Demand Estimatio Essay
Determine the implications for each of the computed elasticities for the business in terms of short-term and long-term pricing strategies. Provide a rationale in which you cite your results. Short term pricing strategies would be crucial in determining the elasticity or inelasticity of demand. In 2008, Pettinger stated that after a price change, demand is likely to be more inelastic in the short run. Customers who are used to purchasing a product will initially continue to purchase it out of habit (2014). If I were in a decision making position, I would lower prices to gain a higher market share and would then slowly increase it. Short term goals should be about gaining new customers and making sure that they know how great our food is.
During this period they should also be getting great customer service so that they will stay when the increase does happen. Long term pricing strategies should reflect the goals of the company. Now that we have a higher market share and plenty of new customers, we need to keep them. Although I would gradually raise the prices, I would not make it too steep so that the customers leave. Consumer retention and word of mouth advertising is the best a firm can get. Now that we have the customers, we can’t let them go. We need to make sure that our shareholders and stockholders are getting the most they can and the only way to do this is to make better products such as new flavors and stay competitive where price is concerned.
Recommend whether you believe that this firm should or should not cut its price to increase its market share. Provide support for your recommendation. I believe that all firms who are trying to gain market share should cut their prices initially. Some consumers want the best but cannot afford it so they go with an alternative, usually a competitor, with cheaper prices. If this firm were to cut their prices, they would immediately see an increase in market share, sales, revenue, and probably profits. This firm should give superb customer service and can track this by customer surveys and sales. Later, the firm could gradually increase their prices. Once a customer is receiving the best possible service, most are more likely to pay a little more for it. Assume that all the factors affecting demand in this model remain the same, but that the price has changed. Further assume that the price changes are 100, 200, 300, 400, 500, 600 dollars.
a Plot the demand curve for the firm.
b Plot the corresponding supply curve on the same graph using the following MC / supply function Q = -7909.89 + 79.0989P with the same prices.
c Determine the equilibrium price and quantity.
d Outline the significant factors that could cause changes in supply and demand for the product. Determine the primary manner in which both the short-term and the long-term changes in market conditions could impact the demand for, and the supply, of the product.
Indicate the crucial factors that could cause rightward shifts and leftward shifts of the demand and supply curves.
Rightward shifts and leftward shifts are caused by prices, service, sales, etc. If a price is too high, then supply may be high but demand may be low. If your price is too low, demand may be high but supplies could run low. In “What Causes the Demand Curve to Shift to the Left”, David Sarokin writes that a shift to the right means that the item is more desirable and at this price, more will be sold. However, when there is a shift to the left, the product is less desirable and less will be sold at this price. There are many factors that could make this happen, including a bad review from any number of sources, a health warning issued by the government, or even competition (2014).
The graph above shows exactly what a left shift in demand would look like if it were plotted on a graph (Google, n.d.). “S” at Price one is the same as Quantity one and Demand one. If our competition was to make a newer product and offer it at a cheaper rate, the supply line would move to the left and “S” would be at Price two, Quantity two and Demand two. At this price, the product is less desirable. Each number will be different for price, quantity, and demand based on the position it’s in on the graph.