Demand Estimation

Assignment One: Demand Estimation

ECO 550- Managerial Economics and Globalization

Strayer University

Assignment One: Demand Estimation

Introduction

With the assumption of being a maker of being a maker of a leading brand of low-calorie, frozen microwavable food computing elasticities for the business in terms of short-term and long-term pricing strategies can be essential in comparing prices for leading competitors, keeping track of monthly inventory and advertising amounts, as well as evaluating per capita income of the local area markets. Pricing is a crucial factor to consumers when they are considering purchasing a product. Therefore, it is vital to establish how price can affect the demand as well as supply of products, which can also aid in determining other factors that bring about change as well as take part in certain shifts as it relates to demand and supply. By using the data from twenty-six supermarkets around the country for the month of April, and assessing the elasticities based on the independent variables this will determine the necessary implications for their pricing strategies.

Elasticity Computations

Based on Option One the regression equation and the calculations for each independent variable are: QD= -5200 – 42P + 20Px +5.2I + .20A + .25M, (2.002), (17.5), (6.2), (2.5), (0.09), (0.21), R2 = 0.55, n=26, F= 4.88. The values for the independent variables are:

Q          =          Quantity demanded of 3-pack units
P (in cents)   =          Price of the product = 500 cents per 3-pack unit
PX (in cents) =          Price of leading competitor’s product = 600 cents per 3-pack unit
I (in dollars)   =          Per capita income of the standard metropolitan statistical area
(SMSA) in which the supermarkets are located = $5,500
A (in dollars)  =          Monthly advertising expenditures = $10,000
M                   =          Number of microwave ovens sold in the SMSA in which the
supermarkets are located = 5,000

Given these independent variables:

P=500, PX=600, I=5,500, A=10,000, M=5,000. QD= -5200 -42(500) +20(600) +5.2(5500) +.20(10000) +.25(5000). [-5200- 21000+12000+28600+2000+1250=17,650].

The elasticity computations for each independent variable are:

Price Elasticity = (P/Q) (∆Q/∆P)

EP=(-42)(500/17650)= -1.19; EA= (.20)(10000/17650)= .11; EI= (5.2)(5500/17650)=1.62; EM=(.25)(5000/17650)= .07; EPx= (20)(600/17650)=.68.

After calculating the elasticities for each variable based on the values from option one, various implications can be made as it relates to short-term and long-term pricing.

References

Sabatelli, L. (2016). Relationship between the Uncompensated Price Elasticity and the Income Elasticity of Demand under Conditions of Additive Preferences. Plos One, 11(3), e0151390. doi:10.1371/journal.pone.0151390