Demand Estimation | [Type the document subtitle] | | Professor: Dr. Camille Castorina | | ECO 550: Managerial Economics and Globalization | 7/21/2014 | |

In this assignment we will look at a certain scenario that involves estimating the demand of a product when certain variables are put into place. So first thing is understanding what is demand and how does it apply in Economics. “The law of demand states that when the price of a good rises, the amount demanded falls, and when the price falls, the amount demanded rises. Economists have considered this thoroughly and have developed a measure of the degree of cutback, which they call the “elasticity of demand.” The elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price.”

“The greater the absolute value of this ratio, the greater is the elasticity of demand. When there is a close substitute for one firm’s brand, for example, a small percentage increase in that firm’s price may lead to a large percentage cut in the amount of the firm’s good demanded. In such a case, economists say that the demand for the good is highly elastic. On the other hand, when there are few good substitutes for a firm’s product, the firm might be able to raise its price substantially with only a small decrease in the quantity demanded resulting. In such a case, demand is said to be highly inelastic” (Henderson,. D 2008).
Now let’s look at converting all price values into dollars. And then place the values of P, A, Px, I and M in the above equation:

QD = -5200 – (42×5) + (20×6) + (5.2×5500) + (0.20×10000) + (0.25×5000) = 26560. * Price elasticity (ep) = ∂Q∂P×PQ
∂Q∂P = -42, P = 5, Q = 26560…… Own Price elasticity (ep) = - 42× 526560 = - 0.008 (approx.) * Cross price elasticity (exy) = ∂Q∂Px×PxQ
∂Q∂Px = 20, Px = 6, Q = 26560
Cross price elasticity (exy) =