Simulation Exercise: Demand Theory

ECON 3083: MANAGERIAL ECONOMICS

Submitted by:
RATIONAL GROUP
Acupan, Aljon Patrick C. Macusi, Roland
Anos, Jomel Magalad, Jerome
Bringino, Theozel John O. Mercado, Ronn Jell V.
Callao, Jenie D. Molera, Ernesto Jr, I.
Canceran, Clarisse Angela A. Mortel, Monica V.
Carrido, Aiela N. Navelgas, Erica Jane A.
Casimiro, Kendrick P. Pasay, Jose Jeremiah
Fernandez, Jeanne Ramelo, Gerald B.
Godinez, Iris Christian Sanggo, Lovely Bianca Ysabel
Gomez, Mary Alyssa Vargas, Cherry Ann C.
Leuterio, Kimberlyn
BSE 4-1

Submitted to:
Ms. Elaine C. Bautista

February 1, 2019
BACKGROUND

This term paper aims to provide a detailed discussion of the simulation exercise on
demand theory conducted last January 26, 2019. The simulation exercise aims to provide
the students with a clear understanding of the behavior of consumers in developing
effective business strategies. The class was told to form two groups that contains one
moderator and one documenter per group and each group having at least five members
acting as buyers while majority of the group are sellers. Buyers face a budget constraint
of Php 100 and have to choose the best alternative that would maximize their utility given
a wide variety of alternatives to choose from. Sellers, on the other hand, need to study
their market – hence the existence of a hypothetical profile of prospect buyers. The
challenge of the simulation exercise comes in the moment when the group needs to
predict who among the relatively large number of sellers will dominate the market and
receive the most revenue despite the very limited information provided by the hypothetical
buyers’ profile. At the end of the simulation exercise, the buyers will reveal their identities,
explain their reason for such purchasing behavior, and enumerate the factors that
affected their decision-making process as a consumer.

PROCEDURE

After a brief discussion of mechanics for the simulation exercise, the group headed for a
discussion and brainstorming for their game plan. The first thing that the group moderator
did was to identify who the buyers and sellers are, then he collected the buyers’ profile
for the reference of the sellers in their market study. After studying the tastes and
preferences of the consumers, the sellers came up with their food products, priced them
accordingly, and offered the buyers with promos and freebies in order to attract more
customers into their businesses.

The simulation proper began. The sellers determined their prospect buyers with respect
to the submitted profile of the buyers which contain information such as tastes and
preferences, religious beliefs, health status, and dietary restrictions. The group moderator
compiled the prospect sales of the sellers corresponding their prices and computed for

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the prospect total revenue of each seller. The entire simulation exercise was witnessed
and documented by the group documenter.

MARKET STUDY

An integral part of the simulation exercise is the market study. The group made sure to
apply their compounded knowledge from past Economics courses like Microeconomics
and other business-related concepts they learnt from their courses like Marketing
Management, Principles of Management, and Basic Accounting. Their background and
prior knowledge of the subject helped them immensely on this simulation exercise. The
first step the group did on the market study part is to determine the prevailing market
model and found that it is in fact a monopolistically competitive market.

Monopolistic competition is a type of imperfect competition such that relatively large

number of producers sell products that are differentiated from one another (e.g. by
branding or quality) and hence are not perfect substitutes. In a monopolistic competition,
there is a considerable emphasis on nonprice factors such as product attributes,
advertising, branding and product packaging. For the purpose of this simulation exercise,
the groups were tasked to test on food products. Sellers offered their buyers with varieties
of food products including pasta, bread, coffee, salad, tofu, sweet corn, soya, burger and
fries – all are food products but do not belong under one specific food classification. Due
to the structure of the market, sellers are conscious towards the prices that they charge
from their buyers. Buyers in a monopolistic competition are highly elastic – a small
increase in price can make the buyers opt for alternatives noting the presence of
numerous potential close substitutes for the goods they offer. Additionally, sellers thought
of cool and funny stall names as this is an important part of branding in business. Lastly,
sellers noted about the economic principle stating that people respond to incentives.
Therefore, if the sellers will offer freebies or discounts then more consumers will be
attracted in patronizing the business.

In Economics, we assume that all agents are rational decision-makers who try to use
his/her money income to derive the greatest amount of satisfaction, or utility, from it.

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Consumers want to get “the most out of their money” or technically, to maximize their total
utility. They engage in rational behavior.

Another very important thing to consider is the budget of the buyers. As included on the
mechanics of the simulation, each buyer is faced with a budget constraint of only Php 100
each and they have to exhaust it. At any point in time the consumer has a fixed, limited
amount of money income. Since each consumer supplies a finite amount of human and
property resources to society, he or she earns only limited income.

