Eco 550 Assignment 1: Demand Estimation
Assignment 1: Demand Estimation
By
Stephanie Airhart
Eco 550
Dr. Camille Castorina
04/25/2016
Banquet® Frozen Meals Founded in 1940, Banquet is the maker of a leading brand of frozen microwaveable dinners. Started by a schoolteacher that needed extra money, the company began in an old barn selling products to the local merchants. Banquet has been providing excellent meals to families all over the world. The line of food contains everything from fried chicken to crisp apple pies. Banquet takes pride in their affordable meals. The thing the makes them unique is the quality of food for such an affordable price. In today’s society, families have less time to spend together. It is very hard to get everyone together for family meals due to sports, long work hours, and other obligations. Many parents have become more and more dependent on fast foods or microwaveable dinners. These dinners have been the go to for thousands of hungry people. When customers buy these meals, they are looking for something fast, tasty, and affordable. Banquet has been very successful because of their low-cost meal options. The company will need to decide if they want to reduce prices to gain even more success. It wouldn’t make sense if …show more content…
the numbers don’t support the change. In order to figure out what a company like this should do, we must perform the proper analysis. One way a company can figure out the next steps is by using demand analysis. Demand analysis is a helpful tool management can use to see how much consumer demand there is for a particular product. This analysis will help a company determine where they stand against its competition as well. Another tool that can be used is price elasticity. According to About.com, price elasticity measures the rate of response of quantity demanded due to a price change. In order for us to figure out if Banquet will benefit from a price change, we must figure out the elasticities for each independent variable. The regression equation is equal to QD = - 5200 - 42P + 20PX + 5.2I + .20A + .25M. Using the following values as the independent variables below, we will be able to compute the elasticities for each independent variable. Q = Quantity demanded of 3-pack units
P (in cents) = Price of the product = 500 cents per 3-pack unit
PX (in cents) = Price of leading competitor’s product = 600 cents per 3-pack unit
I (in dollars) = Per capita income of the standard metropolitan statistical area
(SMSA) in which the supermarkets are located = $5,500
A (in dollars) = Monthly advertising expenditures = $10,000
M = Number of microwave ovens sold in the SMSA in which the supermarkets are located = 5,000
When P = 500, PX=600, I=5,500, A=10,000, and M=5000, using the regression equation, QD= - 5200 – 42(500) + 20(600) + 5.2(5500) + .20(10000) + .25(5000), the quantity demanded equals 17,650.
Once the quantity demanded is found, we will be able to find the elasticity of each variable. The equation to find the elasticity of price would be of price = coefficient * price/q. If we plug the numbers into the equation -42*(500/17650), we would have a total of -1.19 for the elasticity of price (P). The total for (PX) would be 20*(600/17650) = .68. We would have a total of 1.62 for the equation of (I), was 5.2*(5500/17650). Variable (A) would be equal to .20*(10000/17650) = .11. Lastly, the equation for (M) was .25*(5000/17650) which was
.07. Now that we have the numbers we can analyze what this all means. There are three main types of elasticity of demand. You have the price elasticity, income elasticity, and the cross elasticity. Since the price is elasticity is -1.19, it shows to be negative and elastic. That means that in order to increase revenue the price would need to be cut. If the Banquet was to increase their cost by 1% then their quantity demanded will drop by 1.19. When you compare Banquet’s cross elasticity to the competition, it was .68. Because it is a positive number, it means that the two brands are substitutes. If Banquet were to go up on prices than the demand for the competing brand would go up. Lastly, we take a look at how income could affect demand. According to Economicconcepts.com, when the income of a person increases, his demand for goods also changes depending upon whether the good is a normal good or an inferior good. It also mentions if a good has an income elasticity of less than 1 it is called an inferior good. Banquet’s elasticity was 1.62. That means if consumer’s income was to increase than the demand of the product would increase as well.
Recommendations
In my opinion, it would be smart for Banquet to lower prices. There are a lot of working parents that would be the meals if they were cheaper than the competition. The consumers are always looking for a deal. I know I am always looking for the biggest bang for my buck. But looking at the numbers and the analysis, it proves that if Banquet lowers their prices there will be an increase in demand. And when there is more demand there is more money being made. It goes on and on. It won’t hurt Banquet if they were to drop their prices but if they were to increases prices it could be harmful. Our analysis shows that if they were to raise prices the demand of the competition would rise. This would be a gain for the competition and a loss for Banquet. It also looks like they are holding up pretty strong in the market. I would recommend that Banquet reduce its prices just to take competitive advantage.
