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Demand Estimation

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

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

This is the formula calculations. However, we need to substitute the values for competitions, price, income, number of ovens and advertisement in the formula to obtain: QD=-5200-42(500) +20(600) +5.2(5500) +0.20(10,000) +0.25(5000)

QD = -5200-21000+12000+28600+2000+1250

QD = 17650 units

Price elasticity of demand

Own price elasticity of demand (ep) = ×

= -42, P = 500, Q = 1760

Own Price elasticity (ep) = - 42 × = - 1.19

Cross Price elasticity-in terms of competitors’ products

Cross price elasticity (exy) = ×

= 20, Px = 600, Q = 17650

Cross price elasticity (exy) = 20 × = 0.68

Income elasticity

Income elasticity (eI) = ×

= 5.2, I = 5500, Q = 15650 Income elasticity (eI) = 5.2 × = 1.62

Advertisement elasticity

Advertisement elasticity (eA) = ×

= 0.20, A = 10,000, Q = 17650

Advertisement elasticity (eA) = 0.2 × = 0.11

Supply elasticity

Supply elasticity (eM) = ×

= 0.25, M = 5,000, Q = 17650

Supply elasticity (eA) = 0.25 × = 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 of demand is -1.19

There is an inverse relationship between price and demand. In case the ratio is less than 1, increase in the price of the food will reduce the quantity demand by less than the corresponding amount. As a result, increase in price leads to an increase in net income since price x quantity is higher than the current price x quantity amount.

Cross Price elasticity - competitors’ products=.68

If the cross-price elasticity is below 1, it means that people are adamant to switch to the competitors’ goods even with price reduction. Thus, increase in the price results to increase in net income (price x quantity may be higher than the current price x quantity).

Income elasticity is 1.62

It is almost equal to 1. It means that people’s income is directly related to quantity demanded by these people. As a result, the price needs to be affordable to enable more people to purchase the item. This may lead to an increase in net income because in case the price was high, less people will be able to purchase those goods.

Advertisement elasticity is .11

In this case, advertisement elasticity is low meaning that few people would be able to purchase those items sold even after increase in advertising costs. Thus, advertisement is not necessary.

Supply elasticity is 0.07

Low supply elasticity indicates that suppliers won’t change their quantity with either price increased or decreased. However, the supplier is unlikely to dispose the goods below average cost.

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 following issues should be taken into account:

•Since the price elasticity is less than 1, it shows that an increase in the quantity products demand will be low than the change resulting from price increase or decrease. Thus, a higher percentage of price cut will only attract a small percent of new customers.

•Since cross price elasticity is low, people are unlikely to adopt to the competitors’ Products.

•Since supply elasticity is low, price reductions will not increase the quantities produced. Thus, increase in the net income from higher quantities in the quantity x price formula will not be realized.

Hence, the company should not reduce its price.

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.

A. Plot the demand curve for the firm.

QD = - 5200 – 42P + 20(600) + 5.2(5,500)+ 0.20(10,000) + 0.25(5000) = -5200-42P + 12,000+ 28,600 + 2000 + 1,250= -5200-42P + 43,850= Q=38,650-42P P=38650/42-Q42

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=5200 + 45P=

-5200/45 + Q/45

C. Determine the equilibrium price and quantity.

38650 – 42P=5200 + 45P

87P= 33450

P=384.48

Q=5200 + 45

P=384.48

Q=5200 + 45 x 384.48= 22501

In this case, there is no market equilibrium as the demand curve does not intersect with the quantity supplied.

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.

Increase in price of the low-calorie frozen food will lead to an increase in supply of the product since suppliers take advantage of the high income and a reduction in demand since it would be unaffordable to customers in the short-term. In the long term, the prices will drop leading to an equilibrium where the amount of the frozen food supplied in the market will be equal to the demand due to fair prices.

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.

Factors that will increase supply are:

· Lower production costs enable suppliers to produce more items at a lower price; thus, increasing supply (and vice versa).

· Suppliers expectation of future prices increase will make them raise their production capacity to reap expected benefits thus increasing supply (and vice versa)

· Increase in the number of suppliers in the industry results in increase in supply of products in the economy.

· Technological advancements improve on innovation leading to increase in production capacity thus higher supply of products in the market.

Factors that will increase demand are:

· Increase in the amount of disposable income in customers increases their purchasing power thus increase in demand.

· Increase in prices of a substitute product.

· Increase in the number of customers.

· Customer expectation of future price increase will increase demand in the current period.

References Driver, J. (2009). Price elasticity estimates by Quasi–experiment. Applied Economics, 11(2), 147-155. http://dx.doi.org/10.1080/75859058 Independent and Dependent Variables. (2017). Sophia. Retrieved 23 April 2017, from http://www.sophia.org/tutorials/independent-and-dependent-variables--3 Kim, S., & Lee, B. (2012). Measuring Price Elasticity. Pacific Economic Review, 17(2), 181-203. http://dx.doi.org/10.1111/j.1468-0106.2012.00578.x Xiao, T., Luo, J., & Jin, J. (2009). Coordination of a Supply Chain with Demand Stimulation and Random Demand Disruption. International Journal Of Information Systems And Supply Chain Management, 2(1), 1-15. http://dx.doi.org/10.4018/jisscm.2009010101