Impact Of Economic Variables On Demand Of Energy Bars In Atollia Market Essay.

1. Interpret and successfully apply economic concepts of supply and demand for effective organisational problem solving.

2. Apply quantitative methods to forecast complex business variables including demand, supply, production and costs.

3. Critically analyse production processes and cost functions and classify the main forms of market structures as well as recommend appropriate pricing and strategies.

4. Critically evaluate the role and impact of various forms of  government intervention in the economy including the implications of competition and deregulation policy for
managerial practices.

Factors affecting demand for energy bars

Different economic variables play an important in decision making process of a business. Depending in the underlying economic scenario, the organization makes their location decision. Volume of sales depend on the demand of the concerned product. In demand estimation, a number factors are taken into consideration. The main factor determining purchasing power and hence demand is income. In context of a nation, national income used as a measure to find aggregate demand. The fluctuation in income or demand influence price level of the economy. Inflation rate captures the trend in the movement of price level (Dullien et al, 2017). In case of goods imported from outside a nation, the demand is also influenced by imposed tariff on import tariff. The paper is intended to make a projection regarding change in these economic variables on demand of the energy bar in the Atollia market. The information is important for Schmeckt Gut that plans to introduce Besser energy bar the Atollia market within few months.

A market research is conducted on Atollia market. The findings of market research with the aid of economic theories are used to analyze the likely impact of changes in income, inflation and tariff on demand. The analysis aims to provide some useful insight to the company before launching the energy bar in Atollia market.

A projected increase in income comes with a projected increase in import tariff and inflation. In order to model the relation of demand for energy bars with income, inflation and tariff rate a multiple regression analysis is conducted (Keith, 2014). In the regression model demand is taken as the dependent variable and income, inflation and tariff rate is taken as independent variables. 

Based on the regression result the demand equation thus estimated as

For the fitted model the value of adjusted R square is obtained as 0.83.  R square value in the regression model represents the overall explanatory power of the model (Lewis-Beck & Lewis-Beck, 2015). The obtained value of R square thus signifies that income, import tariff and inflation together explain 83% variation in the energy bar demand. The model thus has an overall significance.

The co-efficient of income is 0.0181. The positive coefficient represents a positive relation between income and demand. A 10% increase in income is associated with a 0.1% increase in energy bar demand.  P value of the income coefficient is 0.0000. As the p value is less than the significant value of 0.05, the variable thus is statistically significant. Because of positive significant relation a rinsing income trend in Atollia market indicate a growing prospect of sales of energy bars in the market.

Multiple regression analysis to model the relationship between demand and economic variables

The next determinant of demand is tariff. Co-efficient of tariff is -12.0488. The negative co-efficient indicates an inverse relation between demand and import. 1% increase in income can reduce the demand by 12%. The tariff thus has a large detrimental effect on demand for energy bar. The co-efficient is highly significant as the p value is less than the level of significance. The Atollia market therefore would not be favorable for business if tariff rate continuous to increase.

For inflation the concerned co-efficient is -14.2870. Like tariff, inflation by raising domestic price level adversely affects energy bar demand. The co-efficient suggests that 1% increase in inflation cause a 14% reduction in demand. The demand for energy bar thus is highly sensitive to changes in price level. The p value is 0.0785 which is greater than 0.05. The variable inflation rate therefore is not statistically significant. The relation though is not valid statistically, an overall inverse relation can be predicted between inflation and demand.

The market research provides information regarding income, tariff, inflation rate, number of gym and the associated quarterly demand for energy bars. Of these demand projection is made upon three variables namely development of income, tariff and inflation. Income has direct impact on demand. There are some products for which demand changes along with the changes in consumption habit. Demand for energy bars is associated with healthy habits of people. An increases in income allows people to afford healthy habits like going to gym, consuming energy bars and others. By the law of demand, price has a negative relation with demand. The magnitude of change in demand depends on the concerned elasticity of demand. Income by increasing purchasing power and demand create an upward pressure on price. Therefore, an income change might be associated with a change in price level or inflation. The price level can be further aggravated with changes in import tariff. Tariff raises the price of imported goods. The imported price when combines with domestic price level, results in an increase in the inflation rate. The association of income, inflation and tariff in influencing demand are analyzed with support of fundamental economic theories. The theories discussed here include basic model of demand and supply, macroeconomic model of aggregate demand and aggregate supply, the Phillips curve and the Laffer curve. Each has its own significance in determining demand, inflation, income and optimum amount of tariff rate.

