Economics Assignment

Case study : Hind Oil Industries Demand Analysis

Q1. What are the relevant factors to be considered for modelling a demand
function for Maa mustard oil? How is each factor related to elasticities of
demand? How does the estimation of demand function incorporate the impact
of each factor using multiple regression technique?

Ans: Factors that affect modelling of demand function of Maa mustard oil are
• Per capita NSDP(Net state domestic product )
• Price of product
• Price of competitors product
• Promotional Expenditure
Per capita NSDP will give income elasticity of demand
Income elasticity of demand shows the measure of response of how
quantity demanded varies with the change in income .If the income
elasticity of demand is positive then it is normal goods and in case of
negative it is an inferior goods

Price of product will give Price elasticity of demand

Price elasticity of demand is the measure how the changes in price of
product affect quantity demanded of the same product. If price elasticity of
demand is greater than 1 ,then its elastic i.e a small change in price will
have larger impact on quantity demanded and if price elasticity is less than
1 it will be inelastic i.e a large change in price will have small change in
quantity demanded and if price elasticity is 1 its unit elasticity i.e a change
in price will cause an equal proportional change in quantity demanded.
Price elasticity of demand will always be negative
Price of competitors product will give Cross elasticity of demand
Cross price elasticity of demand is the measure how quantity demanded product
gets affected by the change in price of other product . Cross price elasticity of
demand will be negative for complimentary goods(bread and butter) and positive
for substitute goods (coffee and tea)

Promotional Expenditure

With increase in expenditure in advertisement and promotion will give product

edge in market which will have impact on its quantity demanded
On performing regression in R
E(X) = a0+ a1X1+ a2X2+ a3X3+ a4X4

Q (demand_Maa) = a0+ a1(own_price)+ a2(compe_price)+ a3(inc_per_capita)+ a4(pro_exp)

Q2. Analyze the estimated demand function and calculate the elasticities of
demand for Hind Oil Industries product. What do these calculations suggest
about the effects of changes in each of the variables?

Q (demand_Maa) = a0+ a1(own_price)+ a2(compe_price)+ a3(inc_per_capita)+

a4(pro_exp)
Q (demand_Maa) = 5024.753- 136.6168(own_price)+
117.4078(compe_price)-0.2823(inc_per_capita)+ 7.8651(pro_exp)
After looking at co efficient of all related factor of demand equation

a0 = 5024.753
a0 is the intercept of quantity demanded that means when all factor
are zero then quantity demanded will be 5024.753 units

a1 = - 136.6168
a1 is the co-efficient of own price and the value suggest that with the
increase of one unit in own price factor will decrease quantity
demanded by 136.6168 units
a2 = 117.4078
a2 is the co efficient of compe price (competitive product) and value
suggest that with increase in one unit of compe price will have positive
impact on quantity demanded i.e demad_maa (Q) will increase by
117.4078 units.

a3 = -0.2823
a3 is the co efficient of inc_per_capita(income) and value suggest that
it has negative impact i.e with the increase in one unit of
inc_per_capita ,quantity demanded will decrease by 0.2823 units.

a4 = + 7.8651
a4 is the co efficient of prop_exp (promotional expenditure) ,the value
suggest that with the increase in one unit of prop_exp will have positive
impact and quantity demanded will increase by 7.8651 units
Calculating elasticity for all factors

• Cross elasticity of demand of comp_price is 0.90476(+ve) which means

that if the price of competitive products increases then consumer will
switch to other products

• Price elasticity of demand of own_price is -0.93132 (-ve ) which means

that if price of Maa mustard oil increases its price it will lead to decrease in
the quantity demand of its product.

• Income elasticity of demand of inc_per_capita is -0.14407 (-ve) suggests

that the hind oil product is an inferior goods which means with the increase
in income the quantity demanded will decrease as people will move to
better substitutes available in market

• Advertisement elasticity of demand of prop_exp is 0.70652 (+ve) that

mens with increase in expenditure on advertisement ,the quantity
demanded of said product will go up.
Q3. What would be the impact of price changes on HOI on total revenue of Maa
mustard oil keeping other variables constant ?
Ans: HOI product Maa mustard oil’s price elasticity of demand is -0.93132 i.e
inelastic as price elasticity of demand is less than one. It states with the large
change in price the quantity demanded will change with small margin
Total Revenue is the product of price and quantity demanded. When demand is
elastic as price goes down total revenue increases and when demand is unit
elastic then decrease in price doesn’t affect total revenue and if demand is
inelastic then with further decrease in price total revenue will decrease.
As Maa mustard oil’s price elasticity is inelastic that means with the decrease in
price ,total revenue will also decrease vice versa…..Total revenue has a direct
relationship with price in case of inelastic products.

Q4.What is optimum price at which total revenue can be maximized for Maa
mustard oil if the competitors’ prices do not increase in october2015 (scenario
1)? If competitors increase their price by around 6% as suggested in case
(scenario 2), what would be the optimum price ? Does the company benefit if
competitors increase their price ? perform all calculation under the assumption
of no increase in promotional expenditure in the next month and 1% increase in
the per capita income of consumer?

