SM 300

Engineering Economics
 Demand
Demand is a curve or schedule showing the various quantities of a
product consumers are willing to purchase at possible prices
during a specified period of time, ceteris paribus (a Latin phrase
meaning "with other things the same" or "all other things being
equal or held constant“) Eg.

The above demand schedule and curve shows how many DVDs an
individual consumer is willing to purchase at different possible
prices.
 Demand Function Using Regression Analysis
Example: The following data is collected about the number of pizzas
that are sold when a pizzeria experiments with different prices:
Scatter-Plot for Pizza
Price Pizzas Sold
20
$7 16
$8 14
Price 15

$9 13 10
$10 10
5
$11 10
0
$12 7
0 5 10 15 20
$13 8 Quantity
$14 5
Using this data can you find approximately
$15 3
how many pizzas can be sold at $11.5?
 Demand Function Using Regression Analysis (Contd.)
Consider quantity of Pizza Q to be a function of Price P i.e Q = f(P)
The function could be a linear regression line of the form
Q=a+bP
[Note: While drawing demand curve Q will usually be on x-axis]
where Q = Quantity demanded, P = Price, a = intercept and b =
coefficient of P (= slope of the regression line)
Using Ordinary Least Squares (OLS) Regression Formula we can find
for a general equation such as y  a  bx

n xy   x  y and a   y  b x
b
n x 2  ( x ) 2 n
OR a  y  bx
Where
n= number of paired observations
 Demand Function Using Regression Analysis (Contd.)
In the Case of Pizza:
Price (X) Pizzas Sold (Y) XY X2 y  a  bx
7 16 112 49
8 14 112 64 n xy   x y
b
9 13 117 81 n x 2  ( x ) 2
10 10 100 100
11
12
10
7
110
84
121
144 a 

y b x 
13 8 104 169 n
14 5 70 196
15 3 45 225
99 86 854 1149

n=9 b = (9 * 854 -99 * 86)/ (9 * 1149 - 99 * 99) = -1.53333

a = (86 - (-1.5333) * 99)/9 = 26.422
i.e. Q = 26.422 – 1.533 P
Hence, at P = $11.5, the approx. Q = 26.422 – 1.533 * 11.5 = 8.79 or 9
 Law of Demand
The principle that there is an inverse relationship between the price
of a good and the quantity buyers are willing to purchase in a
defined time period, ceteris paribus. Why is this so?
Explanation 1: From Consumer Equilibrium to the Law of Demand
Eg. Suppose Bob goes to McDonald’s for lunch with $8 in his pocket to
spend for Big Macs ($2 price) and milkshakes ($2 price). Suppose Bob
reaches consumer equilibrium as follows:
Now suppose the price of a Big
Mac falls to $1 and upsets the
above equality. This changes the Bob gains more utility/$ by buying Big
formula to the following: Mac than milkshake. To restore max.
total utility, spends more on Big Macs.
The MU of a Big Mac must fall as he
buys more and the MU of a milkshake
must rise as Bob buys fewer… Thus, a
fall in the price of Big Macs  Bob buys
more Big Macs…The law of demand.
 Market Demand
• Individual demand curves differ for consumers. The market
demand curve = Curve relating the quantity of a good that all
consumers in a market will buy to its price.

2 Points:
(i) Market Demand curve
will shift to the RIGHT as
more consumers enter
the market.
(ii) Factors affecting
demands of many
consumers will also
affect market demand.
 Market Demand (Example)
Assuming Fred and Mary are the only buyers of DVDs in the market.