DEMAND

ESTIMATION
DEMAND ESTIMATION

Is a prediction focusing on future consumer behaviour.

It predicts demand for a business’s products or services by
applying a set of variables that show how, for example,
price changes, a competitor's pricing strategy or changes in
consumer income levels will affect product demand.
IDENTIFICATION PROBLEM

Changing Nature of Demand Relations

Interplay of Demand and Supply
Shifts in Demand and Supply
Simultaneous Relations
IDENTIFICATION PROBLEM

• Changing Nature of Demand Relations

• Demand relations are dynamic.
• Interplay of Demand and Supply
• Economic conditions affect demand and supply.
• Shifts in Demand and Supply
• Curve shifts can be estimated.
• Simultaneous Relations
• Quantity and price are jointly determined.

© 2009, 2006 South-Western, a part of Cengage Learning

© 2009, 2006 South-Western, a part of Cengage Learning
CHANGING NATURE OF DEMAND
RELATIONS

The dynamic nature of demand relations makes it

tough to accurately estimate demand, and even tougher to
determine the effect on demand of modest changes in
prices, advertising, credit terms, prices of competing
products, and so on. The unpredictable nature of the
overall economy is another factor that makes demand
estimation difficult.
INTERPLAY OF
DEMAND AND
SUPPLY
SHIFTS IN DEMAND AND SUPPLY
SIMULTANEOUS RELATIONS
STATISTICAL METHODS

• These are various quantitative methods to find the exact

relationship between the dependent variable and the
independent variable(s).
• The most common method is Regression Analysis
LIMITATION OF STATISTICAL
METHODS

• They require a lot of data in order to be performed.

• They necessitate a large amount of computation.
SPECIFYING THE REGRESSION
MODEL

Linear Model: Q = b0 + bPP + bAA + bII

Multiplicative Model: Q = b0PbPAbAIbI

LEAST SQUARE METHOD

The method of least squares estimates, or fits, the

regression line that minimizes the sum of squared
deviations between the best-fitting line and the set of
original data points.
© 2009, 2006 South-Western, a part of Cengage Learning
© 2009, 2006 South-Western, a part of Cengage Learning