Assignment 1: Demand Estimation
Imagine that you work for the maker of a leading brand of low-calorie, frozen microwavable food that estimates the following demand equation for its product using data from 26 supermarkets around the country for the month of April.
For a refresher on independent and dependent variables, please go to Sophia’s Website and review the Independent and Dependent Variables tutorial, located at http://www.sophia.org/tutorials/independent-and-dependent-variables–3.
- Analyze how production and cost functions in the short run and long run affect the strategy of individual firms.
- Apply the concepts of supply and demand to determine the impact of changes in market conditions in the short run and long run, and the economic impact on a company’s operations.
- Use technology and information resources to research issues in managerial economics and globalization.
- Write clearly and concisely about managerial economics and globalization using proper writing mechanics.
Demand Estimation-Managerial Economics and Globalization
QD= – 5200 – 42P + 20Px + 5.2I + 0.20A + 0.25M
When P=500, M=5000, A=10,000, I=5,500, PX= 600
QD= -5200 – 42 (500) + 20 (600) + 5.2 (5500) + 0.20 (10000) + 0.25 (5000)
Price elasticity= %change in the demand of a product divided by the % price changes
From the equation given change in quantity over change in price = -42
Thus, price elasticity= (-42) * (500/17650)
On the other hand:
Microwave elasticity = (0.25) * (5000/17650) =0.07
Income elasticity = (5.2) * (5500/17650) = 1.62
Advertisement elasticity = (0.20) * (10000/17650) = 0.11
Cross –price elasticity = (20) * (600/17650) = 0.68
Price elasticity – price elasticity of demand help individuals and organizations to measure the reactivity of the amount of a product or service requested in relation to the price changes of the product or the service. Therefore, as calculated in the above computation, the price elasticity of demand is -1.19. Moreover, a change in prices of a commodity leads to the demand of the product according to the rule of demand and supply (Wilkinson, n.d.). Therefore, an increment in the price of the goods by 1% will result in a fall in the requests for the product by 1.19%. Thus, the product or service in question is elastic to the changes in price.
Cross-price elasticity – Cross-price elasticity assists in measuring the reactivity of the amount of a commodity in demand as a result of changes in the price of another product. From the computation above, the Cross-price elasticity is 0.68 which means that when a close substitute by competitors increases their prices by 1% the product in question will increase in demand by 0.68%. As a result, it is correct to state that the product is elastic to the changes in prices of close substitutes.
Income elasticity – Income elasticity assists in measuring the responsiveness of the demanded quantity of a product to the changes in the level of income of an individual or the members of the community. From the computation above, the income elasticity of demand is 1.62 which means that if the income level of individuals in the country or society increases by 1%, the demand of the product will rise by 1.62%. As a result, it is prudent to conclude that the product is elastic concerning the income of individuals in the society (Wilkinson, n.d).
Microwave oven elasticity – Microwave oven elasticity helps in measuring the responsiveness of the demand of the product concerning the number of microwaves in the region. Given the fact that the microwave oven elasticity is 0.07, it means that an increment in the amount of microwaves in the region by 1% will result in an increment of the demand of the product by 0.07%. Considering that the demand for the product will only increase by 0.07, it is correct to state that the product is not elasticity compared to the number of microwaves in the region.
Advertisement elasticity- Advertisement elasticity helps in measuring the effectiveness of the product promotion and advertisement initiated by the company. Given the fact that the advertisement elasticity of the commodity is 0.11, it means that the increment in advertisement activities of the company by 1% will result in an increase in the commodity demand by 0.11%. Given the percent change of the product demanded is too low, it is correct to conclude that the product is inelastic with advertisement (Petersen & Lewis, 2008).
Given the fact that the price responsiveness of demand of the product is more than 1, it is correct to state that a fall in the price of the commodity will result in an increment in demand of the product which in turn will increase and expand the market share of the company. Based on the calculations above, a decrease in the price of the commodity by 1% will increase the demand for the goods by 1.19%, which means that the company stands a chance of increasing its market share by more than 1% in the current market environment (Mithani, 2010). Moreover, the income reactivity of the demand of the goods is more than 1%, which means that an increment of income will lead to an increase in demand for the product by 1.62%. Therefore, a fall in the price of the goods will increase the disposable income of individuals in the society, thus increasing the amount of money set aside to purchase the product and hence increase the market share.
Demand curve of the firm
The equation of the demand curve should be:
Q= -5200 – 42 (P) + 20 (600) + 5.2 (5500) + 0.20 (10000) + 0.25 (5000)
Q = 38650-42P
P = 38650/42 – Q/42
The corresponding supply curve of function:
Q =5200 +45P (Q = -7909.89 +79.0989P) with same prices
Q=5200 + 45P
P = -5200/45 + Q/45
Equilibrium price and quantity
38650 – 42P = 5200 +45P
87P = 33450
P = 384.48 cents, while,
Q = 5200 + 45 (384.48)
Q = 22,501.6
Causes of changes in demand and supply of the product
The demand for a commodity is the quantity of product the customers are inclined and able to purchase while the supply of the commodity is the quantity of the goods the producers are inclined and able to provide in the market. From the scenario given above, it is easy to point out that the prices of close substitutes by competitors, the price of the commodity and the income level of the clients can substantially change the demand and supply of the products (Hirschey & Bentzen, 2016). On other occasions, consumer preferences and tastes, the availability of labor and raw materials have been found to have a bearing on the amount of a product demanded and supplied at a given period in a given geographical location.
A shift in the demand and supply curve consists of the movement along the demand curve owing to other driving factors of demand and supply than the prices of goods and services. Therefore, an increase in consumer income, positive changes in preferences and tastes as well as an increase in population would lead to an increment of demand of the goods which then forces a rightward shift of the demand curve. However, a reduction of the consumer income, negative changes in preferences and tastes and a fall of the population size will force a leftward shift of the demand curve (Menipaz & Menipaz, 2011). Notably, a positive improvement of the production technology, availability of raw materials and cheap labor as well as an increase in subsidies will lead to a rightward shift of the supply curve. However, increases in taxes, lack of government subsidies as well as low labor and poor technology will force a leftward shift of the supply curve of the commodity.
Hirschey, M., & Bentzen, E. (2016). Managerial economics. Andover: Cengage Learning.
Menipaz, E., & Menipaz, A. (2011). International Business: Theory and practice. London: Sage Publications.
Mithani, D. M. (2010). Managerial economics. Mumbai [India: Himalaya Pub. House.
Petersen, H. C., & Lewis, W. C. (2008). Managerial economics. Petaling Jaya: Pearson Malaysia.
Wilkinson, N. (n.d.). Government and managerial policy. Managerial Economics, 469-521. doi:10.1017/cbo9780511810534.018
Wilkinson, N. (n.d.). Nature, scope and methods of managerial economics. Managerial Economics, 3-19. doi:10.1017/cbo9780511810534.004