DEMAND ESTIMATIONTimes have changed when it comes to the way families eat their meals on a daily basis. Most families are always on the run. Whether it they are parents who are working long hours, kids are involved in multiple sports or after school academic activities, or just not being able to settle down for a regular family meal, it’s just not enough time in the day to cook. Everything in life has become very fast. It’s easier and sometimes cheaper to just grab something to eat on the run at a fast food restaurant than it is to go shopping and prepare a meal. It is also easier to just throw something in the microwave for 1.5 minutes and have to do nothing else to it but eat. These have become very popular and affordable meal choices as well. In this assignment, I will compute the elasticities for each independent variable, plot the demand and supply curves, and identify crucial factors that would case shifts in the demand and supply curve for this low calorie, frozen microwavable food. Computation of Elasticities for Each Independent Variable QD =-2000 – 100P + 15A + 25PX + 10I(5234)(2.29)(525)(1.75)(1.5)R2 = 0.85n = 120F = 35.25Q =Quantity demanded of 3-pack unitsP (in cents) =Price of the product = 200 cents per 3-pack unitPX (in cents) =Price of leading competitor’s product = 300 cents per 3-pack unitI (in dollars)=Per capita income of the standard metropolitan statistical area (SMSA) in which the supermarkets are located = $5000A (in dollars)=Monthly advertising expenditures = $640Solution:QD =-2000 – 100P + 15A + 25PX + 10I
Cross-Price Elasticity of Demand = 20 × 600/17,650 = 0.679887 Inelastic Income Elasticity of Demand = 5.2 × 5,500/17,650 = 1.620397 Elastic Demand Elasticity for Advertising = 0.20 × 10,000/17,650 = 0.113314 Inelastic Implications - Demand Elasticity for Microwaves sold = 0.25 × 5,000/17,650 = 0.070822 Inelastic Price Changes & Equilbrium-5,200 – 42P + 20(600) + 5.2(5,500) + 0.20(10,000) + 0.25(5,000) = -5,200 – 42P + 12,000 + 28,600 + 2,000 + 1,250 = 38,650 – 42P-7,909.89 + 79.1P EQ= 38,650 – 42P =-7,909.89 + 79.1P 121.1P = 46,560 P = 384 Q = 22,502 Price QD QS 100 34,450 0 Implications- The price elasticity of demand is elastic which means a "good or service is one for which a 1% price change causes more than a 1% change in the quantity demanded or supplied." (Inelastic) In this case, since the derivative is negative, a 1% decrease in prices would lead to a 42% rise in sales. It is a negative correlation. E PX = ∂Q D /∂P X × P X /Q D Implication- The cross elasticity of demand for substitute goods is positive and inelastic. The demand for one good will increase if the price for the other good increases. For example, if the price of this frozen food increases (but everything else stays the same), the quantity demanded for a substitute meal will increase as consumers switch to an alternative. (Cross Elasticity Of Demand) Therefore, if we lower the price of our frozen meal, we may increase demand from our competitor's consumers as they may find the price more appealing and thusly increase revenues. But it would be a small change and may not be worthwhile.