Chapter 4

Demand Estimation and

Forecasting

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 Demand Estimation Techniques

Qualitative Quantitative
- consumer Surveys - Statistical estimation
- Market Experiments Techniques
- Consumer Clinics - Regression

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 Steps in Demand Estimation
Exercise
• Identification of variables
• Collection of Data
• Mathematical specification of the relationship
• Estimation of the parameters
• Using these estimates to arrive at estimates of
variables

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A Simple Linear Regression Model

• Y = a + BX + u
Where Y is the dependent variable
X is the independent variable
‘a’ is the intercept ; ‘b’ is the slope ; ‘u’ is the
error term.

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 Method of Estimation

• Method of Ordinary Least Square( OLS)

- minimizes the sum of the squared deviations of
each of the points from the mean.

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 Coefficient of Determination

• Regression Sum of Squares (RSS) / Total

Sum of Squares (TSS) is R2 – Coefficient of
Determination
• If R2 = 1, the best fit.
• If R2 = 0.4, 40% of the total deviations is
explained by the regression

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 Graphical Representation

R2 = 1 R2 = 0

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 Problems in using Regression

• Multicollinearity – where there is dependency

amongst independent variables
• Identification problem
• Auto correlation

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 Interpretations
• Linear Regression estimates:
- The coefficients of the independent
variables are Partial Derivatives and give us
the change in the dependent variable due to
a change in the independent variable
keeping all others constant.
- This is used to compute elasticities with the
base values of the variables.

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 Interpretations
Log linear Regression estimates:
The coefficients themselves are the
elasticities.
Elasticities can be computed once demand
equations are estimated.

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 Interpretations
• t- tests have to performed to ascertain
‘statistical significance’ of the estimates

• F-test to be performed to ascertain

statistical significance of the entire
equation.

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 Forecasting Techniques

• Opinion polls and market research

• Expert opinion
• Surveys
• Economic indicators
• Projection Techniques
• Econometric Models

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 Time Series Projection using Least
Square method
• How the dependent variable moves with
time
Yt = f (Tt , St , Ct , Rt ) where
Yt is the actual value of the data in time series
Tt is the trend component at time ‘t’
St is the seasonal component at time ‘t’
Ct is the cyclical component at time ‘t’
Rt is the random component at time ‘t’

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