Frozen Food Demand
Compute the elasticity's for each independent variable. Note: Write down all of your calculations.
Elasticity= % change in quantity demanded / % change in independent variable
Quantity
Demanded
Price in cents
Price of comp. In cents
Per Capita
Income
Monthly advert.
exp
Number of Microwaves
sold
Formula Inputs
1% Change in Price
Quantity
Demanded
Price in cents
Price of comp. In cents
Per Capita
Income
Monthly advert.
exp
Number of Microwaves
sold
Formula Inputs
Percentage Change in QD=
Percentage Change in Price
Elasticity = % change in QD/
% change in price
1% Change in Price of Comp.
Quantity
Demanded
Price in cents
Price of comp. In cents
Per Capita
Income
Monthly advert.
exp
Number of Microwaves
sold
17195
-5200
-21000
12120
29150
2000
Formula Inputs
5,500
10000
Percentage Change in QD=
17195/17075
0.00703
Percentage Change in Price
0.01
Elasticity = % change in QD/
% change in price of comp
0.702782
1% Change in Income
Quantity
Demanded
Price in cents
Price of comp. In cents
Per Capita
Income
Monthly advert.
exp
Number of Microwaves
sold
17366.5
-5200
-21000
12000
29441.5
2000
Formula Inputs
5,555
10000
Percentage Change in QD=
17366.5/17075
0.01707
Percentage Change in Price
0.01
Elasticity = % change in QD/
% change in price of income
1.707174
1% Change in Advert. Exp.
Quantity
Demanded
Price in cents
Price of comp. In cents
Per Capita
Income
Monthly advert.
exp
Number of Microwaves
sold
17095
-5200
-21000
12000
29150
2020
Formula Inputs
5,500
10100
Percentage Change in QD=
17095/17075
0.00117
Percentage Change in Price
0.01
Elasticity = % change in QD/
% change in price of income
0.11713
1% Change in Microwave
Quantity
Demanded
Price in cents
Price of comp. In cents
Per Capita
Income
Monthly advert.
exp
Number of Microwaves
sold
17096.25
-5200
-21000
12000
29150
2020
Formula Inputs
5,500
10100
Percentage Change in QD=
17096.25/17075
0.00124
Percentage Change in Price
0.01
Elasticity = % change in QD/
% change in price of income
0.124451
Determine the implications for each of the computed elasticity's for the business in terms of short-term and long-term pricing strategies. Provide a rationale in which you cite your results.
It appears that price is a significant factor as it relates to quantity demanded in the short-term. The high elasticity indicates that consumers are very price conscious as it relates to the product. This is warranted as the company appears to operate in a perfectly competitive or monopolistically competitive market. As a result the firm is a price taker as it relates to its product offerings. Due to the lack of differentiation with the product, a 1% price increase will result in a 1.2% decline in demand. The same is true for the price of competitor's products. As competitors increase the price of their goods relative to the firm, demand will likely increase.
The elasticity of advertising expense also confirms the theory above. A 1% increase in advertising only results in .01% increase in quantity demanded. This further indicates that the market is characterized by very little differentiation in regards to overall product offerings. Consumers of the company's products are therefore price conscious.
The price elasticity of income also provides evidence of the drivers of growth for the firm's products. Income elasticity is the highest among all the factors present within the regression. A 1% income increase corresponds to a 1.7% increase in demand for the firm's products. This evidence suggests that the product is a "normal good." As income increases so too does the demand for the product.
Finally, the elasticity of microwave ovens sold is particularly interesting. Intuitively, one would believe that microwave dinners and microwave evens are complements, similar in concept to peanut butter and jelly. However, it appears that the number of microwaves sold does not provide a large boost in quantity demanded.
As it relates to pricing strategies, over the long-term, it appears the market for microwave dinners is fragmented without a large price leader. Consumers are particularly prone to price changes in the industry products. Consumers will therefore reduce their demand as prices increase and corresponding increase demand as price drops. Unfortunately, the firm appears to be a price taker in the industry, as the overall market for microwave dinners will ultimately determine the price of the firm's products. In the event that market participants exit the industry, the firm may have the ability to increase prices in the future. As it stands currently however, price increases will be detrimental to the firm.
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 not cut prices to increase market share. Due to the fragmented nature of the market, a price cut will only insulate a price war between market participants. This is due primarily to the large inverse relationship between price and quantity demanded. A price decline in the short-term will increase the demand for the product. However, competitors will soon follow suit by lowering their own prices to recover lost market share. As more competitors engage in this behavior, the price will decline to the point were no firm within the industry will earn adequate returns. A "new normal" will be set that ultimately lowers price of all products within the industry. Depending on the severity of the price...
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