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TOPICS:
Consumer Behavior
Analysis of Demand
Analysis of Supply
Market Equilibrium
Production and Cost Theories
Market Structure and
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Price-Output Determination
CONSUMER BEHAVIOR
Needs vs. Wants
Analysis of Consumer Behavior
o Marginal Utility Approach
a. Consumer Equilibrium
o Indifference Curve Approach
a. Indifference Curve
b. Family of Indifference Curves
c. Budget Line
d. Consumer Equilibrium
Patterns of Filipino Consumption
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The Responsible Consumer
 Important Terms
Needs – have to be satisfied for
an individual to live.

Wants – have to be satisfied in order to live comfortably.

Marginal Utility - means the additional
satisfaction or utility one gets from
consuming an additional unit of a good.
Utils – unit of measure to quantify utility or satisfaction.
Law of Diminishing Marginal Utility - It asserts that as more and
more of a commodity is concerned, his additional utility from
every unit consumed tend to become less and less.
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 Law of Diminishing Marginal Utility

Change in TU
MU =
Change in Q
Where;
MU – Marginal Utility
TU – Total Utility
Q - Quantity
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 Relationship between
Total Utility and Marginal Utility
Table 1

TOTAL UTILITY MARGINAL IMPLICATIONS

UTILITY

increasing positive satisfied

constant zero satiated
decreasing negative dissatisfied
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 Equimarginal Principle – states that consumers maximize their utility
or satisfaction when the marginal utility they get per price of a certain
good is the same as the marginal utility achieved per price of any
other good.
MU for Milk MU for Bread
=
Price of Milk Price of Bread

Marginal Rate of Substitution (MRS) - It measures the maximum

amount of one good given up in order to consumer more units of the
other good. It is also the slope of indifference curve.

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Law of Diminishing Marginal Rate of Substitution –It indicates that
consumer gives up less and less amount of cookies in favor of
additional units of candies.
Budget/Income – It is the amount allocated for buying the goods.
Consumer Equilibrium – It is attained at the point of tangency (the
point where the budget line touches but does not cross the
indifference curve) between the budget line and the highest
possible indifference curve.
The Responsible Consumer
Awareness
Social Concern
Action
Solidarity
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 CONSUMER RIGHTS
Basic Needs

Safety
P15.0
0
Information

Choice

Representation

Redress

Consumer Education

Page  9 Healthy Environment

ANALYSIS OF DEMAND
Price and Quantity Demanded
o Demand Function
o Demand Schedule and Demand Curve
o Other Factors Affecting Demand
Change in Quantity Demanded and
Change in Demand
Price Elasticity of Demand
a. Elastic
b. Inelastic
c. Unit-Elastic
d. Perfectly Elastic and Perfectly Inelastic
o Price Elasticity of Demand and Total Revenue
o Factors Affecting Demand Elasticity
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 Important Terms
Market exists if there is interaction between
buyers and sellers.
Buyers - are the ones who exert demand
Sellers - are the ones who bring about supply.
Price and Quantity Demanded
Demand – refers to the various quantities of a good that a consumer is
willing and able to buy.
Ceteris Paribus (remain constant) – income of the consumers, the
prices of related goods, and the number of consumers.
Demand Function –It specifies the relationship between the price of
the good and the various quantities that a consumer is willing and
able to buy.
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 Demand Schedule - assumption of price levels and for the
corresponding quantities demanded.
a. Individual Demand Schedule – prices and quantities demanded by
one buyer.
b. Collective Demand Schedule– prices and quantities demanded by
several buyers.
Demand Curve– graphical illustration of demand schedule.

DOWN SLOPING DEMANDCURVE

When the price of the good increases, the demand for that
good decreases, keeping other things constant conversely, when the
price decreases, the demand increases, keeping everything else
constant.
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 OTHER FACTORS AFFECTING THE DEMAND

A. Consumers’ Tastes and Preferences

B. Consumers’ Income
C. Number of Consumers
D. Prices of Substitutes and Complements
E. Price Expectations
F. Traditions

CHANGE IN QUANTITY DEMANDED AND

CHANGE IN DEMAND

Shift of the demand curve may be upward to the right, which

means an increase in demand; or downward to the left, which means
there is a decrease in demand.

