The Demand For A Low Assessment Answer

ient of determination and the F-value have also been provided.

Q_D = - 5200 - 42P + 20PX + 5.2I + 0.20A + 0.25M

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

R² = 0.55, n=26 and F = 4.88

Further, based on the given input information about the various independent variables in the regression equation, the estimate of the quantity demanded is as shown below.

Q_D = -5200 – 42*500 + 20*600 + 5.2*5500 + 0.2*10000 +0.25*5000 = 17,650

Price elasticity of demand = (P/Q)*(dQ/dP) = (500/17650)*(-42) = -1.19

The price elasticity as expected is negative and thus complies with the law of demand i.e. as the price rises, the demand of the product would fall. A negative elasticity also indicates the given product is a normal good and not an inferior good. Besides, the magnitude of elasticity is indicative of the fact that a unit percentage change in price would alter the demand by 1.19 percent in the opposite direction of the change in price. A magnitude of more than 1 indicates that price elasticity is positive (Krugman & Wells, 2013).

Cross price elasticity of product = (PX/Q)*(dQ/dPX) = (600/ 17650) * 20 = 0.68

The price elasticity of competitor’s product is positive which clearly indicates that the products are substitutes.  As a result, an increase in the price of competitor’s product by a unit percentage would lower the demand of the competitor’s product and thus enhance the demand of the company’s product by 0.68 percent as consumers would search for cheaper alternatives. A price elasticity of less than 1 indicates relative inelasticity (Nicholson & Snyder, 2011).

Income elasticity of product = (I/Q)*(dQ/dI) = (5500/ 17650) * 5.2 = 1.62

A positive income elasticity indicates that the given product is normal since the demand increases with increase in income levels.  Further, the quantum of income elasticity indicates that a unit percentage change in income levels would lead to an increase of 1.62 percent in demand (Mankiw, 2014).

Elasticity of advertising expenditure = (A/Q) * (dQ/dA) =(10000 / 17650) * 0.20 = 0.113

A magnitude of less than 1 indicates that the demand is inelastic ad a unit percentage increase in advertisement expenditure would lead to increase in the quantity demanded by a meagre 0.113% (Pindyck & Rubinfeld, 2001).

Elasticity of supermarket microwave sales = (M/Q) *(dQ/dM) = (5000/17650)*0.25 = 0.071

It is apparent from the above that a unit percent change in the ovens quantity bought is supermarkets would change the quantity demanded by 0.071%  and hence the demand is inelastic (Samuelson & Marks, 2003).

Implications of individual elasticity for pricing

The price elasticity of the product in the given case is -1.19. Further cross elasticity, income elasticity and elasticity of the demand of the product with regards to the other factors is inelastic since the respective elasticity coefficients have a magnitude of less than 1. Thus, the underlying price of the product is the most critical parameter that tends to impact the demand of the product (Mankiw, 2014).

With regards to decision on price cut, it is advised that company should not go ahead and cut the price. This is primarily because the percentage increase in the quantity caused by the percentage decrease in the price of the product would lead to enhanced revenues for the company but may not generate higher profits for the company as shown below. This is illustrated using the following example (Krugman & Wells, 2013).

Total Revenue = Price * Quantity Sold

Let the current unit price be $ 10 while the corresponding quantity sold is 1000. Let us assume that the total unit cost is $ 5.

Hence, current revenue = 1000*10 = $10,000

Current profit = 1000*(10-5) = $ 5,000

Now, let us assume that the company decreases the price by 10% i.e. from $ 10 to $ 9. This would increase the corresponding quantity sold by 11.9% and hence the sales would become 1119 units.

Thus, new revenue = 1119*9 = 10,071

New profit = 1119*(9-5) = $ 4476

As is evident, even though the overall sales are higher, but the absolute profits and profitability margins have declined. Thus, unless the increase in market share can offset this loss in profitability in the long run, price cur must not be resorted on purely on sales consideration (Pindyck & Rubinfeld, 2001).

Estimating equilibrium market conditions

The quantity demanded can be estimated for different prices using the regression equation provided. Since P is the only variable in the question as other variables are constant, hence the regression equation can be written in a simplified format by substituting the given values of other variables (Nicholson & Snyder, 2011).
Hence, QD = 38650 – 42P

Thus, QD (P=100) = 38650 – 42 (100) = 34450

QD (P=200) = 38650 – 42 (200) = 30250

QD (P=300) = 38650 – 42 (300) = 26050

QD (P=400)  = 38650 – 42 (400) = 21850

QD (P=500) = 38650 – 42 (500) = 17650

QD (P=600) = 38650 – 42 (600) = 13450

The above values of the quantity demanded for various price levels is summarised in the form of following demand function graph.

The supply function for the given product is given by Q = -7909.89 + 79.1P

Hence, QS (P=100) = -7909.89 + 79.1(100) = 0.11

QS (P=200) = -7909.89 + 79.1(200) = 7910.11

QS (P=300) = -7909.89 + 79.1(300) = 15820.11

QS (P=400) = -7909.89 + 79.1(400) = 23730.11

QS(P=500)  = -7909.89 + 79.1(500) = 31640.11

QS(P=600)  = -7909.89 + 79.1(600) = 39550.11

The market equilibrium is reached at a point where the demand function and supply function coincide as demonstrated graphically below.

The equilibrium point can be mathematically determined by equating the demand and supply functions as shown below (Mankiw, 2014).

38650 – 42 P = 7909.89 + 79.1P

Solving the above, we get P = $ 253.84

Further, equilibrium, quantity = 38650 – 42(253.84) = 27988.72 or 27,989 approximately.

Significant factors impacting demand and supply function

One of the key determinants for low calorie food would be consumer incomes as is apparent from the cross income elasticity. Other factors impacting the demand of low calorie food are the price of the competitor’s product offering along with the oven sales. However, an additional variable in this regard is the change in consumer preferences and the underlying health consciousness amongst the consumers. Besides, education levels can be a key determinant of demand for low calorie food since educated people in general have healthier food choices (Krugman & Wells, 2013). A low coefficient of determination of 0.55 also indicates that the given independent variables only explain 55% of the change in the product demand and thus 45% of the demand changes in the low calorie food are not represented by the current regression equation. The increase in income level of consumers would cause a rightward shift in demand while decrease in income levels would result in a leftward shift. Besides, increase in the competitor’s product would increase the demand for company’s product and cause a rightward shift (Nicholson & Snyder, 2011).

References

Krugman, P. & Wells, G. (2013), Microeconomics (3^rd ed.), London: Worth Publishers

Mankiw, G. (2014), Microeconomics (6^th ed.), London: Worth Publishers

Nicholson, W. & Snyder, C. (2011), Fundamentals of Microeconomics (11^th ed.), New York: Cengage Learning

Pindyck, R. & Rubinfeld, D. (2001), Microeconomics (5^th ed.), London: Prentice-Hall Publications,

Samuelson, W. & Marks, S. (2003), Managerial Economics (4^th ed.). New York Wiley Publications,