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Demand Estimation

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In this essay I will assume the role as an employee for the maker of a leading brand of low-calorie, frozen microwavable food chain. Using the data from 26 supermarkets around the country for the month of April and the equation data that has been provided to me, I will compute the elasticity for each independent variable as well as determine the implications for each of the computed elasticities for the business in terms of short-term and long-term pricing strategies. Based on these calculations I will recommend whether the firm should or should not cut its price to increase its market share. Lastly, with the understanding of the concept on supply and demand I will discuss crucial factors that could cause rightward shifts and leftward shifts of the demand and supply curves, illustrating these shifts using graphs plotting the curves. Compute the Elasticity for Each Independent Variable

Assume the following values for each independent variable. These values will be used to compute the elasticity for each independent variable for the food chain. The first step in computing these equations will be to convert all price values into dollars, then put the values of P, Px, A, I and M in the above equation. QD = – 5200 – 42P + 20PX + 5.2I + .20A + .25M

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 where the supermarkets are located = 5,000.

QD = -5200 – (42×5) + (20×6) + (5.2×5500) + (0.20×10000) + (0.25×5000) = 26560 Own price elasticity (ep) = -42, P = 5, Q = 26560
Own Price elasticity = – 42×  = – 0.008
Cross price elasticity = 20, Px = 6, Q = 26560
Cross price elasticity = 20 ×  = 0.005
Income elasticity (eI) = 5.2, I = 5500, Q = 26560
Income elasticity = 5.2 ×  = 1.08
Advertisement elasticity (eA) = 0.2, A = 10000, Q = 26560
Advertisement elasticity = 0.2 ×  = 0.08
Microwave ovens elasticity (eM) = 0.25, M = 5000, Q = 26560
Microwave ovens elasticity = 0.25 ×  = 0.05
From the above results, we can see that the own price elasticity is – 0.008. Therefore the demand for the low-calorie microwavable food is inelastic. An increase in the price of the food will cause a decrease in quantity demanded. Income elasticity of the goods calculated is 1.08, which means that the good selected is a luxury good. Changes in income could also affect the demand of this product. The cross price elasticity is 0.005. Therefore the two goods can be considered as neutral goods. The advertisement elasticity is 0.08. This indicates that advertisement has an important impact on the sales of the product.

Lastly, the microwave ovens elasticity is 0.05. This is a direct correlation as sales of microwave ovens increase; demand for of low-calorie microwavable food also increases. Since price elasticity is less than 1, total revenue will fall if price falls. Moreover the cross price elasticity of the product is almost close to zero. So, if the firm will never lower its price to increase its market share. The cross price elasticity of the product is positive (0.005). Since the value is too low, the goods can be considered as almost neutral goods. But own price elasticity is less than 1. Therefore total revenue test states that total revenue will fall if price falls. Demand and Supply Curve

Assuming that all the factors affecting demand in this model remain the same, but the price has changed. The price changes are 100, 200, 300, 400, 500, 600 dollars. Below are the supply and demand curves illustrating the shifts in the curve.

There are several factors in which supply and demand can be affected. Such factors related to change in demand are number of buyers in the market, consumer income, prices of other products, consumer preference and consumer expectation. Such factors relating to change in supply are the number of product producers/manufacturers, resource prices, state of technology, changes in nature, prices of related products and expectations of the producers/manufacturers. Given these factors of supply and demand changes we could see an effect of short term or long term changes for the product. When comparing the changes of both supply and demand, we can conclude that the changes in demand would create a long term effect for the low-calorie, microwave dinners. All of the factors listed as demand changes, with the exception of consumer income, can be closely related to market trends.

Shifting of the Curve

To illustrate the shift in the curve, I will use the example of increase in income of the consumer. If an increase of the consumer income occurs the demand will shift the demand curve rightward. Similarly, fall in the income of the consumer will shift the demand curve leftward. Besides this, a rise in advertisement expenditure will shift the demand curve rightward and vice versa. However, supply curve can shift rightward if there is any improvement in the technology.

References
Online Retrieval
http://www.sophia.org/tutorials/independent-and-dependent-variables–3 Online Retrieval
http://www.investopedia.com/university/economics/economics3.asp McGuigan, J.R. Moyer, R.C. & Harris, F.H. deB (2014). Managerial Economics; Applications, Strategies and Tactics (13th ed.). Stamford, CT: Cengage Learning

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