Factors Influencing Demand for Energy Bars

Discuss about the Customs Economic Principle and Decision Making.

Schmeckt Gut is interested to know about the demand for energy bars in Atollia market. Demand for a good is the desire of people to buy the good backed by their purchasing power (Baumol & Blinder, 2015).  Demand plays an important role in determining profitability of a business. Based on the demand, company can determine their marketing strategy. The most significant determinant of demand is price of the good. Given all the other things constant, an increase in price generally causes a decrease in demand and vice versa. In addition to price various other factors influence demand. Identification of these factors help to understand dynamics of demand. Once the company knows the factors influencing demand, it can set the marketing strategy accordingly. Schmeckt Gut has made a market survey on three specific factors that influence demand for energy bars in Atollia. The first factor is average income. Purchasing power of people is subject to the income. An increase in income thus expected to increase demand and vice versa (Cowen & Tabarrok, 2015). The second factor effecting demand is rate of taiff on import. Tariff is a specific tax imposed on the imported good. The imposition of tariff is likely to have an adverse effect on demand as it increases the price of imported goods. The third factor that is considered to influence energy bar demand is the number of stores where energy bars are offered. The number of stores determine the availability of the product. Larger number of stores means an easier access to the product and hence, a higher demand.

In order to assess the specific relation between demand of energy bar and the three chosen variables a linear regression mode is estimated. A linear regression model represents cause and effect relation between two or more than two variables (Chatterjee & Hadi, 2015). The demand equation to be estimated is set as follows

α: Intercept

β: coefficient for average income

γ: coefficient of tariff rate

γ: coefficient of number of stores

Based on the market survey data of Atollia the regression output for energy bar demand and three related variables is obtained as follows

The value of R square of the linear regression mode is 0.91. The R square value represents proportion of the dependent variable that can be explained the independent variables. This is the coefficient of determination and indicates goodness of fit of the set model. From the value of R square it can be inferred that average income, tariff rate and number of stores where energy bars are offered account nearly 91 percent variation in the demand for energy bars. The value of R square lies between 0 and 1 (Draper & Smith, 2014). Value of R square close to 0 implies that weak correlation exists between the dependent and independent variables. This means the chosen explanatory variables do not have much significance in determining variation of the dependent variable. The model then can be said a bad fit model. A value of R square close to 1 means the model has considered all the relevant variables for explaining variation in the dependent variable. For the current model a high value of R square value of R square is obtained. This implies that the company has chosen relevant variables for determining the demand for energy bars in the Atollia market. The estimated linear regression model for demand is a good fit model.

Regression Output and Analysis

The R square measure provides relevance of the independent variables as a whole. In order to understand impact of individual variable on demand and its impact on marketing strategy individual variable needs to be considered (Darlington & Hayes, 2016). The coefficient corresponding to average income in 0.005. The positive sign of the coefficient implies that income is positively related with energy bar demand. The rational is simple. With increase in income, there occurs a change in taste and preference of people and associated change in the lifestyle. The increased people encourage people to shift their focus towards a healthy life. More people would then join gym and accordingly demand for energy bar increases. The income elasticity of demand is 0.005. This means with 1 percent increase in income demand for energy bars increases by 0.5 percent. Associated p value for the average income per person is 0.016. The p value less than the significance level of 0.05 implies the variable is statistically significant (Schroeder, Sjoquist & Stephan, 2016). Hence, a statistically significant positive relation exists between average income and demand for energy bars.

For tariff rate the estimated coefficient is -6.457. Import tariff thus have an adverse effect on demand for energy bars. The variable tariff is however statistically significant. The factor that is of particular interest of the company is the effect on number of stores on the demand for energy bars. The Board members are particularly interested in knowing the effect of offering energy bar at another stores on the demand for energy bars have. This can be assessed by analyzing the estimated coefficient for number of stores and its statistical significance. the estimated coefficient for number of stores is 4.072. The positive efficient implies a positive relation between number of stores and demand for energy bars. The corresponding elasticity of number of stores with respect to energy bar demand is 4.072. the elasticity measure greater than 1 implies that for every unit increase in the number of stores the demand for energy bars increases more than unit increase in number of stores. The statistical validity of the relationship requires that the variable to be significant at the chosen level of significance. The p value is 0.047. The p value is smaller than the significance level (0.05). Therefore, a statistically significant positive relation exists between number of stores and demand for energy bar.

