Chapter 7 - Demand estimation and forecasting. After studying this chapter you will be able to: Specify an empirical demand function - both linear and nonlinear functional forms; for price-setting firms with market power, you will learn to how to use least-squares regression methodology to estimate a firm’s demand function; forecast sales and prices using time-series regression analysis. | Chapter 7: Demand Estimation and Forecasting McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. Direct Methods of Demand Estimation Consumer interviews Range from stopping shoppers to speak with them to administering detailed questionnaires Direct Methods of Demand Estimation Potential problems with consumer interviews 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 . | Chapter 7: Demand Estimation and Forecasting McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. Direct Methods of Demand Estimation Consumer interviews Range from stopping shoppers to speak with them to administering detailed questionnaires Direct Methods of Demand Estimation Potential problems with consumer interviews 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 Simple regression analysis Simple linear regression assumes one-way causation Inappropriate for competitive markets Price and output are simultaneously determined in competitive markets Advanced regression techniques are available for estimating demand in competitive markets 7- Empirical Demand Functions In linear form, an empirical demand function can be specified as where Q is quantity demanded, P is the price of the good or service, M is consumer income, & PR is the price of some related good R 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
