For this assignment, one is to imagine that they work for the maker of a leading brand of low calorie, frozen microwavable food. The maker estimates a demand equation for its product. They use data from twenty-six supermarkets around the country for the month of April. To get a better understanding of how to solve the equation, one must first have a better understanding of demand estimation. Demand estimation is a process that involves coming up with an estimate of the amount of demand for a product or service. One of the reasons that companies use demand estimation is to assist with pricing. When one has an idea of what the demand would be for the product, one knows approximately how much they have to price the product. With demand estimation, a company can gauge how much to produce and make other important decisions.
As one moves forward with tackling the assignment, one will first find that the elasticity must be computed for each independent variable. With the regression analysis, quality demand (QD) represents the equation QD = -5200 – 42P + 20PX + 5.211 + .20A + .25M. The product price (P) can have a negative relation to quality demand as well. The price of the leading competitor is represented by (PX). As price changes demand, this is the result (PX). Income is represented by (I). (A) stands for monthly advertising. As one advertises, the end result would be more sells. (M) represents the number of microwaves sold. Within the equation, the price (P) is 500 (five hundred), (PX) is 600 (six hundred), the income (I) is 5,500 (five thousand five hundred), advertise (A) is 10,000 (ten thousand), and (M) is 5,000 (five thousand).
After swapping the values and variables, the quality demand is utilized to solve in hopes of finding the total for quality demand. QD = -5200 – 42 (500) + 20 (600) + 5.2 (5,500) + .20 (10,000) + .25 (5,000) and when one completes the calculations, (QD) quality of demand is averaged to 17,650. One then takes the prefix and multiplies it by its individual values displayed above and uses that average and divides it by the (Q) 17,650 to find the elasticity. The elasticity equation is demonstrated as £q of price = coefficient * price/q. The (P) is equal to -42 * 500/17650 = -1.19. The (PX) is equal to 20 * 600/17650 = .68. (I) is equal to 5.2 * 5500/17650 = 1.62. The (A) is equal to .20 * 10000/17650 = 1.13. Last (M) is equal to .25 * 5000/17650 = .71 After completing this portion of the assignment at hand, one then has to determine the implications for each calculated elasticity. The displayed computation for each independent variable is demonstrated below.
The computed elasticity’s as displayed are -1.1898, 0.679887, 1.623513, 0.113314, and 0.070822. -1.1898 represents the first independent variable of the negative price elasticity of demand. This is an indicator to one that the price needs to be cut. If the demand is elastic, then one should cut the price and increase the total revenue. Lower prices increase sells. The cross price elasticity (PX) is the price of the leading competitor’s product as positive. Its numerical value is 0.679887. Because they are positive, they become substitutes. 1.623513 means that the income elasticity is positive, so the product is normal. This shows that if the income goes up, then people will buy more. 0.113314 is the advertising elasticity. The value is positive. Since it is positive, if one advertises then one is subject to more sells with the more that they have of it. For (M) the price elasticity of demand is 0.070822.
Because this number is positive, one will have an increase in total revenue. Should this firm cut its price to increase its market share? Consumer decisions are based on price elasticity. One should suggest that the firm not cut its price to increase its market share. It’s clear that the market share is up already. The demand is high and the price is not affected, so one should continue at the same price to maximize their total sales. One should move to assume that all the factors affecting demand in this model remain the same, but that the price has changed. One should further assume that the price changes are 100, 200, 300, 400, 500, and 600 dollars. When completing the calculations in Excel, first one should solve for quantity demand.
Next, one should solve for supply. The equation used for this is -7909.89 + 79.0989P. The letter (P) is being replaced with the numerical values previously listed as the price changes (100, 200, 300, 400, 500, 600). Afterwards, one will make Qs = Qd and solve for (P). -7909.89 + 79.0989P = 0, 79.0989P = 7909.89, 79.0989 is divided by both sides which equals P = 79.0989/7909.89 = 100. (P) = 100. The (P) is replaced where 100 is. This will make both sides equal to one another. If a change takes place with demand and supply, it could cause the graph to move to the left or to the right. The price does not change although the graph will change. Indicate the crucial factors that could cause rightwards shifts and leftward shifts of the demand and supply curve? If there is a shift in the demand curve it will either go to the left or right. The price will remain the same. Competition and highly favored products will cause the demand curve to shift left.