Demand Estimation

Income elasticity of the good calculated is 0. 38. This implies that the good selected is normal good. The cross price elasticity is 0. 34. Therefore the two goods are almost substitute goods. Finally, coming to the advertisement elasticity, we can see that the advertisement elasticity is 0. 73. Thus advertisement has an important impact on the sales of the product. Since price elasticity is less than 1, total revenue will fall if price falls. Moreover the cross price elasticity of the product is almost close to zero.

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So, if the firm will ever lower its price to increase its market share. i) The demand curve s drawn below: iii) At these prices there is always an excess supply. Thus market forces cannot determine the equilibrium. Iv) The factors can influence demand and supply are: Demand – Advertisement, Income, price of the competitor’s product, etc. Supply – technological improvement, supply shocks, etc. Increase in advertisement expenditure can increase the demand this will shift the demand curve rightward. Similarly any reduction in advertisement expenditure will shift the demand curve leftward.

Similarly, a rise in per capita income will shift the demand curve rightward and viscera. Now, the supply curve can shift rightward if there is any improvement in the technology. On the other hand any supply shock can shift the supply curve leftward. References: Varian, H. R. (2011). Intermediate Microeconomics: A Modern Approach (8th deed. ).

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