Ans:

Q (demand_Maa) = 5024.753-136.6168(own_price)+ 117.4078(compe_price)

-0.2823(inc_per_capita)+ 7.8651(pro_exp)--------(1)
A.T.Q
Prediction of October 2015 optimum price where total revenue can be maximized
Scenario 2

compe_price = 109.14
inc_per_capita=7620.601 (1% increase) <------- (7545.15 *1.01)

pro_exp =1247.31
own_price =P
Quantity demand =Q

Q = 5024.753-136.6168P+117.4078*(109.14)-0.2823*(7620.601 )+ 7.8651*(1247.31)
Q=5024.753-136.6168P + 12813.8872 - 2151.2956 + 9810.2178
Q = 25497.5624-136.6168P ---------(2)
Now,

Total Revenue = TR
TR= P * Q--------(3)
By putting eq 2 in (3) we get
TR= P(25497.5624-136.6168P)
TR=25497.5624P-136.6168P^2 ------------(4)

Now differentiating both sides w.r.t to P

d(TR)/d(P) = 25497.5624 *d(P)/ d(P)-2*136.6168*P* d(P)/ d(P)
d(TR)/d(P) = 25497.5624- 273.2336P
As slope at TR max is zero therefore
d(TR)/d(P)=0
0= 25497.5624- 273.2336P
P = 25497.5624/273.2336

P= 93.3178 ---------(5)

P= 93.32 (rounding off)

Now putting value of P in eq(4)

TR=25497.5624*93.3178-136.6168*93.3178*93.3178
TR= 2379376.4285-1189688.0294

TR=1189688.3991
TR=1189688.40 (rounding off)
The optimum price at which total revenue can be maximized is 93.32
Scenario 2

Prediction of October 2015 optimum price where total revenue can be maximized
compe_price = 115.6884(6% increase)------→ 109.14*1.06
inc_per_capita=7620.601 (1% increase) -------→ (7545.15 *1.01)

pro_exp =1247.31
own_price =P
Quantity demand =Q
Q = 5024.753-136.6168P+117.4078*(115.6884)-0.2823*(7620.601 )+ 7.8651*(1247.31)

Q=5024.753-136.6168P + 13582.7205- 2151.2956 + 9810.2178

Q=5024.753+ 13582.7205- 2151.2956 + 9810.2178-136.6168P

Q=26266.3957-136.6168P--------(6)
Now,
Using eq 3
TR = P * Q

By putting eq 6 in (3) we get

TR= P(26266.3957-136.6168P)
TR=26266.3957P-136.6168P^2------------(7)
Now differentiating both sides w.r.t to Q
d(TR)/d(P) = 26266.3957*d(P)/ d(P)-2*136.6168*P* d(P)/ d(P)

d(TR)/d(P) = 26266.3957- 273.2336P

As slope at TR max is zero therefore
d(TR)/d(P)=0
0= 26266.3957- 273.2336P

P = 26266.3957/273.2336
P=96.1316
P=96.13 (rounding off)
Now putting value of P in eq(7)

TR=26266.3957*96.1316-136.6168*96.1316*96.1316
TR=2525030.6448-1262514.7188

TR=1262515.926
TR=1262515.93(rounding off)
The optimum price at which total revenue can be maximized is 96.13 (competitive product is
raised by 6% )

Scenario1: Scenario 2:
P= 93.32 P=96.13

Q= 12748.78 Q= 13133.20

TR=1189688.40 TR=1262515.93

The total revenue of Maa mustard oil increases when price of competitive
product is raised by 6% and hind oil has the leverage of increasing its price from
93.32 to 96.13 at the same time its quantity demanded is also increasing from
12748.78 to 13133.20 .

Q5 Plot a demand curve and total revenue curve using the estimated values of
quantity demanded from question 4 by using the concept of total revenue test
and the plotted graphs ?
Ans:

Senario1 Scenario 2
Q = 25497.5624-136.6168P Q=26266.3957-136.6168P
TR=25497.5624P-136.6168P^2 TR=26266.3957P-136.6168P^2
QUANTITY TOTAL QUANTITY TOTAL
PRICE (P) PRICE(P)
DEMANDED(Q) REVENUE(TR) DEMANDED(Q) REVENUE(TR)
20 22765.2264 455304.528 20 23534.0597 470681.194
40 20032.8904 801315.616 40 20801.7237 832068.948
70 15934.3864 1115407.048 70 16703.2197 1169225.379
80 14568.2184 1165457.472 80 15337.0517 1226964.136
93.32 12748.78 1189688.40 96.13 13133.20 1262515.93
105 11152.7984 1171043.832 105 11921.6317 1251771.329
125 8420.4624 1052557.8 125 9189.2957 1148661.963
145 5688.1264 824778.328 145 6456.9597 936259.1565
165 2955.7904 487705.416 165 3724.6237 614562.9105
185 223.4544 41339.064 185 992.2877 183573.2245
Curves:

Demand Curve Total revenue Curve

200

180

1400000
160
1262515.926

1200000
140
1189688.399

1000000
120
Total Revenue

800000
Price

100
96.1316

93.3178 600000
80

400000
60

200000
40

0
0 5000 10000 15000 20000 25000
20

0 Quantity demanded
0 5000 10000 15000 20000 25000
Quantity Demanded

scenario1 scenario 2
Analysis:

In scenario1 when there is an increase in income by 1% and price of competitive

product is kept
constant the price at which total revenue is maximized is 93.32 andthe maximized
total revenue is 1189688.40.
If price increase further demand will become elastic as PED >1 and if price decreases
further it will become inelastic PED<1 at this total maximization point PED=1

Similarly in scenario2 when the price of competitive product increases by 6% and all
other factor remaining same as scenario 1 , the price at which total revenue is
maximized is 96.13 and the maximized total revenue is 1189688.40.

Due to increase in price of competitive products which happens to be others factors,

the demand curve will shift right for Maa mustard oil i.e quantity demanded will
increase.
While calculating total revenue and quantity demanded using demand function and
total revenue formulae we found that hind oil industries can increase their price to
96.13 from 93.32 .Even with this increase in price the quantity demanded increases
to 1262515.93 from 1189688.40 this happens because other factors which price of
competitive product is increased by 6% due to which quantity demanded increases.
This factor levels out the decrease in quantity demand which should have happened
due to increase in price by hind oil.