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DEMAND ESTIMATION

Demand Estimation
Howard Dingle Jr.
Professor Xiaodong Wu
ECO 550
Economics and Globalization
January 25, 2016

Abstract
In this paper I will thoroughly compute the elasticities for each independent variable. I will
thoroughly determine the implications for each of the computed elasticities for the business in
terms of short-term and long-term pricing strategies. I will thoroughly recommend whether I
believe that this firm should or should not cut its price to increase its market share and provide
support for my recommendation. I will thoroughly plot the demand curve for the firm. I will
thoroughly plot the corresponding supply curve on the same graph using the following
MC/supply function Q = 5200 + 45P with the same prices. I will thoroughly determine the
equilibrium price and quantity. I will also thoroughly outline the significant factors that could
cause changes in supply and demand for the low-calorie, frozen microwavable food. I will
thoroughly 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. I will

DEMAND ESTIMATION

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. Finally, I will thoroughly
indicate the crucial factors that could cause rightward shifts and leftward shifts of the demand
and supply curves for the low-calorie, frozen microwavable food.

Demand Estimation
Compute the elasticities for each independent variable. Note: Write down all of your
calculations.
Demand estimation is a process that involves coming up with an estimate of the amount
of demand for a product or service. The estimate of demand is typically confined to a particular
period of time such as a month, quarter, or year. This equation has been estimated through linear
regression. The independent variables are: price of the product discussed in this assignment (P),
advertising expenditure (A), price of leading competitors product (C), per capita income (I) in
the area, and number of microwave ovens sold in the area. The standard errors of estimation are
in parentheses below the equation.
The following equation is the demand function:
QD = 20,000 - 10P + 1500A + 5PX + 10I
(5,234) (2.29) (525) (1.75) (1.5)
R2 = 0.85

n = 120

F = 35.25

The following values are the independent variables use as starting point:
Q = Quantity demanded
P (in cents) = Price of the product = 8,000
PX (in cents) = Price of leading competitors product = 9,000
I (in dollars) = Per capita income of the standard metropolitan statistical area
(SMSA) in which the supermarkets are located = 3,000
A (in dollars) = Monthly advertising expenditures = 64
Solution
QD = 20,000 - 10P + 1500A + 5PX + 10I
When P = 8000, A = 64, PX = 9000, I = 3000, using regression equation,

DEMAND ESTIMATION

QD = 20000 - 10(8000) + 1500(64) + 5(9000) + 10(3000)


QD = 20000 - 80000 + 96000 + 45000 + 30000
QD = 111,000
Price elasticity = (DQ/DP)*(P/Q)
From regression equation, DQ/DP = -10
EP = (-10) * (8000 / 111000) = -0.72
EA = 1500 * (64 / 111000) = 0.86
EPX = 5 * (9000 / 111000) = 0.41
EI = -10* (3000 / 111000) = 0.27
Determine the implications for each of the computed elasticities for the business in terms of
short-term and long-term pricing strategies.
Price elasticity of demand is the ratio of percentage change in quantity demanded to the
percentage change in price. Price elasticity is -0.72 which means a 1% increase in price of the
product causes quantity demanded to drop by 0.72%. So, the demand of the product is relatively
inelastic. Therefore, increase in price may not have large impact on the customers. Advertising
elasticity measure the responsiveness of sales to changes in advertising expenditures as measured
by ratio of percentage change in sales to the percentage change in adverting expenditures.
Advertisement elasticity is 0.86, meaning 1% in advertising expenses increases quality
demanded by on 0.86% which means demand is relatively inelastic to advertising. Therefore,
more advertisement wont necessarily mean that firm can raise the price because it still could
drive customers away. Cross-price elasticity is 0.41 which means if price of competitor product
increases by 1% then quality demanded of this product increases by 0.41%. So, product is
relatively inelastic to competitors price and the firm should not worry about the competitor as
their pricing wont have any major effect on its own sales. Income-elasticity is 0.27 which
means 1% rise in average income in the area boosts quantity demanded by 0.27%. So, product is
relatively inelastic in this aspect.
Recommend whether you believe that this firm should or should not cut its price to
increase its market share. Provide support for your recommendation.
Total Revenue Test: TR=P*Q

