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Managerial Economics Ch4 1
Managerial Economics Ch4 1
Estimation of Demand
How to estimate a demand
equation?
How to calculate demand
elasticities?
Is this how it’s done?
Last This %
Year Year Change Change
Price $4 $5 $1 +25%
Q 8 10 2 +25%
Ep = +25% / +25% = + 1
Questions:
1) Is Ep = + 1?
2) What’s the right way to do it?
Estimation of Demand
I. The Direct Methods
Interviews and Surveys
Market Experimentations and
Simulations
Practical Issues:
Randomness of the sample
Interviewer bias
The best-of-intentions problem
Confusing questions and confusing answers
Simulation and Market
Experimentations
Q = a + b 1 A + b 2 Px + b 3 Pq
Q = aAb1Pxb2 Pqb3
The Estimated 1st Equation
Q = aAb1Pxb2Pqb3
Two key questions:
What are the advantages of the
multiplicative form over the linear form
How to go about estimating this non-linear
equation?
See pp. 154-56 of McGuigan/Moyer/Harris,
10th ed. for details
The Advantages of the
Multiplicative Form
Q = a Ab1Pxb2 Pqb3
= (b3)[(aAb1Pxb2 Pqb3)/Q]
= b3
How to estimate the parameters of
the multiplicative equation?
Ln Q = Ln a + b1 Ln A + b2 Ln Px + b3 Ln Pq