As suggested from the regression result, number of stores has a positive influence on energy bar demand. Therefore, offering energy bar to an additional store might proof beneficial for the company as this would help to increase demand for energy bar in the Atollia market.

Individual Effects of the Determinants

The Board members of Schmeckt Gut has planned to meet with the trade Minister of Industria. The objective is to convince the minister to establish economic link between the two nation. In order to establish a strong intercountry relationship, any form of barriers like that of tariff should be as low as possible (Kennan & Riezman, 2013). The supporting evidence about the adverse impact of tariff can be understood from the regression analysis. The regression results show the magnitude and potential impact of import tariff on demand for energy bars.

A tariff is a special tax imposed on import. As the tariff on energy bars increases the price of imported energy bars increases. In response to high price, people have a general tendency to reduce the demand for energy bars. The same inverse relation is obtained from regression co-efficient. Estimated coefficient for the tariff rate -6.457. Negative sign of the coefficient implies that as tariff rate increases demand for energy bars decreases and vice versa. The tariff thus affects the profitability of the company in the Atollia market. The demand elasticity with respect to tariff is -6.457. With 1 percent increase in tariff rate, demand for energy bar decreases by more than 6 percent. Among the three chosen factors influencing energy bar demand, the largest coefficient is obtained for tariff rate. This shows the rate of tariff on import of energy bars is the most crucial factor influencing demand.

Coming to the statistical significance of tariff rate, the associate p value for the variable is 0.000. The p value is less than the significance level of 0.05. Therefore, the null hypothesis of no significant relation between demand and tariff rate is rejected implying a statistically significant relation between the two concerned variables. The regression result thus suggest that import tariff is a significant obstacle for the energy bar demand in the Atollia market. with presence of high tariff, it is not possible for the company to experience a demand expansion in the Atollia market. The Board members should make the trade minister understand the possible adverse consequence if high tariff rate on demand of their energy bar and business expansion in the Atollia market. A barrier free relation is thus expected to stimulate energy bar demand. It is possible only when the trade ministry of both nations would agree on some common terms and convince to eliminate trade barriers between the two countries.

Policy Implications for Schmeckt Gut

When a country imposes an import tariff, then the tariff not only affects the importing country but also affect the producers and consumers of exporting countries as well. In autarky both the exporting and importing country face a common world price. At the world price, a significant surplus of the product exists in the exporting country (Kovak, 2013). At the same price, importing countries on the other hand faces a shortage. The shortage in importing country should match with the surplus of the exporting country and this together implies the import volume. Now, when country imposes a tariff on import then price of the product in the importing country increases while that in the exporting country reduces. The difference in the two price is the amount of import tariff. As consumers in the importing countries now face a higher price they reduce their import demand. This increases the available supply of the product in the exporting country. Consumers in the exporting country now increases their demand because of a relatively low price. Producers in the exporting country faces a significant loss in form of reduction in producer surplus (Beshkar, Bond & Rho, 2015). The effect of import tariff in the Atollia market on energy bars of Schmeckt Gut is shown in the figure below.

DD curve shows the demand for energy bars. The corresponding supply curve is SS. The world price is set at P_W.  At this price the demand in the domestic market is q1 and supply in the market is q2. As shown from the diagram, the supply in the domestic market at the world price exceeds that of demand (Leamer & Stern, 2017). The initial export is (q2 – q1). Now with imposition of tariff, price faced by the company in the domestic market is P_E. At this price domestic demand increases from q1 to q3 and that of domestic supply decreases from q2 to q4. The excess supply in the domestic market is now reduces to (q3 – q4). The higher import price reduces demand for energy bars in the Atollia market reducing profitability of the company (Handley, 2014). In the domestic market demand though increases but it is more than offset by the relatively lower price. The loss in producer surplus is shown by the area e + f + g +h.

