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Assignment 1: Demand Estimation 1

Assignment 1: Demand Estimation


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

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

QD = -5200 42P + 20(600) + 5.2(5500) + .20(10000) + .25(5000)

=
26560

Ep = dQ/dP x P/Q dQ/dP = -42 p = 5

q=26560
Assignment 1: Demand Estimation 3

=(-42)*5/26560


-0.008


Epx = dQ/dPx x Px/Q dQ/dPx=20 Px = 6

q=26560

=20*6/26560


0.005


Ei = dQ/dI x I/Q dQ/dI=5.2

I = 5500

q=26560

=5.2*5500/26560


1.077



Ea = dQ/da x A/Q dQ/dA=.20
A=1000
0

q=26560

=0.2*10000/26560


0.075


Em = dQ/dm x M/Q dQ/Dm=.25 M=5000

q=26560

=0.25*5000/26560


0.047

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

P1=100 QD1 =(-5200)-42*(100)+20*(600)+5.2*(5500)+0.2*(10000)+0.25*(5000)

34450
P2=200 QD2 =(-5200)-42*(200)+20*(600)+5.2*(5500)+0.2*(10000)+0.25*(5000)

30250
P3=300 QD3 =(-5200)-42*(300)+20*(600)+5.2*(5500)+0.2*(10000)+0.25*(5000)

26050
P4=400 QD4 =(-5200)-42*(400)+20*(600)+5.2*(5500)+0.2*(10000)+0.25*(5000)

21850
P5=500 QD5 =(-5200)-42*(500)+20*(600)+5.2*(5500)+0.2*(10000)+0.25*(5000)

17650
P6=600 QD6 =(-5200)-42*(600)+20*(600)+5.2*(5500)+0.2*(10000)+0.25*(5000)

13450


0
100
200
300
400
500
600
700
0 10000 20000 30000 40000
P
r
i
c
e

Quantity
QDemand
QDemand
Assignment 1: Demand Estimation 6


Plot the corresponding supply curve on the same graph using the supply function Q = 5200 +
45P with the same prices.

P1=100 QD1 =5200+45*(100)

9700
P2=200 QD2 =5200+45*(200)

14200
P3=300 QD3 =5200+45*(300)

18700
P4=400 QD4 =5200+45*(400)

23200
P5=500 QD5 =5200+45*(500)

27700
P6=600 QD6 =5200+45*(600)

32200


Assignment 1: Demand Estimation 7


Determine the equilibrium price and quantity.
QS = QD
QD = - 5200 - 42P + 20PX + 5.2I + .20A + .25M
QS = 5200 + 45P

5200 + 45P = - 5200 - 42P + 20PX + 5.2I + .20A + .25M
10400 = -87P + 20(6) + 5.2(5500) + .20(10000) + .25(5000)
10400 = -87P + 120 + 28600 + .2000 + 1250
10400 = -87P + 31970
-21570 = -87P
247.93 = P


QD = - 5200 - 42P + 20PX + 5.2I + .20A + .25M
= -5200 42(247.93) + 20(6) + 5.2(5500) + .20(10000) + .25(5000)
0
100
200
300
400
500
600
700
0 10000 20000 30000 40000
P
r
i
c
e

Quantity
Supply and Demand
QDemand
QSupply
Assignment 1: Demand Estimation 8
= -5200- 10413.06 + 120 + 28600 + 2000 + 1250
= 16356.94

QS = 5200 + 45P
= 5200 + 45(247.93)
= 5200 + 11156.85
= 16356.85



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
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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