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Lecture 6 Demand Estimation 17032020 020520pm

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18 views26 pages

Lecture 6 Demand Estimation 17032020 020520pm

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alpha five
Copyright
© © All Rights Reserved
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Demand Estimation

Demand Estimation is possible through the following ways:


 Survey Method
 Market experiment
 Consumer Clinics
 Virtual Shopping
 Regression Analysis

Survey Method
◦ To collect the information about the demand, researchers
are using participant observation method or focus group
study.
 Primary Method of data collection
 Interview
 Questionnaire
 Phone
 Fax
 Email
Secondary Method
 Journals

 Periodicals

 Annual reports

 Quarterly reviews

 Monthly reports

 Statistical Bulletins
 Market experiments
◦ To estimate the demand for any product, select several
markets with same socio economic characteristics and
compare it with any other market due to any change in
price level, supply and demand. By using the census
data, a firm can determine the demand for its products
keeping in view the age, gender, income, family size
and level of education of a particular society.
 Consumer clinics
◦ These are laboratory experiments in which certain
group of people are selected and a specific amount of
income has been given to them. The people are asked
to spend according to their discretion and the data has
been collected about the demand. It is an artificial and
short-term method to collect the information.
 Virtual shopping
◦ With the advent of modern technology, the people
are preferring the virtual shopping and the data can
be collected about demand of particular things but
it is not true estimates due to lack of technological
facilities in rural areas which consists of around
65% population of Pakistan

 Regression Analysis
◦ Simple Regression model
◦ Multiple Regression model
 The most common method for demand
estimation is Regression Analysis in which
average relationship between dependent and
independent variables have been analyzed.
 There are four steps to estimate the demand
through regression analysis
◦ The first step is model specification of demand
function. It involves the identification of most
important variables which affect the demand.
◦ Second step involves the data collection and its
correct insertion in the program like SPSS or E. Views.
◦ The data can be gathered on yearly, quarterly,
monthly or weekly basis.
◦ Third step is to specify the functional form of
the demand equation to be estimated.
◦ Fourth step is to estimate with the help of
regression method; OLS method and then
interpret in a simple and logical manner.

Qd  f ( P, P0 , Y , T , W , Pop, GP, P e , Y e )
 There are two types of Regression equation

◦ Simple Regression Equation


◦ Multiple Regression Equation

◦ If there is only one independent variable then


it a simple regression equation and

◦ if more than one independent variables, then it


is Multiple Regression Equation
 The most common method for demand
estimation is Regression Analysis in which
average relationship between dependent
and independent variables have been
analyzed.
Qd     P  
 Where  is an error term or Random Term
which captures any shock event that may
effect the dependent variable.
 There are certain conversions which are
required to estimate the demand.
 There are three main models;
◦ Economic Model
◦ Mathematical Model
◦ Econometric Model or Statistical Model

For estimation of the demand, firstly, we have


to convert economic model to mathematical
model and then into statistical model. With
the help of statistical techniques, we can
estimate the demand
 Identification of variables

 Collection of the data

 Formulation of demand model

 Estimation of parameters of the demand

 Development of the forecast based on the


model
 Regression analysis is used to:
◦ Predict the value of a dependent variable based
on the value of at least one independent
variable
◦ Explain the impact of changes in an
independent variable on the dependent variable
Dependent variable: the variable we wish to
explain
Independent variable: the variable used to
explain the dependent variable
 Only one independent variable, x
 Relationship between x and y is
described by a linear function
 Changes in y are assumed to be
caused by changes in x
Positive Linear Relationship NOT
Relationship Linear

Negative Linear No Relationship


Relationship
The population regression
model:
Populatio Rando
Population Independe m
n Slope
nt Variable Error
Coefficien
Dependent y term,
t

y  β0  β1x  ε
Variable intercept or
residua
l

Linear component Random Error


component
(continued)

y y  β0  β1x  ε
Observed
Value of y for
xi
εi Slope =
Predicted β
Random Error 1
Value of y for
xi for this x
value
Intercept =
β0
xi x
The sample regression line provides an
estimate of the population regression line

Estimated Estimate of Estimate of


(or the the regression
predicted) y regression slope
value intercept
Independe

ŷ i  b0  b1x nt variable

The individual random error terms ei have a


mean of zero
 b0 and b1 are obtained by finding the
values of b0 and b1 that minimize the
sum of the squared residuals

e 2
  (y ŷ) 2

  (y  (b 0  b1x))
2
 The formulas for b1 and b0 are:

b1 
 ( x  x )( y  y )
 (x  x) 2

algebraic
equivalent: and
 xy   x y
b1  n b0  y  b1 x
 x 2

(  x ) 2

n
b is the estimated average
0

value of y when the value of x is


zero
b is the estimated change in
1

the average value of y as a


result of a one-unit change in x
 The coefficients b0 and b1 will
usually be found using computer
software, such as Excel or Minitab
and E. views.
 Other regression measures will also

be computed as part of computer-


based regression analysis
Find Regression parameters ( ᵦ ᵦ
0 and
information
1) from following

House Price Square Feet


(y) (x)
245 1400
312 1600
279 1700
308 1875
199 1100
219 1550
405 2350
324 2450
319 1425
255 1700
 Linear Regression model

Y    1 X 1   2 X 2   3 X 3   4 X 4  

 Multiplicative Model Or Simple Log Linear


Regression Model

Y  aX 11 X 2 2 X 3 3 X 4 4 
log Y  log   1 log X 1   2 log X 2   3 log X 3   4 log X 4  log 
 Estimation of demand provides a guideline to
make profit maximizing price and output
decisions
 The objective of regression analysis is to

develop a functional relationship between


dependent and independent variables
 The least Square technique is used to

estimate the regression coefficient


 The least square minimizes sum of square of

the differences between the observed and


estimated values of the dependent variables
over the sample of observations.

 The T test is used to test the hypothesis that a
given independent variable is useful in
explaining the variations in the dependent
variable
 The F test is used to test the hypothesis that

all the independent variables in the regression


equation explains a significant proportion of
the variation in the dependent variable
 The coefficient of determination (r Square)

measures the proportion of variation in the


dependent variable that is explained by the
regression equation.
 Estimate the demand for 15 less
elastic commodities with the help
of any method, mentioned above.
 Make the analysis for the period

of last five years.

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