Managerial Economics in a

Global Economy, 5th Edition

by
Dominick Salvatore
Chapter 4
Demand Estimation

Prepared by Robert F. Brooker, Ph.D.

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 1

Demand Estimation:
Marketing Research Approaches

Consumer Surveys
Observational Research
Consumer Clinics
Market Experiments
Expert Opinion
Delphi Method

Prepared by Robert F. Brooker, Ph.D.

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 2

Regression Analysis
Year

10

44

40

11

42

12

46

11

48

12

52

13

54

13

58

14

56

10

15

60

Prepared by Robert F. Brooker, Ph.D.

Scatter Diagram

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 3

Regression Analysis
Regression Line: Line of Best Fit
Regression Line: Minimizes the sum of
the squared vertical deviations (e t) of
each point from the regression line.
Ordinary Least Squares (OLS) Method
Prepared by Robert F. Brooker, Ph.D.

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 4

Regression Analysis

Prepared by Robert F. Brooker, Ph.D.

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 5

Ordinary Least Squares (OLS)

Model:

Yt a bX t et

Yt a bX
t
et Yt Yt

Prepared by Robert F. Brooker, Ph.D.

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 6

Ordinary Least Squares (OLS)

Estimation Procedure
n

(X
t 1

X )(Yt Y )

2
(
X

X
)
t

a Y bX

t 1

Prepared by Robert F. Brooker, Ph.D.

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 7

Ordinary Least Squares (OLS)

Estimation Example
Time

Xt

1
2
3
4
5
6
7
8
9
10

10
9
11
12
11
12
13
13
14
15
120

n 10

Yt
44
40
42
46
48
52
54
58
56
60
500

X t 120

Yt 500

t 1

X
t 1

X t 120

12
n
10

t 1

Yt 500

50
10
t 1 n

Prepared by Robert F. Brooker, Ph.D.

Xt X

Yt Y

-2
-3
-1
0
-1
0
1
1
2
3

-6
-10
-8
-4
-2
2
4
8
6
10
n

(X
t 1

t 1

( X t X )2

12
30
8
0
2
0
4
8
12
30
106

4
9
1
0
1
0
1
1
4
9
30

X ) 2 30

106
b
3.533
30

X )(Yt Y ) 106

a 50 (3.533)(12) 7.60

(X

( X t X )(Yt Y )

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 8

Ordinary Least Squares (OLS)

Estimation Example
n

n 10
n

X
t 1

t 1

t 1

Y
t 1

500

Yt 500

50
10
t 1 n

X ) 30

X )(Yt Y ) 106

a 50 (3.533)(12) 7.60

(X

120

106

b
3.533
30

(X

t 1

X t 120

12
n
10

Prepared by Robert F. Brooker, Ph.D.

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 9

Tests of Significance
Standard Error of the Slope Estimate

sb

(Yt Y )

(n k ) ( X t X )

Prepared by Robert F. Brooker, Ph.D.

e
(n k ) ( X
2
t

X
)
t

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 10

Tests of Significance
Example Calculation
Yt

et Yt Yt

et2 (Yt Yt ) 2

( X t X )2

44

42.90

1.10

1.2100

40

39.37

0.63

0.3969

11

42

46.43

-4.43

19.6249

12

46

49.96

-3.96

15.6816

11

48

46.43

1.57

2.4649

12

52

49.96

2.04

4.1616

13

54

53.49

0.51

0.2601

13

58

53.49

4.51

20.3401

14

56

57.02

-1.02

1.0404

10

15

60

60.55

-0.55

0.3025

65.4830

30

Time

Xt

Yt

10

e (Yt Yt )2 65.4830
t 1

2
t

t 1

Prepared by Robert F. Brooker, Ph.D.

(X
t 1

(Y Y )
( n k ) ( X X )
2

X ) 30
2

sb

65.4830
0.52
(10 2)(30)

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 11

Tests of Significance
Example Calculation
n

t 1

t 1

2
2

(
Y

Y
)
t t t 65.4830
n

2
(
X

X
)
30
t
t 1

(Yt Y )

65.4830
sb

0.52
2
(n k ) ( X t X )
(10 2)(30)
Prepared by Robert F. Brooker, Ph.D.

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 12

Tests of Significance
Calculation of the t Statistic
b 3.53
t
6.79
sb 0.52

Degrees of Freedom = (n-k) = (10-2) = 8

Critical Value at 5% level =2.306
Prepared by Robert F. Brooker, Ph.D.

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 13

Tests of Significance
Decomposition of Sum of Squares
Total Variation = Explained Variation + Unexplained Variation

2
2

(Yt Y ) (Y Y ) (Yt Yt )
2

Prepared by Robert F. Brooker, Ph.D.

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 14

Tests of Significance
Coefficient of Determination
R2

Explained Variation

TotalVariation

(
Y

Y
)

2
(
Y

Y
)
t

373.84
R
0.85
440.00
2

Prepared by Robert F. Brooker, Ph.D.

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 15

Multiple Regression Analysis

Model:

Prepared by Robert F. Brooker, Ph.D.

Y a b1 X 1 b2 X 2 L bk ' X k '

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 16

Steps in Demand Estimation

Model Specification: Identify Variables

Collect Data
Specify Functional Form
Estimate Function
Test the Results

Prepared by Robert F. Brooker, Ph.D.

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 17

Functional Form Specifications

Linear Function:
QX a0 a1 PX a2 I a3 N a4 PY L e

Power Function:
QX a( PXb1 )( PYb2 )

Prepared by Robert F. Brooker, Ph.D.

Estimation Format:
ln QX ln a b1 ln PX b2 ln PY

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 18