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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