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Demand Estimation
Mayra Perez
Dr. Lundondo Mumeka
ECON 550
31 July 2014

Demand estimation
Elasticity is the ratio whereby one variable changes causing a change in the other one. The variables being considered are independent variable and dependent variable. In the words of Andrew (2007), the percentage change in one variable causes a one percent change in the other variable. Elasticity estimates the relationship in demanded quantity of the product and the price change. The formula for calculating elasticity of demand is demonstrated below;
Elasticity of demand = change in demanded quantity / change in price
Option One:
Quantity demanded = -5200 – 42(166.67) + 20(200) + 20(10000) + 25(5000) = 345399.86
= -5200 – 42(26) + 20(200) + 20(10000) + 25(5000) = 322708
Elasticity of independent variable = (345399.86 – 322708) / (120 – 26) = 199.05
Option 2
Quantity demanded = -2000 – 100(66.67) + 15(640) + 25(100) + 10(5000) = 53433
= -2000 – 100(120) + 15(640) + 25(100) + 10(5000) = 48100
Elasticity of independent variable = (53433 – 48100) / (66.67 – 120) = -100
Implications of the change in elasticity
In the first option, the change in price from 166.67 to 26 per unit caused a change in the quantity demanded from 345399.89 to 322708. In the second option, the change in price also caused a change in the quantity demanded. When the price is 66.67 per unit, the quantity demanded is 53433. Change in the price to 120 per unit made the quantity demanded to down to 48100. Lowering in the price of the commodity causes a drop in the amount the buyers are willing to purchase (first option). Computation of its elasticity gives a value of 199.05. The demand is price elastic because change in the price of microwaves causes a change in the quantity of microwaves demanded. Since the decrease in the price is causing a decrease in the quantity demanded, the supermarkets...

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Words: 2667 - Pages: 11