Supply and Demand Charts
Quantity(d)
Price 34450
100
30250
200
26050
300
21850
400
17650
500
13450
600
Shown above is what our analysis of Banquet foods looks like in graph form. There are a number of factors that could impact the results of our findings. Changes in income could change the supply and demand. A company’s supply and demand could also change depending on how well the competition is doing. We also learn that the price itself could have an enormous impact on the way consumers buy. There are other factors we can take into consideration as well. The economy, child-birth rates, and labor cost increasing. These can all effect which way the supply and demand curve shifts. A shift in the demand curve to the left or right represents a change in consumer preferences. When the curve shifts to the right it usually means that the item has become more desirable. When the curve shifts to the left, it usually means the good or service is less desirable. You can never be 100% sure why or why not a person will buy your products. Banquet has been doing a great job for the past 75 years, I’m sure they will continue to prosper.
References
McGuigan, James R., R. Charles Moyer, and Frederick H.deB. Harris. Managerial Economics: Applications, Strategies and Tactics, 13e, 13th Edition. Cengage Learning, 2013. VitalBook file.
Price Elasticity of Demand - part 1. (n.d.). Retrieved April 27, 2015, from https://www.youtube.com/watch?v=MNiEHvw6TTg
What Causes the Demand Curve to Shift to the Left? (n.d.). Retrieved April 27, 2015, from http://smallbusiness.chron.com/causes-demand-curve-shift-left-15857.html
Finding equilibrium price and quantity using linear demand and supply equations. (n.d.). Retrieved April 27, 2015, from https://www.youtube.com/watch?v=dhONLIo35Tc&list=PLB19932DA8BE513C9
Types of Elasticity of Demand: (n.d.). Retrieved April 27, 2015, from http://economicsconcepts.com/types_of_elasticity_of_demand.htm
Moffatt, M. (n.d.). Price Elasticity of Demand. Retrieved April 27, 2015, from http://economics.about.com/cs/micfrohelp/a/priceelasticity.htm
Vitez, O. (2009, November 8). What Is Market Demand Analysis? Retrieved April 27, 2015, from http://www.ehow.com/about_5622980_market-demand-analysis_.html
Banquet.com. (n.d.). Retrieved April 27, 2015, from http://www.banquet.com/our-story
By
Stephanie Airhart
Eco 550
Dr. Camille Castorina
04/25/2016
Banquet® Frozen Meals Founded in 1940, Banquet is the maker of a leading brand of frozen microwaveable dinners. Started by a schoolteacher that needed extra money, the company began in an old barn selling products to the local merchants. Banquet has been providing excellent meals to families all over the world. The line of food contains everything from fried chicken to crisp apple pies. Banquet takes pride in their affordable meals. The thing the makes them unique is the quality of food for such an affordable price. In today’s society, families have less time to spend together. It is very hard to get everyone together for family meals due to sports, long work hours, and other obligations. Many parents have become more and more dependent on fast foods or microwaveable dinners. These dinners have been the go to for thousands of hungry people. When customers buy these meals, they are looking for something fast, tasty, and affordable. Banquet has been very successful because of their low-cost meal options. The company will need to decide if they want to reduce prices to gain even more success. It wouldn’t make sense if …show more content…
the numbers don’t support the change. In order to figure out what a company like this should do, we must perform the proper analysis. One way a company can figure out the next steps is by using demand analysis. Demand analysis is a helpful tool management can use to see how much consumer demand there is for a particular product. This analysis will help a company determine where they stand against its competition as well. Another tool that can be used is price elasticity. According to About.com, price elasticity measures the rate of response of quantity demanded due to a price change. In order for us to figure out if Banquet will benefit from a price change, we must figure out the elasticities for each independent variable. The regression equation is equal to QD = - 5200 - 42P + 20PX + 5.2I + .20A + .25M. Using the following values as the independent variables below, we will be able to compute the elasticities for each independent variable. Q = Quantity demanded of 3-pack units
P (in cents) = Price of the product = 500 cents per 3-pack unit
PX (in cents) = Price of leading competitor’s product = 600 cents per 3-pack unit
I (in dollars) = Per capita income of the standard metropolitan statistical area
(SMSA) in which the supermarkets are located = $5,500
A (in dollars) = Monthly advertising expenditures = $10,000
M = Number of microwave ovens sold in the SMSA in which the supermarkets are located = 5,000
When P = 500, PX=600, I=5,500, A=10,000, and M=5000, using the regression equation, QD= - 5200 – 42(500) + 20(600) + 5.2(5500) + .20(10000) + .25(5000), the quantity demanded equals 17,650.
