Compute The Elasticities For Each Independent Variabl 560972

Compute the elasticities for each independent variable. Note: Write down all of your calculations. QD=-P+15A+25PX+10L Substituting the variables in the equation to get the total quantity demanded QD=-) +15(640) + 25(3) +10(5,000) QD=-,000+9,600+75+50,000=37,675 Price elasticity = PEoD = (% Change in Quantity Demanded) / (% Change in Price) QD=37,,675=-,675+2000+20,,675 N= (-) /37475) Elasticity=-0.335 Advertising elasticity Qd=-2000+15A 37,675=-2000+15(640) =37,675=30,075 Elasticity= (/30,075) =0.32 Competitor’s elasticity QD=-2000,675-75+2,000=39,600 Elasticity= (25) (3/39,600) =0.0019 Per capita income elasticity QD=-2000+10L 37,675=-2000+50000= 37,675,000 =-10,525 Elasticity= (/10525) =-4.. Determine the implications for each of the computed elasticities for the business in terms of short term and long-term pricing strategies. Provide a rationale in which you cite your results. PRICE ELASTICITY The elasticity is negative in nature meaning that it is less than one which indicates inelasticity with regard to price. It also indicates that there would be an effect in the price change both in the short term and the long term. Advertising elasticity The value is positive in nature meaning that the product is elastic to advertising; this also means that since it is less than one, there is an effect on the quantity demanded for the amount of money used in advertising both in the short term and the long run. Competitor’s elasticity The product is elastic to the competitors pricing and this means that if the company changes its prices in the short term or long term, the demand will change. Per capita income elasticity This product is perfectly inelastic to the per capita income and this means that a change of the per capita income both in the short term or long term shall not lead to an increased demand for the product all other factors held constant 3. Recommend whether you believe that this firm should or should not cut its price to increase its market share. Provide support for your recommendation. The firm should reduce its prices because the elasticity is less than -1 meaning an increase in prices would reduce the quantity demanded and hence the total revenues as indicate by this equation TR = PQ dTR/dP = Q(dP/dP) + P(dQ/dP) (1/Q)(dTR/dP) = (dP/dP) + (P/Q) (dQ/dP) = = 1 + E If E 0,Means a decrease in price will lead to increased revenues and quantity demanded. 4. Assume that all the factors affecting demand in this model remain the same, but that the price has changed. Further assume that the prices are 100, 200, 300, 400, 500, 600 dollars. QD = -2,P + 15A + 25PX + 10I We substitute the values in the equation to get the QD of various prices then we shall plot the figures to get the demand curve QD=-) +15(640) +25(3) +10(5,000) =-+15(640) +25(3) ) =47,675 for P=100 =-+9600+75+50000=37675, For P=200 =-+9600+75+50000=27675, For P=300 =-+9600+75+50000=17675, for P=400 =-+9600+75+50000=7675, for P=500 =-+9600+75+50000=-2325.for P=600 DEMAND CURVE (Quantity demanded on X axis and Price on Y-axis) b) Plot the corresponding supply curve on the same graph using the following MC/supply function Q = -7909.89 + 79.0989P with the same prices. PRICES=100, 200, 300, 400, 500 AND 600 dollars substituting the prices in the equation Q=-7909.89+79.0989P =-7909.89+79.) =0.0 units =-7909.89+79.) =7,909.89units =-7909.89+79.) =15,819.78 units =-7909.89+79.) =23,729.31 units =-7909.89+79.) =31,639.56 units =-7909.89+79.) =39,549.45units THE SUPPLY CURVE (quantity on X-axis and price on Y-axis) c) Determine the equilibrium price and quantity. EQULIBRIUM CURVE Price on the Y axis and quantity on the Y-axis Price The equilibrium Price=400 dollars The equilibrium quantity=23730 units d) 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. Factors affecting demand · Price of the commodity · Income of the consumers · Consumer’s tastes and preferences · Consumer awareness · Political stability · Price of other related commodities · Speculation of future price changes · Government regulations and laws · Climatic or seasonal factors · Persuasive advertising · Population size and distribution Factors affecting supply · Own price of the commodity · Price of other related commodities · Prices of production factors · Goals of the producing firm · Technology state of the firm · Nature of events · The time span either short run or long run · The supply of production inputs · Tax subsidies and tax laws Both long term and short term changes have positively or negatively impacted the demands and supply of market products, the primary factor being the price of the commodity whereby an increase in prices decreases the demand whereas the same effect increases the supply of the commodity. 5. Indicate the crucial factors that could cause rightward shifts and leftward shifts of the demand and supply curves. Shifts in the supply curve are brought about by changes in factors other than the price of the commodity. A shift in supply is indicated by an entire movement (shift) of the supply curve to the right (downwards) or to the left (upwards) of the original curve. Shifts in the demand curve are brought about by the changes in factors like taste and preferences, prices of other related commodities, income etc other than the price of the commodity. The change in the demand for the commodity is indicated by a shift to the right or left of the original demand curve. References Karlan, D. and Zinman, J (2005). Elasticities of Demand for Consumer Credit: Center discussion paper No.926, Economic Growth Centre. Yale University. Ibrahim, G; Kedir, A and Torres, S (2007) Household level Credit Constraint in Urban Ethiopia : University of Leicester, Department of Economics, Working Paper number 07/03 Bardhan, P (ed) (1989 ). The Economic Theory of Agrarian Institutions : Claredon Press. Adelman and Morris (1968 ) Performance Criteria for Evaluating Economic Development Potential: An Operational Approach Quarterly Journal of Economics, 82(2), 260-80. CPA Study Pack on Economics: Strathmore university, 2006. Complete Learning Exercise D on p. 349 in your textbook.

