# chapter5 - Norton Media Library Chapter 5 Estimating Demand...

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Chapter 5 Estimating Demand Functions Norton Media Library W. Bruce Allen Neil A. Doherty Keith Weigelt Edwin Mansfield

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Here we observe price-quantity observations tracing out what seems to be a demand curve But these prices and quantities may have been generated by movements in supply curves as well as demand curves The Identification Problem
5.2 shows that this “demand curve” is really a set of demand=supply equilibrium points

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Only in 5.3 is the demand curve identified by the shifting of the supply curves alone. Thus we are statistically holding factors that shift demand constant in 5.3.
Methods Used to estimate Demand Functions Consumer Interviews Market Experiments Linear Regression Analysis—fitting a straight line through a scatter of points to measure relationships among variables

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Regression Analysis Suppose that we have isolated a demand curve for a firm. We would like to know quantitative aspects of this demand curve. For example: by how much do sales Y increase as a result of more advertising X? We’ll use the following linear demand curve to illustrate: Here the other variables are price P, price of related commodities and disposable Income I EI DP CP BX A R + + + + = ' Y ) 1 (
Bear in mind that a popular alternative to the linear curve is the constant elasticity demand curve, which is linear in logarithms: Proceeding with (1), regression analysis allows you to obtain estimates of the coefficients. I E P D P C X B A Y R ln ln ln ln ln ) 2 ( + + + + =

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Simple Regression Regression passes a line through the data in such a way as to minimize the distance of the predicted line from the scatter of data points. To focus on advertising X, suppose that all
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chapter5 - Norton Media Library Chapter 5 Estimating Demand...

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