Once the quantity demanded is found, we will be able to find the elasticity of each variable. The equation to find the elasticity of price would be of price = coefficient * price/q. If we plug the numbers into the equation -42*(500/17650), we would have a total of -1.19 for the elasticity of price (P). The total for (PX) would be 20*(600/17650) = .68. We would have a total of 1.62 for the equation of (I), was 5.2*(5500/17650). Variable (A) would be equal to .20*(10000/17650) = .11. Lastly, the equation for (M) was .25*(5000/17650) which was
.07. Now that we have the numbers we can analyze what this all means. There are three main types of elasticity of demand. You have the price elasticity, income elasticity, and the cross elasticity. Since the price is elasticity is -1.19, it shows to be negative and elastic. That means that in order to increase revenue the price would need to be cut. If the Banquet was to increase their cost by 1% then their quantity demanded will drop by 1.19. When you compare Banquet’s cross elasticity to the competition, it was .68. Because it is a positive number, it means that the two brands are substitutes. If Banquet were to go up on prices than the demand for the competing brand would go up. Lastly, we take a look at how income could affect demand. According to Economicconcepts.com, when the income of a person increases, his demand for goods also changes depending upon whether the good is a normal good or an inferior good. It also mentions if a good has an income elasticity of less than 1 it is called an inferior good. Banquet’s elasticity was 1.62. That means if consumer’s income was to increase than the demand of the product would increase as well.
Recommendations
In my opinion, it would be smart for Banquet to lower prices. There are a lot of working parents that would be the meals if they were cheaper than the competition. The consumers are always looking for a deal. I know I am always looking for the biggest bang for my buck. But looking at the numbers and the analysis, it proves that if Banquet lowers their prices there will be an increase in demand. And when there is more demand there is more money being made. It goes on and on. It won’t hurt Banquet if they were to drop their prices but if they were to increases prices it could be harmful. Our analysis shows that if they were to raise prices the demand of the competition would rise. This would be a gain for the competition and a loss for Banquet. It also looks like they are holding up pretty strong in the market. I would recommend that Banquet reduce its prices just to take competitive advantage.
Supply and Demand Charts
Quantity(d)
Price 34450
100
30250
200
26050
300
21850
400
17650
500
13450
600
Shown above is what our analysis of Banquet foods looks like in graph form. There are a number of factors that could impact the results of our findings. Changes in income could change the supply and demand. A company’s supply and demand could also change depending on how well the competition is doing. We also learn that the price itself could have an enormous impact on the way consumers buy. There are other factors we can take into consideration as well. The economy, child-birth rates, and labor cost increasing. These can all effect which way the supply and demand curve shifts. A shift in the demand curve to the left or right represents a change in consumer preferences. When the curve shifts to the right it usually means that the item has become more desirable. When the curve shifts to the left, it usually means the good or service is less desirable. You can never be 100% sure why or why not a person will buy your products. Banquet has been doing a great job for the past 75 years, I’m sure they will continue to prosper.
References
McGuigan, James R., R. Charles Moyer, and Frederick H.deB. Harris. Managerial Economics: Applications, Strategies and Tactics, 13e, 13th Edition. Cengage Learning, 2013. VitalBook file.
Price Elasticity of Demand - part 1. (n.d.). Retrieved April 27, 2015, from https://www.youtube.com/watch?v=MNiEHvw6TTg
What Causes the Demand Curve to Shift to the Left? (n.d.). Retrieved April 27, 2015, from http://smallbusiness.chron.com/causes-demand-curve-shift-left-15857.html
Finding equilibrium price and quantity using linear demand and supply equations. (n.d.). Retrieved April 27, 2015, from https://www.youtube.com/watch?v=dhONLIo35Tc&list=PLB19932DA8BE513C9
Types of Elasticity of Demand: (n.d.). Retrieved April 27, 2015, from http://economicsconcepts.com/types_of_elasticity_of_demand.htm
Moffatt, M. (n.d.). Price Elasticity of Demand. Retrieved April 27, 2015, from http://economics.about.com/cs/micfrohelp/a/priceelasticity.htm
Vitez, O. (2009, November 8). What Is Market Demand Analysis? Retrieved April 27, 2015, from http://www.ehow.com/about_5622980_market-demand-analysis_.html
Banquet.com. (n.d.). Retrieved April 27, 2015, from http://www.banquet.com/our-story