KELOMPOK

5
1. Achmad Gabriel Fahrul U.
175020218113010
2. Firmansyah Aji Nugroho
175020218113014
3. Okki Arnelia Setiani
175020218113019
DEMAND ESTIMATION
AND FORECASTING
Chapter 7
Learning Objectives
Explain strengths and weaknesses of direct methods of demand estimation 1

Specify an empirical demand function 2

Employ linear regression methodology to estimate the demand function for a
single price-setting firm 3

Forecast sales and prices using time-series regression analysis 4

Use dummy variables in time-series demand analysis to account for cyclical or
seasonal variation in sales 5
Discuss and explain several important problems that arise when using statistical
methods to forecast demand 6
DIRECT METHODS OF DEMAND ESTIMATION

Direct methods of demand

estimation are techniques that do
not involve regression analysis.
DIRECT METHODS OF DEMAND ESTIMATION

Consumer interviews
– Range from stopping shoppers to
speak with them to administering
detailed questionnaires.
 Potential problems with consumer interviews

1.
The selection of a
representative
sample
2.
Response bias
3.
The inability of the
respondent to
answer accurately
 Market studies &
experiments
Market studies attempt to hold everything constant during
the study except the price of the good

Lab experiments use volunteers to simulate actual buying

conditions

Field experiments observe actual behavior of consumers

SPECIFICATION OF THE
EMPIRICAL DEMAND FUNCTION

Demand equations derived from actual

market data

Useful in making pricing &

production decisions
 A General Empirical Demand Specification

To estimate a demand function for a product, it is necessary to use a specific

functional form. Here we will consider both linear and nonlinear forms.

𝑸=𝒇 ( 𝑷 , 𝑴 , 𝑷 𝑹 , 𝑵 )
 

 Where,
Q = quantity purchased of a good or service
P = price of the good or service
M = consumers’ income
= price(s) of related good(s)
N = number of buyers
 A Linear Empirical Demand Specification

In linear form, an empirical demand function can be specified as

 
𝑸= 𝒂+𝒃𝑷 +𝒄𝑴 +𝒅𝑷 𝑹 + 𝒆𝑵
In linear form
  ∆𝑄
𝒃=
∆𝑃 b is expected to be negative

  ∆𝑄
𝒄=
∆𝑀 c is positive for normal goods; negative for inferior goods

  = ∆𝑄
𝒅 d is positive for substitutes; negative for complements
∆ 𝑃𝑅
 A Linear Empirical Demand Specification

Estimated elasticities of demand are computed as,

 A Nonlinear Empirical Demand Specification

When demand is specified in log-linear form, the demand function can be written as.

𝒃 𝒄 𝒅 𝒆
 
𝑸=𝒂 𝑷 𝑴 𝑷 𝑵 𝑹

To estimate a log-linear demand function, covert to logarithms

𝒍𝒏 𝑸 =𝐥𝐧 𝒂+𝒃 𝐥𝐧 𝑷 +𝒄 𝐥𝐧 𝑴 + 𝒅 𝐥𝐧 𝑷 𝑹 +𝒆 𝐥𝐧 𝑵
 

In this form, elasticities are constant

 Specify the price-setting firm’s demand function
1

ESTIMATIN
G DEMAND Collect data on the variables in the firm’s
2
FOR A demand function

PRICE-
SETTING
FIRM 3 Estimate the price-setting firm’s demand
TIME-SERIES FORECASTS OF SALES AND
PRICE
A time-series model
A statistical model that shows how
a time-ordered sequence of
observations on a variable is
generated.

Linear Trend Forecasting

Use regression analysis to estimate values of a and b

0
b<0 b>0
Sales are decreasing Sales are increasing
over time over time

b=0
Sales are constant
over time
A Linear Trend Forecast (Figure 7.1)

Estimated trend line

Q
Q̂ 2009
12
2022

Q̂ 2004 
 
20177

Sales
 

  

t

2016
2017
2014
2015
2007

2009
2010
2008

2012
2011

2013

2022
Forecasting Sales for Terminator Pest Control (Figure 7.2)
 SEASONAL (OR
CYCLICAL) VARIATION

Can bias the estimation of parameters in linear trend forecasting

To account for such variation, dummy variables are added to the

trend equation
o Shift trend line up or down depending on the particular
seasonal pattern

o Significance of seasonal behavior determined by using t-

test or p-value for the estimated coefficient on the dummy
variable
 Sales with Seasonal Variation (Figure 7.3)

 
 

     





2014 2015 2016 2017

 Correcting for Seasonal Variation by
Using Dummy Variables

To account for N seasonal time periods

N – 1 dummy variables are added

Each dummy variable accounts for one seasonal time period

Takes value of one (1) for observations that occur
during the season assigned to that dummy variable

Takes value of zero (0) otherwise

The Effect of Seasonal Variation (Figure 7.4)

Qt

Qt = a′ + bt

Qt = a + bt
Sales

c
a′

a
t
Time
Quarterly Sales Data
Dummy Variable Estimates
Dummy Variable Specification
SOME FINAL WARNINGS

The further into the future a forecast is made, the wider is the confidence
interval or region of uncertainty

Model misspecification, either by excluding an important variable or by

using an inappropriate functional form, reduces reliability of the forecast

Forecasts are incapable of predicting sharp changes that occur because of

structural changes in the market
Confidence Intervals
SEKIAN,
TERIMAKASIH
sama-sama.