Demand Estimation with Regression Function - Assignment Example

Demand Estimation with Regression Function Compute the elasti for each independent variable Given, The equation for Quantity Demanded (QD) = -2,000 - 100P + 15A + 25PX + 10I Where, P = Price of the product A = Advertisement expenditure PX = Price of the leading competitor products I = Per capita income Calculation of the change in the QD with, P = 200 cents, PX = 300 cents, I = 5,000 and A = $ 640. Then, QD = - 2,000 - 100(200) + 15(640) + 25(300) + 10(5,000) = 45,100 Formula for price elasticity = (P/Q) (∆Q/∆P) where, ∆Q and ∆P is change in quantity and price. From the given regression equation, ∆Q/∆P = -100. Thus, the Price Elasticity (Ep) = (-100) (200/45,100) = -0.44 Likewise, Price Elasticity of Competitor Price (Ec) = 25(300/45,100) = 0.17 Price Elasticity of Advertisement Price (EA) = (15) (640/45100) = 0.21 Price Elasticity of Per capita income (EI) = (10) (5000/45100) = 1.11 (Boise State University, 2014; Iowa State University Extension and Outreach, 2007) 2. Determine the implications for each of the computed elasticity for the business in terms of short-term and long-term pricing strategies. Provide a rationale in which you cite your results. In accordance to the above calculation, the price elasticity of demand is -.44. The result signifies the fact that 1% increase in the price of the product will lead to .44% decrease in its demand. Thus, the product demand is inelastic. Accordingly, in the short run, price-skimming strategy will be beneficial for profit maximization, while in the long run, the organization should retain its price-skimming strategy till the demand is inelastic (Huimin & Hernandez, 2011). Cross-price or competitor price elasticity is 0.17, which reflects that if the competitor’s price increases by 1%, demand will increase by 0.17%. Thus, the product demand is inelastic to a competitor’s decision on making significant change in prices. Besides, in the short and long run, the company needs to inculcate innovative strategies in its operational processes along with incorporating significant changes in the prices (Economics Revision Focus, 2004). On the other hand, Income-elasticity is 1.11 as per the calculation, which reveals that a 1% rise in the income will increase the demand by 1.11%. In this respect, the company should apply the pricing strategy emphasizing the income range of the customer, in the short run that will help retaining its prices in the long-run (King & Weimer, n.d.). Besides, advertisement-elasticity has been calculated as 0.21, i.e. with the 1% increase in expenditure of advertising, which leads to an increase in the demanded quantity by 0.21%. However, it also signifies that demand is inelastic to the cost of advertisement. Thus, the company should promote its expenses towards advertisement but should be careful when raising the price that can lead to a shift in the customer choices (Allen, et. al., n.d.). 3. Recommend whether you believe that this firm should or should not cut its price to increase its market share. Provide support for your recommendation. Managing the price of the product is always a challenging task for any organization, as any significant changes in the price will have an impact on its market share, igniting changes within the customers’ and competitors’ reactions respectively. From the calculation, it can be comprehended that price elasticity is less than 1 in absolute value. The relative elasticity if less than the one reflects that the price of the product is inelastic. Therefore, decrease in the price of the product will lead to increase in its demand, but restrict increase in quantity demanded owing to the decrease in the price. Thus, this will lead to considerable increase in market share of the company, as the demand of the product shifts upwards, but not as high as expected, because the price elasticity of demand is less than 1, at .44 (Srinivasan, et. al., 2000). 4. Assume that all the factors affecting demand in this model remain the same, but that the price has changed. Further assume that the price changes are 100, 200, 300, 400, 500, 600 cents. Assuming the change in the QD with, P = 100, 200, 300, 400, 500, 600 (cents) and the relative other factor will be constant i.e., PX = 300 cents, I = 5,000 and A = $ 640. Then, QD (at P =100) = - 2,000 - 100(100) + 15(640) + 25(300) + 10(5,000) = 55,100 QD (at P =200) = - 2,000 - 100(200) + 15(640) + 25(300) + 10(5,000) = 45,100 QD (at P =300) = - 2,000 - 100(300) + 15(640) + 25(300) + 10(5,000) = 35,100 QD (at P =400) = - 2,000 - 100(400) + 15(640) + 25(300) + 10(5,000) = 25,100 QD (at P =500) = - 2,000 - 100(500) + 15(640) + 25(300) + 10(5,000) = 15,100 QD (at P =600) = - 2,000 - 100(600) + 15(640) + 25(300) + 10(5,000) = 5,100 The plot the demand curve for the firm depicted below. Fig: Demand Curve with respect to change in the price Calculation of the change in the Quantity Supply (QS) with, P = 100, 200, 300, 400, 500, 600 (cents): Given, Q = -7909.89 + 79.0989P Then, QD (at P =100) = -7909.89 + 79.0989 (100) = 0 QD (at P =200) = = -7909.89 + 79.0989 (200) = 7909.89 QD (at P =300) = -7909.89 + 79.0989 (300) = 15,819.78 QD (at P =400) = -7909.89 + 79.0989 (400) = 23,729.67 QD (at P =500) = -7909.89 + 79.0989 (500) = 31,639.56 QD (at P =600) = -7909.89 + 79.0989 (600) = 39549.45 The plot the demand and supply curve for the firm depicted below. Fig: Demand and supply curve respect to change in the price Keeping all others factors as constants, the equation of the demand is as follows. QD = - 2,000 - 100(P) + 15(640) + 25(300) + 10(5,000) Q = 65,100 - 100P P = (65,100 /100) – (Q/100) The supply curve will be, Q = -7909.89 + 79.0989P P = 7909.89/79.0989 + Q/79.0989 Thus, solving the demand and supply curves concurrently, 65,100 - 100P = -7909.89 + 79.0989P 179.0989P = 73009.89 P = 407.65 And, Q = -7909.89 + 79.0989P Q = -7909.89 + 79.0989(407.65) = 24334.87 From the above calculation the equilibrium price will be 407.65 cents and the equilibrium quantity