Spreadsheet Analysis of Product Demand and Supply Conditions

Spreadsheet analysis is an appropriate means for studying the demand and supply effects of possible changes in various exogenous and endogenous variables. Endogenous variables include all important demand- and supply-related factors that are within the control of the firm. Examples include product pricing, advertising, product design, and so on. Exogenous variables consist of all significant demand- and supply-related influences that are beyond the control of the firm. Examples include competitor pricing, competitor advertising, weather, general economic conditions, and related factors.

In comparative statics analysis, the marginal influence on demand and supply of a change in any one factor can be isolated and studied in depth. The advantage of this approach is that causal relationships can be identified and responded to, if appropriate. The disadvantage of this marginal approach is that it becomes rather tedious to investigate the marginal effects of a wide range of demand and supply influences. It is here that spreadsheet analysis of demand and supply conditions becomes useful. Using spreadsheet analysis, it is possible to learn the demand and supply implications of an almost limitless range of operating scenarios. Rather than calculating the effects of only a few possibilities, it is feasible to consider even rather unlikely outcomes. A complete picture can be drawn of the firm's operating environment, and strategies for responding to a host of operating conditions can be drawn up.

To illustrate this process, consider the case of Sunbest Orange Juice, a product of California's Orange County Growers' Association. Both demand and supply of the product are highly sensitive to changes in the weather. During hot summer months, demand for Sunbest and other beverages grows rapidly. However, hot, dry weather has an adverse effect on supply by reducing the size of the orange crop.

Demand and supply functions for Sunbest are as follows:

Qd = 12,275,000 - 2,500,000P + 200,000PS + 75Y + 5,000T (Demand) Qs = -27,450 + 6,000,000P - 240,000PL - 220,000PK - 200,000T (Supply)

where P is the average wholesale price of Sunbest ($ per case), PS is the average wholesale price of canned soda ($ per case), Y is disposable income per household ($), T is the average daily high temperature (degrees), PL is the average price of unskilled labor ($ per hour), and PK is the risk-adjusted cost of capital (in percent).

During the coming planning period, a wide variety of operating conditions are possible. To gauge the sensitivity of demand and supply to changes in these operating conditions, a number of scenarios that employ a range from optimistic to relatively pessimistic assumptions have been drawn up:

Operating Environment Price of Sunbest Price of Soda Disposable Income Temperature

for Demand

P)

(Ps)

(I)

(T)

Optimistic Scenario 1

$5.00

$4.00

$39,500

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