Demand Estimation
Demand Estimation
Dhruvang kansara
Eco 550, Assignment 1
Professor: Dr, Guerman Kornilov
January 27, 2014
1. Compute the elasticity for each independent variable. Note: Write down all of your calculations.
According to our Textbooks and given information, When P = 8000, A = 64, PX = 9000, I = 5000, we can use regression equation,
QD = 20000 - 10*8000 + 1500*64 + 5*9000 + 10*5000 = 131,000
Price elasticity = (P/Q)*(dQ/dP)
From regression equation, dQ/dP = -10.
So, price elasticity EP= (P/Q) * (-10) = (-10) * (8000 / 131000) = -0.61
Similarly,
EA = 1500 * 64 / 131000 = 0.73
EPX = 5 * 9000 / 131000 = 0.34
EI = 10* 5000 / 131000 = 0.38
2. Determine the implications for each of the computed elasticities for the business in terms of short-term and long-term pricing strategies. Provide a rationale in which you cite your results.
Price elasticity is -0.61 which means a 1% increase in price of the product causes quantity demanded to drop by 0.61%. So, the demand of the product is relatively inelastic. Therefore, increase in price may not have large impact on the customers. Advertisement elasticity is 0.73, meaning 1% increase in advertising expenses increases quantity demanded by only 0.73%. So, demand is relatively inelastic to advertising. Therefore, more advertisement won’t necessarily mean that firm can raise the price because it still could drive customers away.
Cross-price elasticity is 0.34 which means if price of competitor product increases by 1%, then quantity demanded of this product increases by 0.34%. So, product is relatively inelastic to competitor’s price and the firm shouldn’t worry about the competitor as their pricing won’t have any major effect on its own sales.
Income-elasticity is 0.38 which means 1% rise in average income in the area boosts quantity demanded by 0.38%. So, product is relatively inelastic in this aspect and so the firm shouldn’t worry about consumer income considerations
Dhruvang kansara
Eco 550, Assignment 1
Professor: Dr, Guerman Kornilov
January 27, 2014
1. Compute the elasticity for each independent variable. Note: Write down all of your calculations.
According to our Textbooks and given information, When P = 8000, A = 64, PX = 9000, I = 5000, we can use regression equation,
QD = 20000 - 10*8000 + 1500*64 + 5*9000 + 10*5000 = 131,000
Price elasticity = (P/Q)*(dQ/dP)
From regression equation, dQ/dP = -10.
So, price elasticity EP= (P/Q) * (-10) = (-10) * (8000 / 131000) = -0.61
Similarly,
EA = 1500 * 64 / 131000 = 0.73
EPX = 5 * 9000 / 131000 = 0.34
EI = 10* 5000 / 131000 = 0.38
2. Determine the implications for each of the computed elasticities for the business in terms of short-term and long-term pricing strategies. Provide a rationale in which you cite your results.
Price elasticity is -0.61 which means a 1% increase in price of the product causes quantity demanded to drop by 0.61%. So, the demand of the product is relatively inelastic. Therefore, increase in price may not have large impact on the customers. Advertisement elasticity is 0.73, meaning 1% increase in advertising expenses increases quantity demanded by only 0.73%. So, demand is relatively inelastic to advertising. Therefore, more advertisement won’t necessarily mean that firm can raise the price because it still could drive customers away.
Cross-price elasticity is 0.34 which means if price of competitor product increases by 1%, then quantity demanded of this product increases by 0.34%. So, product is relatively inelastic to competitor’s price and the firm shouldn’t worry about the competitor as their pricing won’t have any major effect on its own sales.
Income-elasticity is 0.38 which means 1% rise in average income in the area boosts quantity demanded by 0.38%. So, product is relatively inelastic in this aspect and so the firm shouldn’t worry about consumer income considerations
Cited: Geoff, R. (2012, September 23). Price Elasticity of supply. Retrieved Janaury 27, 2014, from www.Tutor2u.com: http://tutor2u.net/economics/revision-notes/as-markets-price-elasticity-of-supply.html Graves, P. E., & Sexton, R. L. (2006, September 12). Demand and Supply Curves Rotation Shift. Retrieved January 25, 2014, from ebscohost: http://eds.a.ebscohost.com/eds/detail?sid=db301980-ac25-4be9-8bea-be8062ddcf21%40sessionmgr4001&vid=5&hid=4102&bdata=JnNpdGU9ZWRzLWxpdmUmc2NvcGU9c2l0ZQ%3d%3d#db=bth&AN=22930441 Hoagland, S. R. (2013, september 9). Microeconomics theory. Retrieved January 27, 2014, from ebscohost: http://eds.b.ebscohost.com/eds/detail?vid=3&sid=026f848e-5018-4e58-a077-88348a8f26ac%40sessionmgr113&hid=107&bdata=JnNpdGU9ZWRzLWxpdmUmc2NvcGU9c2l0ZQ%3d%3d#db=e6h&AN=47669137 Moyer, H. M. (2014). Managerial Economics Applications, Strategies and Tactics. Cengage Custom Publishing.