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 PRICE ELASTICITY OF DEMAND
It measures how the quantity demanded changes when the
price changes. It measures the degree of the responsiveness of
quantity demanded to the change in the product price.
∆ Qd / Q
ED =
∆ P/ P
Where;
∆ Qd – new quantity demanded – old quantity demanded
Q – new quantity demanded + old quantity demanded
2
∆ P – new price-old price
P – new price + old price
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2
 Types of Demand Elasticity
A. ELASTIC DEMAND – Coefficient is less than 1, demand is said to be price –
elastic. This means that the percentage change in price results in a greater
percentage change in quantity demanded. Goods with many close substitutes are
price-elastic.
B. INELASTIC DEMAND – Coefficient is greater than 1.Percentage change in
quantity demand is smaller than the percentage change in price. Goods that
consume a smaller portion of the consumer’s income are price-inelastic.
C. UNIT-ELASTIC DEMAND – Coefficient elasticity is equal to 1. Percentage
change in quantity demand is equal to the percentage change in price. Goods that
are semi-luxury or semi-essential goods.
D. PEFECTLY ELASTIC DEMAND & PERFECTLY INELASTIC DEMAND
A. Elastic Demand – price elasticity is infinite. Even a slight change in price
can result in an infinitely large change in quantity demanded. This implies that
consumers face several choices and that a slight increase in the price of one good
can result in a large decrease in demand for that good, and an increase in demand
for other goods.
B. Inelastic Demand – zero price elasticity (Quantity Demanded stays the
same, no matter what the change in price is.)
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The Relationship between Product Price and Total Revenue
at various elasticity
Table 2
Value of Demand
Definition Price Total Revenue
Elasticity
Percent change in
quantity demanded is
<1 (inelastic) If price increases Total Revenue increases
less than percent change
in price
Total Revenue
If price decreases
decreases
Percent change in
quantity demanded is Total Revenue is
= 1 (unit-elastic) If price increases
equal to percent change constant
in price
Total Revenue is
If price decreases
constant
Percent change in
quantity demanded is Total Revenue
 1 (elastic) If price increases
greater than percent decreases
change in price
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PRICE ELASTICITY OF DEMAND AND TOTAL REVENUE

TOTAL REVENUE (TR = P x Q) refers to the total expenditure on

the product by a consumer or to the total sales by the producer.
Revenue depends on price elasticity of demand.

Factors affecting Price Elasticity of Demand

1. Availability of Close Substitutes
2. Importance of the goods to consumer
3. Proportion of Income Spent on the Good

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 ANALYSIS OF SUPPLY
Price and Quantity Supplied
o Supply Function
o Supply Schedule and Supply Curve
o Law of Supply
o Other Factors Affecting Supply
Change in Quantity Supplied and
Change in Supply
Price Elasticity of Supply

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 LAW OF SUPPLY

As price increases, the quantity supplied also increases, all other things
remaining constant.

PRICE AND QUANTITY SUPPLIED

Supply – refers to the various quantities of a good that a seller is

willing and able to sell at all possible alternative prices over a given
period of time.

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 Supply Function - The relationship between the
price of the good and the various quantities that a
seller is willing and able to sell can be expressed in
mathematical form which is called the supply
function.
QSx = f (Px)
Where;
QSx - Quantity supplied of Good x
Px – price of Good x
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Supply Schedule - It is made up of a listing of prices and quantities.
The higher the price, the more incentives for the seller to supply
more for a higher profit.

Supply Curve - It is a graphical representation of the supply function.

1. Sellers are encouraged to sell more at a high price than at a low
price since this means more profit. More profits create more goods.
2. At a higher price, even inefficient firms can stay in the industry. But
as price declines, efficient firms displace the inefficient ones,
triggering their withdrawal from the industry.

