Free Essay About Quantity Demanded, Qd = 17650
Assignment 1 – Demand Estimation
Assignment 1 – Demand Estimation
For Option 1, the regression equation is:
QD = - 5200 - 42P + 20PX + 5.2I + .20A + .25M
(2.002) (17.5) (6.2) (2.5) (0.09) (0.21)
Quantity demanded, QD = -5200 – 42(500) +20(600) + 5.2(5500) + 0.20(10000) + 0.25(5000)
Elasticity for price, P = -42(500/17650) ≈ -1.19
Elasticity for price, PX = 20(600/17650) ≈ 0.68
Elasticity for per capita income, I = 5.2(5500/17650) ≈ 1.62
Elasticity for advertising expenditure, A = 0.20(10000/17650) ≈ 0.11
Elasticity for number of microwave ovens sold, M = 0.25(5000/17650) ≈ 0.07
A price elasticity of -1.19 shows that a 1% increase in the price of the product will lead to a drop of 1.19% in sales. Hence, the widget is elastic in terms of its pricing. To maintain sales number, the company should not increase the price too much. The competitor’s price elasticity is 0.68 showing that a 1% increase in the price of the product by its competitors, the company will enjoy an increase of 0.68% in sales of the same product. This is less elastic compared to the product’s price by the company itself.
An income elasticity of 1.62 shows that a 1% increase in the per capita income will increase sales by 1.62%. The elasticity shows that the company can raise the price of its product when the per capita income increases.
An advertisement expenditure elasticity of 0.11 shows that a 1% increase in advertisement expenses will only increase sales by 0.11%. This is less compared to the per capita income variable. Thus, there is no strong reason to spend on advertisement, and raise the price of the product.
The elasticity regarding the number of microwave ovens in the area is 0.07. This shows that a 1% increase in the number of ovens leads to an increase of sales by 0.07%. This is insignificant. The company does not have to consider this variable when pricing its product.
Since the price elasticity is -1.19 which is larger than 1 in magnitude, the company should reduce the price. The reduction will help boost sales. The maximum price for the product after reduction should be such that the elasticity is -1.
QD = -5200 – 42P +20(600) + 5.2(5500) + 0.20(10000) + 0.25(5000)
Rearranging the equation:
QD = -7909.89 + 79.0989P
Quantity demanded at equilibrium, QD=920.24-1000.013+142=22283
Price at equilibrium, P = 0.013(22283) + 100 = 389.68 cents ≈390 cents
The demand can be impacted by the price of the product from competitors, per capita income of the consumer, and the number of microwave ovens sold. The supply can be impacted by the price and availability of the raw materials, the cost of labor, and the number of product suppliers.
A rightward shift in the demand curve can be caused by an increase in the price of the product from competitors, an increase in the per capita income of the consumer, and an increase in the number of microwave ovens sold. A leftward shift in the demand curve is caused can be caused by the decrease of the variables as mentioned above.
A rightward shift in the supply curve can be caused by the cheap price and increase availability of the raw materials, cheap labor, and an increase in the number of product suppliers. A leftward shift in the supply curve can be caused by the increase of price and low availability of the raw materials, high labor costs, and a low number of product suppliers.
Daly, John L. “Pricing for Profitability: Activity-Based Pricing for Competitive Advantage.” 2002. John Wiley & Son. Web. 22 January 2015. Retrieved from
Supply and Demand. Policonomics. 2012. Web. 21 January 2015. Retrieved from
Demand, Supply and Equilibrium. Web-books. (n.d.) Web. 20 January 2015.
Retrieved from http://www.web-books.com/eLibrary/ON/B0/B63/018MB63.html
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