Assignment 2 Operations Decisons

Demand Estimation

Demand Estimation

Low-Calorie Microwavable Food Processing Company

This company is involved in making low-calorie microwavable food. The company wants to ensure they maintain a continuous good performance in the market. Therefore, it is essential to estimate its demand, elasticity and project future performance. The following is a demand equation for the product and a table of its performance in 26 supermarkets nationwide.

Demand equation: p=0.5q+70

Table 1: Demand, Price and Elasticity in the 26 Supermarkets, assume initial price and demand was 130 and 30 respectively.

	Quantity (Independent variable)	%∆ in independent variable	Price (Dependent variable)	%∆ in dependent variable	Elasticity
1	25	16.66%	120	7.69%	0.46
2	27	8.00%	124	3.33%	0.42
3	29	7.41%	128	3.23%	0.44
4	30	3.45%	130	1.56%	0.45
5	31	3.33%	132	1.54%	0.46
6	32	3.23%	134	1.52%	0.47
7	34	6.25%	138	2.99%	0.48
8	35	3%	140	1.45%	0.49
9	30	-14%	130	-7.14%	0.50
10	30	0%	130	0.00%	0.00
11	40	33%	150	15.38%	0.46
12	45	13%	160	6.67%	0.53
13	40	-11%	150	-6.25%	0.56
14	35	-13%	140	-6.67%	0.53
15	34	-3%	138	-1.43%	0.50
16	40	18%	150	8.70%	0.49
17	45	13%	160	6.67%	0.53
18	50	11%	170	6.25%	0.56
19	52	4%	174	2.35%	0.59
20	50	-4%	170	-2.30%	0.60
21	45	-10%	160	-5.88%	0.59
22	48	7%	166	3.75%	0.56
23	50	4%	170	2.41%	0.58
24	52	4%	174	2.35%	0.59
25	54	4%	178	2.30%	0.60
26	58	7%	186	4.49%	0.61

The Production Company
	2011	2012	2013
Total Revenue	$5,379,000,000	$5,341,000,000	$5,741,000,000
Units Produced	64,446,773	63,673,945	65,673,945
Price	$83.46	$83.88	$87.42
	2001-2002	2002-2003	2001-2003
%Change in Quantity	-0.003016015	0.007731089	0.011565016
%Change in Price	0.001244	0.010322	0.010322
Elasticity Coefficient	2.425124846	0.748994536	1.12042869
Elasticity	-0.412349905	1.335123224	0.892515524

Implications of the Elasticities

The figures above depict the dominance of inelastic demand. They give an impression of small change in demand in spite of an observable change in price. Calculations were done according to the formula provided above. I would recommend that this firm should not cut the price to increase its market shares as according to the elasticities figures, there is relatively a small change in demand as a result of change in price (Barber, 2010).

Demand, Supply and Equilibrium Curves

Assume that the price changes are 100, 200, 300, 400, 500, 600 dollars.  Supply function Q = 5200 + 45P with the same prices.

Demand Curve
Quantity	Price
60	600
260	500
460	400
660	300
960	200
1060	100

quantity	price
9700	100
14200	200
18700	300
23200	400
27700	500
32200	600

Equilibrium Curve

Price S	Price D	Quantity
100	600	60
200	500	260
300	400	460
400	300	660
500	200	960
600	100	1060

Equilibrium quantity= 560

Equilibrium price= 350 dollars

Factors that could change the supply and demand for the product

There is a number of prevailing factors that could possibly change the supply and demand for the product. The most common one is price increases or decreases. An incremental decrease in product price leads to huge increase in the demand for the product. On the other hand, an increase in the product price leads to decrease in demand by a significant margin.

As population rises, more and more people become aware of the product and therefore demand increases as a result. Due to this, the company is forced to supply more quantities of the product to satisfy the growing demand. They are not impressed in supplying more products in the market at depressed prices.

Furthermore, available substitutes such as hot food supplies affect the demand and supply of the product. A number of people are able to acquire the same food products at restaurant or being supplied by other competitive companies leading to a drop in demand (Starr, 2011).