Paper For Above instruction

The given assignment involves analyzing the elasticities of demand with respect to various independent variables, understanding their implications for business strategies, and applying economic principles to determine optimal pricing and production decisions. This comprehensive evaluation begins with calculating the price elasticity of demand using the demand function and subsequently interprets each elasticity measure, considering short-term and long-term strategic responses.

In the initial step, the demand function provided is QD = -P + 15A + 25PX + 10L. For calculation purposes, the variables are substituted with their respective values: A = 640, PX = 3, L = 5,000. This substitution yields a total quantity demanded of QD = -10 + (15)(640) + (25)(3) + (10)(5000) = -10 + 9600 + 75 + 50000 = 59,665 units. The elasticity of demand with respect to price (PEoD) is computed using the formula: PEoD = (% Change in Quantity Demanded) / (% Change in Price). To determine this, the initial quantity demanded is calculated as 37,675 units, as per the provided data, giving a basis to evaluate the percentage change and elasticity coefficient.

The price elasticity coefficient calculated is approximately -0.335, indicating that demand is inelastic concerning price; a 1% change in price results in roughly a 0.335% change in quantity demanded. Because the absolute value is less than 1, demand elasticity suggests that price increases would lead to decreases in total revenue in both the short and long term. Correspondingly, the elasticity with respect to advertising (A) is positive (0.32), implying that increased advertising expenditures would positively influence the demand, but the effect is relatively modest given the elasticity value less than one.

The elasticity concerning competitors’ prices (PX) is extremely small (0.0019), denoting that demand is almost perfectly inelastic to competitors' pricing within the observed data range. This indicates that changes in competitors' prices have negligible impact on the firm's demand. Meanwhile, the elasticity concerning per capita income (L) is highly negative (-4), which signals that demand is perfectly income elastic in this model. A decrease in per capita income would dramatically decrease demand and vice versa, suggesting that consumer income levels are critical drivers impacting demand significantly over any horizon.

The strategic implications of these elasticities are substantial. For price elasticity, inelastic demand suggests that the firm could possibly increase prices without severely reducing demand, thus maximizing revenue in the short and long term. However, because demand is relatively insensitive to price changes, aggressive price cuts aimed at expanding market share could also be justified if they lead to increased total revenues due to the elasticity coefficient below -1.

Regarding advertising, since the elasticity is positive but less than one, investing in advertising would modestly increase demand, neither dramatically nor insignificantly. The company should consider maintaining or slightly increasing advertising budgets to capitalize on this elasticity, especially when seeking to boost revenues without altering prices significantly.

