ECO550 Assignment 2

ECO 550

23 July 2017

Introduction

This research paper focuses on the leading brand of low calorie, frozen microwavable food and their demand estimation. The data that is used in the paper was from 26 supermarkets which I analyzed through multiple regression analysis. In the first regression, there are five equations while the second regression equation has four independent variables. This paper will focus on the elasticity of each independent variables with calculations. Second, implications of the computed elasticity will be determined for long and short terms along with a rationale to support my results. Lastly, I will plot both demand and supply curve and also indicate the critical factors that influence left and right shifts of both demand and supply curves alike.

Elasticity for each Independent Variable

When A=10,000 I=5500 C=600 P=500 M=5000

Regression equation which is QD= -5200 – 42P +20PX + 5.21I +0.2A +0.25 M

Quantity demanded

QD= Quantity demanded= -5200 - 42*500 + 20*600 + 5.2*5500 + 0.2*10000 + 0.25*5000 = 17650

Price elasticity (PE)

Calculated from the formula E= (P/Q) * (dQ/dP) dQ/dP= -42

Therefore, Price elasticity = (500/17650) * (-42) = -1.1898

Cross price elasticity

=20, Px = 600 and QD=17650

=20 (600/17650) = 0.68: Indicates substitute products

Advertisement elasticity

0.20, A= 10,000 QD=17650 (10000 / 17650) *0.20 = 0.11

Income elasticity

5.2, I=5500 QD= 17650

= 5.2 (5500/17650) =1.62

Supply elasticity

0.25 M= 5000 QD= 17650

0.25 (5000/17650) = 0.07

Implications for each of the computed elasticity

Price elasticity

Price elasticity is also known as price elasticity of demand. Negative price elasticity means the law of demand is being followed; which states that as price increases, quantity demanded decreases (Child, 2007). As shown from the above calculation price elasticity is -1.1898 meaning that; first, by implicating price, demand will automatically be affected. As product price increases the demand will decrease for the microwaveable food by 119 percentage points. If the price decreases, then product demand will increase.

Cross price elasticity

Cross price elasticity (CPE) is also known as cross elasticity of demand. CPE measures the responsiveness in the quantity demand of one good when the change in price takes place in another product. The term cross price elasticity, therefore, shows the relationship between two services or goods (Pauly, 2003). Specifically, CPE encompasses the openness of one commodities demand versus the price change of another. From economics facts, positive or negative cross price elasticity depend on whether goods are compliments or substitutes. Complimentary goods cross-price elasticity is negative when the increased price of a good increases and the demand for another good decreases. On the other hand, goods that are substituted have positive cross elasticity meaning that the price for one of the goods increases while the demand of the second good increases. According to the calculation shown above cross price elasticity is a positive value meaning that they are substitute goods. This means that if an increase of the price of competitor’s product rises by 1%, then the frozen microwavable food amount demand for will also increase by 0.68%.

Income Elasticity

Income elasticity usually measures the reaction of the amount of demand for a product to a variation in the income of the people demanding the product. Zero income elasticity is associated with sticky goods, positive income elasticity is associated with normal goods and negative elasticity is associated with inferior goods. In the calculation shown above it shows a positive income elasticity meaning that an increase in income of people demanding the product will lead to a rise in demand of the product. The product is a normal good and as the elasticity is greater than one that it is 1.62; the commodity must be a superior good or what economists call it a luxury good. An increase in per capita to the people demanding it will increase demand by 1.62%. Thus, making the commodity elastic. In a long-term perspective, the company can determine what per capita for its customers and as a result they can determine the price of microwavable food and some of possible future success.

Advertising Elasticity

Advertisement elasticity is the measure of the effectiveness of advertising campaign in generating new sales for a certain commodity. A positive advertising elasticity indicates that an increase in advertising campaigns leads to an increase in sales; while negative advertising campaigns shows an in increase in adverts reduces the demand of the product (Krugman, 2013). The advertisement elasticity is 0.11. This means that by increasing the advertising expenses in return it will raise the quantity demanded for the commodity by about 0.11 percent. More advertisement campaigns do not mean that they will be more demand of the commodity. In his situation, demand would be inelastic to advertising. If the organization decides to put more effort in advertisement campaigns and at the same point increase the price of the product due to heavy expense in advertising, this would drive away customers. It is therefore important to put advertisement campaign at an average pace and the one that does not affect the price of the commodity.

Supply Elasticity

Supply elasticity measures the responsiveness of the producers to the changes in the price of a certain commodity (Wessels, 2006). From the above calculations, it shows that price supply elasticity is 0.07 meaning that the price is elastic and supply is sensitive to the price changes.

A recommendation as to whether the firm should or shouldn’t cut its price to increase its market share

Economists have listed several factors that can establish whether any organization or a firm should or shouldn’t cut on its price so as to increase market share. From my view, I think the firm should cut on its prices so as to increase its market share. Example, income price elasticity shows a positive value of 1.62, which from my view is high; these means that, if the firm’s customers’ income goes up then the demand of the product goes up; by cutting on price means that it will increase the quantity of demand even more and with a great margin which in turn will increase its market share. Second, cross price elasticity value is positive, meaning that when the rival firms’ price is up, they will lose customers and their demand reduce.

Demand curve assuming all factors remain constant but price changes

To come up with Quantity demanded, Supply and Price table; one has to get the demand equation which will be

Q = -5200- 42P+ 20(600) + 5.2 (5,500) + 0.2(10,000) + 0.25 (5000) =

-5200-42P + 12,000 + 28,600 + 2000 + 1,250 =

-5200- 42P + 43,850 =

Q = 38,650-42; when Q=5200 and P=45 the demand equation will be P=-5200/45 + Q/45

By applying the equation Q=38,650-42P one can have the table by substituting the values of Price (P) and list the values shown in table one below:

The Supply and demand curve

Price and supply equilibrium

38650 -42P =5200 + 45P = 33450=87P

Pe= 384.48. By substituting the Pe, supple equilibrium will be

Se = Q=5200+ 45 (384.48) =22501

Factors that could cause changes in supply and demand for the low-calorie and frozen microwavable food

As shown from both the supply and demand curves equilibrium price is at 384.43 while the quantity demanded is at 22501. From the previous analyses, there are other factors that can cause changes in supply and demand of the product which are the income of the consumers, the price of the rival firms, and advertising cost.

Crucial factors that could cause rightward shift and leftward shifts of both the supply and demand curves

As shown from the analysis, some rival firm prices, income of the consumers, the price of the product and the correlating goods price can result to change in demand of the commodity. Some of the other variables which have not been included are preferences and tastes example is health consciousness towards the product. Shift in supply curve can also be a result of technological advancement, increase or decrease in production cost, change in the labor availability, raw materials and an increase or decrease in the number of product suppliers.

References

Child, R., New Dimension Media, Inc., & Insight Media (Firm). (2007). Simple supply & demand. Chicago, IL: New Dimension Media.

Krugman, P. R., & Wells, R. (2013). Economics. New York, NY: Worth Publishers.

Pauly, M. V., & National Bureau of Economic Research. (2003). Price elasticity of demand for term life insurance and adverse selection. Cambridge, Mass: National Bureau of Economic Research.

Wessels, W. J. (2006). Economics. Hauppauge, N.Y: Barron's.

Demand 100 200 300 400 500 600 34450 30250 26050 21850 17650 13450 Supply 100 200 300 400 500 600 0.11 7910.11 15820.11 23730.11 31640.11 39550.11