Real Wages and Employment, Research Paper Example

To compute the elasticities for the product according to the following regression equation, it is first essential to calculate the value of Q, which represents the quantity demanded of 3-pack units.  The regression equation reads: QD =  -5200 – 42P + 20PX + 5.2I + .20A + .25M, and it is necessary to insert independent values into the equation to generate a QD that has meaning. Therefore, P = 500, PX = 600, I = $5,500, A = $10,000, and M = 5,000. This allows us to rewrite the equation as Q = -5,200 – 42(500) + 20(600) + 5.2(5,500) + 0.20(10,000) + 0.25(5,000). From solving the equation, we determine that Q = 17,650.

In terms of short-term and long-term pricing strategies, since price elasticity is approximately -1.19, there is a 1% increase in the price of the product. Thus, the demand for the product can be considered elastic, so the company should not raise the price of the product and run the risk of driving potential customers away. Since the cross-price elasticity is 0.68, if the competitor’s price increases by 1%, the quantity demand of the produce will increase by 0.68%. Therefore, the product is inelastic to the price of the competitor and their price should not impact sales. The income elasticity is 1.6, which indicates that an increase by 1 percent of the average income will increase the product’s quantity demand by 1.6%. Therefore, income is elastic and the product should increase in price if the average income increases as well. The advertisement elasticity is 0.11, indicating that a 1% increase in expenses that pertain to advertising will raise the demand for the product by 0.11%, which is a negligibly small amount. Thus, demand is inelastic to marketing and this mean that price should not be raised in order to maintain customers. It is also important to consider the amount of the microwave ovens in this area, because this will allow customers to be able to use the product. This elasticity is 0.07, which indicates that if the number of microwaves increased by 1%, which will increase demand by 0.7%. Therefore, this form of demand is inelastic. Lastly, the quantity demanded depends on the price that is assigned to the product and people’s income, but it is insensitive to competitor’s price, advertising, and amount of microwaves.

A cut in the product price would lead to an increased demand for the product. Therefore, this will result in a net increase of sales. Since revenue becomes the greatest when the elasticity degree is one, the price of the product should be decreased at least slightly in order to maximize its sales, thereby generating a greater degree of revenue for the company.

When all factors in the demand model are constant with the exception of the price, the demand equation will read: Q = -5200 – 42*P + 20*600 + 5.2*5500 + 0.2*10000 + 0.25*5000. Solving the equation gives Q = 38650 – 42P. Rearranging the equation gives P = 38650/42 – Q/42. The demand and supply curve is as follows.

The demand and supply equations can be solved by setting the equations to be equal, which gives: 38650 – 42P = 5200 + 45P. Simplifying the equation gives 87P = 33450, and further simplification indicates that P = 384.48. When P is substituted into the original supply equation, we find that Q = 5200 + 45*384.48, when solved gives 22501. Thus, the equilibrium price is 384 cents and the equilibrium quantity is 22,501 units.  Furthermore, both of these points are observable on the above graph at the intersection in which the supply value and the demand value meet.

As the demand equation indicates, it is possible for the demand of the product to be altered if customer income shifts. Furthermore, there may also be observable changes if the price of the competitor’s product shifts and if the price of the correlating good, which in this case is the microwave, shifts in price as well. This occurs primarily as a consequence of consumer needs, and may shift as a result of their particular preference. For example, certain periods of time may result in an increased demand for low-calorie food. Therefore, the pricing of the item can be seasonal. An example of periods of time in which consumers may be more conscious about the calories they consume are when there are frequent weddings and reunions. Consumers tend to care about their health and physical experience more significantly during these times, and this can potentially impact the pricing of the item due to its shift in supply and demand. The supply of the product can change depending upon a variety of factors as well. For example, the supply of the product can change if the number of product supplies changes as well. More product suppliers will result in a greater production potential of the item, and if more of the item is available in a manner that does not meet the demand, its price will need to be lowered. Additional factors that can impact the supply of the product include the establishment of technological advances that increase the speed with which the product can be produced. This includes elements of the product creation such as raw material availability, which can directly impact the cost of production.

There are a variety of factors that could cause rightward shifts and leftward shifts of the demand and supply curves. If there is an increase in the average income of consumers, a price cut of the microwave oven which functions as the complimentary product, or a population increase can result in an increased preference for the product, which will result in a rightward shift. Furthermore, technology advances that contribute to the cheapened ability to produce the product, such as cheap labor will result in a rightward shift as well. On the other hand, events that results in a decreased income, such as an economic recession will result in a leftward shift of the curve. The increase in price of microwave ovens can also result in a leftward shift in addition to the lack of availability or an increase in the price of the materials needed to make the product, such as price increases in labor, tax increases, the raised price of raw materials, and other costs.

In conclusion, many factors can impact the price of a product, but in the case of the low-calorie food, price elasticity is heavily dependent upon the income of the consumers and the price required to produce the product. Therefore, the success of this product is highly dependent on many economic factors that cannot be easily controlled.

References

Anyadike-Danes, M, Godley W. (1989). Real Wages and Employment: A Sceptical View of Some Recent Empirical Work. Manchester School, 62(2): 172–187.

Braeutigam, Ronald (2010). Microeconomics (4th ed.). New York: Wiley.

Jain, T.R. (2006). Microeconomics and Basic Mathematics. New Delhi: VK Publications.