# Demand Estimation

Elasticities for each independent variable with calculations

Given that; P = 500, C = 600, I = 5500, A = 10000, and M = 5000, using the equation

QD= – 5200 – 42P + 20PX + 5.2I + 0.20A + 0.25M, then

QD =-5200-42*500+20*600+5.2*5500+0.2*10000+0.25*5000=17650

Using the formula, Price elasticity = (P/Q)*(dQ/dP)

Drawing from the regression equation, dQ/dP = -42. (Coefficient of P)

So, price elasticity EP= (P/Q) * (-42) = (500 / 17650)*(-42)  = -1.19

Replicating the same to the other variables we get,

EC =(600/17650)*20 = 0.68

EI ­=(5500/17650)*5.2 = 1.62

EA =(10000/17650)*0.2 = 0.11

EM =(5000/17650)*0.25 = 0.07

Implications of the elasticities

Price elasticity has been calculated as -1.19.  This implies that a 1% increase in the price of the Low Calorie, Frozen Microwavable Food, the quantity demanded responds by dropping by a factor of 1.19%.  Using this understanding, the elasticity of this product can be said to be elastic. An increase in prices is equivalent to chasing customers away.

Cross-price elasticity as indicated is 0.68. This means that If  the price of a competitor’s product shoots up 1%, then quantity demanded of our company’s Low Calorie, Frozen Microwavable Foods will rise by 0.68%. Our product in comparison to the competitor is fairly inelastic meaning that their pricing has little effect to our sales.

Income-elasticity is 1.62 indicating that a 1% rise in the income of the consumers of the product will boost the quantity demanded by 1.62%. It can be said that product is elastic with reference to incomes of the consumers. The company can successfully increase prices if the incomes of the market increases.

With an advertisement elasticity of 0.11, it essentially means that a 1% increase in expenses tied to advertisement, quantity demanded is expected to rise by 0.11%.  This indicates that, demand is somewhat inelastic when it comes to advertising. It is for this reason that the company should not invest heavily in advertisements since the returns from such investments are not likely to be recouped.

When it comes to the Low Calorie, Frozen Microwavable Food business in the area, elasticity is 0.07, is an indication that a 1% increase in the number of ovens in the area quantity demanded of ovens in this company will only be raised by a grissly 0.07%. If inferences are made with regards to this understanding, it should be noted that this company should not be worried by an increase in ovens in the area.

As it has been established thereabove, it can be concluded that the quanity demanded is a sensitive aspect that is easily affected by its prices and incomes of the company’target market. From the same analysis, advertisement budgets by the company should be reduced since the same has been determined to bring in little than it consumers. The number of similar products in the adjacent area should also not worry the company also.

Recommendation on whether to reduce prices to gain market share

It has been determined that the company has a negatice price elasticity of -1.19%. This is proof enough that a price cut would yield a significant increase in sales (market share). More so, the elasticity is well above the unitary elasticity meaning that a price reduction and market share increase are not proportional but are to the advantage of the firm. Therefore, I recommend that the company reduces its prices to capture a more sales and revenues as Keynes (2016), mentions. The profit model of the company should be that which is volumes based as adviced by Hanssens et al., (2003).

Demand and Supply Curves

1. Demand curve for the firm.

The demand equation is derived as follows:

Q = -5200 – 42*P + 20*600 + 5.2*5500 + 0.2*10000 + 0.25*5000

Q = 38650 – 42P

The demand curve is plotted on Figure 1 below according to the cordinates below

• supply curve

Using the equation, Q = 5200 + 45P, the supply curve has been determined using the following points in the graph. The graph is shown in Figure 1.

• Equilibrium price and quantity

The equilibrium can be determined using mathematical or graphical methods.

Mathematically, the equilibrium would be as follows.

38650 – 42P = 5200 + 45P

87P = 33450

P = 384.48

and Q = 5200 + 45*384.48 = 22501

Grahically, the equilibrium is as indicated on the graph where;

P=400

Q=23200

There is a slight difference in the two methods due to the smoothening of the graphs.

Significant factors that could cause changes in supply and demand

Demand of a product as we have seen in the calculations thereabove, can be affected by changes in consumer incomes, prices set by the competitors, as well as the advertising budgets. Furthermore, demand can be affected by consumer preference as indicated by Bowen and Sosa (2014). Supply changes of a product can be occassioned by a change in the number of similar suppliers, technological advances which favor the production of the product, availaility of inputs such as labor and raw-material,  as well as government policies, transport costs and natural conditions as discussed by Bowen and Sosa (2014). Demand and supply are often slow when it comes to reacting to price changes in the short-run. In the long-run however, the price changes are more substand

Factors that could cause shifts of the demand and supply curves

A demand curve can shift to the right, according to Bowen and Sosa (2014), if the the prices of complements are reduced, and incomes of consumers increased. The same effect can be experienced if there is a increased populations as well as preference for the product in question.When consumer incomes reduce, compliments rise in prices, the effect is a leftward shift in the demand curve.

Shifting the supply curve to the left requires an improvement in technology, availability of factors of production such as raw materials and labor at lesser costs, and increased government expenditure in the sector, for instance through subsidies and tax reductions as enumerated by Bowen and Sosa (2014). To shift the supply curve to the left, a decrease un resources supply, poor government support in terms of subsidies and taxes is needed

References

Bowen, W. G., & Sosa, J. A. (2014). Prospects for faculty in the arts and sciences: A study of factors affecting demand and supply, 1987 to 2012. Princeton University Press.

Hanssens, D. M., Parsons, L. J., & Schultz, R. L. (2003). Market response models: Econometric and time series analysis (Vol. 12). Springer Science & Business Media.

Keynes, J. M. (2016). General theory of employment, interest and money. Atlantic Publishers & Dist.

Appendix

Figure 1

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