Free Demand Estimation Research Paper Example
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The successful functioning of a firm depends on how well it frames its strategies. In the short-run ts strategies include setting up the right price of its product, taking up effective advertisement projects and coming up with other marketing strategies. Decisions regarding all these issues require extensive market research. In this analysis we are going to consider the pricing and other decision of a firm that produces low calorie frozen microwavable widgets. We have the regression results of the survey from 26 supermarkets.
The first thing that we need to decide is which regression equation we are going to base our analysis on. In the first option the value of R2 is 0.55. In option 2 the value is higher at 0.85. But we still take the regression equation given in option 1. The reason is first of all, in option 1 n= 26 but in option n= 120. The survey has been conducted on 26 supermarkets. So option 1 seems to be more authentic. Secondly, option 1 includes the number of microwave ovens sold as an independent variable which option 2 does not. The standard error for the coefficient of M is quite low. So we can take it as a determinant of the demand for widgets. Thirdly, Option 2 has a higher F value but Option 1 has a F value high enough to suggest that the independent variables are significant determinant of QD . Fourthly, the value of R2 of option 1 is quite acceptable. So we choose option 1 as the regression equation o which we are going to base our analysis.
QD = -5200 -42*5 + 20*6 + 5.2*5500 + 0.20*10000 + 0.25*5000 = 26560.
Elasticities and their Interpretations
Now we can find the elasticity of demand for each independent variable. The computation of elasticities, their values and the interpretation of the results are given below for each determinant:
Price. The price elasticity of demand is given below:
eP = dQD/dP*P/QD = -42*5/26560 = -0.0079
We can see that eP<1. This implies that the product is inelastic to the changes in its own price. A rise in price will increase the revenue of the firm as the demand will not fall to any significant extent. A fall in price will actually lead to a fall in the revenue as demand will not rise much with the fall in price. So the firm should not follow a strategy of price reduction.
Price of the close substitute
ePX = (dQD/dPX)*(PX/QD) = 20*6/26560 = 0.0045
The cross-price elasticity ePX<1. This implies that the demand for the product does not respond much to the change in the price of the close substitute. This is suggestive of the existence of significant product differentiation and brand loyalty. The competitors in the market won’t compete in price. Rather they will follow non-price strategies.
Income: The income elasticity is given as
eI = (dQD/dI)*(I/QD) = 5.2*5500/26560 = 1.07
The income elasticity is almost equal to 1. The demand changes by the same proportion as the change in income.
Advertisement Expenditure. The elasticity of demand with respect to advertisement expenditure is given as:
eA = (dQD/dA)*A/QD = 0.07
The elasticity of advertisement expenditure eA<1. Advertisements tend to have almost no effect on the demand for the product. The firm should follow some other sales promotion strategies other than advertising.
Sales of Microwaves. The elasticity of demand with respect to the number of microwaves sold is given as:
eM = (dQD/dM)*(M/QD) = 0.25*5000/26560 = 0.04
The elasticity of demand with respect to the number of microwaves sold, eM<1. The number of microwaves sold has very little impact on the demand for the widgets.
Deriving the Demand Curve
QD = 26770 – 42P
Let us now construct the demand schedule for this function. We take the prices as $100, $200, $300, $400, $500 and $600. The demand schedule is given as:
The Supply Curve
Q = -7909.89 + 79.0989P
The corresponding supply curve is given below:
The point of intersection of the demand and the supply curve gives us the equilibrium price and quantity. We can also find the equilibrium mathematically by equating the demand and the supply function as below:
26770 -42P = -7909.89 + 79.0989P
Or, P = $286.38
QD = 14742.
Factors Affecting Demand and Supply
The quantity supplied is positively related to price. A number of other factors may affect supply. The change in price and availability of inputs, technological innovations and even government policies may affect the supply of the product.
Shifts in the demand and supply curve
The demand curve shifts when any factor other than the price of the good changes . In this analysis, an increase in income of the people in this region will cause a rightward shift in the demand curve and vice versa. An increase in advertisement expenditure will also produce a similar effect. A fall in price of the close competitor’s product will lead to a leftward shift in the demand curve. The increase in sales of microwave ovens will produce a right ward shift in the demand.
The supply curve also shifts with the change in factors other than the price of the product. A fall in the price of inputs will shift the supply curve to the right. An improved technology will also have a similar effect on the supply curve.
Koutsoyiannis, A. (2003). Microeconomics. Pulgrave Macmillan.
Pindyck, R., & Rubinfield, D. (2009). Microeconomics (7th ed.). Prentice Hall.
Woolridge, J. M. (2009). Econometrics. Cengage Learning.
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