Interrelation among different macroeconomic variables

Supply and demand are the two basic microeconomic tool used to analyze market dynamics. Demand function captures consumers’ desire to buy a good. The demand function mapped relation between demand and different determinants of demand like price, income price related goods and such others. Supply function on the other hand shows the sellers willingness to supply a good at different prices. These are the two basic tools determining output and price in the market (Baumol & Blinder, 2015). Factors causing changes in demand and supply lead to a change in price output combination.

Next to price, the maximum importance as a determinant of demand is given on income. For any normal good, a rise in income leads to an increase in demand. An increases in income of people in Atolia, allows people to afford a healthy life. They then might prefer to go to a gym for physical fitness. Energy bars are used as a product substitute for full course meal. The energy bars are made to supply energy equivalent to that obtained from other meals.  The increase in income increases demand for energy bars by encouraging people to shift to healthy habit.

The market research finds an increasing trend in income of people. As explained above the increased income has a general tendency to increase the demand for energy bars. The Atollia market thus seems to be an attractive market for Schmeckt Gut to introduce its energy bars. The increased demand initially creates an upward pressure on price which can be reflected from the inflation rate. Inflation is an increase in the general price level. In times rising inflation people cut their spending. Any projected increase in income thus associated with a projected increase in price inflation (Mahanty, 2014). Inflation might also be resulted from an increase in price of imported goods. Tariff rate by raising price of the imported goods produces an adverse impact on demand. Tariff is often offered with the objective of protecting domestic firms from international competition. A high tariff however has a distortionary effect both for importing and exporting nation.

The supply demand dynamics of a single market provides insight of a particular market. In order to understand state of the entire economy the concept of aggregate demand and aggregate supply is needed. The aggregate demand in contrast to individual demand represents the demand of the whole economy (Johnson, 2017). It is expressed as a sum of expenditure made on consumption, investment, government expenditure and net export. The aggregate supply represent the goods and services available to the economy in a given year instead of supply in a particular market. Interaction of forces of aggregate demand and aggregate supply determines gross domestic product and price level in the economy. The is shown in the figure below

The downward sloping curve shows the aggregate demand curve. The aggregate supply curve is the upward sloping curve AS. The two curves meet at point E. It is the point of macroeconomic equilibrium. Corresponding to the macroeconomic equilibrium, the GDP is determined as Y* with associated price level of P*.

The aggregate demand changes in response to changes in different components of aggregate demand. All the three factors income and tariff rate by effecting aggregate demand can influence inflation and real output. When income increases, then there is an overall increase in consumption expenditure. An increase in consumption expenditure increases aggregate demand. As aggregate demand curve shifts upward there is an increase in general price level of inflation. The inflation thus caused by a rising demand side pressure is termed as demand-pull inflation (Jacoby & Brooman, 2017). The increases income marks an increase in both domestic and import demand. The increased import demand however reduces aggregate demand following a decline in net export. In order to restrict import government might opt the policy of imposing an import tariff. The import tariff makes people pay a higher price for the goods imported outside. The increased import price creates an inflationary pressure on the domestic price level.

An interrelation exists among different macroeconomic variables. This is to say that movement in any one variable is associated with a change in other variables. Two such interrelated macroeconomic indicators are inflation and unemployment. The Phillips curve depicts an opposite relation between unemployment and inflation. All other things being equal, an increase in inflation means a higher profitability for each unit of the goods sold. As firms are able to make more profit each unit sold, they are interested to expand output (Mavroeidis, Plagborg-Moller & Stock, 2014). An output expansion in the final goods market have an obvious impact on factor market. In the process as labor demand increases, unemployment falls. For this reasons, a low to moderate inflation rate is accepted for a healthy economy. Any anti-inflationary policy thus might have adverse impact on employment.

For the Atollia market, gain in income results in an increase demand and inflation. As the general price level increases, as depicted by Phillips relation unemployment reduces. The gain in employment can again contribute to an increase income and demand.

