DEMAND ESTIMATION 9

DemandEstimation

Question1

Option1

QD= – 5200 – 42P + 20PX + 5.2I + 0.20A + 0.25M

Inorder to obtain QD value, key in the real values of the variables

QD= -5200 – 42(500) + 20(600) + 5.2(5500) + 0.2(10,000) + 0.25(5000)

=-5200 – 21000 + 12000 + 28,600 + 2000 + 1250

=17,650

PriceElasticity = -42 * 500 /17650

=-1.19

CrossElasticity = 20 * 600 /17650

=0.68

IncomeElasticity = 5.2 * 5500/17650

=1.62

AdvertisementElasticity = 0.2 * 10,000/17650

=0.11

OvenElasticity = 0.25 * 5,000/17650

=0.07

Question2

Thecalculations of price elasticity provided the value -1.19, which isgreater than one. This means that the commodity is price elastic.This is a suggestion that in case price becomes increased, spendingwill go down resulting in a decline in the revenues collected. Thisoriginates from the judgment that consumers are responsive to pricechanges, thus a small change in price will result in buyersresponding accordingly. As a consequence, revenues can only beenhanced by lowering the price of the commodity because, as the pricegoes down, the spending on the commodity will also fall in realterms, making consumers expend more on the commodity since they deemthe prices to be affordable. However, this would only produce aneffect in the long run. During the short run, a change in price maynot be easily felt. Thus, in the short run, consumers may not adjusttheir purchasing behavior even with a price change, but in thelong-term, an adjustment in price would be highly felt by consumersmaking them vary their buying behavior.

Fromthe calculations, the product has a positive cross elasticity. Thisprovides a clue that the commodity being considered is a substitute.However, the elasticity is less than one since the value is 0.68.This implies that although the commodities being considered aresubstitutes, they are not good alternates, and the price of the rivalbusiness would have little effect on the sales revenue. Because theproducts are not perfect substitutes, a change in price in theshort-term and long run will not have a lot of impacts.

Fromthe calculations, the commodity has a positive income elasticity thatis more than one since the value is 1.62. This implies that thecommodity is income elastic and is a superior or luxury good. Thisbeing the case, the commodity is responsive to changes in income bothin the short and long run (Mendes, 2011). An increase in income wouldimply that more of the commodity would be bought this originatesfrom the income elasticity relationship.

Inthe case of advertising elasticity, the elasticity is less than onesince the value is 0.11. This is an indication that the commodity isinelastic on advertising. In this case, a 1% increase in theadvertising expenses will result in a less than 1% augment in sales.This implies that advertising is not a significant factor since ithas little effect on sales. Therefore, in the short-term, the impactof advertising will not be felt, but may be experienced in thelong-term. The same case applies to oven elasticity.

Question3

Inthe case under consideration, I would recommend that the businessshould consider cutting down its prices. In case it decreases itsprices, the revenues will increase. This originates from thereasoning that the price elasticity is greater than one. This impliesthat it would be easy for the firm to make high sales in case itdrops its prices (Armstrong &amp Armstrong, 2012). However, thebusiness must be very cautious when decreasing the prices since thereare levels where it may make losses instead of profits due to theprice charged on the product not covering the production costs.Therefore, the commodity fee should be above the cost incurred duringthe production process.

Question4

DemandCurve Data

Quantity Demanded

Price (Cents)

34,450

100

30,250

200

26,050

300

21,850

400

17,650

500

13,450

600

  1. Option 1Demand Curve

SupplyCurve Data

Quantity Supplied

Price in cents

0.11

100

7910.11

200

15820.11

300

23730.11

400

31640.11

500

39550.11

600

  1. Supply Curve for Option 1

  1. Equilibrium Price and Quantity

Consideringoption 1,

Qd= 26770 – 42P

Qs= -7909.89 + 79.1P

AtEquilibrium, Quantity demanded is equivalent to the quantitysupplied that is Qd = Qs

26770– 42P = -7909.89 + 79.1P

121.1P= 34679.89

P= 286.37

Substitutingthe value of P Q = -7909.89 + 79.1(286.37)

Q= 14741.98

SignificantFactors

Thereare significant factors that can make the demand and supply of thecommodity to change. The demand for the low-calorie food may changeas a result of factors such as changes in consumer income, the priceof a rival product, and changes in tastes and preferences ofconsumers (Ball &amp Seidman, 2012). A short-term decrease inconsumer income may not have an unfavorable effect on the product,but the long-term decline in consumer income may adversely influencethe demand for the goods (Mendes, 2011). This because, in theshort-term, a slight change in the income of the consumer may notaffect the purchasing behavior. However, in the long-term, a smallchange will be experienced for a long period, making it possible forconsumers to notice. On the other hand, the supply of the low-caloriefood may change as a result of factors such as modification in thenumber of suppliers of the commodity, changes in technology,variation in the raw materials and labor. According to Mendes (2011),short-term factors like alteration in supplier numbers and changes inlabor and raw materials cannot adversely affect the supply of thecommodity however, long-term factors such as a change in technologycan adversely affect the supply of the commodity because technologymay be expensive to take up.

Question5

Aleftward shift of the demand curve for the product can be caused by adecrease in the consumers’ income. Also, in case the economyexperiences a recession, the demand curve for the commodity may alsochange to the left (Ball &amp Seidman, 2012). A rightward shift inthe demand curve for the good may be as a result of an augment inconsumer income. Furthermore, in case the price of substitutesdecreases, the demand curve of the commodity will shift to the right(Mendes, 2011). On the other hand, the supply curve for the commoditycan be made to shift to the right by advancement in technology.Alternatively, the supply curve would shift to the left in case theprice of labor increases or unavailability of labor.

References

Armstrong,M., &amp Armstrong, M. (2012). Armstrong`shandbook of human resource management practice.London: Kogan Page.

Ball,M. K., &amp Seidman, D. (2012). Supplyand Demand.New York: Rosen Pub.

Mendes,P. (2011). DemandDriven Supply Chain: A Structured and Practical Roadmap to IncreaseProfitability.Berlin: Springer Berlin.