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 Other Factors Affecting Supply
a. Technology
b. Prices of Resources/Inputs
c. Taxes and Subsidies
d. No. of Sellers
e. Price Expectations
f. Natural Calamities

Change In Quantity Supplied – it refers to the movements of points

along the give supply curve. It happens when the price of a good
under consideration changes.
Change in Supply – it refers to either a downward to the right or
upward to the left movement or shift of the entire supply curve.

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 Factors that Cause Supply to Increase
1. Improvement in technology
2. Decrease in the price of resources/inputs used
3. Decrease in taxes imposed on producers
4. Increase in government subsidy
5. Increase in the number of sellers
6. Decrease in the future prices expected by producers

PRICE ELASTICITY OF SUPPLY

It measures the responsiveness or sensitivity of producers to

changes in the price of a good. This refers to the degree to which the
quantity supplied responds to changes in price.

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 Various Types of Elasticity

A. Elastic Supply – a slight change in price results in a large change in

quantity supplied, implying elastic supply.
B. Inelastic Supply – the percent change in price is higher than the
percent change in quantity supplied.
C. Unit-elastic Supply – the percent change in price is the same as the
percent change in quantity supplied.
D. Perfectly Elastic and Inelastic Supply
a. Perfectly Elastic - the price is fixed but the quantity varies
infinitely.
b. Perfectly Inelastic – whatever the price is, then supply is
fixed.
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 MARKET EQUILIBRIUM
 Market
o Market Equilibrium
o Market Surplus and Shortage
o Effects of Change in Demand on
Equilibrium Price and Quantity
o Effects of Change in Supply on
Equilibrium Price and Quantity
o Effects of Simultaneous Change in
Demand and Supply on Equilibrium
Price and Quantity
 Price setting by the government
o Price Floor
o Price Ceiling
 Tax Incidence
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 Market - It refers to the medium in which
buyers and sellers interact.

Market Equilibrium - It refers to the balance between all quantity

demand and quantity supply. When buyers and sellers transact at an
agreed price, there is market equilibrium.
Equilibrium Price – It is the price at which consumers will be willing to
take exactly the amount that sellers want to place in the market. This
is also called the “market-clearing price”.

Mathematical Solution to Equilibrium

Qd = 18 – 2P (demand for cookies)

Qs = 2 + 6P (supply of cookies)

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 In solving for equilibrium price and quantity, we equate the
demand and supply function :
Qd = Qs
18 - 2P = 2 + 6P
-2P-6P = 2 – 18
-8P = -16
-8 = -8
Pe = P2.00

We can substitute the equilibrium price P = P2.00 for the

demand and supply function, to get the equilibrium quantity (Qe)

18-2(2) = 2 + 6(2)
18-4 = 2+12
14 = 14
Qe = 14 units
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 Table 3
Quantity Quantity
Price Demanded Supplied
Qde Qse
Table 3 shows the demand and
0 18 2 supply schedules for cookies. At
P2.00, the demand for cookies at
1 16 8
14 units is equivalent to the supply
2 14 14 of cookies.
3 12 20

4 10 26

5 8 32

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 Market Equilibrium
6
5
Price

4
3 Supply

2 Demand

1
0
0 10 20 30 40
Quantity

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 Price setting by the Government
Price Floor - It is the price set by the government that is
higher than the equilibrium level.
Price Ceiling - It is the price set below the equilibrium price.

