ESTIMATING DEMAND

FUNCTION &
FORECASTING
DEMAND USING
REGRESSION MODEL
 Revision..
Law of demand: PRICE & QUANTITY of demanded
are inversely related.

Qdx 1/Px
As the price of good increase (decrease) and all
other things remain constant, the quantity
demanded of the good will decrease (increase)
Demand Curve
 Demand shifters
Other variables that influence the demand.
Revise change in quantity demanded & change
in demand.
Change in quantity demanded: changes in the
price of good leads to a change in quantity
demanded. Movement along the the demand
curve.
Change in demand: change in other variables
other than price lead to change in demand.
Shift in the demand curve.
 Demand shifters (cont)
Consumer income
Normal goods change in demand (increase) R shift
Inferior goods decrease in demand. L shift
Price of related/substitute goods
Substitute: price of good - Q for substitute
Complement: Price of good - Q for complement
Advertising
Consumer tastes
Population
Consumer expectations
Other factors e.g health scare
Can AFFECT demand
 Demand function
A function that describes how much of a good
will be purchased at alternative price of that
good and related goods, alternative income
levels, and alternative values of other variables
affecting the demand.
 Demand function

Qdx= f (Px, Py, M, H)

Px = price of good

Py = price of related good

M = income

H = other variables (advertising, population, etc)

Demand function shows thatquantity of a good

consumed depends on its price and demand shifters.
 Demand function
Different product will have different demand
functions of different forms.
One of simple form of demand function: linear
demand function.

Qdx = 0 + XPX + Y PY + MM + HH
 Demand function
Qdx = 0 + XPX + Y PY + MM + HH
fixed number given
By law of demand: increase in Px leads to
decrease in Qdx . So X < 0

Y = will be + or depends on whether its

a complement or substitute good. If (+):
increase in PY increase in consumption of
good X. So X is substitute to Y.
 Demand function
Qdx = 0 + XPX + Y PY + MM + HH
If Y is (-): increase in price of good Y will decrease
the consumption of good X = complement good.

Mcan be (+) or (-) depending whether X is

normal or inferior good.

If M (+)= increase in income (M) will lead to

increase in consumption of good X NORMAL
goods

If M (-)= increase in income (M) will lead to

decrease in consumption of good X INFERIOR
 EXAMPLE
Qdx = 14,000 + 4PX + 5PY + (-1)M + 2H

Qdx = amount consumed of good X

PX = price of good X

PY = price of good Y

M = income

H = advertising
 EXAMPLE
Qdx = 14,000 + 4PX + 5PY + (-1)M + 2H

Suppose price of good X PX= RM 300

PY = RM 20

M= RM 12, 000

H = RM 2000

How much good X do consumer purchase? Are

good X and Y substitutes or complements? Is good
X normal or inferior good?
 EXAMPLE
Qdx = 14,000 + 4(300) + 5(20) + (-1)(12,000) + 2(2000)

Qdx = 14,000 + 1,200 + 100 12,000 + 4000

Qdx = 7,300. consumption of good X

Y is (+), so good X & Y are substitutes. (RM 1 increase

in price of good Y will increase the quantity of good X by
5 units)

M is (-), so RM1 increase in income will decrease the

quantity consumed of good X by 1 unit. So good X is
inferior good.