Expert in study
Jan 21, 2021

What is the main problem of estimation of demand function?​

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1) The demand for any com­modity is a single-valued function of prices and in­come (i.e., a single commodity combination corresponds to a given set of prices and income) and(2) Demand functions are homogeneous of degree zero in prices and income (i.e., if all prices and in­come change in the same direction and proportion, there is no change in the purchase plan of a consu­mer).

These properties are well established in eco­nomic theory. But the businessman is actually in­terested in having firm knowledge of a portion of the demand curve for the product in which he is in­terested.

It is, of course, possible to estimate the demand function for primary products (e.g., agricul­tural commodities) since data on prices and quanti­ties are readily available for a number of years. But this is not true in the case of manufactured goods.

There is another problem due to the existence of dealers in most markets. Most often than not manu­facturers sell directly to dealers and not to the fi­nal consumers. In the short-run, the whole amount taken by dealers may not be sold to the consumers. The quantities taken by dealers tend to correspond with those taken by consumers only in the long-run

Dagm Dagm
Jan 21, 2021
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