# New And Precise Healtcare Insurance Plans

New And Precise Healtcare Insurance Plans

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Demand Estimation

Tammy McCoy

Managerial Economics and Globalization/ECO550

Strayer University

April 26, 2014

Demand Estimation

Estimating the demand of a product is essential to a firm as this helps in decision making involving production, entry into new markets, inventory plans, investing in fixed assets and pricing. We are doing demand estimation of a firm selling low-calorie microwavable food, using data obtained from 26 supermarkets it retails in.

Option 1

Qd = – 5200 – 42P + 20PX + 5.2I + .20A + .25M

(2.002) (17.5) (6.2) (2.5) (0.09) (0.21)

Additional information: R2= 0.55, n=26 and F=4.88, where the standard errors are in parentheses.

Explanation

The equation above is the result for the estimated regression coefficients. In estimating demand, there are several steps followed:

a. Identifying the relevant variables. In our case, these variables are the price of the firm’s product, the price of the competing product, the per capita income of the consumer, the advertising costs and the number of units sold monthly. These variables will help in determining the demand function.

b. Specifying the regression model. This is where we determine the relationship between the dependent variables and the independent ones expressed in the equation. We also calculate the elasticity of each variable. In this model, our elasticities will be:

Ed = dQ x P Where dQ is the coefficient of P which is -42

dP Q dP

Q = -5200 – 42(5) + 20(6) + 5.2(5500) + 0.20(10000) + 0.25(5000) = 26560

Ed = -42 x 5 = -0.0079

26560

Epx = dQ x Px = 20 x 6 = 0.0045

dPx Q 26560

EI = dQ X I = 5.2 x 5500 = 1.077

dI Q 26560

EA = dQ X A = 0.2 x 10000 = 0.0753

dA Q 26560

EM = dQ X M = 0.25 x 5000 = 0.0470

dM Q 26560

c. Estimating of the regression coefficients. This involves estimating the coefficients using the ordinary least squares method. In our solved equation, all the coefficients have been given. The results contain standard errors, the coefficient of determination denoted as R², the adjusted R² and the F-Statistics.

d. Interpreting the regression coefficients. From our results we can conclude that;

· When P increases by one unit, Qd decreases by 0.0079 units because the price of a product and its demand are negatively related.

· When Px increases by one unit, Qd increases by 0.0045 units because people will tend to demand more of the low calorie microwavable food than the more expensive competing product.

· When I increase by one unit, Qd increases by 1.077 units. This is because consumers have more disposable income to spend.

· When A increases by one unit, Qd increases by 0.0753 and this can be attributed to the fact that high advertising costs indicate more advertising, thus more consumers get to know about the product, and thus demand for it.

· When M increases by one unit, Qd increases by 0.0470 units. As the number of microwaves increase in the SMSA, people will demand for more of the lo-calorie food since they are complementary goods in this case.

Option 2

Qd = -2,000 – 100P + 15A + 25PX + 10Y

(5,234) (2.29) (525) (1.75) (1.5)

Where; P = 200 cents, Px = 300 cents, I=\$5000 and A= \$640.

R2 = 0.85 n = 120 F = 35.25

Solution:

Q= -2000-100(2) + 25(3) +10(5000) +15(640) = 57625

Computing the elasticities we would have;

Ed = dQ X P = -100 x 2 = -0.0035

dP Q 57625

Epx = dQ X Px = 25 x 3 = 0.0013

dPx Q 57625

EI = dQ X I = 10 x 5000 = 0.8676

dI Q 57625

EA = dQ X A = 15 x 640 = 0.1666

dA Q 57265

From the elasticities above, one can conclude that;

· When P changes buy one unit, a negative change occurs to the quantity demanded by 0.0035 units.

· When I changes by one unit, the quantity demanded changes in the same direction by 0.0013

· When I changes by one unit, the quantity demanded of the low calorie food changes in the same direction by 0.8676 units.

· When A changes by one unit, the quantity demanded changes in the same direction by 0.1666 units.

From the comparison of options A and B, I would recommend for the firm to cut down on its prices, as the per capital income decreases. From both options A and B we can see that the competitor cut down his price by half. Our case study firm cut its prices by the same amount that is 300. This has led to the low-calorie food gaining more than twice its previous market share that is from 26560 to 57625.

