Study on Demand Estimation

Added on - 29 Apr 2020

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Demand EstimationScenario1.Imagine that you work for the maker of a leading brand of low-calorie, frozenmicrowavable food that estimates the following demand equation for its product usingdata from 26 supermarkets around the country for the month of April.1. Compute the elasticities for each independent variable. Note: Write down all of yourcalculations.QD = - 5200 - 42P + 20PX + 5.2I + 0.20A + 0.25MGiven thatPX=600,P= 500,A=10,000,I=5,500And M=5000Applying the values in the regressionmethod we obtain:QD= - 5200 – 42(500) + 20(600) + 5.20(5500) + 0.25(5000) + 0.20(10000) =17,650Price Elasticity= (P/Q) (∆Q/∆P)From the regressionequation,the ∆Q/∆P is equivalent to-42.Therefore, thePrice Elasticity (Ep)= (P/Q) (-42)= (500/17650)
=-1.19Income Elasticity (EI)=(P/Q) (5.20) (5500/17650)= 1.62Cross Elasticity (EC)=(20) (600/17560)= 0.68Advertisement Elasticity (EA)= (P/Q) (0.20) (10000/17650)= 0.11Market Elasticity (EM)= (P/Q) (0.25) (5000/17650)= 0.072.Determine the implications for each of the computed elasticities for the business interms of short-term and long-term pricing strategies. Provide a rationale in which youcite your results.Price Elasticity (EP)refers to the responsiveness of a product demand to the changes inits price. In the case of the microwaves, the computed price elasticity is -1.19. In other words, ifthe price of a microwave increase by 1%, then the quantity demanded would decrease by 1.19%.Therefore the demand of the product shows a small degree of elasticity.Income Elasticity (EI)refers to how sensitive is the demand of a product to the change inthe income of the consumers/ target market. An increase in income would lead to an increase inproduct demand and vice versa. In thiscase,an income elasticity of demand of 1.62 has been
computed. This shows that if the average income increases by 1%, then the product demandwould subsequently increase 1.62%. The microwave product shows elasticity. This nature ofelasticity depicts that the company can choose to increase the product price when there is anaverage increase of income(Bishop, Parrott , Martie , & Miller, 2014).Cross Elasticity (EC)refers to the level of responsiveness is the demand of a productinfluenced by the change in thepriceof a competitor’s product. The computed cross-priceelasticity of demand is 0.68. The figure implies that if the price of a similar product bycompetitors increase by 1% then the quantity demanded of the microwave would increase with0.68%. This can be explained as a fairly inelastic product in relation to the competitor’s price(Raisová & Ďurčová, 2014).Advertisement Elasticity (EA)refers to how sensitive is the demand of the product to thechanges of the advertising/ promotional expenses. In other words, howdothe changes in thepromotional expenses influence the demandforthe commodity? In thiscase,the advertisementelasticity of demand was computed as 0.11. The resultsshowthat an increase of advertisingexpenses by 1% would lead to an increaseindemandforthe product by 0.11%. This shows thatadvertisementhasan inelastic relationship with the product demand. Anincreasein the amountinvested in theadvertisementshould not automatically lead to an increased price of the product(Gillespie, 2014). The firm should not find an excuse in the increase advertisement expenses toincrease the price of the product because the consumers are likely to switch to the competitor’sproduct.Market Elasticity (EM)refers to how responsive is the demand of the precut to thechanges in the market. Market elasticity evaluates how elastic is the demand of the product to theexternal forces which influence the market. The Microwave ovens have a market elasticity of
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