ESTIMATING DEMAND FUNCTION &

FORECASTING DEMAND USING

REGRESSION MODEL
Group No. 4
Jun Long
Naqib Khalit
Farid Fadzil
Shahrul Abdul Majid
Devan Velayuthan
Nelson Teh
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.
M can 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 goods.
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.
 Next to add:
Elasticity concept
.
.
.
Until regression anaysis
DEFINITION

Forescating is predict or estimate of future event

Demand forecasting is where an estimation or prediction
of market demand where prospects of sales, cost and
profits are important.
Is a essential tools and skills for economists and
businessman to survice in the business industries
How to Forecasting Demand

Qualititive research method

where data and information are been collected and gather not
in numerical form (e.g.: questionnaires, unstructured
interviews or observations. .
Quantitive research method
where data and information are been collected and gather in
numerical form which type of data can be used to construct
graphs and tables of raw data.

Qualitative data is harder to analyze than quantitative

data
Qualititive Research Method

Opinion method
sale force opinion (where information collected from the sales
personnal)
expert opinion (Delphi)
Survey method
sample survey
test marketing
Quantitive Research Method

Trend projection
Barometric method
Simultaneous equation method
Regression analysis method
Regression Analysis Method

Is one of quantitative method where the prediction and

forecast of relationship between at least two variable data
it is generally based on historical data
Regression Analysis of Consumer Demand

It is a statistical technique which is used to "explain" or

"predict" the relationship in an economic variable which
focuses the dependent variable (changes) and the
relationship of one or more independent variables (fixed).
Desirable Characteristics

It shows the exclusive association between the

dependent and the independent variables.
It also provides statistical reliability allowing the
researchers to measure a reliable prediction.
In Econometrics, the economists call it:
BLUE property (Ordinary least squares (OLS) is often used for estimation since it
provides the BLUEor "best linear unbiased estimator" (where "best" means most efficient,
unbiased estimator) given the Gauss-Markov assumptions)
Procedure of Regression Analysis

Specifying the variables

Obtaining data on the variables
Specifying the form of the estimation equation
Estimate the regression parameters using the method of
least squares.
Demand and Elasticity Estimation

Step 1 - The model:

Q = f(A, Px, and Pq), where

Q = Number of 2-year contracts sold

A = Advertising expenditures (in dollars)
Px = Price of 1-year contract (in dollars)
Pq = Price of 2-year contract (in dollars)