will be 24,335 units approximately. Moreover, the equilibrium quantity and the price will be the point where supply and demand curves intersect each other. d) With the above calculation and analysis, it can be comprehended that the demand of the brand of low-calorie, frozen microwavable food is strongly affected due to the alteration of consumers’ income and the pricing policy of the competitors’ product. Moreover, it is worth mentioning that the changes will be significantly affected by the customer preferences and demands. Likewise, supply of the product is also quite likely to get affected by the number of the factors as suppliers’ products and the technology used in the suppliers’ products. Nevertheless, additional factors, like raw materials and labor availability, are also among the key factors in the production cost of the products. Correspondingly, in the short run, the factors like change in the income, taste, price of the competitors’ products, may also be regarded as the key determinant of the demand, cost and price of the substitute products, affecting the supply. Whereas, in the long run, shifts in market demographics, advertisement, expectation and the distribution of the income affects the demand along with government policies, affecting the supply of the product (University of Victoria, 2004). 5. Indicate the crucial factors that could cause rightward shifts and leftward shifts of the demand and supply curves The rightward and leftward shifts are referred to the movements of the demand and supply curves, indicating the situation when the consumer purchase patterns are observed to change. This reflects that if the price of product changes, increases or decreases, the demand of the products, services or resources will also shift simultaneously. Besides, the shift in the supply curve refers to the situation where the supply of the products, services or resources are affected due to the changes in the price of the products and services. The key factor of such right and leftward sifts therefore depends on the desires and perceptions of customers towards its price. Illustratively, if the demand increases with the price unchanged, which shifts the curve towards right and if the consumer is keen to pay less for the product, the demand curve shifts towards left (California State University, 2014; McConnell et al., 2009). The key factor in the movement of the demand curve is the relative income of the customers. The underlying notion perceived is that as the income increases, the demand of the goods is significantly increased in subsequence. Moreover, the other factors related to the size as well as the structure of the changing population, expectation, taste and price of the related goods are also among the major factors to lead towards such increase and decrease (McEachern, 2008). Correspondingly, changes in input prices, changes in technology, changes in the number of producers, changes in expectations, and changes in the price of related goods or services are identified as few of the major factors that lead to the rightward and leftward shifts in the supply curve (Deepashree, 2006). For instances, if the price of product A increases, consumers will respond accordingly and shift their demand by purchasing in lesser quantity and accordingly if the income also increases, there would be a rightward shift within the demand curve. The below figure illustrates a shift in the demand curve, where, D1 refers to movement along with demand cure whereas D2 & D3 changes in the curve. Fig: Movement along the Demand Curve and Shift in the Demand Curve Source: (McConnell et al., 2009) The figure below replicates shift in the supply curve of coffee. Fig: Movement along the Supply Curve and Shift in the Supply Curve Source: (McConnell et al., 2009) References Allen, W. 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Retrieved from http://www.pucsp.br/icim/ingles/downloads/papers_2011/part_3/part_3_proc_36.pdf Iowa State University Extension and Outreach. (2007). Elasticity of demand. Retrieved from http://www.extension.iastate.edu/agdm/wholefarm/pdf/c5-207.pdf King, M. K., & Weimer, D. L. (n.d.). Price and income elasticity of demand for energy. Retrieved from http://www.eolss.net/sample-chapters/c08/e3-03-16.pdf McConnell, C R., Brue, S L., & Flynn, S M. (2009). Economics: Principals, problems and policies. United States: McGraw-Hill/Irwin. McEachern,W. A. (2008). Microeconomics: A contemporary introduction. United States: Cengage Learning. Srinivasan, S., Leszczyc, P. T. L. P., & Bass, F. M. (2000). Market share response and competitive interaction: The impact of temporary, evolving and structural changes in prices. Intern. J. of Research in Marketing, 17, 281-305. University of Victoria. (2004). Aggregate supply and aggregate demand. Retrieved from http://web.uvic.ca/~aahoque/VIU/Chapter%2026.pdf Bibliography Hoover, W. E., Eloranta, E., Holmström, F., & Huttunen, K. (2002). Managing the demand-supply chain: Value innovations for customer satisfaction. United States: John Wiley & Sons. California State University. (2014). Supply & demand. Retrieved from http://www.csun.edu/~dgw61315/PTlect2y.pdf Department of Economics. (2014). Demand & supply. Retrieved from http://www.albany.edu/~xl843228/teaching/ECON110/Lecture03.pdf Jain, T. R., & Ohri, V. K. (n.d.). Introductory microeconomics and macroeconomics. United States: FK Publications. Moon, M. A. (2013). Demand and supply integration: The key to world-class demand forecasting. United States: FT Press. Pearson Education. (2014). Demand, supply, and market equilibrium. Retrieved from http://www.prenhall.com/behindthebook/0132447029/pdf/OSullivan_CH03.pdf Straub, H. (n.d.). Demand and supply of aggregate exports of goods and services: Multivariate cointegration analyses for the United States, Canada, and Germany. Germany: Springer Science & Business Media. University of Pittsburgh. (2014). Supply and demand. Retrieved from http://www.pitt.edu/~mgahagan/Definitions/SupplyandDemand.pdf Read More