Tax Incidence - It refers to the final

resting of a tax burden. It crucially
depends on how the demand and supply curves are drawn.
It is largely dependent on price elasticity of demand and
supply; the flatter the demand curve (more elastic) is than
the supply curve, the lesser will be the burden on
consumers.
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 PRODUCTION AND

COST THEORIES
Production Theory
o Production Function
o Production Periods
o Short-run Production
a. Total produce and Average Product
o Marginal product and Law of
Diminishing Returns
Cost Theory
o Cost Concepts
o Short-run Costs
a. Total Cost : Fixed and Variable
b. Average Cost : Fixed and Variable
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c. Marginal Cost
 Important Terms
The goal of a producers is to maximize profits (sales minus costs)
and, at the same times, minimize costs.
Production - It refers to the process of creating goods and services
with the use of productive resources or factors of production.
Production Function - It refers to the relationship between inputs that
are required and outputs that are obtained.
Inputs – refer to the different ingredients used to produce
goods and services.
Outputs – refer to the goods and services that result from the
production process.
“How many units of input must be combined to produce so much of
an output?”
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 Production Period - It is the length of time within
which the firm can vary the amount of production
inputs to be used.
3 Classifications of Production Period
1. Immediate period – the time is too short for the firm to vary the
quantity of its inputs. This is why it is sometimes called the very short
run, or the market period.
2. Short-run period – the time is long enough for the firm to vary some
– but not – all of its inputs. Thus, some inputs are variable while
others are fixed. Land, buildings, machinery, and heavy equipment
are usually held fixed in the short-run period; raw materials, laborers,
and power supply are available.
3. Long-run period – is extensive enough for the firm to vary the
quantity of all inputs used. Therefore, in the long run, all inputs are
variable. No fixed inputs exist.
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 SHORT RUN PRODUCTION
For the production of children’s dresses (output), one of the inputs is
permanent (fixed input) while the other one is changing (variable
input) .
Variable input increases or as more dressmakers are hired, more
dresses are produced. Total Product (TP) increases, keeping capital
constant.
Average Product – refers to the total output produced divided by the
total units of inputs used.
Total Product
Average Product =
Variable Input

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Law of Diminishing Returns for Labor – there is a decrease in the
number of additional dresses produced per additional dressmaker
hired.
Marginal Product – pertains to the additional output produced when 1
unit of input is added, keeping other inputs constant.

Change in Total Product

Marginal Product =
Change in Variable Input

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 Production Schedule of Children’s Dresses
Table 4

Dresses Marginal Product Average Product

Dressmakers
(TP) (MP) (AP)
0 0

1 5 5 5

2 9 4 4.5

3 12 3 4

4 14 2 3.5

5 15 1 3

6 15 0 2.5
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 Total Product & Marginal Product
16

14

12

10
TP,MP

0
1 2 3 4 5 6
Labor
Total Product Marginal Product Average Product
At this point, the firm should stop hiring dressmakers.
That is six labor is enough to be combined with the fixed input,
Page  37 sewing machine.
 Cost Theory - Production involves cost. The inputs used in
producing goods and services are paid for by the business firm
that uses them.
Cost Concepts
Private Costs – are expenses shouldered by individual producers.
The firm incurs them when it acquires resources for use in the
production process. Example – Wages, rent, and cost of materials.
Social Costs – are additional costs that are not paid for by the
producers but are borne by society. Example – a cement
manufacturer causes pollution in the environment.

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Social Cost/benefit - can either be positive or negative in
terms of effect on society. Sometimes, production may
involve the benefits to the community and not negative
costs.
Example: The residents in a community wherein industries
are put up will benefit through jobs generated and business
opportunities created, like canteens, dormitories for
workers. However, they suffer in terms of pollution and a
possibly high crime rate in the area.

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The private cost of the producer can either be
explicit or implicit in nature.
Explicit or expenditure cost – consist of actual
payments made by the firm for resources bought or
hired. Examples : Payments for raw materials and
salaries of hired workers.
Implicit Cost – costs of self-owned or self-employed
resource.

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Variable Costs – are incurred for variable
inputs.
Example : Wages of ordinary laborers, cost of
raw materials, and transportation.
Fixed Costs – are spent for fixed inputs.
Example : Salaries of those in top
management, rent, and insurance payments.