Market study is not an easy process to succeed. The feasibility of one’s business can fail
if the market was not observed and studied by interested businesses to operate.

BUYERS

Being rational consumers, they will choose the commodity that maximizes his/her utility
given a certain amount of budget limitation. However, not all consumers in the market
have common tastes and preferences. Each consumer has a clear-cut preferences for
certain of the goods and services that are available in the market. We assume buyers
also have a good idea of how much marginal utility they will get from successive units of
various products they might purchase.

Table 1: Buyers’ profile based on food preferences and dietary restrictions

Name of Buyer Characteristics
Likes Dislikes Allergies Notes
Healthy dishes
1 Consumer KL Pescatarian
Spicy dishes

Egg yolk
2 Consumer EN Soup based dishes Fried chicken
Spicy dishes

Prefers budget-
3 Consumer CV Masarsa dishes egg
friendly meals

Sweets
4 Consumer RM Pork
Veggies

Sweets
5 Consumer KC Fruits Veggies Hypertension
Seafoods

Too sweet
Seafood
6 Consumer AC Low-fat diet Too salty Prefers light meals
chicken
Spicy dishes
7 Consumer JC Veggie shake Seafood

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Table 1 shows the profile of the buyers containing the tastes and preferences for food
products. Five out of seven buyers prefer food that is healthy such as fruits and/or
veggies. It can also be seen that three out of seven buyers have dietary restrictions
caused by allergies. One out of seven says he/she will choose budget-friendly options.
Consumer KL is a pescatarian or one whose diet includes fish but no other meat
(Merriam-Webster). Consumer KC is faced with hypertension, while consumer AC prefers
low-fat diet.

This data were submitted to the sellers which are used as a tool by the sellers in thinking
of appropriate food products to offer their prospect buyers based on their preferences and
budget.

SELLERS

Upon consideration of the buyers’ profile, the sellers were able to distinguish their
preferences and come up with their food product which they will offer to the market. Each
seller have the objective of having the most revenue among its competitors.

Table 2: Stalls’ product, freebies/promo and corresponding prices.

Stall
Stall Name Product Freebies/Promo Price
Number
Bread 3 pcs bread + free
1 Love Aly P100.00
Coffee coffee
Combo 1 P35.00
Vegetables and Tofu dishes
2 Veto Combo 2 P40.00
Fruit Shake
Combo 3 P55.00
3 Pruuut Fruit Salad Good for 5 persons P100.00
Sweet corn
4 MaCorn 2 orders P40.00
Binatog
Comes w/ free drinks
5 Godi’s Point Pasta P50
and garlic bread
Fruit Shake
6 Shake it off Buy 1, Take 1 P10.00
Veggie Shake
Buy 1 and get another
7 Yes, Corn Please! Spicy Corn Flakes P25.00
for P10
Mushroom Burger P50.00
Buy 2 of 3 products
8 GJ Food Corp Fries P80.00
for a free up-size
Soya P100.00

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Table 2 shows the name of the stall with their corresponding food product,
freebies/promo, and prices. The sellers have developed their unique pricing system
depending on their willingness to sell (WTS) weighing their implicit and explicit costs. It
can be seen from the data presented above that all sellers capped their prices on and
below the budget constraint of the buyers. It is also reflective that the sellers responded
well on the preferences of the buyers which are healthy food and avoided the food
products that go against the dietary restrictions and health concerns of their prospect
buyers since none of the sellers opted to sell pork, seafood, and chicken except for Yes,
MaCorn Please! whose main product is Spicy Corn Flakes which is a dislike of two out of
seven buyers.

Table 3: Sellers’ prospect buyers and total number of prospect buyers

Stall
Prospect Buyer/S Total Number Of Prospect Buyers
Number
1 EN, CV, AC, RM, KC, JC 6
2 KL, EN, RM, AC, JC 5
3 KL, EN, CV, AC, RM, KC, JC 7
4 KC, AC, JC, CV 4
5 KL, EN, CV, AC, RM, KC, JC 7
6 KC, JC, RM, KL 4
7 KL, CV, AC, JC 4
8 KL, EN, CV, AC, JC, RM KC 7

Table 3 shows the prospective buyers of each sellers and the total prospect buyers each
seller has. It can be seen that three sellers are expecting all seven buyers to patronize
their business. Meanwhile, seller 4, 6, and 7 are expecting only four buyers to support
their business.

