# Estimating Demand and Its Elasticities

Estimating Demand and Its Elasticities

From the scenario for Katrina’s Candies, examine the procedure Herb will use to estimate the demand model developed in the scenario for Week 1. Analyze the elasticity of demand for products within the selected industry relevant to Katrina’s Candies. Determine the factors involved in making decisions about pricing these products that you believe to be the most influential.

Herb and Rene felt the best way to proceed was to first build a new model of the demand for Katrina’s sugar-free chocolate candy. They, then, used the model to predict the demand. In the model, the quantity of Katrina’s sugar free candy is designated as the dependent variable and independent variables. The distinction between a dependent and independent variable is that a dependent variable changes value when changes occur in some other variable while an independent variable impacts or causes change. The dependent variable which is on the left-hand side is the quantity demanded for Katrina’s sugar free candy (Qdksfc) and the independent variables which are on the right side are the:

Price of the sugar-free chocolates

Price of the substitute good – caffeinated coffee

Price of bottled water

According to Herb, the demand model is as follows:

Qd ksfc = b0 – b1 psfc + b2 pcaff coffee – b3 p water

From a decision-making perspective, it is imperative that business owners know the effects of changes in the detriment of demand. The best way to measure the responsiveness of quantity demanded to changes in any of the variables that influence the demand and supply is elasticity (McGuigan, Moyer, & Harris, 2014). From this week’s scenario, it was determined that the demand for Katrina’s Candy was inelastic which means the demand for Katrina’s chocolates did not change. It would be safe to say that Katrina’s Candy can raise the price of sugar-free candy in order to increase total revenue. It also implies that if the price Katrina’s sugar-free candy increases, the quantity demand will decrease. The most influential factors involved in making decisions about pricing are competitors’ prices, the economy, and government laws and regulations. For example, if a customer wanted to buy a pound of sugar-free candy, but was able to find it at a price 30% lower than Katrina’s, they would more than likely purchase it from the competitor. Companies tend to lower their prices when the economy is weak and the unemployment rate is high.

https://blackboard.strayer.edu/bbcswebdav/institution/ECO/550/1142/Week

1/Scenario/story.html

http://2012books.lardbucket.org/books/marketing-principles-v1.0/s18-02-

factors-that-affect-pricing-de.html

McGuigan, J.R., Moyer, R.C., & Harris, F.H. (2014). Managerial economics:

Applications, strategies, and tactics. (13th Ed.). Stanford, CT: Cenage

Learning

created the data set in excel

The procedure that Herb and Rene will use to estimate the demand model developed in the scenario for Week 1, is based on the following:

Qd ksfc = b0 – b1 psfc + b2 pcaff coffee – b3 p water

In essence, the discussion of the demand model for Katrina’s Candies is as follow. The dependent variable (changes value when changes occur in some other variable) the independent variable impacts or causes a change

or left –hand variable is Quantity demanded of Katrina’s sugar-free candy (Q dksfc ), while independent or right-hand variables are as follows:

Price of sugar free chocolate (P sfc )

Price of (substitute good) caffeinated coffee (P caff coff )

Price of bottled water (P water )

Numbers of buyers in the market

However, the demand model for Katrina’s Candies has been characterized as follows:

Qd ksfc = b0 – b1 psfc + b2 pcaff coffee – b3 p water

2) From the e-Activity, analyze the elasticity of demand for products within the selected industry relevant to Katrina’s Candies. Provide a rationale for your response.

The tabulated results of Excel Summary Output shown in Weekly Scenario are presented in an equation form as follows:

Qd kfsc = 344400.5 – 29965.7 Psfc + 168454.8 Pcaff coffee – 51646.5 Pbottled water +31.12 Income

There are three elasticities which are follows:

1) (Own) Price elasticity of demand

2) Income elasticity of demand

3) Cross-price elasticity of demand; if the sign is positive, the goods are substitutes, and if the sign is negative, the goods are complements

The (own) price elasticity of demand for Katrina’s sugar-free candy (KSFC) is given by the following formula:

E q = (∆Q/∆P)*(P/Q)

E q = (-29965.7)(P/Q)

From the Week 2 Scenario video, we know the demand for Katrina’ Candy was -0.483 (inelastic). This implies Katrina Candy can raise the price of sugar-free candy to increase total revenue. It also means that if the price of KSFC increases by 100%, quantity demanded will decrease by 48%.

In the model, the quantity of Katrina’s sugar free candy is designated as the dependent variable and there is also five independent variables. The price of Katrina’s sugar free chocolate was the first independent variable. They had to include the price of sugar free chocolate; otherwise, there is no demand curve. Second is the price of the substitute good – caffeinated coffee. Third is the complimentary good – bottle water. The price of bottle water is the next independent variable. Income is another variable typically used in the demand curve. For their model, they selected the median income household. The number of buyers were also considered in the demand model.

Price elasticity speaks in reference to how demand for a product will change if the price changes for a particular good.  If the price elasticity is between 0 and 1, then the price elasticity is inelastic, meaning that demand is not largely affected by a change in price.  If the price elasticity is greater than 1 than the product would be considered price elastic, meaning that a change in price would have a larger effect on demand.   Chocolate itself would be considered inelastic, because there is a lack of substitute goods.  Whether or not the

The elasticity of demand in this scenario is used to show the responsiveness of the quantity (Katrina’s dependent variable) demanded to the change in its price. A product can only become elastic is the percentage change in the quantity demanded is very much so greater than the percentage change in price (division for negative or positive outcome). Three important factors involved in making decisions about the pricing of Katrina’s sugar-free chocolate include the price of Cocoa/ Cocoa butter, the price of artificial sweeteners, and the comparison price of product from other chocolate companies such as Mars Incorporated or Nestle. These three important factors determine specifically whether the product has no choice to increase or

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