economy homework help

8

Demand and Supply Estimation

Assignment 1: Demand and Supply Estimation

Your name

Your Instructor’s name

Course Id:

Your Institution’s name

Date:

Imagine that you work for the maker of a leading brand of low-calorie, frozen microwavable food that estimates the following demand equation for its product using data from 26 supermarkets around the country for the month of April.

1. Compute the elasticity for each independent variable.

QD=-2000-100P+15A+25PX+10L

Replacing the variables you get

QD=-2000-100(200) +15(640)+25(3)+10(5,000)

QD=-2000-200+9,600+75+50,000=37,475

Price elasticity

QD=57,475

57,475=-2000-100p

=57475+2000=-200

59475+200

59675

N =-100)(200/37475)

Elasticity=-0.533

Advertising elasticity

Qd=-2000+15A

37,475=-2000+15(640)

=57,475+2000-9600=29875

ELASTICITY=(15)(640/29875)

=0.32

COMPETITOR’S ELASTICITY

QD=-2000+25(3)

37,475-75+2,000=39,400

ELASTICITY=(25)(3/39,400)

=0.0019

PER CAPITA INCOME ELASTICITY

QD=-2000+10L

37,475=-2000+50000=

37,475+2000-50,000

=-10,525

=ELASTICITY=(10)(5000/10525)

=-4.75

2. Determine the implications for each of the computed elasticities for the business in terms of short-term pricing strategies. Provide a rationale in which you cite your results.

Competitor’s elasticity

The item is elastic to the competitor’s price and this implies that if the corporation changes its prices in the short term or long term, the demand of the product will change.

Per capital income elasticity

This item is perfectly elastic to the per capita income this implies that a change in the per capita income both in the long term or short term will lead to an increment in demand of the product with holding all the other factors constant

PRICE ELASTICITY

The price elasticity is -ve in nature implying that it is less than 1 which shows elasticity with respect to the price. It also shows that an effect would occur in the price change both in the long term and the short term.

Advertising elasticity

The Advertising elasticity is negative in nature implying that the product is perfect elastic to advertising this also shows that there is an effect on the demanded quantity for the amount of cash spent in advertising both in the long run in the short term.

3. Recommend whether you believe that this firm should or should not cut its price to increase its market share. Provide support for your recommendation.

The firm should lessen its prices since the elasticity is less than -1 detonating an increment in prices would reduce the demanded quantity and therefore the total revenues as shown below by the equation

TR = PQ

dTR/dP = Q(dP/dP) + P(dQ/dP)

(1/Q)(dTR/dP) = (dP/dP) + (P/Q)(dQ/dP) = 1 + E

If Elastic < –1 dTR/dP> 0, shows a decrease in the price would lead to an increment in quantity demanded and quantity demanded.

4.Assume that all the factors affecting demand in this model remain the same, but that the price has changed. Further assume that the price changes are 100, 200, 300, 400, 500, 600 cents.

· QD=-2000-100(200) +15(640)+25(3)+10(5,000)

· =-2000-10000+15(640) +25(3) +10(5000)=47,675 for P=100

· =-2000-20000+9600+75+50000=37675, For P=200

· =-2000-30000+9600+75+50000=27675, For P=300

· =-2000-40000+9600+75+50000=17675, for P=400

· =-2000-50000+9600+75+50000=7675, for P=500

· =-2000-60000+9600+75+50000=-2325.for P=600

a. Plot the demand curve for the firm.

DEMAND CURVE

b.

c. Plot the corresponding supply curve on the same graph using the following MC / supply function Q = -7909.89 + 79.098P with the same prices.

PRICES=1, 2, 3, 4, 5 AND 6 DOLLARS replacing the equations in

Q=-7909+79.0989P

=-7909+79.0989(100) =0.89 UNITS

=-7909+79.0989(200) =7910.78 UNITS

=-7909+79.0989(300) =15,820.67 UNITS

=-7909+79.0989(400) =23730.56 UNITS

=-7909+79.0989(500) =31640.45 UNITS

=-7909+79.0989(600) =39550UNITS

SUPPLY CURVE

d. Determine the equilibrium price and quantity.

EQULIBRIUM CURVE

e. Outline the significant factors that could cause changes in supply and demand for the product. Determine the primary manner in which both the short-term and long-term

changes in market conditions could impact the demand for, and the supply, of the product.

Clearly from the demand equation it indicates that if there is made a change in price of competitors’ products, change in income of the consumer and/or change price of correlated goods would lead into the changes of the demanded low-calorie food. In addition Preferences and tastes of the buyers’ changes will also lead to a change in the demand of the item as well (Klein, 2014).

5. Indicate the crucial factors that could cause rightward shifts and leftwards shifts of the demand and supply curves.

Some of the crucial factors that bring about shifting of demand include: change in the costs of related goods, for example, complements and substitutes. Another important element is changes in wages, such as inferior goods and normal goods. The other two variables are changes in preferences and taste (Steitieh, A., & Smadi, 2013). These factors are said to be demand shifters.

Some of the crucial factors that lead into a shift of supply include; producer expectations, available technology, cost of inputs, the number of sellers and profitability of other goods (Klein, 2014). Different changes in supply shifters can have comparable impacts. Some of the cause that leads to a shifting to the right by supply curve are; increment in technology efficiency, increase in number of sellers ,decrease in profitability of producing other items and a decrease in the price inputs (Steitieh, A., & Smadi, 2013).

A reduction in price of the product leads to an increment in the income of buyers. (Henderson, 2010). Consequently, an increment in the population would lead to the shifting of demand curve to the right; similarly a decrease in buyers' income, decrease in the population and an increment in price of the item would lead to a shifting of the demand curve to the left. (Henderson, 2010)

References:

Steitieh, A., & Smadi, M. (2013). Wheat in Jordan: Demand & supply estimations & projections. Amman, Hashemite Kingdom of Jordan: Royal Scientific Society, Economic Research Dept.

Henderson, H. (2010). Supply and demand. Chicago: University of Chicago Press.

Klein, L. (2014). The economics of supply and demand. Baltimore, Md.: Johns Hopkins University Press.

qd 100 200 300 400 500 600 47675 37675 27675 17675 7675 -2325 qs 100 200 300 400 500 600 0.89 7910.78 15820.67 23730.560000000001 31640.45 39550 qd 47675 37675 27675 17675 7675 -2325 100 200 300 400 500 600 qs 0.89 7910.78 15820.67 23730.560000000001 31640.45 39550 100 200 300 400 500 600