Week 9 Assignment

Demand Estimation in the Market

Monieke Woods

ECO550

Dr. Juliet Elu

July 21, 2017

Option 1

Given the demand function is Q= -5200 – 42P + 20Px + 5.2l + 0.20 A +0.25M

Differentiate the demand function

With respect to P: with respect to Px:

With respect to I: ; with respect to A:

With respect to M:

For the given values of independent variables, quantity demanded is

ANS = 26560

Calculations:

Cross price elasticity of demand

Income elasticity of demand

Demand elasticity for A

Demand elasticity of M

Therefore, the price elasticity of demand is 0.0079, i.e. inelastic. This means the total expenditure of the consumer is directly related with the price.

Since, an increase in price will raise the total revenue of the firm; the firm’s pricing strategy is to increase the price (Saada, 2013). 

Option 2

Given the demand function is

Differentiate

With respect to P: with respect to Px:

With respect to I: ; with respect to A:

For the given values of the independent variables, the quantity demanded is

ANS = 57475

Calculations

Price elasticity of demand:

Cross price elasticity of demand

Income elasticity of demand

Demand elasticity for A:

Therefore, the price elasticity of demand is 0.0035, i.e. inelastic. This means the total expenditure of the customer is directly related with price. Since a rise in price will increase the total revenue of the firm, the firm’s pricing strategy is to increase the price.

A price cut will lead to fall in the firm’s revenue. Therefore, the firm should not cut its price.

4 Significant factors causing changes in supply and demand of low calorie

Demand curve

The demand curve is negatively sloping indicating the relationship between consumer demand for goods and the prices of the goods. Increase in the prices of the goods leads to decreased demand for the commodity since the consumers are not willing to pay more for the commodity. The property of increase in price with decrease in demand results from the microeconomic law that states; with all other factors held constant, as the price of the good increases, the demand for the good or services decreases hence the translation of the negatively sloping demand curve.

Supply curve is positively sloping showing a direct relationship of commodities supplied to the prices of the goods. Increase in the prices of the goods results to suppliers increasing the quantity in the market to maximize the profit earning. The law of supply and demand explains the interaction between the supply of a resource and demand of the commodity.

Equilibrium exists where the market is merely having balances of the forces enforcing its operations. Equilibrium point is the point where the demand and supply curve interject forming an almost perfect market, where both consumers and suppliers are at benefit. Point where the equilibrium point connects to the price is the equilibrium price while point it connects to the quantity marks the equilibrium quantity.

At equilibrium, quantity supplied is equal to the quantity demanded and happens at a specific point creating both the equilibrium price and quantity. Equilibrium quantity is the amount of goods provided to the market at a specific price on a particular time while the equilibrium price is the price the firm is willing to provide the goods at a particular period of time. The market price is a merely an outcome and not necessarily a fair price since does not guarantee satisfying of both the seller and buyer. Market forces direct the positioning of the equilibrium points which changes with changes in the market. Changes in the market affects the demand and supply which later on translates to the equilibrium point change as well as the equilibrium price and quantity affecting sometimes both the demand and supply at once or either of the two disciplines.

5. Factors for rightward shifts and leftward shifts of the demand and supply curve

On the demand curve

A rightward shift on the demand curve symbolizes an increase in demand, having more buyers purchasing a commodity at the very price which is influenced by several factor including rise in income levels, fall in price of a complementary commodity, expectations of future increase in prices. The several factors affect the demand of a commodity differently in the market. Firstly, rise in income levels give the consumers purchasing power to acquire the goods they desire hence increasing the demand of the commodity. Secondly, a complementary good is a good that requires another good to incorporate and work together, fall in price of complementary good results to consumer demanding more of the commodity since the cost of the complementary good is already cut. A substitute good is also a special good as well as the complementary good, the substitute is the best other alternative consumers would chose to consume for the place of the existing good. Increase in the prices of the substitute good results to consumer fully depending on the existing product hence increasing the demand levels of the commodity (Ruttan & Thirtle, 2014). 

Lastly, future anticipation of increase in prices of the frozen microwave food will result to consumers demanding the good now to avoid paying for the good with the increased prices in the future. All these factors increasing the demand rate of the good translate to the rightward movement of the demand curve.

Leftward Shift

A leftward shift of the demand curve reports a decrease in demand of the goods available in the market. Decrease of demand is influenced by the negative factors of those leading to increase in demand for example, future anticipation of falling prices, increase in prices of complementary goods as well as the falling of prices for the substitute goods.

Supply Curve

The supply curve represents the production and availing of the goods in the market by the producing hosts of the good. A leftward shift of the supply curve represents a decrease in supply influenced by the several factors; increase in production costs causing the supplier face increased costs incurring at production hence cutting on the quantity to help survive the costs. A change in the expected demand with a predictable fall in demand will result to cutting in the supplies to avoid incurring losses to the organization hence resulting to the leftward shift of the supply curve. Any other factors discouraging the production of a good such as increased government procedures results to the leftward shift of the demand curve (Ruttan & Thirtle, 2014). 

Rightward shift

This signifies the increase in supply of the commodity in the market influenced by the several factors affecting supply. Favorable conditions such as, favorable weather, government subsidies, reduced taxations favor the production and supply of the commodity to the market resulting to a rightward shift of the supply curve. Anticipation of increased demand will translate to an increase in supply to rep out quantity profits resulting to the rightward shift of the supply curve.

References

Saada, A. S. (2013). Elasticity: theory and applications (Vol. 16). Elsevier.

Conlon, C. T., & Mortimer, J. H. (2013). Demand estimation under incomplete product availability. American Economic Journal: Microeconomics, 5(4), 1-30. http://www.ingentaconnect.com/contentone/aea/aejmi/2013/00000005/00000004/art0000 1

Ruttan, V., & Thirtle, C. (2014). The role of demand and supply in the generation and diffusion of technical change (Vol. 21). Routledge. https://books.google.com/books?hl=en&lr=&id=CoF9AwAAQBAJ&oi=fnd&pg=PP1&dq=shift+in+s upply+and+demand&ots=9WZ4WQxyBM&sig=uO07vj2rs2yyHtQqmdCuTfi9Slc