Economics Research Paper: Demand Estimation

Elasticity refers to the change in one variable in response to changes in other variables (Zafirovski, 2003). These factors that affect changes in quantity demanded include; the price of the good or other complementary of substitute goods, per capita income, and advertising. The elasticities to be computed for this company include the price, income, cross, and advertisement elasticities of demand. The regression model is Qd = -5200 42P +20 Px + 5.2 I + 0.2A + 0.25M

Price Elasticity of Demand

Price elasticity = (DQ/DP) x (P/Q). The value of (DQ/DP) is derived from the regression model, and it is equal to -42. The mean price and mean quantity now need to be calculated by making use of the standard deviation and the R squared. The standard deviation is 6.2 while the R squared is 0.55. Hence;

s = S(x-)2 / (n-1)

The price is 500 cents which is equal to 5 dollars.

6.2 ^2 = (5 - )/25; = -26

From the equation provided, the value of Q is 26,770. To get the mean quantity sold, using the standard deviation; (2.002)2 = (26,634.80 mean Q) / 25

Mean quantity = 26,759.99. The price elasticity of demand is therefore equal to -42 x (7.5 / 26,759.99) = -0.0408

The price elasticity of demand is negative to show that a one unit increase in the price of the food will lead to a reduction in the quantity demanded by 0.0408 units. This shows that the demand curve is relatively elastic.

Cross Elasticity of Demand

(DQ/DP) = 20

Mean price; (2.5)2 = (6 - )/ 25; = - 7.5

The cross elasticity of demand is hence equal to; 20 x (-7.5 / 26,759.99) = -0.0056. It is negative depicting that X is a substitute for the frozen microwavable food. If the price of the product increases by one unit, the quantity demanded will reduce by 0.0056 units.

Income Elasticity of Demand

(DQ/DP) = 5.2

(0.09)2 = (5500 - ) / 25; = 5499.55

The income elasticity of demand is hence equal to 5.2 x (5599.55 / 26,759.99) = 1.0881. The value of the income elasticity of demand is positive. This depicts that an increase in the income levels of the people in the metropolitan statistical area by one unit will cause the demand for the products to rise by 1.0881 units.

Advertising Elasticity of Demand

(DQ/DP) = 0.20

(0.09)2 = (5000 - ) / 25; = 9998.95

The advertising elasticity of demand is thus 0.20 x (9998.95 / 26,759.99) = 0.07473

The value of the advertising elasticity of demand is positive which shows that an increase in the advertising expenditure by one unit will cause the quantity demanded to increase by 0.07473.

Cross elasticity of demand

The other product used in this analysis is microwave ovens.

(DQ/DP) = 0.25

(0.25)2 = (5000 - ) / 25; = 4998.75; 0.25 x (4998.75 / 26,624.8) = 0.04694

The cross elasticity of demand in relation to the number of microwaves sold in the standard metropolitan standard area is positive. This shows that an increase in the number of microwaves sold in that region by one unit will lead to an increase in the demand levels by 0.0469 units. In the short run, the increase observed will be minimal, but in the long run, the impact felt by the company will be more extensive (Groenewegen, 2003). This means that an increase in the number of microwaves sold in the SMSA region is positively correlated to the quantity of products sold.

The value of the R squared is equal to 0.55. The coefficient of correlation is hence equal to 0.7416. This means that overall, the different independent factors positively correlate strongly to the quantity demanded.

The firm can reduce its price in a bid to increase its market share. This is because the company is operating in a relatively elastic market. This means that minimal changes in price levels will lead to a high change in the demanded quantity. Therefore, the company should reduce its prices to significantly increase its market share.

Demand and Supply Curve

Figure 1

The equilibrium demand price and quantities are equal to 284.6 cents and 14605.13 units respectively.

Factors affecting demand

Different factors can influence the demand for the food products. First, price directly affects the quantity demanded. Changes in price lead to movements up and down the demand curve. A products price affects the quantity of the product demanded based on the type of elasticity the products demand curve depicts (Watson, 2013). It could be elastic or inelastic. For relatively elastic and inelastic demand curves, a reduction in price levels causes the demand to increase bot in varying proportions.

The second factor that affects the quantity demanded is income levels. An increase in the levels of income leads to an increase in the demanded quantity. Third, increased advertising leads to an increase in the quantity demanded. This is because increased advertising increases product exposure. Fourth, an increase in substitutes of the product will lower the quantity demanded. Conversely, an increase in complementary products leads to an increase in the quantity demanded of the product. Finally, expectations of a future increase in prices or reduced availability of a product will lead to increase in quantity demanded (Principles of Economics, 2015).

Factors affecting supply

The price of alternative products highly affects the quantity of a product supplied based on how it affects profitability. An increase in the prices of substitute products leads to increased supply of the products and vice versa. Improvements in technology that aids the production of the food will increase the quantity supplied. Third, an increase in the number of producers also increases the market supply of a given product. This however changes in the long run due to reduced profitability caused by increased competition levels. Finally, the expectations that producers have of future changes in price in price will influence the quantity supplied. If they expect prices to increase in the future, they will consequently increase the quantity supplied (Watson, 2013).

Shifts in the demand curve

Different factors can cause a rightward or leftward shift in the demand curve. Changes in peoples preferences will affect the quantity demanded. If the peoples preferences become aligned to the product, the demand curve will shift rightwards. However, if the preferences are opposed to the product, the demand curve will shift to the left. Second, the price of substitutes and complementary goods will cause the demand curve to shift. An increase substitute products price will cause a rightward shift while a decrease in prices will lead to a leftward shift in the demand curve. Conversely, an increase in prices of complementary goods will lead to a leftward shift while a decrease will cause the curve to shift leftwards (Graves & Sexton, 2006). Finally, a rise in the preference of a given product will cause the demand curve to shift rightwards.

Shifts in the Supply Curve

An increase in the cost of factors of production such as land and labor will cause the supply curve to shift to the left. Conversely, a decline in the costs of production will lead to a shit of the supply curve to the right. Technological improvements will cause a shift in the supply curve to the right. Additionally, an increase in the prices of substitutes will cause the supply shift to shift rightwards (McRae & Butler, 2014). Finally, if there are future expectations of increases in prices, the supply curve will shift rightwards because the producers will increase the quantity supplied.

References

Graves, P., & Sexton, R. (2006). Demand and Supply Curves: Rotations versus Shifts. Atlantic Economic Journal, 34(3). Retrieved from https://link.springer.com/article/10.1007/s11293-006-9021-2Groenewegen, P. (2003). Classics and Moderns in Economics: Essays on Nineteenth and Twentieth Century Economic Thought (1st ed.). Routledge.

McRae, I., & Butler, J. (2014). Supply and demand in physician markets: a panel data analysis of GP services in Australia. International Journal of Health Care Finance and Economics.

Principles of Economics. (2015). Demand, Supply, and Equilibrium. Principles of Economics. Retrieved from https://open.lib.umn.edu/principleseconomics/chapter/3-3-demand-supply-and-equilibrium/

Watson, E. (2013). A closer look at some of the supply and demand factors influencing residential property markets. Reserve Bank of New Zealand.

Zafirovski, M. (2003). Market and Society: Two Theoretical Frameworks (p. 161).