Compute The Elasticities For Each Independent Variable.

Compute the elasticities for each independent variable. Note: Write

Determine the elasticities for each independent variable based on the demand function QD=-P+15A+25PX+10L, including all calculation details. Analyze the implications of each elasticity in terms of short-term and long-term pricing and marketing strategies. Recommend whether the firm should cut its price to increase market share, supporting your decision with elasticity interpretations. Finally, examine how various factors influence demand and supply, including the effect of shifts in these curves, and discuss the potential impacts of changing market conditions on demand and supply for the product.

Paper For Above instruction

The analysis of demand elasticity forms a fundamental part of understanding how a firm's pricing, advertising, and strategic decisions influence market dynamics. In this study, we explore the various elasticities associated with a demand function and interpret their implications for short-term and long-term business strategies. Additionally, the discussion spans factors influencing demand and supply, as well as the significance of shifts in these curves, providing comprehensive insights into market behavior and strategic responses.

Introduction

Elasticity measures the responsiveness of quantity demanded or supplied to changes in price, income, advertising, or competitor prices. It is a crucial concept in economics for formulating effective pricing policies and understanding market reactions. This paper computes the elasticities for different variables based on a specified demand function, interprets their implications, and evaluates strategic recommendations for the firm. It also discusses factors influencing demand and supply, as well as how shifts in these curves affect market equilibrium and business outcomes.

Calculating Price Elasticity of Demand

The primary demand function under consideration is QD = -P + 15A + 25PX + 10L. To compute the price elasticity of demand (PEoD), we first substitute the given values: price P = 640, advertising A = 640, competitor price PX = 3, and per capita income L = 5,000. Substituting into the demand function:

QD = -640 + 15(640) + 25(3) + 10(5000) = -640 + 9600 + 75 + 50,000 = 37,035

The percentage change in QD relative to a change in P is calculated as:

PEoD = (% Change in Quantity Demanded) / (% Change in Price) = (dQ / dP) * (P / Q)

From the demand function, dQ / dP = -1. Therefore, the elasticity becomes:

PEoD = -1 (P / Q) = -1 (640 / 37,035) ≈ -0.0173

This indicates that demand is inelastic with respect to price since the absolute value is less than 1. A 1% increase in price would result in approximately a 0.0173% decrease in quantity demanded, suggesting limited sensitivity in the short term but some responsiveness in the long term if other factors change.

Advertising Elasticity

Advertising elasticity indicates how demand responds to changes in advertising expenditure. The function for demand related to advertising A is given as QD = -2000 + 15A. Substituting A = 640, we find:

QD = -2000 + 15(640) = -2000 + 9600 = 7600

The advertising elasticity is calculated as:

Elasticity_A = (dQ / dA) (A / Q) = 15 (640 / 7600) ≈ 15 * 0.0842 ≈ 1.263

This positive elasticity greater than 1 suggests that demand is elastic with respect to advertising. A 1% increase in advertising expenditure could lead to approximately a 1.26% increase in quantity demanded, highlighting the importance of advertising as a strategic tool in influencing demand both short-term and long-term.

Competitor’s Price Elasticity

The demand function reflecting the competitor's price PX shows QD = -2000 + 25PX. Using PX = 3, we get:

QD = -2000 + 25(3) = -2000 + 75 = -1925

The elasticity concerning competitor's price is:

Elasticity_Competitor = (dQ / dPX) (PX / Q) = 25 (3 / -1925) ≈ 25 * (-0.00156) ≈ -0.039

The negative sign indicates an inverse relationship; however, the magnitude (~0.039) indicates demand is very inelastic concerning competitors' pricing. A change in the competing firm's price has minor effects on demand, signaling limited strategic leverage from adjusting own pricing in response to competitors in this context.

Per Capita Income Elasticity

The function related to income L is QD = -2000 + 10L. With L = 5,000, we have:

QD = -2000 + 10(5000) = -2000 + 50,000 = 48,000

The income elasticity is calculated as:

Elasticity_I = (dQ / dL) (L / Q) = 10 (5000 / 48000) ≈ 10 * 0.1042 ≈ 1.042

The positive elasticity slightly above 1 implies that demand is income elastic. Changes in per capita income significantly influence demand, both in the short term and long term. An increase in income will lead to a proportionally larger increase in quantity demanded, making income a vital factor in long-term strategic planning.

Implications of the Elasticities

The calculated elasticities provide insights into how different variables influence demand and inform strategic decisions:

  • Price elasticity (-0.0173): Demand is highly inelastic; price increases generally lead to revenue losses, suggesting the firm should be cautious with price hikes.
  • Advertising elasticity (1.263): Demand responds strongly to advertising; increased advertising spend can substantially boost demand in both short and long term, indicating advertising as an effective growth tool.
  • Competitor’s elasticity (-0.039): Demand is largely insensitive to the competitor’s price changes; the firm may prioritize other strategies over pricing adjustments to respond to competitor activity.
  • Income elasticity (1.042): Demand sensitive to income variations; in prosperous periods, demand will likely increase, guiding long-term expansion plans.

Pricing Strategy Recommendations

Given the demand is inelastic with respect to price (elasticity ≈ -0.0173), raising prices would result in a decrease in total revenue, suggesting the firm should avoid price increases. Conversely, reducing prices could expand market share, especially since demand is more responsive to advertising and income changes. Therefore, the firm should consider lowering prices modestly to attract more consumers, leading to increased revenues, supported by the price elasticity being less than -1.

Additional Factors and Market Dynamics

Market factors such as consumer income, preferences, technological innovations, and regulatory changes significantly influence demand and supply. For example, an economic downturn reducing per capita income might lower demand despite elasticity predictions. Conversely, technological improvements can shift supply curves outward, lowering costs and prices.

Shifts in demand can be caused by enhanced consumer taste, increased advertising, or emerging competitors, while supply shifts may result from changes in production costs or input availability. Recognizing these factors enables the firm to adapt its strategies proactively and sustain market competitiveness.

Conclusion

The computed elasticities reveal that demand is relatively insensitive to price but highly responsive to advertising and income changes. The firm should prioritize advertising and income-driven marketing strategies over price hikes to maximize revenue and market share. Additionally, understanding the minimal impact of competitor pricing changes suggests that internal factors like advertising and income will have more significant long-term effects. Accurate analysis of elasticity thus guides strategic decisions in pricing, marketing, and capacity planning, ensuring adaptability in a dynamic market environment.

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