The near-zero elasticity to competitors' prices suggests that competitive pricing strategies in isolation may have limited impact on demand. Therefore, competitive pricing may require supplementary strategies, such as product differentiation or branding. Conversely, the high income elasticity underscores that demand is highly sensitive to income changes; economic downturns could noticeably reduce demand, whereas economic growth could significantly increase demand.

Based on these insights, it appears prudent for the firm to consider lowering prices slightly to stimulate demand, given that price elasticity is less than -1 in magnitude, which means total revenues could increase with a price reduction. This aligns with the basic economic principle that when demand is elastic, a price decrease fosters greater total revenues and market penetration. Conversely, increasing prices would likely diminish total revenues due to demand inelasticity, unless the company aims to capitalize on higher margins in a niche market.

The subsequent analysis involves assessing how different price points affect demand. By substituting prices of 100, 200, 300, 400, 500, and 600 dollars into the demand function, the respective quantities demanded are computed, resulting in a demand curve. For example, at a price of 100 dollars, QD approximates 47,675 units, whereas at 600 dollars, demand drops to negative or negligible levels, highlighting the decline in quantity demanded with increasing prices.

Similarly, the supply curve is obtained through the given supply function Q = -7909.89 + 79.0989P, with corresponding quantities calculated at the same prices. The intersection of the demand and supply curves indicates an equilibrium price of approximately 400 dollars and an equilibrium quantity of about 23,730 units. This equilibrium point informs the optimal pricing strategy, balancing supply and demand considerations.

Several factors influence shifts in demand and supply, including consumer income, tastes, prices of related commodities, technological advances, government policies, seasonal factors, and broader economic conditions. In the short term, demand and supply are often affected by price changes, while long-term shifts are driven by structural factors such as technological innovation or demographic changes. For instance, increased consumer income or advertising efforts can shift demand to the right, increasing both price and quantity, whereas technological improvements in production can shift supply outward, lowering prices and increasing quantities supplied.

Shifts in demand are also driven by changes in preferences or external factors like climatic conditions, whereas supply shifts may result from input cost variations, technological progress, or regulatory changes. These shifts are essential for understanding potential market dynamics and formulating responsive strategies. For example, a rightward shift in demand coupled with an outward shift in supply would increase equilibrium quantity, with ambiguous effects on equilibrium price depending on the magnitude of shifts.

Overall, companies need to monitor these factors continuously. Strategic management should incorporate flexible pricing, production adjustments, and promotional efforts to adapt to market movements. For example, during economic downturns, declining demand due to reduced income might necessitate lower prices or product diversification, whereas in prosperous times, premium pricing could maximize profits. Understanding how external shocks and internal business decisions influence demand and supply curves enhances the ability to make informed, proactive choices.

References

• Karlan, D., & Zinman, J. (2005). Elasticities of Demand for Consumer Credit: Center discussion paper No. 926. Yale University.
• Ibrahim, G., Kedir, A., & Torres, S. (2007). Household level Credit Constraint in Urban Ethiopia. University of Leicester, Department of Economics, Working Paper number 07/03.
• Bardhan, P. (1989). The Economic Theory of Agrarian Institutions. Clarendon Press.
• Adelman, H., & Morris, C. (1968). Performance Criteria for Evaluating Economic Development Potential: An Operational Approach. Quarterly Journal of Economics, 82(2), 260-80.
• Strathmore University. (2006). CPA Study Pack on Economics.
• Perloff, J. M. (2015). Microeconomics (7th ed.). Pearson Education.
• Pindyck, R. S., & Rubinfeld, D. L. (2018). Microeconomics (9th ed.). Pearson.
• Nicholson, W., & Snyder, C. (2017). Microeconomic Theory: Basic Principles and Extensions. Cengage Learning.
• Varian, H. R. (2014). Intermediate Microeconomics: A Modern Approach. W.W. Norton & Company.
• McConnell, C. R., Brue, S. L., & Flynn, S. M. (2018). Microeconomics (20th ed.). McGraw-Hill Education.