Supply and Demand in Businesses
1. Compute the elasticities for each independent variable. Note: Write down all of your calculations.
When P = 500, C = 600, I = 5500, A = 10000 and M = 5000, using regression equation, QD = -5200 - 42*500 + 20*600 + 5.2*5500 + 0.2*10000 + 0.25*5000 = 17650 Price elasticity = (P/Q)*(dQ/dP) From regression equation, dQ/dP = -42. So, price elasticity EP= (P/Q) * (-42) = (-42) * (500 / 17650) = -1.19 Likewise, EC = 20 * 600 / 17650 = 0.68 EI = 5.2 * 5500 / 17650 = 1.62 EA = 0.20 * 10000 / 17650 = 0.11 EM = 0.25 * 5000 / 17650 = 0.07
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 -1.19. This indicates a 1% increase in the price of the product, which results the quantity demanded to drop by 1.19%. Therefore, the demand of this product is somewhat elastic. Subsequently, increase in price may drive customers away. Cross-price elasticity is 0.68. If the price of a competitor’s product goes up by 1%, then quantity demanded of this product will increase by 0.68%. This product is fairly inelastic to a competitor’s price and there is no need to be concerned about the competitor since their pricing won’t affect sales.
Income-elasticity is 1.62. This indicates that a 1% rise in the average area income will boost the quantity demanded by 1.62%. In this aspect, the product is elastic and the company can make the decision to raise the price if the average income rises.
Advertisement elasticity is 0.11which means that a 1% increase in advertising expenses will raise the quantity demanded by only 0.11%. Therefore, demand is a rather inelastic to advertising. So for that reason, more advertisement doesn’t automatically mean that a company can raise the price because that still could drive customers away. With respect to microwave ovens in the area,
When P = 500, C = 600, I = 5500, A = 10000 and M = 5000, using regression equation, QD = -5200 - 42*500 + 20*600 + 5.2*5500 + 0.2*10000 + 0.25*5000 = 17650 Price elasticity = (P/Q)*(dQ/dP) From regression equation, dQ/dP = -42. So, price elasticity EP= (P/Q) * (-42) = (-42) * (500 / 17650) = -1.19 Likewise, EC = 20 * 600 / 17650 = 0.68 EI = 5.2 * 5500 / 17650 = 1.62 EA = 0.20 * 10000 / 17650 = 0.11 EM = 0.25 * 5000 / 17650 = 0.07
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 -1.19. This indicates a 1% increase in the price of the product, which results the quantity demanded to drop by 1.19%. Therefore, the demand of this product is somewhat elastic. Subsequently, increase in price may drive customers away. Cross-price elasticity is 0.68. If the price of a competitor’s product goes up by 1%, then quantity demanded of this product will increase by 0.68%. This product is fairly inelastic to a competitor’s price and there is no need to be concerned about the competitor since their pricing won’t affect sales.
Income-elasticity is 1.62. This indicates that a 1% rise in the average area income will boost the quantity demanded by 1.62%. In this aspect, the product is elastic and the company can make the decision to raise the price if the average income rises.
Advertisement elasticity is 0.11which means that a 1% increase in advertising expenses will raise the quantity demanded by only 0.11%. Therefore, demand is a rather inelastic to advertising. So for that reason, more advertisement doesn’t automatically mean that a company can raise the price because that still could drive customers away. With respect to microwave ovens in the area,
References: Bruno, M., & Sachs, J. D. (1979). Supply vs. demand approaches to the problem of stagflation. Blanchard, O. J., &Quah, D. (1990).The dynamic effects of aggregate demand and supply disturbances. Campbell, J. Y., &Viceira, L. M. (2002). Strategic asset allocation: portfolio choice for long-term investor.