ECO 501: Managerial Economics

ASSIGNMENT:

REGRESSION & ELASTICITY

Course Instructor

Professor Dr. Jamshed uz Zaman

Prepared By

Maruf Shahjahan Md. Moeid Hasan Md. Tahamidur Rahman Shoeb Hasan Biplob Saha Md. Nazmul Hasan Sarkar

ID: 09364002 ID: 10264007 ID: 10264024 ID: 10164054 ID: 10164022 ID: 10164045

Date of Submission: 4th March 1, 2011

Introduction
In economics the Demand theory is one of the most important theories that give many insightful suggestions in making any business. Demand theory describes the relationship of the demand of a product with the price of the product. There are other factors that also influence in the change of demand. To understand the strength of these relationships and what they depict, we use Elasticity as a measure to estimate to what extent demand changes with the change of other factors. The regression analysis is a part of calculating the elasticity and the strength of relationship different independent variables have with the dependent variable.

Objective
Our main objective in the making of this report is to understand the elasticity of demand and how different factors like price, competitor price, advertising expenditure, and income of the customers are related with the quantity demanded of bread as a product.

Data
The data for this report was collected from in the internet. The data is from San Francisco Bread Company. It shows the demand for Bread in different markets at different price levels. The data also shows the competitor price, the advertising expenditure by the company and income level of the customers in different markets and price levels. The quantity demanded of bread is considered as the Dependent Variable and Price of bread, competitor price, advertising expenditure, and income of customers are considered as Independent Variable according to the objective of the study. The data set consists of 30 sets of data to get more accurate results.

The equation to formulate the relationship is as follow:

Ln (Q) = Z + a Ln (P) +b Ln (PX) + c Ln (Ad) +d Ln (Y)

Where, Q = Quantity Demanded P = Price per unit of bread PX = price per unit of competitors bread Ad = advertisement expenditure by San Francisco Bread Company Y = Customer Income Z = the intercept a = elasticity of Price b = elasticity of competitors price c = elasticity of Advertisement expenditure d = elasticity of income

Results and Analysis

First all the data in the table was applied logarithm and the results are shown in the appendix. Then the regression was done by using the Microsoft Excel Data Analysis. The results are given below. Note: All the figures taken here are to 4 significant figures. Coefficients and Intercept and T-statistic: Z = 4.0427 a = -0.2228 (-4.5340) b = 0.1570 (4.1831) c = 0.1019 (2.5332) d = 0.7510 (8.3424) Acceptability: Multiple R = 0.9060 R2 = 0.8208 F = 28.6284

The equation now is:

Ln (Q) = 4.0427 - 0.2228 Ln (P) + 0.1570 Ln (PX) + 0.1019 Ln (Ad) + 0.7510 Ln (Y)
From the results we can see that the t-statistic of the coefficients is all greater than absolute 2. So the results are acceptable. Moreover, the F value is also greater than absolute 2, proving the results can be acceptable. The R and R2 values are also closer to 1, which shows the results are of good quality. Thus we can accept the results of the regression analysis as all the acceptability tests are passed. The positive Z value shows that even when there is no price and no advertising, there is still demand for the bread. This shows that even without marketing their product San Francisco Bread Company can sell their product. The price coefficient (a) or the price elasticity shows us that the relationship between demand and the price of bread is inelastic. The demand for bread increases by 0.2 times when the price is reduced by $1 per unit. Since, the sign is negative the relationship is normal. This tells us that the law of demand is applied here as when price decreases, the demand increases. Since the price is inelastic, it can be understood that changing the price will not have much effect on demand. So the company should not think of reducing the price to get a bigger market share. Also as the price is inelastic, a decrease in price will also decrease the total revenue of the company. So the company is better off not reducing the price and losing revenue. The competitor price elasticity is 0.16 (approx.) depicts that the competitor price is inelastic and that $1 increase in the competitor price will increase the demand by 0.16 times and vice versa. This tells us that the change in the competitor price is not of that much effect for the bread company. This could be due to various reasons. The customers of San Francisco Bread Company are brand loyal and they do not tend to change from their taste of this bread to other companys breads. So the company does not need to worry about the changes in competitors price. The advertising elasticity is 0.10 (approx.) depicts advertising expenditure is inelastic to demand and that $1 increase in advertising expenditure will increase the demand by 0.10 times. This tells us that the company does not need to spend

greatly in its advertising, as it will be of less use. So it can reduce the advertising expenditure and focus more on production to sell more bread. The customers already have learned about the taste of San Francisco Bread Companys bread, so they do not need much reminder to consume it through advertisement. So focusing more on production could give the company better revenue. Since bread is a daily consumed product, its freshness and quality matters most to its customers. So expenses in these areas would be of greater benefit for the company. The income elasticity is 0.75 (approx.) depicts that income of customers is inelastic to demand and that $1 increase in income will increase the demand by 0.75 times. Its elasticity is positive so its normal. Even though the income is inelastic, it is close to being unit elastic. This means that more the income of the customer increases, the more they will consume this bread. But its not absolutely elastic so in this sense we can say it is one kind of basic necessary goods for the higher class people as well as the target customers point of view. Though, target customers of bread are higher class people. Also among all the other factors income is the only factor that is close to elastic. From this we can understand that, the consumers of the bread are the people of wealthy class. So this bread has set a good impression in the minds of the wealthy people. Thus the company should be more focusing on the quality of the bread as said before, the freshness and the packaging so that the bread looks more attractive to the people of higher class. Thus on the whole from this elasticity analysis we can understand that the demand for bread is inelastic to its price, advertising, changes in competitor price and income of consumers. So the company can keep the price of the bread at a standard level slightly lower than the competitors price, so that their revenue flow is not hampered. Although a decrease in price will decrease the revenue as the price is inelastic, but lowering it slightly than the competitors will increase the demand for bread. Thus the decrease in the revenue can be covered. They should focus more on the quality and the freshness and packaging of the bread than advertising and target high income group people as their customers of focus. If these business decisions are taken, then San Francisco Bread Company is surely to flourish is future.

