Demand Estimation

ECO 550 Assignment 1: Demand Estimation

Option #1

  • Compute all elasticities for each independent variable.

Quantity Demanded= (-5200)-42(500)+20(600)+5.2(5,500)+.20(10,000)+.25(5,000)

=(-5200)-21000+12000+28600+2000+1250=17650

=17650

Cross Price Elasticity

=20, Px=600, QD= 17650

=20(600/17650)

=0.68, means there are substitute products

Income Elasticity

5.2, I=5500, QD=17650

=5.2(5500/17650)

=1.62

Advertisement Elasticity

0.20, A= 10,000, QD= 17650

0.20(10000/17650)

0.11

Supply Elasticity

0.25, M=5000, QD= 17650

.25(5000/17650)

0.07

Price of the product elasticity= -42(500/17,650) = -1.19. The price of the microwaveable food product is elastic, implicating that the price of the product will affect the demand. As the price of the product increases, the demand for the frozen microwaveable food will decrease as well as if the price of the microwaveable food decreases, the demand for them will increase.

  • 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.

Cross elasticity= 20(600/17,650) = .68. The cross elasticity is positive, suggesting that they are substitute products. The elasticity is less than 1, this means that they are not good substitutes and the competitor’s price has a very small impact to the product sales.

Per capita Income elasticity= 5.2(5,500/17,650) = 1.62. The product is income elastic. This would indicate that the product is a luxury product and will be responsive to income variations.

Advertising elasticity= .20(10,000/17,650) = .11. The product is inelastic with respect to advertising. An increase in advertising will have a very small effect on product sales.

QD=-5200-42P+20(600)+5.2(5500)+0.2(10000)+.25(5000)

  • Recommend whether you believe that this firm should or should not cut its price to increase its market share. Provide support for your recommendation. In order to increase market share the company should cut its prices. Seeing the price elasticity of a product will give you incite on whether or not a firm should increase or decrease their cost. Seeing the price elasticity will also show the firm whether or not it will have an effect on the demand of a product. According to the price elasticity of the microwavable food, the price elasticity of 1.19 and the change in price is going to have an effect on demand for the product. If the price were to decrease then there would be an increase in demand.
  • A. The following equation is needed to plot the demand curve.

17650-42P

P+17650/42-Q/42

B. The following equation is needed to plot the supply curve.

Q= -7909.89+79.0989P

P= 17650/42-Q/42

C. Determine the equilibrium price

QD=QS

17650-42P = -7909.89 +79.0989P

P= -34989.56/121.0989

P=288.93/2.88 Dollars

Q= -7909.89 +79.0989 (288.93)

=14944.15 (approximately 14944 units)

D. Significant factors that could change concerning supply and demand for this firm is the cost of food and cost of production of the product. As stated previously if the firm lowers the price of their products demand would increase, but if production cost increase then supply deceases.

5. According to the law of demand if all other factors remain equal, the higher the price of the goods the less people will demand those goods (Heakal, 2014). In lamest terms the higher the price the lower the quantity demanded. The firm will not have as many buyers if they were to raise their price of their microwave foods. The demand and supply curve may shift left do to negative product reviews, if consumers see that product has negative reviews they may have second thoughts about purchasing the product. For example maybe there was a study to show that the low calorie microwave food causes silent strokes, this may reduce demand and shift the curve. New competition can also cause the demand curve to shift left as consumers stop buying one product to try a new one (Sarokin). The demand and supply curve may shift right due to a rise in income, a rise in price of a substitute or a fall in price of a counterpart (Shifts in Demand, 2015).

References

Heakal, R. (2014). Economics Basics: Supply and Demand. Retrieved from Investopedia: http://www.investopedia.com/university/economics/economics3.asp

Sarokin, D. (n.d.). What Causes the Demand Curve to Shift to the Left? Retrieved from Small Business: http://smallbusiness.chron.com/causes-demand-curve-shift-left-15857.html

Shifts in Demand. (2015). Retrieved from Economics Online: http://www.economicsonline.co.uk/Competitive_markets/Shifts_in_demand.html

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