The following sample essay on Demand Estimation Example discusses it in detail, offering basic facts and pros and cons associated with it. To read the essay’s introduction, body and conclusion, scroll down.
It would be impossible for any business to survive if there were no demand for their product. Therefore, one of the most important attributes of managerial economics Is demand estimation. Demand estimation Is an Important tool because It helps the managers to estimate demand using a scientific method known as Econometrics.
It is essential for a manager to be able to determine the appropriate variables of demand function, according to the textbook, Managerial Economics Applications: Strategies and Tactics, by James Michigan, R. Charles Moyer and Frederick Harris (2014), “Effective decision making eventually requires the quantitative measurement of economic relationships” (p. 100).
Thus, when the variables of demand function are understood, it will be easier for management to make forecasting decisions with fewer errors.
In this paper, demand estimation will be done through a regression analysis. This analysis will examine the elements that management should look at when determining demand for a product such as: price, competitor’s price, customer income, advertising and the cost of microwave ovens.
When price elasticity of demand s elastic, the company should lower prices. When price elasticity of demand is inelastic, the firm should increase prices. When price elasticity of demand is unit elastic, changing the price will not change total revenue, since price and quantity will generally change in lock step with each other.
For the scenario present in this paper, the price elasticity of this product is -. 008 which means a 1 percent increase in price of the product causes quantity demanded to drop by -8 percent; therefore, the demand of the product is relatively inelastic. According to Arthur Sullivan, Steven
Suffering and Stephen Perez (2012), authors of the textbook, Survey of Economics: Principles, Applications and Tools, “If the elasticity number is large, it means that the demand forth product is very elastic, or very responsive to changes in price. In contrast, a small number indicates that the demand for a product is very inelastic” (p. 82). Thus, an increase in price may not have a huge impact to the customers. Next, the competitor’s price elasticity for this product is 0. 05 which means if price of competitor product increases by 1 percent, then quantity demanded of this product also increases by percent.
Hence, this product is relatively inelastic to a competitor’s price and the company will not have much concern about the competitor because their pricing will not have any major effect on its own sales. In addition, income- elasticity is 1. 08 which means a 1 percent rise in the average income in the area. This will boost the quantity demanded of this product by 108 percent. This means that this product is relatively inelastic and the company will not have to concern itself too much with their consumer income when considering the pricing strategy.
Also, annuity demanded will not be affected too much even if income increases or decreases. Furthermore, the adverting elasticity for this product is 0. 08. This will require a 1 percent increase in advertising expenses with increases in quantity demanded of only 8 percent; so, demand is relatively inelastic to advertising. Therefore the company should not increase the price because it could drive away customers. Lastly, microwave elasticity is . 05; therefore, the demand of the product is relatively inelastic.
Thus, an increase in price will not have a huge impact on the customer’s willingness to buy microwavable foods. And so, in the long-term the Recommend Whether You Believe That this Firm Should or Should Not Cut Its Price to Increase Its Market Share. A price slash would increase quantity demanded because the products price elasticity is negative. However, the level of elasticity is a less than one. Revenue is maximized when the magnitude of elasticity is one. Therefore, a decrease in price will increase quantity demanded, and this will lead to a loss of sales.
As the demand equation points out, demand of the low- calorie food can change due to a change in consumer income, price of competitor product and price of related goods (microwave oven). The change can also come as a result of change in consumer preference (like awareness towards low-calorie food). Supply of the product can change due to change in number of suppliers of the product, technological advances in the production and other factors like change in availability of labor and raw-material which directly affect production costs.
In the regression equation, the Arsenals percent which is explained while 15 percent is unexplained and the T-stats is plus or minus two and in the equation it is 2. 5. The F- stats is weak because it is 4. 88 and the higher the number the better. Indicate the Crucial Factors that Could Cause Rightward Shifts and Leftward Shifts of the Demand and Supply Curves. A rightward shift of demand curve could be caused by an increase in consumer income, a decrease in price of complementary product like microwave ovens, an increase in population or increased preference for the product like awareness towards low-calorie food.
In fact, An Increase (or Decrease) in Demand refers to a shift in the entire demand curve. Whenever there is a change in any factor increasing the demand for a good, aside from the price of the good itself, the demand curve shifts to the right and there has been an increase in demand (Manama, 2012) A leftward shift of demand curve can be caused by a drop in consumer income or secession, increase in price of complementary product like microwave ovens; moreover, An Increase (or Decrease) in Supply refers to a shift in the entire supply curve.
Whenever there is a change in any factor that increases the supply of a good, other than a change in the good’s price, the supply curve shifts to the right, yielding an increase in supply (Manama, 2012) A rightward shift of supply curve can be caused by technology advances in food processing, increased availability of cheap labor and raw material, increased tax cuts and government subsidies etc. A leftward shift can e caused due to a decrease in availability / increase in price of labor, raw materials and increased taxes.