Trade shows a mutual dependent relation between countries. No country can produce all the goods it needed by itself efficiently. Every nation has its own area of specialization. A nation having specialization in one good can produce the good in a cost efficient way as compared to other nations (Feenstra, 2015). Countries by engaging in free trade can thus enjoy a good quality product at a lower cost. Any barrier to free trade can have a distortionary effect on welfare of both the nations. One form of trade barrier is imposition of import tariff (Felbermayr, Jung & Larch, 2013). The argument in favor of free trade can be made by making a comparative analysis of two situations- one with free trade and another with the presence of barrier is form of import tariff.

Impact of Import Tariff on Energy Bar Demand

Dd and Sd respectively denotes the domestic demand and supply curve. Without trade, the free market equilibrium is determined at E. The point in isolation is obtained from the intersection of domestic demand and supply curve (Viner, 2016). The free market price is P₃ and corresponding quantity produced in the domestic market is Q_5. Now with openness to international trade the quantity available to domestic consumers now increases. The supply curve representing the supply is considered to be perfectly elastic (Helpman & Razin, 2014). The supply curve is now become Sd+Sf. Corresponding to the aggregate foreign and domestic supply, F is the new equilibrium point. At point F, the price has reduced to P_1. At P_1, quantity demand by domestic consumer is OQ₂ while available domestic supply is only up to OQ_1. The difference between OQ₂ and OQ₁ represents the imported quantity. Under free trade, because of a lower world price, the surplus to consumer increases from the area of the triangle NP₃E to FP₁N. The domestic producers though suffer a loss from the low price but the gain to consumers offset the loss to producers resulting in an increases in aggregate social welfare (Balassa, 2013).

Now considers the effect of an import tariff of the amount T. The tariff raise autarky supply curve from Sd + Sf to Sd + Sf + T. As a consequence of tariff equilibrium is now shifts to the point G. In response to tariff, domestic price increases to P_2. The domestic consumers now reduce their demand to OQ_4. The domestic supply after imposition of tariff increases to OQ_3. The import volume now reduces to Q₃Q₄ from earlier Q₁Q₂. The consumer surplus after tariff reduces to the area NP₂G. Therefore, tariff causes a significant loss to consumer surplus (Neary, 2016). The loss in consumer surplus is equivalent to the area P₁P₂GF. The domestic producers however gain a surplus equivalent to area B. Tariff opens up additional source of government revenue. For all the imported good, government now receives a tariff revenue. The total tariff revenue is the volume of tariff times the tariff rate and is the sum of the area T + V. The only gain from tariff is realized in forms of gain in producers surplus and revenue to the government (Baier, Bergstrand & Feng, 2014). The loss to consumer surplus is however much greater than these two gain and hence, social welfare reduces after the introduction of tariff. The aggregate loss is obtained as the area S + U. The tariff thus not only adversely affect the exporting country but also affect the importing country as well. As depicted above tariff leads to no better state of social welfare in either exporting or importing nations. The distortionary effect of tariff implies that countries should always go for free trade as it brings maximum social welfare (Irwin, 2015).

Conclusion

The same argument holds for Industria and Atollia regarding exchange of energy bars. The import tariff in the Atollia market significantly reduces welfare to the consumers in Atollia. Because of high imported price of Schmeckt Gut’s energy bar people in Atollia substitute their demand for energy bar with some cheaper local brand. This though benefits the local producers but in the long run might harm health of the consumer. In Industria, the imposed import tariff reduces domestic price of energy bar. The company would face a significant loss in market share in Atollia. Therefore, go by standard trade theory it is favorable for both the nation to opt a free trade policy (Ries, 2018).

The international trade theory of tariff distortion is further supported by the result of linear regression. From the regression, an inverse relation is obtained between demand of energy bars and rate of tariff on imported energy bars. This statistically significant relation suggests that tariff creates an unfavorable condition for demand of energy bars. The market research indicates that import tariff is vital component for determining demand of energy bars in Atollia. A small import tariff means a high demand for energy bars and vice versa. The trade theory and market research report both suggest that the profitable operation of the company requires a free trade between Industria and Atollia.

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