The Demand for a Low Calorie Food Company

Question: Using the demand and supply function, the equilibrium point of the market would be estimated along with the various factors that would impact the market dynamics for the company. Answer: Introduction The main aim of the given research is to estimate the demand for a low calorie food company based upon the given information. Besides the estimation of demand function, an essential objective of the given report is to comment on the point elasticity which can eventually shed light with regards to the most effective pricing strategies. Additionally, using the demand and supply function, the equilibrium point of the market would be estimated along with the various factors that would impact the market dynamics for the company. Determination of the individual elasticities The regression equation for demand of widgets is as shown below. The respective standard errors are shown in brackets immediately below the given coefficient. Further, other critical information such as coefficient of determination and the F-value have also been provided. QD = - 5200 - 42P + 20PX+ 5.2I + 0.20A + 0.25M (2.002) (17.5) (6.2) (2.5) (0.09) (0.21) R2 = 0.55, n=26 and F = 4.88 Further, based on the given input information about the various independent variables in the regression equation, the estimate of the quantity demanded is as shown below. QD = -5200 42*500 + 20*600 + 5.2*5500 + 0.2*10000 +0.25*5000 = 17,650 Price elasticity of demand = (P/Q)*(dQ/dP) = (500/17650)*(-42) = -1.19 The price elasticity as expected is negative and thus complies with the law of demand i.e. as the price rises, the demand of the product would fall. A negative elasticity also indicates the given product is a normal good and not an inferior good. Besides, the magnitude of elasticity is indicative of the fact that a unit percentage change in price would alter the demand by 1.19 percent in the opposite direction of the change in price. A magnitude of more than 1 indicates that price elasticity is positive (Krugman Wells, 2013). Cross price elasticity of product = (PX/Q)*(dQ/dPX) = (600/ 17650) * 20 = 0.68 The price elasticity of competitors product is positive which clearly indicates that the products are substitutes. As a result, an increase in the price of competitors product by a unit percentage would lower the demand of the competitors product and thus enhance the demand of the companys product by 0.68 percent as consumers would search for cheaper alternatives. A price elasticity of less than 1 indicates relative inelasticity (Nicholson Snyder, 2011). Income elasticity of product = (I/Q)*(dQ/dI) = (5500/ 17650) * 5.2 = 1.62 A positive income elasticity indicates that the given product is normal since the demand increases with increase in income levels. Further, the quantum of income elasticity indicates that a unit percentage change in income levels would lead to an increase of 1.62 percent in demand (Mankiw, 2014). Elasticity of advertising expenditure = (A/Q) * (dQ/dA) =(10000 / 17650) * 0.20 = 0.113 A magnitude of less than 1 indicates that the demand is inelastic ad a unit percentage increase in advertisement expenditure would lead to increase in the quantity demanded by a meagre 0.113% (Pindyck Rubinfeld, 2001). Elasticity of supermarket microwave sales = (M/Q) *(dQ/dM) = (5000/17650)*0.25 = 0.071 It is apparent from the above that a unit percent change in the ovens quantity bought is supermarkets would change the quantity demanded by 0.071% and hence the demand is inelastic (Samuelson Marks, 2003). Implications of individual elasticity for pricing The price elasticity of the product in the given case is -1.19. Further cross elasticity, income elasticity and elasticity of the demand of the product with regards to the other factors is inelastic since the respective elasticity coefficients have a magnitude of less than 1. Thus, the underlying price of the product is the most critical parameter that tends to impact the demand of the product (Mankiw, 2014). With regards to decision on price cut, it is advised that company should not go ahead and cut the price. This is primarily because the percentage increase in the quantity caused by the percentage decrease in the price of the product would lead to enhanced revenues for the company but may not generate higher profits for the company as shown below. This is illustrated using the following example (Krugman Wells, 2013). Total Revenue = Price * Quantity Sold Let the current unit price be $ 10 while the corresponding quantity sold is 1000. Let us assume that the total unit cost is $ 5. Hence, current revenue = 1000*10 = $10,000 Current profit = 1000*(10-5) = $ 5,000 Now, let us assume that the company decreases the price by 10% i.e. from $ 10 to $ 9. This would increase the corresponding quantity sold by 11.9% and hence the sales would become 1119 units. Thus, new revenue = 1119*9 = 10,071 New profit = 1119*(9-5) = $ 4476 As is evident, even though the overall sales are higher, but the absolute profits and profitability margins have declined. Thus, unless the increase in market share can offset this loss in profitability in the long run, price cur must not be resorted on purely on sales consideration (Pindyck Rubinfeld, 2001). Estimating equilibrium market conditions The quantity demanded can be estimated for different prices using the regression equation provided. Since P is the only variable in the question as other variables are constant, hence the regression equation can be written in a simplified format by substituting the given values of other variables (Nicholson Snyder, 2011). Hence, QD = 38650 42P Thus, QD (P=100) = 38650 42 (100) = 34450 QD (P=200) = 38650 42 (200) = 30250 QD (P=300) = 38650 42 (300) = 26050 QD (P=400) = 38650 42 (400) = 21850 QD (P=500) = 38650 42 (500) = 17650 QD (P=600) = 38650 42 (600) = 13450 The above values of the quantity demanded for various price levels is summarised in the form of following demand function graph. The supply function for the given product is given by Q = -7909.89 + 79.1P Hence, QS (P=100) = -7909.89 + 79.1(100) = 0.11 QS (P=200) = -7909.89 + 79.1(200) = 7910.11 QS (P=300) = -7909.89 + 79.1(300) = 15820.11 QS (P=400) = -7909.89 + 79.1(400) = 23730.11 QS(P=500) = -7909.89 + 79.1(500) = 31640.11 QS(P=600) = -7909.89 + 79.1(600) = 39550.11 The market equilibrium is reached at a point where the demand function and supply function coincide as demonstrated graphically below. The equilibrium point can be mathematically determined by equating the demand and supply functions as shown below (Mankiw, 2014). 38650 42 P = 7909.89 + 79.1P Solving the above, we get P = $ 253.84 Further, equilibrium, quantity = 38650 42(253.84) = 27988.72 or 27,989 approximately. Significant factors impacting demand and supply function One of the key determinants for low calorie food would be consumer incomes as is apparent from the cross income elasticity. Other factors impacting the demand of low calorie food are the price of the competitors product offering along with the oven sales. However, an additional variable in this regard is the change in consumer preferences and the underlying health consciousness amongst the consumers. Besides, education levels can be a key determinant of demand for low calorie food since educated people in general have healthier food choices (Krugman Wells, 2013). A low coefficient of determination of 0.55 also indicates that the given independent variables only explain 55% of the change in the product demand and thus 45% of the demand changes in the low calorie food are not represented by the current regression equation. The increase in income level of consumers would cause a rightward shift in demand while decrease in income levels would result in a leftward shift. Besides, increas e in the competitors product would increase the demand for companys product and cause a rightward shift (Nicholson Snyder, 2011). References Krugman, P. Wells, G. (2013), Microeconomics (3rd ed.), London: Worth Publishers Mankiw, G. (2014), Microeconomics (6th ed.), London: Worth Publishers Nicholson, W. Snyder, C. (2011), Fundamentals of Microeconomics (11th ed.), New York: Cengage Learning Pindyck, R. Rubinfeld, D. (2001), Microeconomics (5th ed.), London: Prentice-Hall Publications, Samuelson, W. Marks, S. (2003), Managerial Economics (4th ed.). New York Wiley Publications,