Chapter 7 - Demand estimation and forecasting. After studying this chapter you will be able to: Specify an empirical demand function - both linear and nonlinear functional forms; for price-setting firms with market power, you will learn to how to use least-squares regression methodology to estimate a firm’s demand function; forecast sales and prices using time-series regression analysis;...
n bias the estimation of parameters in linear trend forecasting • To account for such variation, dummy variables are added to the trend equation • Shift trend line up or down depending on the particular seasonal pattern • Significance of seasonal behavior determined by using ttest or pvalue for the estimated coefficient on the dummy variable 7 Managerial Economics Sales with Seasonal Variation (Figure 7.3) 2004 7 2005 2006 2007 Managerial Economics Dummy Variables • To account for N seasonal time periods • N – 1 dummy variables are added • Each dummy variable accounts for one seasonal time period • Takes value of 1 for observations that occur during the season assigned to that dummy variable • Takes value of 0 otherwise 7 Managerial Economics Effect of Seasonal Variation (Figure 7.4) Qt Q t = a’ + b t Sales Q t = a + b t a’ c a t Time 7 Managerial Economics Some Final Warnings 7 • The further into the future a forecast is made, the wider is the confidence interval or region of uncertainty • Model misspecification, either by excluding an important variable or by using an inappropriate functional form, reduces reliability of the forecast • Forecasts are incapable of predicting sharp changes that occur because of structural changes in the market .. .Managerial Economics Sales with Seasonal Variation (Figure 7. 3) 2004 7 2005 2006 20 07 Managerial Economics Dummy Variables • To account for N seasonal time periods • N – 1 dummy variables are added... Takes value of 0 otherwise 7 Managerial Economics Effect of Seasonal Variation (Figure 7. 4) Qt Q t = a’ + b t Sales Q t = a + b t a’ c a t Time 7 Managerial Economics Some Final Warnings 7 • The further