Laffer curve describes the relation between rate of tax and revenue generated from the tax. Revenue from taxes does not increase uniformly for every unit increase in tax rate. The revenue at the initial state increases with rise in tax rate. Revenue however continues to be increase up to a certain level. After that level revenue founds to be falling. This makes the Laffer curve to shape like an inverted U (Miravete, Seim & Thurk, 2017). The same rationale is applicable for revenue generated from tariff which is a special form of import tax.

As obtained from the Atollia market analysis result, tariff rate was initially set at 5%. The tariff rate then increases to 10%. However, from the fourth quarter of 2014, rate of import tariff declines to reach at 7.5%. The Laffer curve relation offers an explanation for this trend of tariff rate.

Different economic theories hence explain a 5% increase in income leads to a hike in the demand for energy bars. Domestic suppliers might be unable to meet the increased domestic demand. This put pressures on imported energy bars. With an objective to restrict import tariff can be increased from 5% to 10%. The domestic and import demand together creates an inflationary pressure leading to an inflation rate of 2%. The market research result along with theoretical conceptualization thus provides development income (5%) is associated with an increase in rate of import tariff from Industria (10%) and that of an increases in inflation rate of inflation (2%) (Bernanke, Antonovics & Frank, 2015). The association can be valid for different rate of development in income, inflation and tariff.

The estimated relationship between demand and factors influencing demand (income, inflation and tariff) can be used to determine marketing strategy for the Atollia market. Higher tariff rate on import from Industria has an adverse effect on energy bar demand. The company thus should convince the trade minister to keep the tariff rate as low as possible. In the presence of high tariff, it is not advisable for the company to enter the Atollia market because it then faces a small demand for energy bars. The current tariff rate in Atollia is 7.5%. This is lower than a rate of 10% persisted previously. A reduction is tariff thus has a likely effect of raising the demand. This makes Atollia a favorable market for the company.

In Atollia, there is an increasing trend in income. Following a positive association between income and demand, the company can expect an increasing demand for energy bars. Schmeckt Gut thus can successfully launch its energy bar in the Atollia market. The company however should take an appropriate strategy to compete with existing sellers of energy bars.

Finally, inflation has an adverse impact on demand. In order capture higher market share in the new location the company should set a lower price for the energy bar.

Conclusion 

In Atollia market, the demand for energy bars depend on income, inflation rate and imposed import tariff from Industria. With the help of market research and economic theories it has been found that an increase in income is associated with an increase in tariff rate and inflation. In the estimated demand equation, income is found to have a positive influence on demand. The tariff rate and inflation likely to influence energy bar demand adversely. Income in the market has an upward rising trend. Tariff rate is also at a lower level compared to previous two years. The company therefore can enter the market with suitable marketing strategies.

Reference list 

Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Cengage Learning.

Bernanke, B., Antonovics, K., & Frank, R. (2015). Principles of macroeconomics. McGraw-Hill Higher Education.

Dullien, S., Goodwin, N., Harris, J. M., Nelson, J. A., Roach, B., & Torras, M. (2017). Macroeconomics in Context: A European Perspective. Routledge.

Jacoby, H. D., & Brooman, F. S. (2017). Prices, Wages, and Aggregate Supply. In Foundations of Macroeconomics (pp. 232-251). Routledge.

Johnson, H. G. (2017). Macroeconomics and monetary theory. Routledge.

Keith, T. Z. (2014). Multiple regression and beyond: An introduction to multiple regression and structural equation modeling. Routledge.

Lewis-Beck, C., & Lewis-Beck, M. (2015). Applied regression: An introduction (Vol. 22). Sage publications.

Mahanty, A. K. (2014). Intermediate microeconomics with applications. Academic Press.

Mankiw, N. G. (2014). Principles of macroeconomics. Cengage Learning.

Mavroeidis, S., Plagborg-Møller, M., & Stock, J. H. (2014). Empirical evidence on inflation expectations in the New Keynesian Phillips Curve. Journal of Economic Literature, 52(1), 124-88.

Miravete, E. J., Seim, K., & Thurk, J. (2017). Market Power and the Laffer Curve.

Uribe, M., & Schmitt-Grohé, S. (2017). Open economy macroeconomics. Princeton University Press.