Question

how do you estimate a demand curve given quantity and sales

Answer 1

Demand curve is the graph that related the quantity sold and price, showing the maximum number of units that will be sold at a given price. As price falls, more people decide to buy and unit sales increase.

The demand curve shows the link that exists between a product’s price and how much of that product people are willing to buy. Usually, the relationship is inverse. This means if the price of a product increases, the quantity bought by consumers will fall and sales decrease.Alternatively, if the price falls, consumers would be eager to acquire more of the product and sales increase.

Inother words, the demand curve measures how consumers will react to a change in price. This information can help businesses understand the effect that different pricing policies could have on product sales.

1. Collecting Data

Businesses can start off with doing some market research on their products, including conducting consumer surveys to understand how people would react to a price hike or a price discount. Other research techniques at a firm’s disposal are focus groups, which could give insight into how much consumers would react to changes in price.

For example, a chocolate company can give out questionnaires to a focus group of girls to understand their taste when buying a chocolate.

2. Statistical Tools

After collecting the data, basic computer models can then be used to estimate the demand curve. There are many types of computer packages that businesses or corporate analysts can use to estimate the demand curve. Commonly, Microsoft Office suites, specifically Excel spreadsheets, have been used to tally the data and produce a chart that shows the predictor line that best fits the data collected from the market research. Other more applicable statistical packages used by professionals are Minitab, SAS, or SPSS application software.

3. Regression Analysis

The actual mathematical technique applied by most computer packages in estimating the demand curve is the least squares regression model. Many statistical packages already have least squares regression functionality built into them. This technique will give analysts an equation model that is most applicable to the data obtained from the group of customers who participated in the survey. The model equation can then be used to infer on how consumers will possibly react if the company increases the product’s price.

4. Multiple Variables

Although the demand curve only looks at the effect prices have on quantity bought by consumers, there are a host of other factors that can affect a consumer’s demand.

Forexample, the level of the buyer’s income or the number of inventory available to a particular seller can affect how many products a customer will be able to purchase. Hence, statisticians first try to understand other factors that affect consumer purchases in order to isolate their effect on demand. Doing so will present a much effective analysis of how customers will specifically react to price changes.

If price increase qunatity demand decreases,sales decreases and vice versa.

Quantity is directly proportional to sales and inverslin proportional to price.