Consumer tastes and preferences affect the supply and demand of goods and services in the market. Some consumers prefer cooking their own food rather than buying packaged microwavable food. Again, consumer trends may shift basing on the fact that microwavable food is not safe.

Another cause could be recession and high rates of unemployment. The recession is one good example of when and how change starts occurring in supply and demand. In the current recession that we are living in, people are losing their jobs and so they have to find ways to economize and make changes in the way they spend and what they purchase. Consumers also take in mind what is needed the most and what is considered a luxury or treat. People will often differentiate between their needs and wants.

Under free market conditions, a negative shift in demand results in lower quantities demanded and as such, suppliers are inclined to reduce supply. A positive shift in demand leads to a rise in quantities demanded and a positive shift in supply as suppliers position themselves to take advantage of higher prices. As a supplier, the lower the price, the less I will supply to the market in a bid to push up prices when demand increases. With a rise in demand, I would supply more units to the market so that I can make more profits by charging more for the product (Palmer & Ontario, 2006).

Competition from other substitutes should be contained by reducing the price of the goods and commodities sold. This will encourage consumers to opt for the cheaper commodity as opposed to the alternatives in the market. The same principle can be applied in situations where consumer tastes and preferences change in favor of a rival product. It should be noted that there is a minimum below which prices cannot be reduced due to overheads and incidental costs like repair and maintenance. In other instances, it may be prudent for the firm to invest in products that the consumers prefer rather than engage in expensive price wars.

Primary Manner In Which Both The Short-Term And The Long-Term Changes In Market Conditions Could Impact The Demand For, And The Supply Of The Product.

Short-term changes in the market include seasonal supply of substitute commodity, seasonal product preferences, price fluctuations, inflation in economy among others. The short-term changes tend to create sharp increase or decrease in both demand and supply seasonally but in overall the price or demand deviation is maintained at manageable levels.

On the other hand long-term changes in the market would involve customer shifting their trends permanently and adopting the usage of another better product leading to decreased demand and supply. Other factors that would play a great role in long-term changes in the market include change in technology, change of culture and lifestyle, change in economy among others. A change in technology would mean that people will cease to use the product as there are other better means of utilizing the product or get totally replaced products. This implies that demand will decrease substantially similarly to supply as prices will tend to decrease discouraging the suppliers. Change in feeding culture leads to permanent shift of consumer trends leading to a decrease in demand and thus the supply. In case the economic performance of a nation improves, consumer tends to shift to higher preferences and tastes lowering the demand and supply of the product (Palmer & Ontario, 2006).

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Crucial Factors That Could Cause Rightward Shifts of the Demand and Supply Curves

The factors that lead to rightward shift include rise in income. With increased income, consumers have extra or more money to spend particularly on normal goods. Hence, the demand on the product will increase despite of high prices offered. Consequently supply will increase shifting both the curves of demand and supply rightwards. Also when the price of complement goes down and that of substitute goes up, demand and supply curves will shift rightwards as more people tends to prefer the product they can afford. Also the people preference may make them to like a certain product hence causing an increase in demand and thus the supply. This results in a rightward shift of demand and supply curve. Other cases include the situation where the consumer expect an increase in value of the product, hence increasing demand and supply thus the rightward shift. An increase in population too.

Crucial Factors That Could Cause Leftward Shifts of the Demand and Supply Curves

A leftward shift is caused by a decrease in income. The consumers have insufficient funds to spend and they spend the little they have on inferior goods. The demand for the product goes down. The suppliers are unwilling to supply more hence the leftward shift for both cases. An increase in price will discourage consumers from purchasing the product by causing them to look for a cheap substitute; this causes the demand and supply to decrease, consequently leading to a leftward shift. Change in tastes also causes the leftward shift of the demand and supply curves when the preference disfavors the product.

References

Barber, J. R. (2010). Elasticity. Dordrecht: Springer.

Palmer, J., Roseman, E., Murgatroyd, S., Films for the Humanities (Firm), & TVOntario. (2006). Supply and demand. Princeton, NJ: Films for the Humanities and Sciences.

Starr, R. M. (2011). General equilibrium theory: An introduction. New York: Cambridge University Press.