Saturday, January 25, 2014

Demand Estimation



Contents









ABSTRACT
A leading microwavable Widgets manufacturer wants to predict the demand behavior of the product after collecting data from 26 supermarkets across the USA. Every manufacturing company has the dire need to understand the impact of the price change on the supply and demand for their product. A detailed study has been carried out considering various parameters acting together and individually to analyze the impact of each of them on the demand and supply of the product.
This report doesn’t expose or talk about the raw data that was collected to analyze and derive a demand equation that would better explain the relationship between the independent variable price and the dependent variable Quantity of supply. Albeit various other independent variables are used in the study, the equation would be directly put to use to study the implications. Three different scenarios are discussed with excel support to illustrate the impact of various parameters on the demand. Recommendations and suggestions are made based on the discoveries resulted out of the study.
Elasticities of independent variables are calculated with the predetermined elasticity coefficients to determine whether those independent variables have positive or negative influence on the demand.
Graphs are also plotted to better illustrate the behavior of the demand curve across the scenarios discussed.

CHAPTER 0NE

1.1  Executive Summary

1.    Determine if a microwavable Widgets product would have sustained growth of demand against the increasing price, increasing competitor's price and recession. The statistical data representation with the help of charts and excel data, calculations are used to better illustrate the effect of each of these independent variables on the demand.
2.      Recommendations and suggestions are made to sustain the demand for the product in the face of recession, inflation and increasing prices change and competitors price change.
3.      This report is supported by an excel file that would illustrate the behavior of demand under the influence of various independent variables that would impact the same.

1.2  Problem Statement

Information Domain:
This report doesn’t include or discuss about the information that was collected from 26 supermarkets across the USA. The equations derived from the analysis of these data is used to calculate the supply in UOM EA for the price change at 100 cent interval. The demand equation that was derived was Supply (EA) = 20,000 – 10xP   + 1500xA   + 5xPx   + 10xI. Similarly, we have used various other coefficients for independent variables like Competitors Price change, Per Capita Income and Advertising expenses.
CHAPTER TWO

2.1 Scenario 1

Independent variables like Price change, Competitors Price change, Per Capita Income, and Monthly Advertising Expenses are used to analyze the behavior of the demand. The “Scenario 1” sheet in the excel document  calculates the supply against varying price change, competitor's price change and per capita income.
The elasticities were calculated for the price change, competitive price and per capita income. Elasticity of an independent variable is the ratio of the percentage change in supply quantity to the percentage change in the value of the independent variable.
Mathematically Price change Elasticity = [(Qnew – Qold)/(Qold)] / [(Pnew – Pold)/(Pold)]
To avoid circular reference, we would be calculating the ratio of the rate of change separately from the corresponding independent variable coefficients.
Demand Equation when all variables are constant except the price variable is
QuantityCAR  = 20000 - 10x Price (10 is the coefficient for the independent variable in the demand equation).
A comprehensive demand equation that includes all the independent variables would look something like this.
QuantityCAR  = (20000 - 10 x Price) + (10 x Competeiter Price) + ( 10 x Per Capita Income) + (1500 x Monthly Advertising Expenses) .
The coefficients for the independent variables are as follows
Independent Variables
Coefficients
Price
-10
Competitor Price
5
Per Capita Income
10
Monthly Advertising Expenses
1500

The coefficients are nothing but the ratio between the quantity change and the corresponding independent variable change.
In the scenario 1 the change interval and the trends of change in any of the independent variables were uniform. Either the values are increased or decreased with an interval of standard error rate change that are calculated separately in the excel sheet. As a result the Quantity values followed an increasing trend.
The elasticities are calculated in the price, the competitor’s price, per capita income and monthly advertisement expenses.

2.2 Demand behavior in Scenario 1

In the Scenario 1 we have allowed the Price, Competitor’s Price and Per Capita income independent variables to be affected with a fixed interval. So the demand increased even though the price was raised along with the increase in the Per Capita Income and Competitor Price variables. This leaves the consumer with no choice but to adapt to the prevailing recession and inflation.
All the three elasticity values are greater than 1, which means that the Quantity of supply increases when all the three independent variables increase or decrease at the same time.

2.3 Scenario 2:

The only difference that the scenario 2 has with that of the scenario 1 is that the values of the independent variables are chosen adhocly without following any particular increasing or decreasing regular intervals.

2.4 Observations from Scenario 2:

Whenever there is a sudden change or fluctuation in the competitor’s price, per capita income and monthly advertisement expenses, the corresponding supply value decreases. In cases when the price is high while the competitor's price and per capita income is low, the supply decreases and vice versa.
The elasticities calculated for the same independent variables are very high compared to the scenario1.
When a elasticity value is greater than 1, this indicates that the dependent variable Quanity of supply increases with the increase in price which is directly proportionate growth. When a elasticity value is less than 1, this indicates that the supplyincreases when the price decreases. This is a kind of negative or indirectly propotional behavior. The competeitor price elasticity is less than 1, which means that if the competeitor price increases the demand decreases.

2.5 Constant  Parameter:

In this scenario all the independent variables except the price variable is kept constant. Only the price elasticity is calculated since all other variables remain unaltered.
The price elasticity calculated is less than 1, which means that the lowering of the price increases the demand and hiking the price decreases the demand.

2.6 Demand Charts:

The demand charts for all the three scenarios are as follows.
Fig 1: Demand charts illustrating all the three scenarios.

2.7 Recommendations and Suggestions:

The analysis and graphs suggest that it is always safe to keep the price of the product low compared to the price of the competetor’s product. During recession it is better to keep the prices low. The charts clearly indicate that the per capita income has direct impact on the demand. The Scenario 2 contains the fluctuations that clearly tells the impact of competeitors price and per capita income. Fig 1 Suggests that its safe to take the course of the tide to maintain the demand.
The fall of price of the microwave wovens has a significant contribution to the rise in demand for the product.










REFERENCES(APA)

Websites:

Grunert, K. (2005, September ). Widgets quality and safety: consumer perception and demand . Retrieved from http://erae.oxfordjournals.org/content/
PB, G. (1992, May). A review of new demand elasticities with special reference to short and long run effects of price changes. Retrieved from http://www.bath.ac.uk/e-journals/jtep/pdf/Volume_XXV1_No_2_155-169.pdf
J.Tellis, G. (1992, May). The price elasticity of selective demand" may 1992. journal of marketing research. Retrieved from http://www.jstor.org/stable/3172944






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