Empirical demand (Essay Sample)

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Introduction:
This report is a research project into JiffyMed which is an organization that produces and sells a number of medical diagnostic tools. The organization has the Quick Kit as its main product which is a simple-to-use test kit that is used in the diagnosis of Hepatitis C. The kit is supposed to be used by only medically trained personnel who are in clinical laboratories and emergency rooms. The product has made the screening of Hepatitis C a quick and easy process where the patient can receive their results in less than 30 seconds. This report is a combination of the empirical demand function for the produce as well as its demand function. The report has also looked into recommendations to the management of the organization based on the empirical demand function.
Analysis
the price of one kit of Quick Kit is $30 and the price of production of the additional kit is ideally zero. The company has made substantial investments in advertising expenditures in the last three years of its operation. this is because the product is facing competition from a rival product in the market known as HepaTest which is being manufactured by one of the rival companies known as BigPharma. In 2008 the company sold 20,000 Quick Kit kits. The company had spent almost $5,000 in advertising the product in the market and the average income for the Canadian population was $40,000 in 2008. The price for one unit of HepaTest is $40 dollars which is substantially higher than that of QuickKit. Form this figures it is correct to conclude that the advertising ventures paid off very well due to the response that the good has received in the market.
There are a number of factors that have directly affected the number of units of the product that have been sold. These are: the price elasticity of the product, cross-price elasticity of the product and income elasticity of the population.
Price elasticity of demand = (% change in Quantity Demanded)/ (%change in price)
Historic data contained in the company's records indicates that the market is inelastic as far as price is concerned. This is because it is a medical product and therefore a necessity. This means that alone, price has little effect on the quantities demanded. Other drivers for demand are more significant, such as the quality and reliability of the product. If the price is reduced by $2 for each kit, for example, and the change is just 1000 more or less units sold, the price elasticity of demand is 0.35 which means that the market is inelastic.
Price elasticity in this case is a measure of how the demand for the product will be affected due to changes in price of the good. The price elasticity of the good showed that then good is very elastic because the market is very receptive of the good and changes in price do not directly affect its demand. This is because most of the target market can readily afford the product and it is largely being viewed as an essential part of modern medicine because it has helped to save the lives of people who have been diagnosed properly with hepatitis C. Cross price of elasticity looks at the demand for a certain good with respect to price change of a competing product. The cross price elasticity of the product is very low.
Recommendations
I recommend that, since the demand for the product has been very high, it is paramount that the company consider lowering the price and dealing with higher sales volumes. This is based on the assumption that the long term effect is positive. It is possible that the competitors might get the same technology as the company has, which would essentially take away the competitive advantage. Due to the fact that most households can afford to take a test in hospitals as well as hospitals being able to afford buying the product due to the nature of its price. The company as compared to its competition is offering the consumers the product at a very reasonable price and thus most of the consumers are readily willing to purchase the product.
I also recommend that the company carry out price differentiation with an offer for bulk buyers such as hospitals. This will encourage them to buy from the company rather than from the competitors, and essentially mean that the price will enjoy higher sale volumes.
Also, since the marginal costs of making additional units to meet increased demand are already ab...