Demand Estimation, Research Paper Example

Abstract

Project management incorporates many tools and techniques to facilitate the opportunity for the success of a project implementation.  Demand planning as well as the inherent variables, including dependent and independent variables, play a contributing role in determining the optimal pricing for goods or services.  The selection of price impacts the supply and demand for a product and the gravity of that impact is based upon the elasticity of the good or service provided.  The factors play a major role in planning the optimal price to provide the most amount of revenue for the good or service or could provide the key leverage point to gain market share in a competitive market.

Demand Elasticity

As many have stated previously, a project is by definition a temporary endeavor to produce a unique deliverable at the conclusion of the endeavor (PMI, 2008).  With any endeavor that will result in a specific deliverable there is a cost associated with the work and other resources that go into the delivery of that good or service (Monk & Wagner, 2009).  As the project progresses through the lifecycle the time draws closer to start assigning costs to the project.  At this point, the project’s scope has been appropriately defined.  With that being said the expectations are set with the stakeholders and a deliverable is expected at a certain time in the future.  During this project the main objective is to ensure the competitive advantage of producing low-calorie microwaveable meals is maintained while also balancing the supply and demand in conjunction with optimizing the shareholder’s wealth.  Maintaining the ability to adjust and optimize the key variables within the parameters of demand are key to ensuring the maximum amount of profit is obtained.  During the current planning phase both cost estimating and cost budgeting activities will occur.  There are multiple tools and techniques for estimating the project costs.  The tools will be examined and applied as needed to result in the cost estimation for the project.  The processes for implementing an effective and accurate cost estimate will include estimating costs, determining budget and controlling the costs (Bloucher, Stout & Cokins, 2009).  All three areas are imperative to project execution and cost management.

The current market supply is extended to 26 supermarkets located in the domestic market.  This is potentially going to expand as the demand increases for the product but for the month of April the supply chain includes the domestic supermarkets only.  The current objective is to accurately and precisely measure and manage the demand based upon the independent and dependent variables that exist for the low-calorie microwavable foods.  With independent variables the key attribute revolves around their ability to not be impacted by other variables.  These independent variables, while important, are steadfast in their relationship with other entities.  For example, age of the person purchasing the microwavable entrees is an independent variable due to the fact that the age does not change with any other variable.  Time is constant and is not impacted by other variables.  The dependent variables rely on other variables within the equation.  The age of a person could have an impact on the amount of microwavable dinners they purchase.  The length of time it takes to prepare the meal could impact the amount of dinners purchased.  These variables are impacted by outside sources and with each impact a different result could occur in the demand equations.

Elasticity Calculation

Computing elasticity for independent variables allows the data from demand to become information that is usable to make informed business decisions. The elasticity shows a level of responsiveness between the demand for an item and the price that is placed on that item.  It shows the relationship between the percent change in quantity demanded with a specified percent change in price, either up or down.  In order to maximize the revenue generated from a specific good, in this case microwaveable food products, the price would be set so that the elasticity of demand or (PED) is set to 1.  This optimizes the amount of demand with the best pricing option which allows for maximum profit.  This maximization of profit would ultimately lead to increased shareholders’ wealth and fall in line with the goals and objectives of the organization.  To calculate the elasticity of demand we would use the formula: Elasticity of Demand=(% Change in Quantity)/(% Change in Price).  In this example is we had a base price of $7.00 and increased it to $10 and had a quantity of 10,000 and it decreased to 9,000 the PED would be: (-1,000/10,000)/(3/7)=-0.2333.  In most calculations for PED the resulting number would be a negative based on the fact that with the law of demand an increase in price more than likely results in a decrease in demand.  That does not mean that the increase in price is not effective or necessary.

The increase in price could ultimately negate the decrease in demand by providing an increase in revenue that would not be experienced with a lower price and higher volume (Prencipe, Davies & Hobday, 2007). There are multiple factors in regard to acceptance of higher prices for consumers. The factors vary between multiple areas. These include the availability for substitutions or replacements for the good or service being provided.  In this case if there are other microwavable foods that are comparable in quality and content and it is an easy switch for the consumer to make there could be less ability to move price on the item.  Another factor would be the actual income of the consumer.  The target market of the microwaveable foods plays a key role in the overall ability to move price points and adjust the demand to optimize revenue.  The amount of income an individual devotes to a specific good or service would be a determinant on how elastic or non-elastic the good or service is.  Food in general is not necessarily elastic because it is a necessity and cannot be substituted.  Microwavable food products are elastic because there are multiple substitutes and the amount of income devoted to these food stuffs has a high level of fluctuation.

