ECO550 Managerial Economics and Globalization January 29,
2014
Assignment 1: Demand Estimation 2
Compute the elasticities for each independent variable. Note: Write down all of your calculations. QD = - 5200 - 42P + 20PX + 5.2I + .20A + .25M (2.002) (17.5) (6.2) (2.5) (0.09) (0.21) R2 = 0.55 n = 26 F = 4.88 Your supervisor has asked you to compute the elasticities for each independent variable. Assume the following values for the independent variables: Q = Quantity demanded P (in cents) = Price of the product = 500 PX (in cents) = Price of leading competitors product = 600 I (in dollars) = Per capita income of the standard metropolitan statistical area (SMSA) in which the supermarkets are located = 5,500 A (in dollars) = Monthly advertising expenditures = 10,000 M = Number of microwave ovens sold in the SMSA in which the supermarkets are located = 5,000
Determine the implications for each of the computed elasticities for the business in terms of short-term and long-term pricing strategies. Provide a rationale in which you cite your results.
The calculations from the previous section, lead to several conclusions. From the above results, we can see that the own price elasticity is -.007907. The Price Elasticity is 0 < |Ep| < 1. The price is inelastic. The increase in price will cause a drop in quantity but will mean an increase in total revenue. Income elasticity of the good is calculated at 1.0768. Elasticity is 0 > Ep. This is an income-superior good. The product is an economical good. Increase or decrease of economic activity should not affect this product. Assignment 1: Demand Estimation 4 We can see that the advertisement elasticity is .0753. Elasticity is 0 > Ep. There is a positive correlation to advertisement. It is not very high but it is important to the demand for the product. The cross price elasticity is .0045. Elasticity is 0 > Ep. These products are substitutes. They are not a very strong relationship. In business terms, the company should look to increase their price in the short term. This will increase total revenue. The company need not worry about economic change indicators because they are not important to the overall demand. They should have a healthy advertisement budget to influence demand. Their relationship to the other product is not very strong. They should not be overly concerned with competitors. Recommend whether you believe that this firm should or should not cut its price to increase its market share. Provide support for your recommendation. The elasticity for price is less than one. This means that if the price decreases then the total revenue will decrease. The Cross Price Elasticity is nearly zero. This means that lowering the price will not increase market share. I could not recommend the company lower its prices. Also, the Cross Price Elasticity is positive. The value is very low making practically a neutral good. The Price Elasticity is less than one. If they increase the price the quantity will lower but the overall total revenue will increase. This does not translate to more market share because the quantity is actually lower. 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 dollars. Plot the demand curve for the firm: Assignment 1: Demand Estimation 5
The equilibrium price would be: Approximately 248 and the equilibrium quantity would be roughly: 163567
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.
There are several factors that affect the supply and demand for the products. The income level of the consumer, price of competitive products, and the mount of advertisement are a few that could affect the Supply and Demand. There can be more unexpected issues like supply disruption which can result in price change. The improvements in technology can affect demand as well. According to Renner, there are two distinct properties of the market. They are market equilibrium and economic efficiency. The complete markets move toward equilibrium which drive the supply and demand. The level of efficiency will affect the price. (Renner 2003)
Indicate the crucial factors that could cause rightward shifts and leftward shifts of the demand and supply curves. Assignment 1: Demand Estimation 9 The personal income of the individual can shift the curve left or right dependent on if it were negative or positive. An Increase in income would move the curve to the right and vice versa. According to Stonebraker, if either the demand or supply curves shifts or moves, the equilibrium price and quantity will move as well. (Stonebraker 2013) Advertisement can move the demand curve. The more invested in advertisement will move the demand curve to the right. Supply curve can move to the right based on improvements in technology or unexpected yields of supplies.
The market economy can be constructive or destructive. The competitive aspects push the market toward efficiency. This can be seen in the models for supply and demand. According to Nalini, The destructive nature revels itself as it emphasizes dominance of economic interest, highlights personal gains over social necessities, and stresses self-regard and self-serving over public sell-being.(Nalini) These properties are mitigated through governmental interference and regulation.
0 100 200 300 400 500 600 700 0 5000 10000 15000 20000 25000 30000 35000 Price Quantity Demand New demand Assignment 1: Demand Estimation 10 References Nalini, R. (n.d.). Ignou The People's University. Retrieved January 20, 2014, from http://www.ignou.ac.in/upload/bswe-02-block5-unit-24-small%20size.pdf Renner , D. E. (2003). Supply and Demand: The Market Mechanism. Retrieved January 20, 2014, from http://kr.mnsu.edu/~cu7296vs/supdem.htm Stonebraker, R. J. (2013, September 29). The Joy of Economics. Retrieved January 20, 2014, from http://faculty.winthrop.edu/stonebrakerr/book/demand_and_supply.htm