Demand estimation for Schwan's frozen food products

Frozen Food Demand

Compute the elasticity's for each independent variable. Note: Write down all of your calculations.

Elasticity= % change in quantity demanded / % change in independent variable

Quantity

Demanded

Price in cents

Price of comp. In cents

Per Capita

Income

Monthly advert.

exp

Number of Microwaves

sold

Formula Inputs

1% Change in Price

Quantity

Demanded

Price in cents

Price of comp. In cents

Per Capita

Income

Monthly advert.

exp

Number of Microwaves

sold

Formula Inputs

Percentage Change in QD=

Percentage Change in Price

Elasticity = % change in QD/

% change in price

1% Change in Price of Comp.

Quantity

Demanded

Price in cents

Price of comp. In cents

Per Capita

Income

Monthly advert.

exp

Number of Microwaves

sold

17195

-5200

-21000

12120

29150

2000

Formula Inputs

5,500

10000

Percentage Change in QD=

17195/17075

0.00703

Percentage Change in Price

0.01

Elasticity = % change in QD/

% change in price of comp

0.702782

1% Change in Income

Quantity

Demanded

Price in cents

Price of comp. In cents

Per Capita

Income

Monthly advert.

exp

Number of Microwaves

sold

17366.5

-5200

-21000

12000

29441.5

2000

Formula Inputs

5,555

10000

Percentage Change in QD=

17366.5/17075

0.01707

Percentage Change in Price

0.01

Elasticity = % change in QD/

% change in price of income

1.707174

1% Change in Advert. Exp.

Quantity

Demanded

Price in cents

Price of comp. In cents

Per Capita

Income

Monthly advert.

exp

Number of Microwaves

sold

17095

-5200

-21000

12000

29150

2020

Formula Inputs

5,500

10100

Percentage Change in QD=

17095/17075

0.00117

Percentage Change in Price

0.01

Elasticity = % change in QD/

% change in price of income

0.11713

1% Change in Microwave

Quantity

Demanded

Price in cents

Price of comp. In cents

Per Capita

Income

Monthly advert.

exp

Number of Microwaves

sold

17096.25

-5200

-21000

12000

29150

2020

Formula Inputs

5,500

10100

Percentage Change in QD=

17096.25/17075

0.00124

Percentage Change in Price

0.01

Elasticity = % change in QD/

% change in price of income

0.124451

Determine the implications for each of the computed elasticity's for the business in terms of short-term and long-term pricing strategies. Provide a rationale in which you cite your results.

It appears that price is a significant factor as it relates to quantity demanded in the short-term. The high elasticity indicates that consumers are very price conscious as it relates to the product. This is warranted as the company appears to operate in a perfectly competitive or monopolistically competitive market. As a result the firm is a price taker as it relates to its product offerings. Due to the lack of differentiation with the product, a 1% price increase will result in a 1.2% decline in demand. The same is true for the price of competitor's products. As competitors increase the price of their goods relative to the firm, demand will likely increase.

The elasticity of advertising expense also confirms the theory above. A 1% increase in advertising only results in .01% increase in quantity demanded. This further indicates that the market is characterized by very little differentiation in regards to overall product offerings. Consumers of the company's products are therefore price conscious.

The price elasticity of income also provides evidence of the drivers of growth for the firm's products. Income elasticity is the highest among all the factors present within the regression. A 1% income increase corresponds to a 1.7% increase in demand for the firm's products. This evidence suggests that the product is a "normal good." As income increases so too does the demand for the product.

Finally, the elasticity of microwave ovens sold is particularly interesting. Intuitively, one would believe that microwave dinners and microwave evens are complements, similar in concept to peanut butter and jelly. However, it appears that the number of microwaves sold does not provide a large boost in quantity demanded.

As it relates to pricing strategies, over the long-term, it appears the market for microwave dinners is fragmented without a large price leader. Consumers are particularly prone to price changes in the industry products. Consumers will therefore reduce their demand as prices increase and corresponding increase demand as price drops. Unfortunately, the firm appears to be a price taker in the industry, as the overall market for microwave dinners will ultimately determine the price of the firm's products. In the event that market participants exit the industry, the firm may have the ability to increase prices in the future. As it stands currently however, price increases will be detrimental to the firm.

Recommend whether you believe that this firm should or should not cut its price to increase its market share. Provide support for your recommendation.

The firm should not cut prices to increase market share. Due to the fragmented nature of the market, a price cut will only insulate a price war between market participants. This is due primarily to the large inverse relationship between price and quantity demanded. A price decline in the short-term will increase the demand for the product. However, competitors will soon follow suit by lowering their own prices to recover lost market share. As more competitors engage in this behavior, the price will decline to the point were no firm within the industry will earn adequate returns. A "new normal" will be set that ultimately lowers price of all products within the industry. Depending on the severity of the price ware, the decline will be to the point that it will be difficult to raise prices as consumers are now accustomed to the new price levels set. Thus lowering price will ultimately reduce profitability, margins, and returns to shareholders.

