# A Price Elasticity of Demand

2021-05-18 06:11:07
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Inference: A price elasticity of demand for the product is -1.1898. It implies that a 1% increase in the product price will lead to drop in the quantity demanded by 1.1898. The demand of the product of elastic. Increase in revenue may fail to attract a prospective customer.

Cross-Price elasticity of Demand (CED)

CED = Q/PX * (PX/Q)

CED = 20* 600/17,650

CED = 0.68

Inference: Increase in competitor price by 1% leads to an increase in the quantity demanded by 0.68%. The nature of demand for the product is relatively inelastic to competitors price and there is therefore no worry about the alternation of prices since it has negligible effects on the sales.

Income Elasticity of Demand (IED)

IED = Q/I * (Q/I)

IED = 5.2 * 5,500/17,650

IED = 1.6203

Inference: An income elasticity of demand of 1.6203 implies that an increase in the income by 1% leads to a consecutive increase in the quantity demanded by 1.6203%. The product possess an elastic demand and the business can therefore increase the price once the average income increases.

AED = Q/A * (Q/A)

AED = 0.2 * 10,000/17,650

AED = 0.113

Inference: With an elasticity of 0.0753 an increase in the advertising expenditure by 1% leads to an increase in quantity demanded by 0.113%. The product has an inelastic demand since its elasticity is less than 1. Increasing the advertisement expenditure does not affect the price directly since it could still fail to attract demand.

Demand Elasticity of M

AED = Q/M * (Q/M)

AED = 0.25 * 5,000/17,650

AED = 0.071

As for the microwaves, the elasticity is 0.071. An increase in the price of the ovens by 1% leads to an increase in the quantity of microwave ovens demanded by 0.071 %. The demand of the microwaves is inelastic and adopting a particular pricing strategy does not significantly affect the quantity demanded. .

Recommendation.

Cutting down the price has the effect of increasing the quantity demanded since the price elasticity of the product is 1.1898 in absolute terms. The resultant effects would be the increase in the market share.

Option 2

QD = -2,000 - 100P + 15A + 25PX + 10I

P = 200 cents

A = \$640

PX = 300 cents

I = \$5,000

Solution

QD = -2,000 - 100P + 15A + 25PX + 10I

QD = -2,000 100(200) + 15(640) + 25(300) + 10(5,000)

QD = -2,000 20,000+ 9,600 + 7,500 + 50,000

QD = 45,100

Price Elasticity of Demand (PED)

Price Elasticity (Ep) = (P/Q) (Q/P)

From the regression equation:

Q/P = - 100

PED = - (-100) * 2/45,100

PED = 0.00443

A price elasticity of demand for the product is 0.00443. This implies that a 1% increase in the product price will lead to an increase in the quantity demanded by 0.00443. The demand of the product of inelastic.

Cross-Price elasticity of Demand (CED)

CED = Q/PX * (PX/Q)

CED = 25* 3/45,100

CED = 0.001663

Inference: Increase in competitor price by 1% leads to an increase in the quantity demanded by 0.001663%. The nature of demand for the product is relatively inelastic to competitors price and there is therefore no worry about the alternation of prices since it has negligible effects on the sales.

Income Elasticity of Demand (IED)

IED = Q/I * (Q/I)

IED = 10 * 5,000/45,100

IED = 1.1086

Inference: An income elasticity of demand of 1.1086 implies that an increase in the income by 1% leads to a consecutive increase in the quantity demanded by 1.1086%. The product possess an elastic demand and the business can therefore increase the price once the average income increases.

AED = Q/A * (Q/A)

AED = 15* 640/45,100

AED = 0.2129

Inference: With an elasticity of 0.2129 an increase in the advertising expenditure by 1% leads to an increase in quantity demanded by 0.2129%. The product has an inelastic demand since its elasticity is less than 1. Increasing the advertisement expenditure does not affect the price directly since it could still fail to attract demand.

Recommendation

Cutting down the price has no effect of increasing the quantity demanded since the price elasticity of the product is negligible (0.00443). It would have no effect on the market share.

Demand curve for the firm.

With all factors held constant, the demand equation is as follows:

Option 1

QD = - 5200 - 42P + 20PX + 5.2I + 0.20A + 0.25M

P = 500 cents

PX = 600 cents

I = \$5,500

A = \$10,000

M = 5,000

QD = - 5200 - 42P + 20PX + 5.2I + 0.20A + 0.25M

QD = - 5200 42P + 20(600) + 5.2(5,500) + 0.20(10,000) + 0.25(5,000)

QD = - 5200 + 12,000 + 28,600 + 2,000 + 1,250 42P

QD = 38,650 42P

Option 2

QD = -2,000 - 100P + 15A + 25PX + 10I

P = 200 cents

A = \$640

PX = 300 cents

I = \$5,000

QD = -2,000 - 100P + 15A + 25PX + 10I

QD = -2,000 100(P) + 15(640) + 25(300) + 10(5,000)

QD = -2,000 100P+ 9,600 + 7,500 + 50,000

QD = 65,100 100P

Price (\$) QD1 = 38,650 42P QD2 = 65,100 100P

100 34,450 55,100

200 30,250 45,100

300 26,050 35,100

400 21,850 25,100

500 17,650 15,100

600 13,450 5,100

Plotting the Demand and Supply Function

Price (\$) QD = 38,650 42P QD = 65,100 100P Supply

QD = -7,909.89 + 79.1P

100 34,450 55,100 0.11

200 30,250 45,100 7,910.11

300 26,050 35,100 15,820.11

400 21,850 25,100 23,730.11

500 17,650 15,100 31,640.11

600 13,450 5,100 39,550.11

6286501343024006286501447800

Determine the equilibrium price and quantity.

From the Graph;

Equilibrium (Quantity demanded = Quantity supplied)

Quantity: Option 1: 22,502.26

Quantity: Option 2: 24,312.35

Equilibrium Price

Option 1: 384.47 cents

Option 2: 407.8765 cents

Demand and supply factors.

There is a possibility for the demand of low-calorie food to change in case of a change in the consumer income, competitors prices as well as the price of microwave ovens. The change takes place as a result of change in consumer preferences such as attitudes towards low-calorie food. Consequently, the supply of the product can change in case of a change in the number of product suppliers, production technological advances in additional to the other elements like labor and raw materials availability variations which have a direct influence of the product costs.

Demand and supply curve shift.

Demand curve

A shift of the demand curve to the right may be brought about by a decrease in the price for the complementary commodity such as the advertising the low-calorie food, increase in population, rise in preference for the product as well as the increase in consumer income.

A leftward shift of the demand curve on the other hand can caused by a decline in the consumer income, a recession as well as increase in price of a complementary product.

Supply curve

On the other hand, a shift of the supply curve to the right can arise out of an increase in the availability of cheap labor and raw materials, increase in tax cuts and government subsidies as well as enhanced technological advances in food processing.

On the other hand, a leftward shift of the supply curve may result out of a decrease in the availability or a surge in price of labor and raw materials (inputs in production) as well as increased taxes.

References

Hall, R. E., & Lieberman, M. (2012). Microeconomics: Principles and applications. Cengage Learning.

Jiang, Q., Lee, Y. C., & Zomaya, A. Y. (2016). Price Elasticity in the Enterprise Computing Resource Market. IEEE Cloud Computing, 3(1), 24-31.

Rios, M. C., McConnell, C. R., & Brue, S. L. (2013). Economics: Principles, problems, and policies. McGraw-Hill.

Varian, H. R. (2014). Intermediate Microeconomics: A Modern Approach: Ninth International Student Edition. WW Norton & Company. Have the same topic and dont`t know what to write?
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