Demand Estimation Eco 550 Walaa Yousif Mohammad Sumadi 24 Ja

Demand Estimationeco 550walaa Yousifmohammad Sumadi24 Januar

Demand estimation involves analyzing the relationship between various economic factors and the quantity demanded of a product. The core components include demand curve derivation, elasticity calculation, and understanding how different factors influence demand and supply. This comprehensive analysis considers specific data points such as prices, income levels, advertising expenditure, and their impact on demand elasticity. Furthermore, it explores business implications related to price and marketing strategies based on demand elasticity measures, along with the equilibrium point where market demand equals supply. The factors that cause shifts in demand and supply curves are also examined, providing insights into how external changes can affect market equilibrium.

Paper For Above instruction

Demand estimation is a cornerstone of microeconomic analysis that provides vital insights into how various factors influence consumer behavior and market dynamics. In this context, the demand function is specified as Q_D = -2P + 15A + 25P_X + 10I, encapsulating the relationships between quantity demanded and key variables such as price, advertising expenditure, competitor's price, and income levels. This functional form forms the basis for deriving elasticity measures, understanding strategic pricing decisions, and analyzing market equilibrium.

To begin with, the demand figure can be calculated by substituting known values into the demand function. Using the given data—product price (P) = 200, competitor’s price (P_X) = 300, income (I) = 5000, and advertising expenditure (A) = 640—the level of demand (Q_D) is computed as follows:

Q_D = -2(200) + 15(640) + 25(300) + 10(5000) = -400 + 9600 + 7500 + 50,000 = 45,100

Understanding elasticity is crucial for making informed business decisions. Price elasticity of demand (E_P) measures how sensitive the quantity demanded is to changes in price and is calculated as:

E_P = - (dQ/dP) * (P/Q)

From the demand equation, the partial derivative with respect to price is dQ/dP = -2. So, substituting the values:

E_P = - (-2) * (200 / 45,100) ≈ 0.44346

This value indicates inelastic demand because the absolute value is less than one, signaling that price changes will not significantly affect demand.

Similarly, the elasticity of demand with respect to advertisement expenditure (A) is calculated as:

E_A = (dQ/dA) (A/Q) = 15 (640 / 45,100) ≈ 0.21286

This suggests that demand is relatively inelastic concerning advertising expenditure, implying that increasing advertising investment yields limited additional demand.

Cross-price elasticity with respect to the competitor’s price (P_X) is assessed via:

E_X = (dQ/dP_X) (P_X / Q) = 25 (300 / 45,100) ≈ 0.1663

This indicates a weak substitute relationship; demand is somewhat responsive to the competitor’s pricing but remains inelastic, so price changes among competitors have limited impact on demand for the product.

Income elasticity of demand (E_I) is given by:

E_I = (dQ/dI) (I / Q) = 10 (5000 / 45,100) ≈ 1.10865

Since this elasticity exceeds one, the demand is elastic with respect to income, highlighting that higher income levels significantly increase demand. Consequently, targeting higher-income segments can amplify sales volumes and profits.

Implications for business strategies are derived from these elasticity measures. Demand's inelastic nature regarding price indicates that the manufacturer has significant pricing power; raising prices could increase total revenue without substantial loss in quantity demanded. Conversely, because demand is inelastic concerning advertising, aggressive marketing campaigns might not be cost-effective. The firm should therefore judiciously allocate advertising funds, focusing on areas with higher responsiveness. The weak cross-price response suggests that price competition may be limited, allowing the firm to set prices without heavily fearing substitute products’ influence.

Moreover, the high income elasticity signifies that the firm should orient marketing efforts toward higher-income areas. Such target markets are more likely to exhibit increased demand levels, enhancing profitability. For sales to be maximized, the firm must consider the demand elasticity when planning pricing strategies. A decline in price would be advantageous only if demand is elastic; in this case, since it is inelastic, increasing prices could be more profitable.

Determining the market equilibrium involves equating demand and supply. The given demand curve is:

Q_D = 65100 - 100P

and the supply curve is:

Q_S = -7909.89 + 79.0989 P

At equilibrium, Q_D = Q_S:

65100 - 100P = -7909.89 + 79.0989 P

Simplifying yields:

73009.89 = 179.0989 P

Thus, the equilibrium price P_* is approximately $408, and corresponding quantity is about 24,335 units, establishing the point where market forces balance.

External factors influencing demand and supply are diverse. Variables such as consumer income, advertising levels, substitute and complementary goods’ prices, and future expectations cause demand shifts. Similarly, input prices, number of competitors, and technological changes impact supply. Rightward shifts in demand might result from income increases, higher substitute prices, or increased advertising, while leftward shifts often stem from income declines or reduced advertising.

In conclusion, demand estimation using elasticity principles offers strategic insights for optimizing pricing, marketing, and production decisions. Recognizing whether demand is elastic or inelastic to various factors enables businesses to tailor their approaches effectively, maximizing profitability and market share while responding adeptly to external market changes.

References

• Snyder, C., & Nicholson, W. (2008). Microeconomic Theory: Basic Principles and Extensions (10th ed.). Cengage Learning.
• Mankiw, G. N. (2006). Principles of Microeconomics (4th ed.). Cengage Learning.
• Stiglitz, J. E., & Walsh, C. E. (2007). Economics (4th ed.). W.W. Norton & Company.
• Varian, H. R. (2014). Intermediate Microeconomics: A Modern Approach (9th ed.). W.W. Norton & Company.
• Perloff, J. M. (2012). Microeconomics: Theory and Applications with Calculus. Pearson.
• Krugman, P. R., & Wells, R. (2012). Microeconomics (3rd ed.). Worth Publishers.
• Frank, R. H., & Bernanke, B. S. (2013). Principles of Microeconomics (6th ed.). McGraw-Hill Education.
• Gordon, R. J. (2016). Microeconomics. Harvard University Press.
• Pindyck, R. S., & Rubinfeld, D. L. (2012). Microeconomics (8th ed.). Pearson.
• Nicholson, W., & Snyder, C. (2014). Microeconomic Theory (11th ed.). Cengage Learning.