Table 4: Stalls’ target sales (considering the total number of prospect buyers and lowest
price on their menu.)
STALL NUMBER P Qd TR = P x Qd
1 P100 6 P600
2 P35 5 P175
3 P100 7 P700
4 P40 4 P160
5 P50 7 P350
6 P10 4 P40
7 P25 4 P100
8 P50 7 P350

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Table 4 shows the target sales of each seller as computed by multiplying their prices to
the quantity demanded. Each quantity demanded represents one prospect buyer of each
seller. It can be seen that Stall Number 3 expects the most revenue among all his
competitors with P700 while Stall Number 6 expects the lowest total revenue with only
P40.

BUYERS MEETS SELLERS

Now that sellers have conducted their market study and have kicked-off with their
businesses, it’s time for the buyers to enter the market. With a budget constraint of P100,
each rational consumer aims to maximize his/her utility and exhaust the budget to avail
the products offered by the sellers in the market.

Upon weighing out the prices and nonprice factors such as preferences and number of
sellers, the buyers have finally arrived with their demand in mind.

Table 5: Buyer’s demand schedule.

Name of buyer Stall number Money spent

1 Kim Leuterio (KL)
2 Erica Navelgas (EN)
3 Cherry Vargas (CV)
4 RJ Mercado (RM)
5 Kendrick Casimiro (KC)
6 Aiela Carrido (AC)
7 Jenie Callao (JC)
2 P40.00
4 P25.00
6 P25.00
5 P50.00
8 P50.00
4 P25.00
5 P50.00
6 P25.00
2 P50.00
5 P50.00
3 P100.00
1 P35.00
2 P40.00
6 P25.00
2 P50.00
4 P25.00
6 P25.00

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The buyers have made their purchases and their respective utilities were maximized. Who
among the sellers have gained the most revenue? Which has the least revenue? Were
the predictions accurate?

Table 6: Stalls’ total sales (in peso) corresponding to the buyers’ demand schedule

Stall number 1 2 3 4 5 6 7 8
sales (in peso) P35.00 P40.00 P100.00 P25.00 P50.00 P25.00 P50.00
corresponding to the P50.00 P25.00 P50.00 P25.00
buyers’ demand schedule P40.00 P25.00 P50.00 P25.00
P50.00 P25.00
TOTAL P35.00 P180.00 P100.00 P75.00 P150.00 100.00 0 P50.00

Contrary to the expectations of the sellers, stall number 2 had the most revenue among
all the competitors in the market. Effective pricing system could have been the factor that
helped it gain the most total revenue. Stall number 7 sold nothing and has to make
decisions based on the outcomes of the interaction. Failure to abide by the preferences
of the prospect buyers have been a great factor in this scenario. It persisted in selling
spicy corn flakes even if two out of seven buyers dislike spicy food. Stall number 3 who
expected all seven buyers to patronize his fruit salad business ended up having only 1
buyer. A great factor that influenced this is the expensive amount that the stall charged
from the buyers. Stall number 7 who expects selling P40 worth of smoothie unexpectedly
sold P100, apparently his tactic of pricing his smoothie for P10 aside from a buy 1, take
1 promo worked.

Total sales per stall

200
TOAL SALES (IN PESO)

150

100

50

0
1 2 3 4 5 6 7 8
STALL NUMBER

Column2

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CONCLUSION

Overall, the simulation exercise was an enriching academic activity. It enabled students
to collaborate, brainstorm, and strategize. It was effective in a way that students have
applied their knowledge of Demand and Consumer Behavior Theory as well as business-
related concepts such as the 4Ps of Marketing – product, price, place, and promotion.

However, the group was not able to accurately predict the outcome of the buyers’ and
sellers’ interaction in the market. There are variety of factors that affected the behavior of
the consumers that weren’t taken as significantly by the sellers. Strategic pricing system
and obedience to the preferences of the buyers were important factors that attributed to
the success of stall number 2. Five out of seven buyers revealed that price wasn’t their
main consideration for choosing their food products, rather it is their tastes and
preferences. Two out of seven, on the other hand, revealed that they prefer budget-
friendly choices over their personal preferences. They also added that freebies and
promos can have an important effect to the sales of one business. Nonetheless, the
sellers in the market will have the opportunity to make decisions on how they will gain
more revenues in reference to their initial experience.

A very important take-away from this simulation exercise is the validity of the assumption
in Economics that reads “All Economic agents are rational and utility-maximizing entities.”
This is useful for managers because one can actually have a glimpse of the market
outcomes through a simulation exercise. Entering a market as a seller should be a
calculated risk. Above all, it is essential that the business knows his market. A well-done
market study can save one person’s money from going to waste caused by careless
decision-making.