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Sample Essay Paper on Demand Estimation

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Sample Essay Paper on Demand Estimation

Question 1 Elasticity Calculations

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

P= 500

Px = 600

I = 5,500

A = 10,000

M = 5,000

Therefore the   QD = -5200 – 42(500) +20(600) +5.2(5500) + 0.20(10000) + 0.25(5000)

                        QD = 15,650 units

Elasticity = (slope of the independent variable)-1       * (independent variable /QD)

Price of the product                                       = -42 * 500/17650

                                                            = – 1.19

Price of leading competitor’s product                        = 20 * 600/17650

                                                            = 0.68

Per capita income                                            = 5.2 * 5500/17650

                                                            = 1.62

Monthly advertising expenditures                  = 0.20 * 10000/17650

                                                            = 0.113

Number of microwave ovens sold                  = 0.25 * 5000/17650

                                                            = 0.071

Question 2: Analysis of the Calculated Elasticity

From the above calculations it is evident that the quantity demanded is almost unitary elastic to price of the commodity. This notion is strengthened by the fact that the elasticity calculated in almost one. Hence the prices vary with the quantity demand in almost the same proportion (Gillespie & Gillespie, 2011). This calculation also means that as the prices changes, the quantity demand is deemed to change in almost the same proportion. The negative sign shows that the commodity in question is a normal good. It means that as the firm increases its prices, the quantity demanded is expected to reduce in almost the same proportion. Therefore a one percent increase in the price of this commodity would lead to a 1.19% decrease in the quantity demand for this good (Lipsey & Harbury, 2014).

A closer look at the cross elasticity of the competitor price, the quantity demand is less elastic to the price of the competitor’s goods. This means that a 1% increase in the price of the commodity would lead to a 0.68% increase in the quantity demanded. The change of the quantity demanded therefore is less proportionate to the change effected on the price. It only means again that the competition between these companies also involves non price competition which would revolve around the quality of the good and the efficiency of the delivery of these services (Gillespie & Gillespie, 2011). The positive sign postulated in the elasticity connotes that there is appositive correlation between the price of the competitor and the quantity demanded. It means that a 1% increase in the price of the competitor’s goods leads to a 0.68% increase in the quantity demanded of for the company goods. Hence these two products are substitutes since the increase in price of one leads to increase in quantity demanded for another (Lipsey & Harbury, 2014).

On the account of the income elasticity, the commodity is more elastic to income as shown by the elasticity value which is higher than 1. It means therefore that a specific increase in the income of the individual consumer would lead to a more than proportionate increase in the quantity demanded for the good. Additionally, the positive sign connotes that as the income increases, the level of consumption also increases as depicted by the high quantity of the commodity demanded hence it is deemed to be a normal good (Welch & Welch, 2016).

The elasticity on the number of goods sold and the advertising expenses are quite small and way below 1 which means that they are quite inelastic and hence has minimal effect on the quantity demanded for the good. They therefore cannot be used for price decision making because of their negligible effect on the quantity demanded (Lipsey & Harbury, 2014).

Question 3: Recommendation

The company should cut its prices since the prices of the goods are more elastic. From the above calculations it is evident that the quantity demanded is almost unitary elastic to price of the commodity. This notion is strengthened by the fact that the elasticity calculated in almost one. Hence the prices vary with the quantity demand in almost the same proportion (Gillespie & Gillespie, 2011). This calculation also means that as the prices changes, the quantity demand is deemed to change in almost the same proportion. The negative sign shows that the commodity in question is a normal good. It means that as the firm increases its prices, the quantity demanded is expected to reduce in almost the same proportion. Therefore a one percent increase in the price of this commodity would lead to a 1.19% decrease in the quantity demand for this good (Welch & Welch, 2016).

 

 

 

 

 

 

 

 

 

Question 4 A and B
Question 4 C Equilibrium Quantities and Price

At equilibrium quantity supplied = quantity demanded

Hence

-42(p) + 38650 = 79.1(p) – 7909.89

-121.1(p) = 46559.89

P = 384.47 cents

Q = 79.1*384.47 – 7909.89

Q = 22,502 units

Question 4 d factors affecting demand and supply

One of the factors that affect the demand and the supply is the price of the commodity. As the company increases the prices of the commodity, the demand for the commodity is expected to reduce since the available amount of cash available amount of cash meant for a specific good is deemed to decrease (Deepashree, 2013). The decrease is attributed to the fact that not the same amount of cash is able to collect the same amount of goods as before. The high prices therefore tend to reduce the purchasing power of the consumers hence creating an advent of reduction in the consumption of the goods. It therefore follows that the prices of goods is indirectly proportional or correlated to the demand for the same goods (Gillespie & Gillespie, 2011).

On the account of the supply, the higher the prices of the goods in question, the higher the supply. The producers have the main goal of maximizing the profit which mainly occurs at the time when the prices are deemed to be high. The high prices induces them to increase their supply hence quantity supplied is usually directly proportional to the prices of the commodity. The levels of income also affect the quantity supplied and demanded. The higher the income levels the higher the quantity demanded (Lipsey & Harbury, 2014). Consumers’ purchasing power is usually raised in the event that their income levels increase hence they would demand more goods to be sold to them than before. This factor is also based upon the fact that the other factors remains constant which would mean that only income affects the demand in its sole capacity (Gillespie & Gillespie, 2011). Additionally, higher income makes the suppliers to avail more goods into the market for sale and hence the higher the income levels the higher the quantity supplied. The type of good also matters a lot which will depict its demand and supply variations. Inferior good for example will have high demand at the point when it prices increases while the normal good would have its demand low at the point where the prices rises (Welch & Welch, 2016).

Question 5 factors of shift in demand and supply curve

Increase in the efficiency in the factors of production causes the supply curve to shift to the left which means that more quantities would be supplied at lower prices. This notion happens because the efficiency has the effect of creating more goods at relatively lower costs which would mean that the prices would also be lowered as well making the company to get more clients which it can supply the goods (Lipsey & Harbury, 2014). The higher the income levels the higher the quantity demanded which makes the demand curve t shift to the right. Consumers’ purchasing power is usually raised in the event that their income levels increase hence they would demand more goods to be sold to them than before. This factor is also based upon the fact that the other factors remains constant which would mean that only income affects the demand in its sole capacity. Additionally, higher income makes the suppliers to avail more goods into the market for sale and hence the higher the income levels the higher the quantity supplied (Deepashree, 2013).

The type of good also matters a lot which will depict its demand and supply variations. Inferior good for example will have high demand at the point when it prices increases while the normal good would have its demand low at the point where the prices rises. Population decrease in the population has the effect of shifting the demand curve to the right making the quantity demanded be lower since the consumers have reduced a great deal. On the account of supply curve the supply curve is expected to shift to the left since the amount being supplied will be high at the higher prices caused by the less quantity supplied (Gillespie & Gillespie, 2011).

 

 

 

 

 

 

 

 

References

Deepashree,  (2013). General economics: For CA Common Proficiency Test (CPT). New Delhi: McGraw Hill Education.

Gillespie, A. & Gillespie, A. (2011). AS & A level economics through diagrams. Oxford: Oxford University Press.

Kilgore, M. A. (2002). Economics of natural resources management. New York: McGraw-Hill.

Lipsey, R. G. & Harbury, C. D. (2014). First principles of economics. Oxford: Oxford University Press.

Welch, P. J. & Welch, G. F. (2016). Economics: Theory & practice. New York: Wiley

 

 

 

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