Demand Estimation - Elasticity of the Variables - Assignment Example

Demand Estimation al Affiliation Elasti of the variables Given that P=500, C=600 500, A=10,000 and that M=5000 from the given regression equation The quantity demanded can be calculated as below This gives the quantity demanded as 17650 Given the calculated quantity demanded, the various elasticity can be calculated as below Price elasticity (PE) Calculating from the regression equation =-4 As such, PE=P/Q (-42)= -1.19, Similarly, EC= Also, elasticity of A (EA)= The elasticity of E (EL) =* The elasticity of M (EM) = * 2. Implications of the computed variables to the business both in the long-run and the short run. The calculated price elasticity is -1.19. The value indicates that any unit change in the price of the product would result in 1.19 percent reduction in the quantity demanded. According to theory, a product with such a response is said to have elastic demand (Nugent, & Kulkarni, 2013). Consequently, we can claim that any increases in consumer income might push away consumers. The cross price elasticity is established to be 0.68. The given price elasticity depicts that a unit increase in the price of competitor products such as substitutes would result in 0.68 percent increase in the quantity of the low-calorie, frozen microwavable food product. Such a product according to economic theory is said to exhibit somewhat elastic demand relative to that of similar products in the market (Graves, & Sexton, 2009). Consequently, the owner of the low-calorie, frozen microwavable food product may need to worry less about rivals in the market since the pricing strategies have a negligible impact on his products. The income elasticity is estimated at 1.62. Such a result is an indication that a 1 percent positive change in the average incomes of the consumers of the product would lead to 1.62 percent increase in the quantity demanded. Theorists argue that such a degree of responsiveness due to changes in consumer income is elastic (Saez, Slemrod, & Giertz, 2012). In line with this, the firm can take the step increasing the price of the commodity if the incomes of the consumers are increased. The elasticity of advertisement is estimated at 0.1 implying that a unit increase in the funds spent on advertisement results to 0.11 increase in the quantity demanded. The result that the degree of responsiveness of the quantity demanded to changes in the intensity of the advertisement is relatively elastic. As such, increases in the level of advertisement do not justify increases in prices by the firm since it is possible that such price have the potential to scare away the consumers (Graves, & Sexton, 2009). In relation to the microwave ovens in the region, the elasticity is estimated at 0.07. Despite the food product being a complement to the microwave oven, a 1 percent elevation in the quantity of ovens in the region only increases the quantity of the food product by merely 0.07 percent. Concerning this, the degree of responsiveness of the quantity needed in relation to variations in the price of the oven is inelastic. The management is better off ignoring the effect of the changes in the price of the ovens when strategizing on pricing its food product (Graves, & Sexton, 2009). 3. Recommendation for price strategies to the business From economic theory, when the price elasticity of a product is more than the absolute value,it is expected that a decline in price would result to more than proportionate increases in the quantity demanded. Such an effect tends to lead to a rise in market consolidation or market shares. The firm might need to take the chance and reduce the price, as a way of increasing its market share given that the company’s (PED) is more than 1.19 (Graves, & Sexton, 2009). Given that for a product with a unitary elasticity has no significant value to a business, the company is in a position to increase its market share substantially by increasing reducing its price relative to the ones charged by the other players in the market. 4. Effects of the changes a. Graphical presentation of the demand curve b. Graphical presentation of the demand curve Finding the equilibrium value Given that all the factors under consideration are held constant, the resultant demand equation due to the proposed changes will be estimated as follows. this implies that , Q= 38,650 – 42P Making price the subject of the equation gives, As such Which reduces to Working out the demand and supply curves simultaneously yields: The new equilibrium price and demand are estimated at 384 cents and 22.501 units respectively. Graphically, the point of intersection between the two curves of demand and supply indicate the equilibrium point from which the marketing clearing price