Demand Analysis of Low-Calorie Microwavable Food
Vernette Nathan
Strayer University
ECO 550
Professor Juliet Elu
5 November 2015
Demand Analysis of Low-Calorie Microwavable Food
1. Compute the elasticity for each independent variable.
QD=- 5200 - 42P + 20PX + 5.2I + 0.20A + 0.25M
To get the total quantity demanded, substitute the variables in the equation
QD=- 5200 – 42(500) + 20(600) + 5.2(5500) + 0.20(10000) + 0.25(5000)
QD=-5200-21000+12000+28600+2000+1250=17650
Price elasticity will then be;
QD=17650 Advertising elasticity;
17650=-5200-42P QD=-5200+0.2A
=17650+5200 57,475=-5200+0.2(1000)
22850+21000 =57,475+5200-200=62475
43850 Elasticity= (0.2) (1000/62475)
N= (-42) (500/57475) =0.0032
Elasticity = -0.3654
Elasticity of the competitors; Elasticity of the per capita income;
QD=-5200+20(600) QD=-5200+5.2(5500)
17650-12000+5200=10850 17650=-5200+28600=
Elasticity= (20)(600/10850) 17650+5200-28600
=1.106 =-5750
Elasticity= (5.2)(5500/-5750)
=-1300
2. The implications for each of the computed elasticity
Price elasticity: The price elasticity is negative in nature since it is less than the one which indicates elasticity considering the price. This shows that there would be an effect in the price change in the short term as well as the long term.
Advertising elasticity: The value of advertising elasticity is negative in nature to mean that the product is elastic to advertising since it is less than one, it means that there is ban effect on the quantity demanded the amount of money spent on advertising purposes in the long run and the short term.
Competitor's elasticity: The product seem to be elastic to the competitors pricing, and this may mean that in case the company changes its prices in the short or long term, the demand will automatically change.
Per capital income elasticity: The product is perfectly elastic to the per capita income meaning that any change in the per capita income whether in the short term or long term shall result in an increase in demand for the product given that all the other factors are held constant.
3. The firm should look forward to reducing its prices since the elasticity is less than -1 and this means that an increase in the prices would the quantity demanded of its product and so to the total revenues. This can be supported by the following equation.
TR = PQ
dTR/dP = Q(dP/dP) + P(dQ/dP)
(1/Q)(dTR/dP) = (dP/dP) + (P/Q)(dQ/dP) =
= 1 + E
If E< –1 (elastic), dTR/dP> 0, Meaning that a decrease in price will lead to an increase in revenues and the quantity demanded (Whelan, 2011).
4. Assume that all the factors affecting demand in this model remain the same, but that the price has changed. Further assume that the prices are 100, 200, 300, 400, 500, 600 cents.
QD = - 5200 - 42P + 20PX + 5.2I + 0.20A + 0.25M
Substituting the values in the equation we get the QD of various prices, and then plot the figures to get the demand curve.
QD=-5200-25200+12000+28600+2000+1250
QD=- 5200 – 42(500) + 20(600) + 5.2(5500) + 0.20(10000) + 0.25(5000)
- 5200 – 42(100) + 20(600) + 5.2(5500) + 0.20(10000) + 0.25(5000) = 34450for P=100
- 5200 – 42(200) + 20(600) + 5.2(5500) + 0.20(10000) + 0.25(5000) = 30250for P=200
- 5200 – 42(300) + 20(600) + 5.2(5500) + 0.20(10000) + 0.25(5000) = 26050for P=300
- 5200 – 42(400) + 20(600) + 5.2(5500) + 0.20(10000) + 0.25(5000) = 21850 for P=400
- 5200 – 42(500) + 20(600) + 5.2(5500) + 0.20(10000) + 0.25(5000) = 17650for P=500
- 5200 – 42(600) + 20(600) + 5.2(5500) + 0.20(10000) + 0.25(5000) = 13450for P=600
a) The demand curve
b) Plot the corresponding supply curve on the same graph using the following MC/supply function Q = -7909.89 + 79.0989P with the same prices.
PRICES=1, 2, 3, 4, 5 and 6 dollars, substituting the prices in the equation
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
c) Determine the equilibrium price and quantity.
Equilibrium Curve: In equilibrium, the quantity demanded= quantity supplied
d) Outline the significant factors that could cause changes in supply and demand for the product.
The significant factors that can cause changes in the demand of the product include;
I. Competition; since competitors always look into taking a bigger share of the available market, if the price of the competitor's product is reduced the demand for the product will reduce as the consumers will find the competitor's product to be affordable. Consequently, if the prices of the competitors' product are increased the demand of this product will increase. Also, if the competitors offer a better version of the product in the market, the demand for this product will reduce (Whelan, 2011).
II. Price; this is the most important factor affecting the demand of a product. If the price of the product increases, its demand will reduce as fewer people will be able to afford the product.
III. Income levels; when an individual gets extra income, he will be able to have a better purchasing power and thus the demand for the product will increase, but when an individual’s income reduces he loses the purchasing thus he will not be able to consume the product and the demand will reduce as a result (Mankiw, 2014).
The supply of the product may change due to several factors such as;
I. The price of the product; this is the most significant factor affecting the supply of a product. If the price of the product increases, the producers will tend to increase their production capacity thus supply more in the market with the aim of earning higher profits (Whelan, 2011).
II. Prices of competing product; and change in the price of the competing product will cause a change in the supply of the product. If the price of the competing product increases the demand for this product in question will increase so does, it supply.
III. Prices of factors of production; if the prices of the factors that are used in producing this product increases, its supply will reduce as the company will not be able to produce the enough quantity to satisfy the demand in the market (Mankiw, 2014).
The short-term changes in the market conditions like a reduction in the purchasing power of the consumer can result to a decrease in demand for the product and a decrease in the supply of the product. Long-term changes in the market conditions can like the increase in the production cost can lead to higher demand of the product and reduce supply leading to the rise in the price of the product.
5. Preferences and expectations;
The preferences of the consumer changes from time to time, if the preference of the consumer reduce there would be a leftward shift in the demand curve. Expectations in the economy can make the demand and supply curves to behave differently, for examples if the consumers expect that the price of the product will decrease in future, there will leftward shift in demand, and the supply curve will tend to shift to the right.
Disposable income, when there is an increase in the amount of the disposable income, the demand increase thus the demand curve shifts to the right, if the disposable income decreases, the demand curve will shift to the left.
Reference
Whelan, J. (2011). Economic Supply and Demand. Cambridge publishers.
Mankiw, G. (2014). Principles of Microeconomics, 7th edition. South-western college publishers.
Luke, M., Froeb, B and McCann, B. (2015). Managerial Economics. South-western college publishers.
vee330
eco550revision.docx
0