DEMAND ESTIMATION
According to research demand estimation is commonly used so that it can help with
production. Before a company puts a large amount of money into producing a product, it can
have an estimate of the demand for that product. If the demand in the area is for 20,000 units
they should most likely not invest in making 1 million units during that time frame. This way
more of your capital can stay on hand instead of being invested into inventory (2008).
Assume that all the factors affecting demand in this model remain the same, but that the
price has changed. Further assume that the price changes are 100, 200, 300, 400, 500, 600
dollars.
a. Plot the demand curve for the firm.
General Mills, Inc.: Revenues & Profitability

b. Plot the corresponding supply curve on the same graph using the supply function
Q = 5200 + 45P with the same prices.
Q = 5200 + 45P
QS - 5200 = 45P, 45P = Q- 5200
P (Supply) = (Q-5200)/45
5200 + 45P = 20,000 - 10P + 1500*64 + 5*9000 + 10*3000
P = (20000+1500*64+5*9000+10*3000-5200)/55 = 3378.182
c. Determine the equilibrium price and quantity.
General Mills recorded revenues of $17,910m in the fiscal year ending May 2014, an
increase of .8% compared to fiscal 2013. Its net income was $1,824m in fiscal 2014,
compared to a net income of $1,855m in the preceding year.

DEMAND ESTIMATION

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.
General Mills is engaged in the manufacturing and marketing of branded consumer foods.
The company also supplies branded and unbranded food products to the foodservice and
commercial baking industries. It manufactures products in 16 countries and markets them in
more than 100 countries.

Market Value - The United States frozen food market grew by 1% in 2013 to

reach a value of $33,441.3 million.


Market Value Forecast - In 2018, the United States frozen food market is forecast

to have a value of $34,253.6 million, an increase of 2.4% since 2013.


Market Volume - The United States frozen food market grew by 1.3% in 2013 to

reach a volume of 7,135.5 million kilograms.


Market Volume Forecast - In 2018, the United States frozen food market is
forecast to have a volume of 7,172.5 million kilograms, an increase of 0.5% since

2013.
Category Segmentation - Frozen ready meals is the largest segment of the frozen

food market in the United States, accounting for 35.7% of the market's total value.
Geography Segmentation - The United States accounts for 27.9% of the global

frozen food market value.


Market Share - Nestle S.A. is the leading player in the United States frozen food

market, generating a 20.2% share of the market's value.


Market Rivalry - Frozen food products are largely undifferentiated, making it
more difficult for market players to retain buyers, and forcing them to compete
through pricing and end user brand loyalty, thus forcing buyers to purchase what
the consumer wants.

DEMAND ESTIMATION

Indicate the crucial factors that could cause rightward shifts and leftward shifts of the
demand and supply curves.
Sales for frozen pizza seem to have, well, frozen, over the past five years, and no thaw is
expected soon. Sales grew by only 0.2% in 2014 for a total of $5.5 billion and will likely remain
flat into 2019. According to research, stagnant sales on a somewhat improved economy as more
customers opt for costlier restaurant, takeout, delivery pizza over more affordable froze pizza
(2015).
General Mills has two international joint ventures: Cereal Partners Worldwide (CPW) and
Haagen-Dazs Japan (HDJ). CPW is a 50-50 partnership with Nestle, which manufactures and
markets breakfast cereals in over 130 countries and republics outside the US and Canada. CPW
also markets cereal bars in several European countries and manufactures private label cereals for
customers in the UK. HDJ, in which General Mills has 50% equity interest, manufactures,
distributes, and markets Haagen-Dazs ice cream products and frozen novelties in Japan.

DEMAND ESTIMATION
General Mills, Inc.: Assets & Liabilities

DEMAND ESTIMATION

References
Authur, Luke, (2008 October, 21), What Is Demand Estimation? Houston Chronicle,
Retrieved from,
http://smallbusiness.chron.com/demand-estimation-24651.html
Frozen Food in the United States: September 2014. (2014). Frozen Food Industry Profile:
United States, 1-36, Retrieved from,
http://eds.b.ebscohost.com/eds/pdfviewer/pdfviewer?sid=0fcdd4a0-5726-4477-a40e8e2d74f73a20%40sessionmgr112&vid=41&hid=126
Hynum, Rick, (2015 August, 31). The 2015 Pizza Power Report, PMQ Pizza Magazine,
Retrieved from,
http://www.pmq.com/December-2014/Pizza-PowerThe-2015-Pizza-Power-Report/

DEMAND ESTIMATION