Major Economic Calculations - Assignment Example

This implies that a percentage increase in the price of the product will result in a reduction in the quantity demanded of the good by 1.19%. This further means that the demand for the product is elastic and thus any price rise may drive customers away.

Cross-price elasticity is calculated by 0.68. This implies that a percent rise in the price of a competitor’s good results in a 0.68% rise in the quantity demanded of the good or service. 0.68 indicates that the product is fairly inelastic to a competitor’s price and thus will not necessarily consider their competitor since their pricing won’t affect its sales.

Income-elasticity is found to be 1.62. This means that a one percent increase in the average income of its customers will increase the number of goods demanded by 1.62%. In this consideration, the product is elastic and therefore the firm can make arrangements to raise its price when income rises.

Advertisement elasticity, on the other hand, is 0.11 which implies that a 1% rise in expenses used for advertising will lead to a rise in the number of goods demanded by just 0.11%. The demand for the product is therefore inelastic to advertising. Due to this reason, more advertisement doesn’t necessarily mean that the company can raise the price since this will derive would drive customers away.

Concerning microwave ovens in the area, elasticity is calculated to be 0.07 and this means that an increase of one percent of ovens in the area will increase the quantity demanded by 0.07%.  The revelation indicates that the demand for the product is inelastic and negligible in the pricing strategy of the company.

From the above analysis, the amount of the products demanded shows a lot of responsiveness towards the price and income of the clients. The demand is however moderately responsive to the price of competing goods with advertising and microwaves existing in the area recording the lowest response indicators to demand

Since the price elasticity is negative a reduction or cuts in price would raise the quantity demanded. The firm will attain maximum revenues at the point where the degree of elasticity is one. Holding that argument, a price cut will raise the quantity demanded and thus increase net gain in sales as elasticity moves towards unity. In my opinion therefore the firm should reduce the price as this would result in an increased revenue generated and market share.

Ceteris paribus, the demand equation for the firm is given as follows:

Q = -5200 – (42x P) + (20 x 600) + (5.2 x 5500) + (0.2 x 10000) + (0.25 x 5000),
Q= 38650- 42P,
P = 38650/42- Q/42 (plotted in the excel graph).