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 SHORT-RUN COSTS
In the short run, the firms has insufficient time to vary all its
inputs.
A.Total Cost: Fixed and Variable
Total Fixed Costs – refer to the costs of fixed inputs used by the
firm.
Total Variable Costs – refer to the costs of variable inputs used by
the firm. These are costs of labor as well as raw materials. VC
changes as output changes. VC is zero when output is zero.
Total Cost – is composed of total fixed costs(FC) and total variable
costs (VC)

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 Average Cost : Fixed and Variable
Average Fixed Cost – decreases continuously as output increases.
The greater the output, the smaller the AFC. This is due to a fixed
cost that is spread to more output levels.

Total Fixed Cost

Average Fixed Cost =
Output
or
TFC
AFC =
Q
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Average Variable Cost – refers to the variables costs per unit of output
produced by the firm. It is obtained by dividing VC by the level of
output.
Total Variable Cost
Average Variable Cost =
Output

Or

TVC
AVC =
Q

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Average Cost - is obtained by dividing TC by the level of
output. It is also obtained by adding the sum of AFC and
AVC.
Total Cost
Average Cost =
Output
Or
TC
AC = or AC = AFC + AVC
Q
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Marginal Costs – refer to the additional costs incurred by
the firm in producing an additional unit of output.
Change in Total Cost
Marginal Cost =
Change in Output
Or
∆ TC TC1 – TC0
MC = MC =
∆Q Q1 – Q0

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 MARKET STRUCTURE AND

PRICE-OUTPUT
DETERMINATION
Perfect Competition
Monopoly
Monopolistic Competition
Oligopoly
Determinants of Market Structure
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 PERFECT COMPETITON
It is characterized by the presence of several sellers or
producers in the market who offer homogeneous or identical goods.
Examples are sellers of farm products like rice, corn, coconuts, and
sugar.
Since numerous firms are engaged in farm products, a single
seller is relatively small in comparison to the entire market or
industry. Because of this, a single seller under perfect competition is
a price taker, who cannot affect the market price.
Under perfect competition, there is complete mobility of
goods and resources, which means that producers and sellers can
freely enter into or leave the market whenever they wish.

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Total Revenue – price multiplied by quantity
produced
Average Revenue – total revenue divided by
quantity produced.
Marginal Revenue – additional revenue a
producer gets when an additional unit of
quantity is produced.

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 Profit Maximization of
Perfectly Competitive Firm
TR > TC = Profit
TR < TC = Loss
TR = TC = Breakeven or 0 profit
MR>MC = produce more until MR =MC
MR=MC = profit maximized
MR<MC = produce less until MR=MC
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 MONOPOLY

It comes from two Greek words – mono, meaning “one”, and

polist, meaning “seller”. Therefore, it refers to one seller
dominating the market. This type of market structure is the exact
opposite of perfect competition.
Example: Public Utility firms (Meralco)

Patent - It is the exclusive right granted an inventor to enable him to

control the use of his invention – also hinders other firms from
penetrating the market.
Profit Maximization of Monopolist
P > MR = MC
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 MONOPOLISTIC COMPETITION

In this kind of competition, there are

many firms competing and it is easy
for a firm to enter and exit the
market. Note that these characteristics
are the same as those of perfect
competition.
The difference is that the products sold in
monopolistic competition are not completely
homogeneous. Different producers/firms make it
appear as if their own product was unique and different
from the rest, but in reality, the products available in
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the market are close substitutes.
 OLIGOPOLY

In an oligopoly, only a few sellers control a big share

of the market. In this market structure, there is some
degree of control over the market price and the sellers
are interdependent – a phenomenon called collusion.

Oligopolists forge price agreements to promote their own

economic interests. The biggest producer among them is the price
leader. In the case of oil, the price leader is Saudi Arabia. There is
also some sort of output agreement among oligopolists to avoid
surplus, which will cause a decline in the price of their products.

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DETERMINANTS OF MARKET STRUCTURE

A. Government Laws
B. Technology
C. Business Policies
D. Economic Freedom

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Page  55 HOME