In general, if the price increases the demand decreases and the opposite is true if the price decreases the demand generally increases.  With the ability to increase or decrease prices there is a decision to make on how to gain market share.  With decreased prices the demand should ultimately increase and thus take a larger portion of the market share away from the competitors.  On the other hand to realize maximum revenue the PED should approach if not reach 1.  There are two main factors that need to be understood prior to making a price change. Those include the price effect and the quantity effect.  For inelastic goods a price increase will increase revenue and a price decrease will decrease revenue.  The microwavable food that is produced by the company is actually an elastic good due to the fact that there are many substitutes, brand loyalty is low and the percentage of income devoted is not microwavable dinners.  This means that the opposite is true in most cases.  Increase in price does not mean direct increase in revenue and a decrease in price does not mean a decrease in revenue.  Based on the price elasticity for demand being less than zero the price could be raised to increase revenue.  To gain market share and increase the amount of product in the market the price could be decreased to increase demand based upon the elasticity calculation.  We should drop the price to increase demand until the market share desired is achieved.  The risk with this option is due to the inelasticity of the good and the price may have to remain there on a consistent basis to maintain the market share unless a new product is released or the competition changes their pricing strategy (Cooper, Grey, Raymond& Walker, 2005).

Supply and Demand Curves

The supply and demand curves are calculated through plotting the prices changes from 100, 200, 300, 400, 500 and 600.

Within the supply and demand equation for this product there are multiple factors that could impact both areas.  Supply and demand is a fundamental foundation for understanding the concepts of economics.  In order to understand these concepts it is imperative to understand what impacts both supply and demand.  There is a direct and calculated relationship between the price of a good or service, how much is supplied to the consumer and how much is actually demanded by the consumer based on availability, price, quality and other key factors.  Key factors that impact the demand for an item revolve around income of the consumer, price of the good, intrinsic need or want for a good and the amount of people that can actually use or consume the good.  With the microwavable meals there is a specific target market that the company is looking to pursue.  There is a specific income as well as a group of people willing to purchase the meals.  The demand for the good is significant but there are also factors such as substitutes and pricing that impacts the demand.  The supply curve can be shifted for different reasons.  The price shifts both the demand and supply curve but in different directions.  The increase in price removes demand while the increase in price makes the producer want to increase supply of the good.  Production of the microwavable meals impact supply based on the fact that either there can be only a specific number of meals created or there are limitations within the supply chain that limit supply to the consumer.  The substitutes also play a key role in the supply.  If the substitutions are truly interchangeable and the prices vary from one supplier to the next, the pricing of the goods will play a key role in the amount of supply that is needed to fill the demand for the good.

Conclusion

With the demand estimations based on dependent and independent variables there are decisions to be made based on the pricing models, amount of demand desired and the ability to supply the consumers the quantities they need.  To gain market share in this example, the pricing should be lowered slightly while the understanding that market share will be gained but the optimization of profit will suffer slightly.  The overall objective was to gain market share while also maintaining a profit and slightly lowering prices should, based on the calculations, increase the demand for the product thus increase the overall market share owned by the organization.

References

Bloucher, E., Stout, D., &Cokins , G. (2009). Cost management:a strategic emphasis. (5 ed.). McGraw-Hill.

Cooper, D. F., Grey, S., Raymond, G., & Walker, P. (2005). Project risk management guidelines, managing risk in large projects and complex procurements. John Wiley & Sons.

Monk, E., & Wagner, B. (2009). Concepts in enterprise resource planning. (3 ed.). Boston, MA: Course Technology Cengage Learning.

Prencipe, A., Davies, A., & Hobday, M. (2007). The business of systems integration. Oxford University Press, USA.

Project Management Institute, P. M. (2008). A guide to the project management body of knowledge. (4th ed.). Newtown Square: Project Management Inst.