ASSIGNMENT 1:

 

Demand Estimation: Frozen Microwavable Food

 

ECONOMICS  550

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand Estimation: The Frozen Food Industry

 

Overview

             

This paper will present the demand estimation for a leading brand low-calorie frozen microwavable food. The data has been collected from 26 supermarkets around the country. The regression equation is utilize to estimate the company’s demand and supply. I will also determine the calculations for the elasticities for the independent variables. The managers of our company will consider the demand elasticity price with the non-price determinants of demand. They are the consumer income, the price of competitor, advertising, the substitute goods, and the number of microwaves ovens sold in the designated area (Schiller,1999). In addition, the managers will review the market equilibrium price that affects demand. This will provide the significant factors that affect the demand. In addition, this will allow the managers to determine the level of the  market conditions that may impact the demand and supply of the business (Schiller,1999).

 

The demand function is utilized to calculate the demand analysis (Hague, 2003). This information provides an overview of the data to the marketing team in reference to demand.  The demand law states if there is a decrease in price then there is an increase in the quantity demanded (Hague, 2003).  The impact of a higher price on revenue is depended on the price of elasticity to the demand (Shiller 1999). Higher prices will predict higher revenue when the demand is inelastic (Schiller 1999).  If the demand is elastic the lower the price will generate higher revenue (Gordon 2013).  Once the price of elasticity for demand is determined, then we can predict the response of consumers to the changing prices (Gordon 2013).  In addition, we can also predict the seller’s  revenue results (Pettinger2013). The Demand elasticity is finalized by the calculation of the percentage of change in quantity divided by the percent of change in price ( Schiller 1999).  The regression equation to compute the elasticities are listed :

The independent variables consist of:

 

The Elasticity Implications

The company would like to increase the revenue. The law of demand states that the higher the price of a product then the lower its demand (Hague 2005). The lower the price for  a good the higher the demand (Hague, 2005).  The analysis of demand elasticity will tell when or  how much the demand can rise or decrease compared to the price fluctuations (Gordon, 2013).  The company will need to know the reaction of our consumers to a change in price. The price elasticity is calculated using the percent change in price divided by the percent change in quantity (Pettinger,2012). The solution will provide the economist to review or analyze how elastic or inelastic the price of the product is compared to the percent of price change and the amount requested by the consumers (Hague, 2005). If the demand elasticity is less than 1 then it is considered to be inelastic (Schiller, 1999).  If the demand elasticity is greater than 1 it is elastic (Schiller,1999). The consumers will respond to the change in price.  The company’s price elasticity of 1.19 is elastic. The consumers will be sensitive to the percent change (Schiller 1999). The price elasticity of the competition is (0.68). This is inelastic because it is more expensive, and any increase in price will not affect the quantity demanded. The income has a demand elasticity of 1.62. This means it is elastic, this will affect the amount demanded.  The demand elasticity for advertising is (0.11) and for the microwaves it is (0.07). Both are less than one and inelastic. This will have a small or no impact on the consumer demand for frozen  microwavable meals.  Listed are the values for the independent variables and whether their  results are elastic or inelastic:

Ep        = -42(P/Q) = -42(500/17650) = -1.19                   result is elastic,

Epx      = 20(Px/Q) = 20(600/17650) =0.68                      result is inelastic

EY        = 5.2(I/Q) = 5.2(5,500/17650) = 1.62                    result is elastic

EA       = .25(A/Q) = .20(10,000/17650) = 0.11                  result is inelastic

EM       = .25(M/Q) = .25(5000/17650) = 0.07                  result is inelastic  

Qd       = -5200-42*(500) = 17,650                                       result is inelastic

 

Pricing Recommendations

 

As stated the price elasticity of demand is an absolute value of 1.19. This is elastic. I would recommend the company discounting the prices (Pettinger, 2012). The discount for the price would increase the quantity that is demanded. This would increase the total revenue for the company (Pettinger, 2012). The income elasticity is also elastic. This would also affect the amount demanded. The consumer reaction to price that is affected by income, will justify stable   economic conditions for the company to decrease price (Pettinger, 2012). The consumers will expand on the demand due to the discounted prices.

The Demand Curve

The chart and the listed calculations represent the quantity demanded and the quantity supplied for frozen food. The factors impacting demand stay constant other than price.

Price	Qdemand	Qsupplied
100	34450	0
200	302050	7909.88
300	26050	15819.8
400	21850	23729.7
500	17650	31639.6
600	13450	39549.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equilibrium Price and Quantity

 

The interaction between supply and the demand will determine the market equilibrium price (Gordon, 2013).  The market equilibrium price equals the quantity supplied ( Qs= 7908.89+79.0989P) and quantity demanded (Qd=38650-42P). The graph intersect at the value of P (384.48), which is the market equilibrium price.  The most significant factor that causes a shift is due to the price and income. A 300-dollar decrease in price to 500 dollars then down to 200 dollars will cause an inelastic demand elasticity. This will  also increase quantity that is supplied. This justifies the law of demand, which states a decrease in price means an increase in quantity demanded.(Schiller, 1999).  When the consumer income decreases and the discounted price drops the consumers may consider a substitute or alternative goods..

 

 

 

Summary

Utilizing the demand equation can assist with a firm’s goals to increase revenue. This demand equation is efficient and consistence in calculations. Also the measure of forecasting this demand equation can be utilize with standard errors. The standard errors allows more certainty to the assumptions that are taken from the analysis for the demand elasticity. To maximize the company’s profits I recommend discounting prices and continue to serve low caloric microwavable food options to the consumers. The income elasticity will drive quantity demanded due to the lower price. This will justify the consumers’demand.

 

 

 

 

 

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References:

Schiller, Bradley, R. , (1999). The Essentials of Economics /Bradley R. Schiller-3^rd ed..

 

Hague M. O. (2005) Income Elasticity and Economics Development: Methods and Applications: Dordrecht: Springer.

 

Gordon, B. R. Goldfarb, A., & Yang, L. (2013), Does Price Elasticity vary with Economic Growth? A Cross-Category Analysis. Journal of Marketing Research   (JMR), 50(1) , 4-23.

Pettinger, T. (2012, February 1). Understanding Elasticity. Retrieved May 1, 2015, from http://www.economicshelp.org/blog/301/concepts/understanding-elasticity/