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Chapter8

# Chapter8 - MANAGERIAL ECONOMICS An Analysis of Business...

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1 MANAGERIAL ECONOMICS An Analysis of Business Issues Howard Davies and Pun-Lee Lam Published by FT Prentice Hall

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2 Chapter 8: Estimating and Forecasting Demand Objectives: After studying the chapter, you should understand: 1. The difference between estimation and forecasting demand 2. The strengths and weaknesses of alternative approaches to estimation 3. The strengths and weaknesses of alternative approaches to forecasting
3 Estimation Estimation attempts to quantify the links between the level of demand for a product and the variables which determine it. The demand for hotel rooms depends upon: their price the price of bed and breakfast accommodation household incomes in visitors’ home countries natural events (the weather, foot-and-mouth disease)

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4 Forecasting Forecasting simply attempts to predict the level of sales at some future date How many Japanese tourists will visit Hong Kong in 2000? How many delegates will attend conferences in London in 2001?
5 Simple Estimation Procedures Direct estimation of an arc elasticity 8 6 100 120 A B But are A and B on the same demand-curve? Quantity Price

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6 Econometric Estimation Q d = f(P o , P c, P s , Y d , T, A o , A c , A s , I. C, E) THE GENERAL FORM OF THE DEMAND FUNCTION ( CANNOT BE ESTIMATED BY THE USUAL METHODS UNTIL A PARTICULAR LINEAR FORM IS CHOSEN) Q d = a + b 1 P o +b 2 P c +b 3 P s +b 4 Y d +b 5 T +b 6 A o +b 7 A c +b 8 A s +b 9 I+b 10 C+b 11 E THE SIMPLE LINEAR FORM Q d = P o a .P c b ,. P s c Y d d T e .A o f A c g A s h I i . C j , E k THE EXPONENTIAL FORM WHICH GIVES log Q d = alogP o +blogP c +clogP s +dlogYd+elogT+flogA o +glog Ac +hlogAs+ilogI+jlog C+klogE THE LOGLINEAR FORM
7 Econometric Estimation In principle, collect data on quantity demanded and the other variables and find the ‘best-fit’ line/plane Price Quantity Demand-curve

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8 For instance, Dr.P-L Lam took the following approach for the Hong Kong Town Gas Industry QUANTITY = b o +b 1 PRICE +b 2 INCOME +b 3 LPGPRICE +b 4 CLPPRICE +b 5 DUMMY PRICE = PRICE OF TOWNGAS INCOME = GROSS DOMESTIC INCOME LPGPRICE = PRICE OF LPG CLPPRICE = PRICE OF ELECTRICITY DUMMY = 0 before 1982, 1 afterwards (to measure the effect of the Safety report in 1981)
9 RESULTS FOR TOWNGAS Estimates for elasticities PRICE -.263 (not significant) INCOME +1.531** LPGPRICE +.059 (not significant) CLPPRICE -.053 (not significant) DUMMY +.363** R 2 = 0.993

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10 Problems with Econometric Estimation 1. The best fit may not be a good fit 2. The co-efficients are only good estimates for the
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