Economics Operations Decision Paper

RUNNING HEAD: Demand Estimation 1

Demand Estimation

7

Courtney A. Wilson

Dr. Phyllis Isley

Managerial Economics and Globalization

October 22, 2017

Introduction

The following data presented is for a leading brand of low-calorie, frozen microwavable food which estimates the following demand equation for its product using data from 26 supermarkets around the country for the month of April.

QD = -5200 – 42P + 20PX + 5.2Y + 0.20A + 0.25M

= -5200 – 42(500) + 20(600) + 5.2(5,500) + 0.20(10,000) + 0.25(5,000)

= -5200 – 21,000 + 12,000 + 28,875 + 2,000+ 1,250

QD = 17,925

Q = Quantity demanded of 3-pack units

P (in cents) = Price of the product = 500 cents per 3-pack unit

PX (in cents) = Price of leading competitor’s product = 600 cents per 3-pack unit

Y (in dollars) = Per capita income of the standard metropolitan statistical area (SMSA) in which the supermarkets are located = $5,500

A (in dollars) = Monthly advertising expenditures = $10,000

M = Number of microwave ovens sold in the SMSA in which the supermarkets are located = 5,000

Elasticity Calculations

Price of the Product (P)	Price of leading competitor’s product (PX)	Per capita income of SMSA (Y)	Advertising expenditures (A)	Number of microwave ovens sold (M)
= -42 * (500/17,925)	= 20 * (600/17,925)	= 5.2 * (5,500/17,925)	= 0.20 * (10,000/17,925)	= 0.25 * (5,000/17,925)
= -1.1715	= 0.6695	= 1.5955	= 0.1116	= 0.0697

· Price of the Product Elasticity – This will cause consumers to get a higher priced microwave when they can afford it making this an inferior good.

· Competitor’s Price Elasticity – The competitor’s price is inelastic. This means if they raise the price on their microwaves, it would not make a difference and consumers would still purchase them. This is the same, vice versa. If they lower the price on their microwaves, consumers will still purchase about the same.

· Per capita income Elasticity – Per capita income of this area is elastic. Per capita income is the average amount each person makes in this area. This means if consumers in this area make more or less affects how many microwaves are made and/or how many microwaves they actually want to buy.

· Advertising Elasticity – The advertising that the companies do does not affect how consumers buy microwaves. This means they could actually do less advertising and save more money and if would not make a difference in the sales of the microwaves. They could actually use the money they save from less advertising and put into something that would actually increase sales.

· Microwaves Sold Elasticity – The microwaves that are being sold are inelastic. This means they sell about the same number of microwaves in this area. This could be interpreted that something needs to be done to make the slope more flat. Revenue or sales should be something that increases and not stays constant time over time.

Equilibrium Price

Intercept	Price	Px at 600	Y at 5,500	A at 10,000	M at 1,250
-5,200	-42P	20 12,000	5.2 28, 875	0.20 2,000	0.25 1,250
Where the curve sits at	38, 925

Qd = 38,925 – 42P

Qs = -7, 909.89 + 79.1P

38,925 – 42P = -7, 909.89 + 79.1P

38, 925 – 42P (+42P) = -7, 909.89 + 79.1P (+42P)

38, 925 = -7, 909.89 + 121.1P

38, 925 + 7, 909.89 = -7, 909.89 (+7, 909.89) + 121.1P

46, 834.89 = 121.1P

46, 834.89/121.1 = 386.76

Equilibrium Price = 386.76

According to the equilibrium price, we should be charging more. So, as a firm, we should definitely increase our prices in order to increase market share if right now we are only charging $5 and the equilibrium price is $6.45. Currently, as a firm, we are losing money.

Assuming Price Changes

The supply curve could shift to the right if there was an increase in the quantity supplied. For instance, the competitor could raise their price, income could increase in the area, or there could even be an increase in the number of microwaves sold. And vice versa for a shift to the left in the supply curve. This would mean there would be a decrease in the quantity supplied in order for this to occur.

In order for the demand curve to shift to the right is pretty self-explanatory. There would have to be an increase in demand. According to Shifts in Demand, “A shift in demand to the right means an increase in the quantity demanded at every price” (Economics Online, 2017).

Works Cited

Economics Online, Inc. 2017. Shifts in Demand. Retrieved from http://www.economicsonline.co.uk/Competitive_markets/Demand_shifts.html.

Internet Center for Management and Business Administration, Inc. 2010. The Supply Curve. Retrieved from http://www.netmba.com/econ/micro/supply/curve/.

Khana Academy, Inc. 2017. Price Elasticity of Demand and Price Elasticity of Supply. Retrieved from https://www.khanacademy.org/economics-finance-domain/microeconomics/elasticity-tutorial/price-elasticity-tutorial/a/price-elasticity-of-demand-and-price-elasticity-of-supply-cnx.

Supply 100 200 300 400 500 600 0.11 7910.11 15820.11 23730.11 31640.11 39550.11 Demand 100 200 300 400 500 600 34725 30525 26325 22125 17925 13725

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