Assignment

1

Demand Estimation

Dawn

Tate

Professor

Mohammed Sumadi

ECO

550 Managerial Economics and Globalization

Due: January 22, 2018

Introduction

As

an employee of the creator of one the leading brand of frozen low-calorie microwavable

food. In this publication I will

estimate a demand equation for product in our production using the data from 26

supermarkets from around the country. I

will use the following regression equation with standard errors in parenthesis

for the demand for widgets: QD= -5200 – 42P + 20PX + 5.2I + 0.20A +

0.25M

(2.002) (17.5) (6.2) (2.5)

(0.09) (0.21)

R2 = 0.55 n = 26 F = 4.88

Under the instruction

of my supervisor the computation of the elasticities of each independent

variable using the following values of the independent variables below are as

follows:

Q Demand equals – 5200

minus 42P plus 20PX plus 5.2I plus .20A plus .25M

P = .500 cents per 3 pack unit

PX = .600 cents per 3 pack unit – competitor’s product

I = $5500 average supermarket income

A = $10,000 advertising expenses

M = 5000 microwavable ovens sold

Finding

Q based on the values given: P, PX, I, A, and M.

QD= – 5200 – 42P + 20PX + 5.2I + .20A + .25M

QD = -5200 – 42*500 + 20*600 + 5.2*5500 + 0.2*10000

+ 0.25*5000 = 17,650

QD

= 17,650

Price

elasticity of Demand: = (DQ / DP) *(P/Q)

Regression equation (DQ / DP) = -42

EP = (-42) * (P/Q) = (500 / 17650) = -1.19

Advertisement

Elasticity (EA) of demand = (DQ / DA)*(A/Q)

EA = (10.000 / 17,650) * 0.20 = 0.11

Cross

Price Elasticity of Demand = (DQ/DPX)

* (PX/Q)

Cross price Elasticity EPX = 20 * (600 /

17650) = 0.68

Income

Elasticity of Demand: –

(DQ /DI)*(I/Q)

Income Elasticity EI = (5500 / 17650) *

5.2 = 1.62

Microwave

Oven Elasticity of Demand: – (DQ

/DI)*(I/Q)

Microwave oven Elasticity EM = 0.25 * (5000

/ 17650) = 0.07

Implications

of each computed elasticities

When

the elasticity price is calculated the measurement associated to the

relationship is computed with a change quantity demand for the microwave oven versus

the change derived within the price.

This prediction is based on theory that each factor that has the ability

to change will not affect demand. The

computation of the price elasticity of demand is (1.19), indicates an increase

in price for every 1% increase price.

With this information it can cause the average consumer spending/demand

for microwave ovens to decrease in the short-term which will result in less

food purchased in the consumer’s household.

So, in the long-term revenue will cause total sales to be reduced.

However,

the calculation of the cross price elasticity of demand of (.068) shows if

there is an increase in the competitors’ microwavable food price by 1%, then

the demand of our company’s microwavable food will increase by .68%. This relationship between goods and services

indicates the association of the quality demand and the goods when there is a

change.

According

to McGuigan the calculated income for elasticity of demand is 1.62%. If it is assumed that the all the other

factors that affect demand remains unchanged then the percentage ration in

quantity demand will be related to the percentage change in revenue (McGuigan, 2013). This translates to the

merchandise is of high quality and the aptitude of the elasticity will respond

to income as it alternates. This also

requires managers to be more cognizant in events that produces downturns in the

long-run, mangers should make the appropriate adjustments, because during this

time the consumers’ disposable income will decrease.

Because

the relationship to advertising is calculated at 0.11, which is smaller than 1,

the company’s sales level may not have any influence in advertising. This translates to the demand is not elastic

to advertisement.

Elasticity

of demand for microwavable ovens is calculated as 0.07. This calculation indicates that if there is a

one percent increase in microwave ovens, other appliances will increase by .07%. This information indicates that the sale of

microwave ovens demand is inelastic. By

using this application the demand for microwavable food will have an increase

in the quantity of sales because the coefficient of the elasticity is

calculated at 0.07.

Determine whether company should

cut price

If

the absolute value of the price elasticity is greater than any price level

reduction, the price level will increase quantity demand. Because an upsurge in quantity demand will

also increase total sales and profit, which would effectively increase earnings

per share which should result in a price cut (Aksoy, 2016).

Determine

a Demand Curve

QD = -5200 – 42*P + 20*600 + 5.2*5500 + 0.2*10000 +

0.25*5000

QD = 38,650 – 42P

So, different prices are substituted in the above

equations. Then the price of 100 demands will be calculated as:

QD = 38,650 – 42(100) =

34,450

But if price is 200;

QD

= 38,650 – 42(200) = 30,250

If price is 300;

QD

= 38,650 – 42(300) = 26,050

If price is 400;

QD

= 38,650 – 42(400) = 21,850

If price is 500;

QD

= 38,650 – 42(500) = 17,650

If price is 600;

QD

= 38,650 – 42(600) = 13,450

Plotting

the corresponding demand supply curve using the MC/Supply function

QD

= -7909.89 + 79.0989P with the same prices are as follows:

Equilibrium

price and quantity determinant.

The demand and supply equations are written as

follow:

38650-42P = -7909.89 + 79.0989P

38650+7909.89 = (79.0989+42) P

Hence, 121.0989P= 46,559.89

Therefore, P = 384.4782

Putting P in either of the equations gives QD=

22744.6924

The equilibrium price is 378.70 cents and the

equilibrium quantity is 22,745 units.

Influences

that will change the demand and supply of low-calorie frozen food:

It

is known in the demand equation that the demand for the merchandise will react

to the changes in the consumer’s income.

Also, the merchandise preference and the pricing of the microwave oven

versus the pricing of the competitor will also affect the demand equation. However, the disturbances in the

manufacturing cost that attribute to the raw material, labor for and innovation

of technology are attributing factors to the demand equation (Krystallis, 2011).

Rightward

and leftward shift in the demand and supply curves:

The

demand and supply curve is related to how the curve swings to the left and

right. This relates to the price change

of the consumer’s income. Consumers will

have a higher desire for low-calorie foods when the price is less expensive,

this in comparison to food items that are prepared in stoves, oven,

microwavable, air fryers, etc. This will

cause the curve to swing rightward. But,

if the pricing of the substitute products decrease then the swing will go

leftward. Other critical components that

affect the curve swing going leftward or rightward are the innovation of

technology, such as amount of time spent on processing the food. Another component would be the how the

production of the product changes, and example would be updating software or

recall of parts.