Demand Estimation

Demand Estimation

Option 1

  1. Reg

  2. QD= -5200-42P+20PX+5.2I+0.20A+0.25M

  3. ression equation

(2.002) (17.5) (6.2) (2.5) (0.09) (0.21)

R2=0.55       n=26     F=4.8

Computation of elasticity’s for each independent valuable when;

P=500        PX=600         I=5,500       A=10,000    M=5000

Hence; QD=-5200-(42*500)+(20*600)+(5.2*5,500)+(0.20*10,000)+(0.25*5000)

QD=17650

Price elasticity calculated as; Qd=-5200-42P     dQ/dP=-42

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

Likewise;

EPX=600/17650*20=0.68

Ei=5500/17650*5.2=1.62

Ea=10000/17650*0.20=0.11

Em=500/17650*0.25=0.07

  1. Explanations

A price elasticity of -1.19 shows that if there’s an increase in price of goods by 1% quantity demanded would decrease by 1.19%. An increase in price decreases quantity demanded hence demand is elastic. This may lead to customers looking for substitute goods.

EPX of 0.68 shows that if a price of competing products goes up by 1%, then quantity demanded for the product would increase by 0.68%. This shows that the product is inelastic compared to competitors prices hence no need for the firm to concern about.

Income elasticity of 1.62% shows that if there’s a 1% increase in average income, it will increase quantity demanded by 1.62% hence the product is elastic meaning that the firm can increase prices if income increases.

The product has an advertisement elasticity of 0.11% which means that 1% increase in advertisements will only increase quantity demanded by 0.11% hence demand is inelastic meaning that increase in advertisements does not automatically mean increase in price of the product.

Microwave oven in the area has an elasticity of 0.07% which means that elevating the number of ovens in the area by 1% will increase quantity demanded by 0.07%. Demand in this case is inelastic.

As seen above, quantity demanded is directly related to prices of the product and average income of the people however it’s insensitive to competitor’s prices, advertisements and number of microwaves existing in the area (Hoagland, 2015).

 

Option 2

Regression equation; = QD=-2000-100P+15A+25PX+10I

(5.234) (2.29) (5.25) (1.75) (1.5)

R2=0.85      n=120        F= 35.25

Computation of elasticity of independent variables when;

P=200     PX=300    I=5000     A= 640

QD=-2000-100*200+15*640+25*300+10*5000

QD=45100

Price elasticity=P/Q*dQ/dP

dQ/dP=-100

Therefore; Ep=200/45100*-100=-0.4

This shows that the demand is elastic since an increase in price by 1% decreases quantity demanded by -0.4%.

EPX=300/45100*25=0.167

This shows that a change in prices of competitors price by 1% changes quantity demanded by 0.167% hence demand is inelastic.

Ei=5000/45100*10=1.12

Increase in consumer income by 1% will increase quantity demanded by 1.12% hence the demand is elastic.

Ea=640/45100*15=0.2

Advertisement elasticity is 0.2 meaning that a 1% increase in advertisements will only raise quantity demanded by 0.25 hence demand is inelastic.

  1. Recommendation to the firm on whether it should or should not cut product price to increase its market share.

If the firm opts to cut down the price of the product it would raise the quantity demanded since price elasticity of the product is negative. Profit is maximized when the degree of elasticity is equal to one (Hoagland, 2015). Having known that, reduction in price will increase quantity demanded and the firm increasing its net sales as price elasticity shifts towards unity. The firm should therefore maintain low prices which will enable it increase in quantity demanded and maximize on revenue generated.

4 a) Plotting demand and supply curves of the firm

Holding all factors constant Dd curve=Q=-5200-42P+ (20*600) + (5.2*5500) + (0.2*10000) + (0.25*5000)

Q=38650-42P      P=920-Q/42

Supply curve Q=-7909.89+79.1P

  1. b) Quantities when P=100,200,300,400,500,600

P Qd Qs
100 34450 0
200 30250 7910
300 26050 15820
400 21850 23730
500 17650 31640
600 13450 39550

 

 

  1. c) Calculations of equilibrium price and quantity

Qd=Qs at equilibrium

Qd=38650-42P     Qs=-7909.89+79.1P

38650-42P=-7909.89+79.1P

Therefore; P= 46559.89/121.1=384.5

Q=38650-42(384.5)=22501

At equilibrium prices are 384.5 and quantity demanded =22501 units From the demand function, demand of the product can change if there changes in levels of consumer income, price of related goods, tax by the government and competition from similar goods. Similarly quantity demanded can also change as a result of other factors such as change in consumer tastes and preferences however; variance in the supply can occur as a result of change in technology, raw material availability, number of suppliers and labor markets. All the factors affect the production costs of the firm.

  1. Factors that cause shifts in demand and supply curves

Change in average income of consumers determines at a greater level shifts in both demand and supply curves. Increase in consumer income while decreasing prices of complimentary goods will cause a rightward shift in the demand curve and vice versa decreasing consumer income while increasing the price of complimentary goods shifts the demand curve on the left (Roger LeRoy Miller, 2013).

Factors such as technological advancements and taxes cause an upward shift in the supply curve (Werner Hildenbrand, 2014). An increase in labor prices, raw material and taxes shifts the supply curve on the left.

 

 

References

Hoagland, S. R. (2015). Elasticity. Elasticity-Research Starters Business.

Roger LeRoy Miller. (2013). Economics Today. Pearson.

Werner Hildenbrand. (2014). Market Demand: Theory and Empirical Evidence. Princeton University Press.

 

 

 

 

 

 

 

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