Demand Estimation: Regression Analysis, Elasticities, Forecasting Decisions

Introduction It would be impossible for any business to survive if there were no demand for their product. Therefore, one of the most important attributes of managerial economics is demand estimation. Demand estimation is an important tool because it helps the managers to estimate demand using a scientific method known as Econometrics. It is essential for a manager to be able to determine the appropriate variables of demand function, according to the textbook, Managerial Economics Applications: Strategies and Tactics, by James McGuigan, R. Charles Moyer and Frederick Harris (2014), “Effective decision making eventually requires the quantitative measurement of economic relationships” (p. 100). Thus, when the variables of demand function are understood, it will be easier for management to make forecasting decisions with fewer errors.
In this paper, demand estimation will be done through a regression analysis. This analysis will examine the elements that management should look at when determining demand for a product such as: price, competitor’s price, customer income, advertising and the cost of microwave ovens. The main objective of this paper will be to: estimate the demand function using regression analysis, find elasticities of demand with respect to various variables and make forecasting decisions based upon the values of elasticities. The data to compute the equation will be gathered from twenty-six grocery stores throughout the country for the month of April. Compute the Elasticities for Each Independent Variable.
Qd=-5200-42P+20Px+5.2I+.20A+.25M, when P=500, PX=600, I=5,500, A=10,000, and M=5,000.
Price (P)
Ep = (Dq÷Dp) x (P ÷Q)
Ep = -42 x (5÷26,560)
Ep = -.008
Less than 1, inelastic

Competitor Price (PX)
Epx = (Dq÷Dp) x (Px ÷Q)
Epx = 20 x (6÷26,560)
Epx = .005
Less than 1, inelastic
Income (I)
Ei = (Dq÷Dp) x (I÷Q)
Ei = 5.2 x (5500÷26,560)
Ei = 1.08
Greater than 1, elastic

Advertising (A)
Ea = (Dq÷Dp) x (A÷Q)
Ea = .20 x

References: Mankiw, N. G. (2012). Essentials of economics. (6th ed., pp. 22-23). Mason, OH: South-Western Cengage Learning. McGuigan, J. R., Moyer, R. C., & Harris, F. H. deB. (2014).Managerial economics: applications, strategies and tactics (13th ed.).Stamford, CT: Cengage Learning. O 'Sullivan, A., Sheffrin, S., & Perez, S. (2012). Survey of economics: principles, applications, and tools (5th ed.). Upper Saddle River, NJ: Pearson-Prentice Hall.