If market participants exit due to the low returns of the industry, the firm will then have the ability to steadily raise prices. However, the action of raising prices will inevitably invite new market entrants. The threat of new market entrants caps the ability of the firm to raise prices to the pre-price war level. Therefore, the firm should not engage in a price cut, but instead look to differentiate its products relative to peers.

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.

Price Change

Quantity Demanded

33875

29675

25475

21275

17075

12875

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.

Quantity Supplied

0

15819.78

23729.67

31639.56

39549.45

Price

c. Determine the equilibrium price and quantity.

Price 375

Quantity 22,500

Quantity Supplied

0

15819.78

23729.67

31639.56

39549.45

Quantity Demanded

33875

29675

25475

21275

17075

12875

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.

Significant factors that would cause changes in the supply curb relate to input costs. Increases in wages paid to employees or materials costs may raise the price of the product. Likewise, due to the increase costs associated with supplying the product, these costs will ultimately be transferred to the consumer. As indicated in the above, the consumer will respond be reducing demand.

Indicate the crucial factors that could cause rightward shifts and leftward shifts of the demand and supply curves

A new innovative solution could shift both the supply and the demand curve. A new more efficient and healthier solution for example, could shift the demand for the firm's products. Likewise, changes in consumer tastes could shift the demand curve. Finally, changes in expectations could shift both the supply and demand curve. If consumers are optimistic about the future, they may tend to purchase more freely. However, if consumers are more pessimistic regarding the future, they may tend to reduce spending shifting the demand curve.

References:

1. Arrigo Opocher and Ian Steedman, "Input Price-Input Quantity Relations and the Numeraire," Cambridge Journal of Economics, V. 3 (2009): 937 -- 948

2. Basij J. Moore, Horizontalists and Verticalists: The Macroeconomics of Credit Money, Cambridge University Press, 1988

3. Michael Anyadike-Danes and Wyne Godley, "Real Wages and Employment: A Sceptical View of Some Recent Empirical Work," Manchester School, V. 62, N. 2 (Jun. 1989): 172 -- 187

4. P. Garegnani, "Heterogeneous Capital, the Production Function and the Theory of Distribution," Review of Economic Studies, V. 37, N. 3 (Jul. 1970): 407 -- 436

Chart2

33875

29675

25475

21275

17075

12875

Quantity Demanded

Chart1

3.88

4.29128

4.74615568

5.2492481821

5.8056684894

6.4210693493

Sheet1

WACC 13%

Year Beginning Book Value Per Sh. Earnings Per Share Capital Charge Abnormal earnings PV Factor PV of Abnormal Earnings PV Perpetuity

2009 $27.66 3.88 $3.47 $0.41 $0.89 $0.36 $30.91

2010 $28.21 4.29128 $3.54 $0.75 0.797 $0.60 $34.19

2011 $28.78 4.74615568 $3.61 $1.13 0.712 $0.81 $37.81

2012 $29.35 5.2492481821 $3.68 $1.57 0.636 $1.00 $41.82

2013 $29.94 5.8056684894 $3.76 $2.05 0.567 $1.16 $46.26

2014 $30.54 6.4210693493 $3.83 $2.59 0.507 $1.31 $51.16

Total $5.24 $242.16

Total PV of Abnormal Earnings+PV Perpetuity $247.40

Sheet1 (2)

Choose % increase in book value Worst Case

Best Case 10%

Moderate Case 12%

Worst Case 15%

Book Value Increase 0.15

WACC 13%

Year Beginning Book Value Per Sh. Earnings Per Share Capital Charge Abnormal earnings PV Factor PV of Abnormal Earnings PV Perpetuity

2009 $27.81 3.88 $3.49 $0.39 $0.89 $0.35 $30.91

2010 $28.37 4.29128 $3.56 $0.73 0.797 $0.58 $34.19

2011 $28.93 4.74615568 $3.63 $1.11 0.712 $0.79 $37.81

2012 $29.51 5.2492481821 $3.70 $1.55 0.636 $0.98 $41.82

2013 $30.10 5.8056684894 $3.78 $2.03 0.567 $1.15 $46.26

2014 $30.70 6.4210693493 $3.85 $2.57 0.507 $1.30 $51.16

Total $5.16 $242.16

Total PV of Abnormal Earnings+PV Perpetuity $247.32

Aggressive

Customer Jan Feb Mar Apr Total by customer

Nate 12.5-16.25-16.25-23.75-68.75

Eric 2.5-2.5-48.75-12.5-66.25

Allen 6.25 6.25 1.25-165-178.75

Devin 10-11.25 3.75 7.5-32.5

Total by month 31.25-36.25-70-208.75-346.25

Sheet5

Scenario Selector 3

Scenario 1-2-3 4

Description Base Case Rev=55, Cost=40 Infl=2.5%

Start Date 12/31/12

End Date 6/15/15

Revenue (real) 0-50 55

Costs (real) 0-30 40

Inflation 0.03 0.03 3%

Cost of Capital 15%