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demand_equation.docx
Demand Estimation
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Demand Estimation
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Estimation of Demand Equation
Lashunta Grant
Dr. Zohre Ardalani
Managerial Economics and Globalization
January 23, 2017
Introduction
In this paper I will show the calculations and analysis have been done for the month of April, using data gathered from 26 supermarkets around the country. The calculation shows the estimation of demand equation for the low-calorie frozen microwavable food.
Computation of Elasticity
QD = - 5200 - 42P + 20PX + 5.2I + .20A + .25M
(2.002) (17.5) (6.2) (2.5) (0.09) (0.21)
R2 = 0.55 n = 26 F = 4.88
I (in dollars) = Per capita income of the standard metropolitan statistical area
Q = Quantity demanded of 3-pack units
M = Number of microwave ovens sold in the SMSA in which the
P (in cents) = Price of the product = 500 cents per 3-pack unit
(SMSA) in which the supermarkets are located = $5,500
PX (in cents) = Price of leading competitor’s product = 600 cents per 3-pack unit
A (in dollars) = Monthly advertising expenditures = $10,000
Supermarkets are located = 5,000
The price value is changed into dollar values to get better calculations. Placing the values of P, A, Px, I and M in the equation above, we found that;
QD = -5200 – (42×5) + (20×6) + (5.2×5500) + (0.20×10000) + (0.25×5000) = 26560
· Now, own price elasticity (ep) = ×
= -42, P = 5, Q = 26560
Own Price elasticity (ep) = - 42× = - 0.008 (approx.)
· Cross price elasticity (exy) = ×
= 20, Px = 6, Q = 26560
Cross price elasticity (exy) = 20 × = 0.005 (approx.)
· Income elasticity (eI) = ×
= 5.2, I = 5500, Q = 26560 Income elasticity (eI) = 5.2 × = 1.08 (approx.)
· Advertisement elasticity (eA) = ×
= 0.2, A = 10000, Q = 26560
Advertisement elasticity (eA) = 0.2 × = 0.08 (approx.)
· Microwave ovens elasticity (eM) = ×
= 0.25, M = 5000, Q = 26560
Microwave ovens elasticity (eM) = 0.25 × = 0.05 (approx.)
Implications for Computed Elasticity
From the derived results of above computations, we can find that the own price elasticity is -0.008. The result from the low-calorie microwavable food shows that the demand is inelastic. Overall this means that increase in the price of food leads to the decrease of the amount demanded. The income elasticity of goods is 1.08 which means there is a demand for the product.
Neutral is the measurement of the goods being that the cross price elasticity is 0.005. A 0.08 advertisement elasticity has an impact on the trading of the goods.
There is a demand for microwavable foods based off the calculations. Microwave oven elasticity is 0.5% which shows somewhat of a demand and for the supply of microwavable foods.
Recommendation for the Firm
As elasticity of price is less than 1, overall earnings will decrease if cost value decreases. The price elasticity is shown to be close to zero. The pricing will never be dropped by the firm therefore the firm will never raise market share and drop its price
Factors Affecting Demand
1. Demand Curve:
2. Corresponding Supply Curve:
3. Equilibrium Price And Quantity:
At equilibrium, market demand = market supply.
P = 21570/87=247.93 ≈ 248 and Q = 5200+(45*247.93)16356.9 ≈ 16357 calculations on excel sheet as well
Factors that causing changes in demand and supply include,
· For Demand: Opponent firm’s product, income, price, advertisement, etc.
· For Supply: Supply upsets, Technological development, etc.
Demand and Supply Curves Shifts
Rising earnings of the person can boost the demand in which the demand curve will be shifted rightward. In the same way, reduction from the earnings of the client will cause the demand curve to be shifted leftward. The demand curve can shift rightward if there is a rise in operating cost for the cost of advertisement. Development in technology can cause a shift in demand. The supply curve should be shifted leftward in case there in supply changes.
References
Byron, R. P. (2008). Methods for Estimating Demand Equations. Retrieved from http://onlinelibrary.wiley.com/doi/10.1111/j.1467-8454.1968.tb00162.x
KhanAcademy.(n.d.).RetrievedJanuary23,2017, from https://www.khanacademy.org/economics-finance-domain/microeconomics/supply-demand-equilibrium/supply-curve-tutorial/a/what-factors-change-supply
Walter Nicholson, Christopher Snyder (2012). Microeconomic Theory: Basic Principles and Extensions (11th ed.). USA: Cengage Learning
Demand and Supply
Demand 26560 22570 18370 14170 9970 5770 1570 5 100 200 300 400 500 600 Supply 5425 9700 14200 18700 23200 27700 32200 5 100 200 300 400 500 600Quantity
Price
Demand 26560 22570 18370 14170 9970 5770 1570 5 100 200 300 400 500 600 New demand 31760 27770 23570 19370 15170 10970 6770 5 100 200 300 400 500 600Quantity
Price
Demand 26560 22570 18370 14170 9970 5770 1570 5 100 200 300 400 500 600Quantity
Price