Appendix
The Original Data:

San Francisco Bread Company

Market 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Demand (Q) in packs 596,611 596,453 599,201 572,258 558,142 627,973 593,024 565,004 596,254 652,880 596,784 657,468 519,866 612,941 621,707 597,215 617,427 572,320 602,400 575,004 667,581 569,880 644,684 605,468 599,213 Price (P) per unit 7.62 7.29 6.66 8.01 7.53 6.51 6.20 7.28 5.95 6.42 5.94 6.47 6.99 7.72 6.46 7.31 7.36 6.19 7.95 6.34 5.54 7.89 6.76 6.39 6.42 Competitor Price (PX) per unit 6.54 5.01 5.96 5.30 6.16 7.56 7.15 6.97 5.52 6.27 5.66 7.68 5.10 5.38 6.20 7.43 5.28 6.12 6.38 5.67 7.08 5.10 7.22 5.21 6.00 Advertising (Ad) in USD 200,259 204,559 206,647 207,025 207,422 216,224 217,954 220,139 220,215 220,728 226,603 228,620 230,241 232,777 237,300 238,765 241,957 251,317 254,393 255,699 262,270 275,588 277,667 277,816 279,031 Income (Y) in USD 54,880 51,755 52,955 54,391 48,491 51,219 48,685 47,219 49,775 54,932 48,092 54,929 46,057 55,239 53,976 49,576 55,454 48,480 53,249 49,696 52,600 50,472 53,409 52,660 50,464

26 27 28 29 30

610,735 603,830 617,803 529,009 573,211

6.82 7.10 7.77 8.07 6.91

6.97 5.30 6.96 5.76 5.96

279,934 287,921 289,358 294,787 296,246

49,525 49,489 49,375 48,254 46,017

The logarithm data:

San Francisco Bread Company

Market 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 Demand (Q) Price (P) Competitor Price (Px) Advertising (Ad) Income (Y)

13.2990 13.2988 13.3034 13.2573 13.2324 13.3503 13.2930 13.2446 13.2984 13.3891 13.2993 13.3962 13.1613 13.3260 13.3402 13.3000 13.3333 13.2575 13.3087 13.2621 13.4114 13.2532 13.3765 13.3138 13.3034 13.3224 13.3110 13.3339

2.0308 1.9865 1.8961 2.0807 2.0189 1.8733 1.8245 1.9851 1.7834 1.8594 1.7817 1.8672 1.9445 2.0438 1.8656 1.9892 1.9961 1.8229 2.0732 1.8469 1.7120 2.0656 1.9110 1.8547 1.8594 1.9199 1.9601 2.0503

1.8779 1.6114 1.7851 1.6677 1.8181 2.0229 1.9671 1.9416 1.7084 1.8358 1.7334 2.0386 1.6292 1.6827 1.8245 2.0055 1.6639 1.8116 1.8532 1.7352 1.9573 1.6292 1.9769 1.6506 1.7918 1.9416 1.6677 1.9402

12.2074 12.2286 12.2388 12.2406 12.2425 12.2841 12.2920 12.3020 12.3024 12.3047 12.3310 12.3398 12.3469 12.3578 12.3771 12.3832 12.3965 12.4345 12.4466 12.4518 12.4771 12.5267 12.5342 12.5347 12.5391 12.5423 12.5704 12.5754

10.9129 10.8543 10.8772 10.9040 10.7891 10.8439 10.7931 10.7626 10.8153 10.9139 10.7809 10.9138 10.7376 10.9194 10.8963 10.8113 10.9233 10.7889 10.8827 10.8137 10.8705 10.8292 10.8857 10.8716 10.8290 10.8102 10.8095 10.8072

29 30

13.1788 13.2590

2.0882 1.9330

1.7509 1.7851

12.5940 12.5989

10.7842 10.7368

Regression Summary
SUMMARY OUTPUT Regression Statistics 0.9059834 Multiple R 62 0.8208060 R Square 33 Adjusted R 0.7921349 Square 98 0.0259586 Standard Error 4 Observations 30 ANOVA df Regression Residual Total 4 25 29 SS 0.0771651 19 0.0168462 75 0.0940113 93 Standard Error 1.2052124 27 0.0491461 9 0.0375351 14 MS 0.019291 28 0.000673 851 F 28.62840 638 Significan ce F 5.22497E09

Intercept Price (P) Competitor Price (Px)

Coefficients 4.0427071 42 0.2228273 41 0.1570120 73

t Stat 3.354352 354 4.533969 785 4.183071 646

P-value 0.002539 277 0.000124 71 0.000309 225

Lower 95% 1.560525 704 0.324045 814 0.079707 058

Upper 95% 6.524888 579 0.121608 869 0.234317 088

Lower 95.0% 1.560525 704 0.324045 814 0.079707 058

Upper 95.0% 6.524888 579 0.121608 869 0.234317 088

Advertising (Ad) Income (Y)

0.1018784 46 0.7510416 11

0.0402165 79 0.0900272 31

2.533244 915 8.342382 654

0.017948 285 1.08528E08

0.019050 85 0.565627 059

0.184706 041 0.936456 163

0.019050 85 0.565627 059

0.184706 041 0.936456 163