Demand estimation

Elasticity
To get

estimation is what we want.

Arc elasticity, we need discrete data

points
To get

point elasticity, we need a demand

function specified.

 How

do we get a specific demand function?

 Can

specify a relationship as observed in

past data.

With

the hypothetical data given earlier, what

kind of a demand function can be specified?

 The
How

specification should explain the data.

is it done?
- explain with a scatter diagram.

 With

many independent variables?

Resort

to statistical techniques.

- Regression.

Steps

STEPS:

Listing of variables

Model specification

Data collection

Run the regression

Check the results

Demand function

Demand = f( price, income, prices of related goods, etc.)

Functional relationship to be specified and estimated

Linear or non-linear

Linear- Regression technique.

Qx= a + bPx + cI + dPr + ..

Regression helps us estimate the values of a,b,c,d

An Example

Demand Estimation for Pizzas in the U.S

Variables: Demand for Pizzas-Dependent variable;

Independent Variables: Own Price (X1), Avg Annual
Tuition
Fee(X2), Price of Soft drink(X3),Location(X4)

Linear Model: a+bX1+cX2+dX3+eX4

Data: Time series or cross section-Past data

 Results:
Q

= 38.5 0.16X1+ 0.02X2 - 0.05X3 +

2.67X4

Interpretation

 Coefficient
Tests
p-

of Determination : R2

of Statistical significance

value

Results continued

Elasticity estimation
Base values
X1: 1.75; X2: 15000; X3:0.75; X4(urban):0

Q = 7.05

Own Price elasticity: -0.16*175/7=-4

Tution Fee Elasticity: 0.02*15/7=0.04

 Compute

the cross price elasticity.

 Valid

for what range?

Important

because elasticity varies along a

linear function.

 More

Estimations:

Demand for 45-inch colour TV sets sold by

Computronics

Q=1000

2P+0.0003A+ 0.001I
+0.000001N+0.1Pr

Non-Linear Specifications:

Exponential form: aXb Yc Zd

Linearize using logs

Lg a +b lgX + c lgY + d lgZ

Data to be fed in as logs.

* The coefficients are the elasticities

Coefficients are elasticities

S

= B* A * P

S/

A = B * A -1 * P

S/

A = S * / A

= S/ A * A / S

Example of Log-Linear estimation:

Demand for SriLankan tea in the US.

Log Q = b log Pc+c logPi+ d log Pb + eLog Y

Where, Pc is the price of SriLankan tea; Pi is the

price of indian Tea

Pb is the price of Brazilian coffee; Y is income

 Results:

-1.481Log Pc+1.181 Log Pi+0.186log Pb+

0.257 log Y

Interpretation

of coefficients as Elasticities .