Chapter 7: Demand Estimation and Forecasting Flashcards
dummy variable
A variable that takes only values of 0 and 1.
empirical demand functions
Demand equations derived from actual market data.
representative sample
A sample, usually drawn randomly, that has characteristics that accurately reflect the population as a whole.
response bias
The difference between the response given by an individual to a hypothetical question and the action the individual takes when the situation actually occurs.
seasonal or cyclical variation
The regular variation that time-series data frequently exhibit.
time-series model
A statistical model that shows how a time-ordered sequence of observations on a variable is generated.
Problems with consumer interviews
- selection of a representative sample
- response bias
- inability of respondent to answer accurately
empirical demand function
Q=a + bP + cM + dP[R]+eN Q = quantity P = price of the good/service M = consumer income P [R] = price of some related good R N = number of buyers
b=chQ/chP, c=chQ/chM, d=chQ/chP[R]
expected signs of the coefficients
- b is expected to be negative
- if good X is normal (inferior), c is expected to be positive (negative)
- if related good R is a substitute (complement), d is expected to be positive (negative)
estimated elasticities of demand
E=b(P/Q), E [M]= c(M/Q), E[XR]=d(P/Q)
log linear demand
Q=aP^bM^cP^d[R]
elasticities are constant: E=b, E[M] = c, E[XR]=d
Empirical demand functions
demand equations derived from actual market data and are useful in making product and pricing decisions.
Q=f(P, M,P[R],N)
price elasticity of demand
E=%chQ/%chP = P/Q = b x P/Q
P&Q inversely related by the law of demand so E is always negative; the larget the abs E, the more sensitive buyers are to a change in price
elastic
segment of demand for which |E| > 1
inelastic
segment of demand for which |E| < 1
