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Estimating Demand Curves

The document discusses estimating demand curves, specifically linear and power demand curves. It provides background on demand curve estimation and its purposes, then describes features and identification of linear demand curves, noting they rarely exist in reality due to changing elasticity and relationships between price and demand for different products.

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HIMANSHU DARGAN
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55 views2 pages

Estimating Demand Curves

The document discusses estimating demand curves, specifically linear and power demand curves. It provides background on demand curve estimation and its purposes, then describes features and identification of linear demand curves, noting they rarely exist in reality due to changing elasticity and relationships between price and demand for different products.

Uploaded by

HIMANSHU DARGAN
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Estimating Demand Curves: Estimating Linear and Power Demand Curves

Demand curve estimation refers to the exercise of estimating the demand curve, typically the
market demand curve (as opposed to the individual demand curve) for a good. Demand curve
estimation is typically done for the following purposes:

It may be done by sellers (and in some cases buyers) with significant market power, so that they
can decide the appropriate price to set. Note that buyers or sellers who do not have market power
simply set the price as the market price and know that whatever quantity they produce will get sold.
In contrast, in the extreme case of a monopoly, the seller chooses both the price and quantity but is
not guaranteed to sell everything. In order to be so guaranteed, the seller needs to have a plot of the
market demand curve so that the (price, quantity) pair can be chosen as a point on the demand
curve.

It may be done by buyers or sellers in order to better estimate prices and quantities to buy or sell
for the future. Note that this is advantageous even in a perfectly competitive market: with
knowledge of the future demand and supply curves, sellers can estimate future prices, and therefore
optimize their long-run choices (i.e., make appropriate fixed cost investments).

Linear Demand Curve

Understanding linear demand curves is critical to learning the basics of how a market works and
running a successful business. Being able to use a demand is almost like telling the future, because it
predicts consumer behavior. However, in the real world, most curves are nonlinear, so you
constantly need to analyze demand for your products.

Identification of Linear Demand Curve

A linear demand curve is the graphical representation of the relationship between the price of a
good and the quantity of that good consumers are willing to pay at a certain price at a point in time.
The slope, or rate that the line rises or falls, is equal to the difference between two quantities of a
product — usually represented on the horizontal axis on the graph — divided by the difference price
of two points of the graph — usually on the vertical axis.

Features of Linear Demand Curve

Linear curves rarely exist in the real world because demand depends in large part on elasticity of
demand, or how consumers react to a change in price. Also, the relationship between demand and
price is not always constant. Some products are in demand regardless of price. For instance,
customers probably use about the same amount of electricity regardless of price because it is
essential to living. On the other hand, televisions are a luxury, so consumers usually become
exponentially more willing to buy a unit as the price drops.

Tip for Linear Demand Curve

Look at data from your past sales to graph a demand curve. You may want to hire a market research
firm to help you set the price on your goods or calculate production level if you do not have sales
data. You may also need to use your own estimation skills and to factor in the economic
environment. For instance, Christmas decorations and new toys usually spike in price right before
the holidays but fall during the beginning of the year because demand plummets. In the world of
supply and demand, price increases as demand increases, and vice versa.

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