Assignment 1 Demand and Supply Estimation

Managerial Economics & Globalization Assignment 1: Demand and Supply Estimation Your name Your Instructor’s name Course Id: Your Institution’s name Date: Demand and Supply Estimation 1. Compute the elasticity for each independent variable. Note: Write down all of your calculations. Solution: When P= 500, M= 5000, A= 10,000, I = 5,500, C=600, By putting values of P, M, A, I and C in the regression equation we get, QD= - 5200 – 42(500) + 20(600) + 5.2(5500) + 0.20(10000) + 0.25(5000) = 17,650 As we know that: Price Elasticity (Ep) = (P/Q) (∆Q/∆P) From the regression equation we get, ∆Q/∆P = -42. So, Price Elasticity (Ep) = (P/Q) (-42) (500/17650) = -1.19, similarly, (Microwave oven’s Elasticity (EM) = (P/Q) (0.25) (5000/17650) = 0.07 Income-elasticity (EI) = (P/Q) (5.2) (5500/17650) = 1.62 Advertisement-elasticity (EA) = (P/Q) (0.20) (10000/17650) = 0.11 Cross- price elasticity ( Ec) = 20(600/17560) = 0.68 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. Solution: Price Elasticity: The calculated Price Elasticity is – 1.19. It means that if there is made an increase of 1% in the price of the product then it will drop the quantity demanded by 1.19%. So, it shows that the quantity demand is elastic in result. Consequently, it leads to the situation that if the incomes of the consumers increase then this may drive them away. Cross –Price Elasticity: The above calculated Cross- price elasticity is 0.68; it shows that if competitors increase the price level of the product by 1 % upward, it resulted into the increase in the quantity demand of that product by 0.68%. Consequently, this shows fairly inelastic behavior of the product demanded to the price of competitors and there is no need to concern about competitors as there is no influence on the sales of the competitors. Income Elasticity: The income elasticity is determined as 1.62. This shows that if there brings about an upward rise of is a 1% in the income of the consumer it will also increase the quantity demand of the product by 1.62%. So, this indicates that the product is elastic. In keeping this into view company may increase the price of its product if it observe an increase in the income of consumers. Microwave Oven Elasticity: The elasticity calculated in relation to microwave ovens in the area is 0.07, This means if there is made 1% increase in the number of microwaves ovens in the area it would resulted the increase in quantity demanded by a mere 0.07%. So, in this case demand of the product is inelastic related to microwave ovens in the area. Advertisement Elasticity: The calculated advertisement-elasticity is 0.11, which means if there is mad e 1% increase in the advertisement expenses by the business it would resulted into the increase of quantity demanded by 0.11%. This shows that demand of the product is inelastic related to advertisement of the business. This also drives the consumers of the company away because the increases in advertisement expenses trigger the company to increase the price of the product. So, the increase in price ultimately drives away consumers. Recommend whether you believe that this firm should or should not cut its price to increase its market share. Provide support for your recommendation. Solution: As, it the Price elasticity calculated above is greater than 1 in absolute value, so this shows that if there is made a decrease in the price of the product will result into increase in the quantity demand of that product (in % term), that ultimately resulting an increase in the market shares of the product. So, it can be concluded that if price of the product of a company is cut will increases the market share of that product because Price elasticity of demand is greater than 1 i.e. 1.19. Furthermore, it also seen that the revenue of the product maximum when elasticity is 1. So, in this way a cut in price would increase the quantity demanded by leading a net gain in the sales of the product as elasticity of the product is moving towards unity. By taking into account this situation, the company need to reduce price of its product so that there is made an increase in the market share that ultimately generates revenue. 3. 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. Solutions: A. Plot the demand curve of the Firm With all others factors remaining constants, the demand equation becomes as follows: Q = -5200 - 42(P) + 20(600) +5.2(5500) +0.2(10,000) +0.25(5000) Q = 38,650 – 42P P = 38,650/42-Q/42 B. Plot the corresponding supply curve on the same graph using the supply function Q = 5200 + 45P (Q= -7909.89+79.0989P) with the same prices. Q = 5200 + 45P P = - 5200/45 + Q/45 C. Equilibrium Price and Quantity Thus, solving the demand as well as supply curves concurrently we get, 38,650 - 42P = 5200 + 45P 87P = 33,450 P = 384.48 AND Q = 5200 + 45(384.48) Q = 22,501.6 D. Outline the significant factors that could cause changes in supply and demand for the product. Determine the primary manner in which both the short-term and the long-term changes in market conditions could impact the demand for, and the supply, of the product. Hence, the calculated equilibrium quantity of the product is 22,501 units where equilibrium price is 384 cents. Moreover, the equilibrium quantity as well as price can be viewed on the graph described at the point where both demand and supply intercept or meet together. As, it is clearly indicating from the demand equation that if there is made a change in prices of correlated goods, the prices of competitor product, or change in income of the consumer, it would result into the change in the demand of the low-calorie food. Furthermore, if the tastes or preferences of the consumers also change it brings about change in the demand of the product as well. If there is bring about change in the availability of more labor & raw material, improvement in production technologies, as well as there is a change in number of suppliers of the products, this would change the supply of the product. It also directly affects production costs of the product. 5. Indicate the crucial factors that could cause rightward shifts and leftward shifts of the demand and supply curves. Solution: The price reduction of the complementary product, an increase in the income of the consumers, increase preferences of consumers (awareness towards low calorie), and increase in population, would result a right ward shift of the demand curve of the product. On the other hand increase in the price of complementary product, decrease in income, as well as decrease in preferences or population would shift leftward of the demand curve of the product. Moreover, If there is made improvements in the technology of food processing, ensure more availability of raw materials and labors, decrease in Govt. taxes and increase in subsidies would result into a right ward shift of the supply curve. While if technology do not improve, and there is increase in taxes and decrease in subsidies as well as lowering of labors and raw materials lead a leftward shift of the supply curve of the product.