Assignment 2 Operation Decision

Demand Estimation

Shawn Johnson-Illery

Dr. Diana Bonina

ECO550- Managerial Economics and Globalization

January 23, 2016

1. Compute the elasticities for each independent variable. Note: Write down all of your calculations.

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

Substituting the variables in the equation to get the total quantity demanded

QD= - 5200 – 42(500) + 20(600) + 5.2(5,500) + 0.20(10,000) + 0.25(5000)

QD= - 5200 – 21,000 + 12,000+ 28,600 + 2,000 + 1,250

QD =17,650

i. Price elasticity = PEoD = (% Change in Quantity Demanded) / (% Change in Price)

PEoD = Slope* P /Q

N= (-42) (500) /17,650)

Elasticity= - 1.19

ii. Cross elasticity of demand

Cross elasticity of demand = Slope* PX /Q

Cross elasticity of demand = (20) (600)/17,650

= 0.68

iii. Per capita income elasticity

Per capita income elasticity = Slope* I /Q

= 5.2 * 5,500/ 17650

= 1.6

iv. Advertising elasticity

Elasticity = Slope* A /Q

Elasticity= (0.2) (10,000/17,650)

= 0.11

v. Substitute elasticity

Elasticity = Slope* M /Q

Elasticity= (0.25) (5000/17,650)

=0.07

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

Price elasticity

The price elasticity is greater than 1 meaning it is elastic. A given percentage fall in own price will cause more than proportionate change in quantity demanded.

Cross elasticity of demand

It is inelastic because it is less than 1. A 1 % fall in competitor price will cause 0.68% raise in quantity demanded.

Per capital income elasticity

This product is elastic to the per capita income and this means that an increase of the per capita income both in the short term or long term shall lead to an increased demand for the product all other factors held constant. It is either a normal good or luxury good.

Advertising elasticity

The value is less than 1 meaning that the product is inelastic to advertising; this also means that 1% increase in advertisement will lead to 0.11 % in the quantity demanded.

Substitute elasticity

The product is inelastic to the substitutes and this means that a % fall in substitutes sold cause less than proportionate raise in quantity demanded.

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 reduce its prices because the elasticity elastic. This means a decrease in prices would increase the quantity demanded by 1.19 % and hence the increase the total revenues and market share.

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       =          - 5200 - 42P + 20PX + 5.2I + 0.20A + 0.25M

QD= - 5200 – 42(100) + 20(600) + 5.2(5,500) + 0.20(10,000) + 0.25(5000) = 34,450,for 100

QD= - 5200 – 42(200) + 20(600) + 5.2(5,500) + 0.20(10,000) + 0.25(5000) = 30,250 ,for 200

QD= - 5200 – 42(300) + 20(600) + 5.2(5,500) + 0.20(10,000) + 0.25(5000) = 26,050 ,for 300

QD= - 5200 – 42(400) + 20(600) + 5.2(5,500) + 0.20(10,000) + 0.25(5000) = 21,850, for 400

QD= - 5200 – 42(500) + 20(600) + 5.2(5,500) + 0.20(10,000) + 0.25(5000) = 17,650 ,for 500

QD= - 5200 – 42(600) + 20(600) + 5.2(5,500) + 0.20(10,000) + 0.25(5000) = 13,450 ,for 100

a. Plot the demand curve for the firm.

b. Plot the corresponding supply curve on the same graph using the following MC / supply function Q = -7909.89 + 79.1P with the same prices.

Q = -7909.89 + 79.1(100)= 0.11, for 100

Q = -7909.89 + 79.1(200)= 7,910.11, for 200

Q = -7909.89 + 79.1(300)= 15,820.11, for 300

Q = -7909.89 + 79.1(400)=23,730.11 , for 400

Q = -7909.89 + 79.1(500)=31,640.11 , for 500

Q = -7909.89 + 79.1(600)= 39,550.11, for 600

c. Determine the equilibrium price and quantity.

Equilibrium price = 385

Equilibrium quantity = 22,500

d. Outline the significant factors that could cause changes in supply and demand for the low-calorie, frozen microwavable food. Determine the 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.

Factors affecting demand

· Price of the commodity

· Income of the consumers

· Consumer’s tastes and preferences

· Consumer awareness

· Political stability

· Price of other related commodities

· Speculation of future price changes

Factors affecting supply

· Own price of the commodity

· Price of other related commodities

· Prices of production factors

· Goals of the producing firm

· Technology state of the firm

Both long term and short term changes have positively or negatively impacted the demands and supply of market products, the primary factor being the price of the commodity whereby an increase in prices decreases the demand whereas the same effect increases the supply of the commodity.

5. Indicate the crucial factors that could cause rightward shifts and leftward shifts of the demand and supply curves for the low-calorie, frozen microwavable food.

Shifts in the supply curve are brought about by changes in factors other than the price of the commodity. A shift in supply is indicated by an entire movement (shift) of the supply curve to the right (downwards) or to the left (upwards) of the original curve.

Shifts in the demand curve are brought about by the changes in factors like taste and preferences, prices of other related commodities, income etc. other than the price of the commodity. The change in the demand for the commodity is indicated by a shift to the right or left of the original demand curve.

 

References

Karlan, D. and Zinman, J (2005). Elasticities of Demand for Consumer Credit: Center discussion paper No.926, Economic Growth Centre. Yale University. http://www.eea-esem.com/papers/eea-esem/2003/968/householdEEA.pdf

Bardhan, P (ed) (1989). The Economic Theory of Agrarian Institutions: Claredon Press.

Adelman and Morris (1968) Performance Criteria for Evaluating Economic Development Potential: An Operational Approach Quarterly Journal of Economics, 82(2), 260-80.