Option 1 Compute the elasticitys 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 Therefore: 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 Determine the implications for each of the computed elasticitys for the business in terms of short-term and long-term pricing strategies. Provide a rationale in which you cite your results. Price elasticity measures how demand is responsive to a change in price of the product (Vivekananthan et al,2014). Price elasticity is 1.19. This shows a 1% increase in the cost of the item, which makes the amount requested to drop by 1.19%. Accordingly, the demand of this item is to some degree elastic. Thus, increment in cost may push clients away. Therefore as the owner of this business I should be so sensitive as I increase the price in the market as it can have adverse effects on the demand on the product. Cross elasticity measures the responsiveness of the quantity demanded of the product to the change in price of a substitute product (Soderbery, 2015). Cross elasticity is 0.68. In the event that the cost of a contenders item goes up by 1%, then Quantity demanded of this item is bound to increase by 0.68%. This item is genuinely inelastic to a competitors price and there is no need to be worried about the contender since their evaluating wont influence deals. The price of the competitor wont affect the my price as the owner of this company so I should maximize on this fact because it is very clear people in the market are not so much concerned with the price of the product but rather the quality among other factors. Income elasticity measures how demand of the product responds or is affected by the change in the consumers income. Income elasticity is 1.62. This demonstrates a 1% ascend in the normal region wage will result in 1.62% increase in quantity demanded for the given product. In this viewpoint, the item is elastic and the organization can settle on the choice to raise the price of the product if the normal wage rises. The company should therefore be focused on the market price and focus on the changes in the salaries of the consumers or on the economic wage of the people on the nearby locality to make maximum profits by changing the price appropriately. Advertisement elasticity measures the responsiveness of the quantity demanded to the change in the price of the product. Advertisement elasticity is 0.11which implies that a 1% increase in total advertising costs will increase the demand of the product by just 0.11%. In this manner, interest is somewhat inelastic to promoting expenses. Thus, more notice doesnt naturally imply that an organization can raise the cost since that even now could push clients away. In this case the company should focus on the strategy of looking on the market changes rather than focusing more on the product promotion which might not have any effect on the price of the product. Regarding microwave Ovens in the zone, Elasticity is 0.07, which demonstrates a rise of 1% in the quantity of stoves in the territory increases the quantity demanded by just a slight change of 0.07%. Accordingly, in this viewpoint, demand is inelastic and the estimating technique can essentially avoid this component. It therefore, advisable to avoid this aspect when setting up the prices for this product. Pricing strategy whether long term or short term should not be subject to this factor. Thus, quantity (as we have seen above) is sensitive to the cost of item and the wage of individuals yet to some degree insensitive to our rivals price and totally insensitive to promoting and the number of microwaves existing in region. Due to this fact the price strategies to undertake should be focused on the price of the product and the income of the persons in the region. An increase in the income of the people in the regions should encourage an adjacent increase in the price of the product. While increasing the price of the product the as the owner I should be very sensitive not to chase the customers away. Recommend whether you believe that this firm should or should not cut its price to increase its market share. Provide support for your recommendation A reduction in price has the effect of increasing the quantity demanded because as we have seen in the worked out price elasticity figure is negative. The elasticity on the other hand is very minimal when one is comparing it with a unit product. If one in interested in maximizing the revenues in the normal cases he or she should focus a situation when the elasticity of the given product is one. Having this in mind one can make the best decision in this case since it is notably that a reduction in the price has the effect of increases in the revenues since the elasticity is moving towards a unity. In my general opinion in this case I would advise the firm to reduce the price in order to increase or widen the market share and maximize on the revenues generated. Assume that all the factors affecting demand in this model remain the same, but that the price has changed. Further assume that the price changes are 100, 200, 300, 400, 500, 600 cents. A. Plot the demand curve for the firm. With all other factors constant, the demand equation is as follows: Q = -5200 42*P + 20*600 + 5.2*5500 + 0.2*10000 + 0.25*5000 Q = 38650 42P P = 38650/42 Q/42 (plotted below) Demand curve Plot the corresponding supply curve on the same graph using the supply function Q = -7909.89 + 79.1P with the same prices. Key Quantity demanded Quantity demanded Determine the equilibrium price and quantity. Solving the demand and supply equation concurrently, 38650 42P = 5200 + 45P 87P = 33450 P = 384.48 and Q = 5200 + 45*384.48 = 22501 Therefore, the equilibrium price is set at 384 cents while on the other hand the equilibrium quantity is set at 22,501 units. Additionally, the equilibrium price as well as the equilibrium quantity can be seen on the graph shown at the point where the supply and the demand curves intersect. The equilibrium is usually the market price, the price at which consumers are will to part with as the opportunity cost for the given product. This price is usually constant in the short run but is bound to change at the long run as factors will be incorporated in place to cause a permanent shift in the demand and the supply curve. The implication of the equilibrium price is that if the seller supplies the products at a price below is he will make substantial amount of loss of revenue in the short run. Outline the significant factors that could cause changes in supply and demand for the product. Determine the primary manner in which both the short-term and the long-term changes in market conditions could impact the demand for, and the supply, of the product. The demand of the low calorie food will only be affected by the change in the incomes of the consumers, the pricing of the complementary goods(microwave oven) as well as the price of the substitute products something which has been explained very well in the demand equation. Consumers choice or preference can also lead to the same effect that is the consciousness towards the low calorie food. On the other hand the supply of a product is as well affected by a change in the number of the products supplied in the market. Technological advancement as it affects the direct production cost has the effect of increasing supply in the market due to the fact that the products are being made available at a cheaper cost than before. Availability of cheap labor as well as raw materials behaves the same as the technology because the three are inter linked by the fact they decrease the direct production cost. Indicate the crucial factors that could cause rightward shifts and leftward shifts of the demand and supply curves. The shift of a demand or supply curve is caused by a change in the other factors apart from price which affect the demand of a product (Fisher & Vaidyanathan, 2014). An increase in purchaser salary, a cost cut in the cost of an integral item (e.g., microwave Oven) could bring about a rightward movement of interest bend item; as could a populace increment or expanded inclination for the item (e.g., mindfulness towards low-calorie food). A reduction in customers income or a cost of substitute product (like the U.S. has been encountering) can bring about a leftward movement of demand curve; furthermore, an increase in cost of a correlative item (microwave broiler and so on.) could bring about the same leftward movement of interest bend. Technology advancement for instance has the effect of increasing the availability of cheap raw materials and labor, expanded accessibility of modest work and crude materials, expanded tax reductions and government sponsorships (in addition to other things) can bring about a rightward movement of supply curve. A leftward movement can be brought about by a diminishing in accessibility or an expansion in cost of work and crude materials, expanded expenses, and so forth. References Fisher, M., & Vaidyanathan, R. (2014). A demand estimation procedure for retail assortment optimization with results from implementations. Management Science, 60(10), 2401-2415. Soderbery, A. (2015). Estimating import supply and demand elasticities: Analysis and implications. Journal of International Economics, 96(1), 1-17. Vivekananthan, C., Mishra, Y., Ledwich, G., & Li, F. (2014). Demand response for residential appliances via customer reward scheme. Smart Grid, IEEE Transactions on, 5(2), 809-820.
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