as people expect prices to increase in substitute good of a commodity increases, the supply of
the future, quantity demanded at present will increase, the other will increase and vice versa. If the price of a
and if prices will decrease in the future, quantity complementary good of a commodity increases, the
demanded will decrease. supply of the other will decrease, and vice versa.

Changes in Population – The number of buyers of a Expectation on future prices – An increase in price in
product also influences the demand for that product. the future will lead to a decrease in supply at present.
Thus, higher population would generally increase the
Technology – Technological development increases in
demand more, or as population increases, quantity
efficiency in production. Hence, technological
demanded is likely to increases well, and vice versa.
development increases supply.

Government regulations – A high amount of money to

CHANGES IN DEMAND be paid due to government regulations is likely to
decrease supply. If tax is high, we can expect a decrease
- refer to the shift of demand curve which is
in the supply of different commodities. Conversely,
brought about by the changes in the
when government subsidies increase, the supply will
determinants of demand like income,
also increase.
population, price expectation and so forth
Number of suppliers/ sellers – If the number of
CHANGES IN THE QUANTITY DEMANDED
suppliers increases, supply will also increase.
- indicate the movement from one point to
Unexpected calamities or natural disasters -
another point.
unexpected calamities or natural disasters will decrease
supply.

SUPPLY

- the quantity of goods and services sellers are MARKET EQUILIBRIUM – a point where quantity
willing and able to sell at different prices demanded is equal to the quantity supplied.

Law of Supply – as prices increases, quantity supplied

will also increase (assuming all other factors are
constant)

Quantity Supplied – the number of goods or services

that suppliers will produce and sell at a given market
price.

Supply Schedule – a tabular representation of the

various quantities of commodities that are supplied by a
supplier at different price levels over a period. It shows
the relationship between the price of goods and the
quantity of goods supplied.

Supply curve – a graph that shows how a change in the

price of a good or service affects the quantity a seller
supplies. Price is listed on the vertical y-axis, while
quantity supplied is listed on the horizontal x-axis.

Determinants of Supply – factors that influence the

supply of certain goods and services.

DETERMINANTS OF SUPPLY

Input prices – If price of the input of a commodity is

high, we can expect that its price will also increase.
Moreover we can expect that the supply of said
commodity will decrease as the increase in the input
price will be costly to the producer/seller. Hence, if the
cost of input increases, quantity supplied is likely to
decrease and vice versa.