What happens when prices change ceteris paribus? Using option A;

Qd = – 5200 – 42P + 20PX + 5.2I + .20A + .25M

(2.002) (17.5) (6.2) (2.5) (0.09) (0.21)

R2 = 0.55 n = 26 F = 4.88

When P= \$100, Q= -5200 – 42(100) + 20 (6) +5.2 (5500) +.20(10000) +.25(5000) = 22570

When P=\$ 200, Q= -5200 – 42(200) + 120 + 28600 + 2000 + 1250 = 18370

When P=\$ 300, Q= -5200- 42(300) + 120 +28600 + 2000 + 1250 = 14170

When P= \$400, Q= -5200-42(400) + 120 + 28600 + 2000 + 1250 = 9970

When P= \$500, Q= -5200- 42(500) + 120 + 28600 + 2000 +1250 = 5770

When P=\$600, Q= -5200 – 42(600) + 120 + 28600 + 2000 + 1250= 1570

We are given Qs = -7909.89 + 79.0989P (supply function)

 Price Qd Qs 100 22570 0 200 18370 7909.89 300 14170 15819.78 400 9970 23729.67 500 5570 31639.56 600 1570 39549.45

0

5000

10000

15000

20000

25000

30000

35000

40000

100200300400500600700

QdQs

Demand and Supply Curves

At equilibrium, quantity demanded (Qd) = quantity supplied (Qs).

Qd = – 42P – 5200 + 120 + 28600 + 2000 + 1250 = -42P + 26770

Therefore; -42P + 26770 = -7909.89 + 79.0989P

121.0989P = 34679.89

P=289.37659

Substitute P in either Qs or Qd. Thus Q = -42(289.37659) + 26770 = 14742.183

There are certain factors that cause changes in the supply and demand for the product. The market price of a product will affect its supply and demand (Welch and Welch, 2009). If the market price of the low-calorie microwavable food reduces from its original, its demand will increase while its supply will reduce because the producer is not motivated to produce. If the price increases, the demand will decrease as the supply will increase as the producer rushes to make more profits. The production costs of the product will affect its supply. High production costs will discourage the producer from producing more. Supply is also affected by the expectations of the supplier (Welch and Welch, 2009). If the supplier expects future rise in prices of the product, he will stock up hoping to sell more when prices are high. Price of inputs also affects supply. If they are high, supply is low and when they are low supply is high.

Demand of a product is affected by the disposable income of the consumer (Brux, 2010). When the disposable income of the consumer increases, demand for the good increases. Demand is also affected by the price of a substitute good. When the substitute’s price is high, people will consume more of the low-calorie microwavable food. Changes in consumer tastes and preferences also cause changes in demand. Demand will be high when the consumers prefer low-calorie microwavable foods to the high calorie ones.

Due to changes in the demand and supply, the demand and supply curves behave differently. Some changes will cause a movement along the demand and supply curve while others will cause a shift. A rightward shift of the demand curve occurs when the income of consumers increases. Increase in income means that the consumers have a higher purchasing power and will therefore demand more. This will shift the demand curve to the right while a shift leftwards occurs when their purchasing power decreases due to decreased income (Ja Teline, 2010). An increase in the taste and preferences for a good will shift the demand curve to the right and to the left when preference for the product decreases. When consumers are expecting the price of a product to rise, they will demand more thus the demand curve shifts to the right and to the left when they are expecting it to decrease.

A rightward shift in the supply curve means that supply has decreased whereas a left side shift shows an increase in supply. A rightward shift will occur when the wage rate increases, government taxes increases, when more firms enter the industry and when labor productivity decreases. A leftward shift will be noted when wage rates decrease, firms leave the industry, government taxes decrease and subsidies increase and when labor productivity increases.

References

Brux, J. (2010). Economic issues and policy. Stamford: Cengage Learning. 5th Ed.

Ja Teline. (2010). 6 factors that determine changes in demand. Retrieved from: www.preservearticles.com/…/factors-that-determines-changes-in-demand.html

Welch, P. and Welch, G. (2010). Economics: Theory and Practice. New Jersey: John Wiley & Sons Publishers.

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