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Lecture Managerial economics: Chapter 6 - Dr. Hasnain Naqvi

This chapter provides knowledge of demand estimation & forecasting. The contents of this chapter include all of the following: Direct methods of demand estimation, empirical demand functions, nonlinear empirical demand specification, demand for a price-setter, time-series forecasts,. | Demand Estimation & Forecasting Direct Methods of Demand Estimation Consumer interviews Range from stopping shoppers to speak with them to administering detailed questionnaires Potential problems Selection of a representative sample, which is a sample (usually random) having characteristics that accurately reflect the population as a whole Response bias, which is the difference between responses given by an individual to a hypothetical question and the action the individual takes when the situation actually occurs Inability of the respondent to answer accurately Direct Methods of Demand Estimation Market studies & experiments Market studies attempt to hold everything constant during the study except the price of the good Lab experiments use volunteers to simulate actual buying conditions Field experiments observe actual behavior of consumers Empirical Demand Functions Demand equations derived from actual market data Useful in making pricing & production decisions In linear | Demand Estimation & Forecasting Direct Methods of Demand Estimation Consumer interviews Range from stopping shoppers to speak with them to administering detailed questionnaires Potential problems Selection of a representative sample, which is a sample (usually random) having characteristics that accurately reflect the population as a whole Response bias, which is the difference between responses given by an individual to a hypothetical question and the action the individual takes when the situation actually occurs Inability of the respondent to answer accurately Direct Methods of Demand Estimation Market studies & experiments Market studies attempt to hold everything constant during the study except the price of the good Lab experiments use volunteers to simulate actual buying conditions Field experiments observe actual behavior of consumers Empirical Demand Functions Demand equations derived from actual market data Useful in making pricing & production decisions In linear form, an empirical demand function can be specified as Empirical Demand Functions In linear form b = Q/ P c = Q/ M d = Q/ PR Expected signs of coefficients b is expected to be negative c is positive for normal goods; negative for inferior goods d is positive for substitutes; negative for complements Empirical Demand Functions Estimated elasticities of demand are computed as Nonlinear Empirical Demand Specification When demand is specified in log-linear form, the demand function can be written as Demand for a Price-Setter To estimate demand function for a price-setting firm: Step 1: Specify price-setting firm’s demand function Step 2: Collect data for the variables in the firm’s demand function Step 3: Estimate firm’s demand using ordinary least-squares regression (OLS) Time-Series Forecasts A time-series model shows how a time-ordered sequence of observations on a variable is generated Simplest form is linear trend forecasting Sales in each time period (Qt ) are