and demand are read (Hoffman, 2009). Significant factors that could most probably cause a change in the quantity demanded. As previously indicated in the discussion, the demand of the food product can change in relation to changes in the incomes of the consumers, the cost of similarcommoditiies in the market, and the price of complementary products (microwave oven). The reported change could also be attributed to changes in consumer preferences, for instance, consumers are becoming more conscious of the need to consume low-calorized products. The supply of the product could also be affected by fluctuations in the amount of the suppliers of the product, changes in the technology applied in the production of the product, and other substantial elements such as labour, fluctuations in the availability of raw materials (Enders, & Hurn, 2007). 5. Factors causing a shift in the demand and supply curves Shift in the demand curve Depending on the change of an underlying factor, the position of the demand curve will tend to shift either leftwards or to the right. A rightward shift of the demand curve is an indication of an increase in demand. Such a shift is attributed to increases in the incomes of the consumers; reductions in the price of complement products such as microwave ovens in this case. Increases in the incomes of the consumer could result from reductions in income taxes, and promotions (Nugent, & Kulkarni, 2013) Conversely, it is possible that the demand for a product can decrease leading to a leftward shift of the demand curve. A leftward movement of the demand curve depicts a reduction in supply. The resultant shift to the left could be attributed to a fall in the price of similar products, a positive change in the price of complements (microwave oven) and reductions in the incomes of the consumers (Enders, & Hurn, 2007). Shift in the supply curve Just in the case of the demand, the position of the supply curve will tend to shift due to changes in one or most of the determinants of supply. The most probable causes are changes in the production costs, technology and government policy. Advancements in food processing technologies, increases in accessibility to cheap labour, raw materials and other factors of production, more tax reductions from the government and increase in the amount of subsidies are some of the most probable causes of the leftward shift in the supply (Rieber, 2010). As such, a rightward shift of the supply is an indication of an increase in supply (Barlas,& Gunduz, 2011). A leftward shift of the supply curve depicts a reduction in the quantity supplied (Oner, 2013). In this case, the reduction in quantity supplied is caused by rising cost and other determinants of supply such as the price of raw materials and labor and taxes that are significant to the product. References list Barlas, Y., & Gunduz, B. (2011). Demand forecasting and sharing strategies to reduce fluctuations and the bullwhip effect in supply chains. The Journal of the Operational Research Society, 62(3), 458-473. doi:http://dx.doi.org/10.1057/jors.2010.188 Enders, W., & Hurn, S. (2007). Identifying aggregate demand and supply shocks in a small open economy. Oxford Economic Papers, 59(3), 411. doi:http://dx.doi.org/10.1093/oep/gpl029 Graves, P. E., & Sexton, R. L. (2009). CROSS PRICE ELASTICITY AND INCOME ELASTICITY OF DEMAND: ARE YOUR STUDENTS CONFUSED? American Economist, 54(2), 107-110. Retrieved from http://search.proquest.com/docview/603216498?accountid=1611 Hoffman, S. D. (2009). Revisiting marshalls third law: Why does labors share interact with the elasticity of substitution to decrease the elasticity of labor demand? Journal of Economic Education, 40(4), 437-445. Retrieved from http://search.proquest.com/docview/604104645?accountid=1611 Nugent, K. L., & Kulkarni, A. (2013). An interdisciplinary shift in demand for talent within the biotech industry. Nature Biotechnology, 31(9), 853-5. doi:http://dx.doi.org/10.1038/nbt.2694 Oner, E. (2013). Simultaneous effects of supply and demand elasticity with market types on tax incidence (graphical analysis of perfect competition, monopoly and oligopoly markets). International Journal of Economics and Finance, 5(2), 46-55. Retrieved from http://search.proquest.com/docview/1431279341?accountid=1611 Rieber, W. J. (2010). The expenditure effects of supply side tax cuts: The role of the interest elasticity of money demand. Quarterly Journal of Business and Economics, 23(3), 29. Retrieved from http://search.proquest.com/docview/194738925?accountid=1611 Saez, E., Slemrod, J., & Giertz, S. H. (2012). The elasticity of taxable income with respect to marginal tax rates: A critical review. Journal of Economic Literature, 50(1), 3-50. doi:http://dx.doi.org/10.1257/jel.50.1.3 Read More