Question

Having an understanding of the demand curve for a product can be important for a firm’s price setting decision. A firm will likely not have an accurate demand curve for their product (such as log?=5.50−0.82log?) on hand, but they want to understand the demand for their product. Suggest 2 or 3 ways that you can think of that a firm could use to try to estimate the demand curve for their product.

Answer 1

Demand curve is always downward sloping and people demand more goods when the price is low. It presents relationship between the quantity of a product demanded and the price.

Firms can estimate the demand curve by conducting surveys, where they will be able to gauge how many people would buy their product. And also whether they are willing to purchase a certain product at a particular price. With the help of this data, it will be able to estimate the demand curve, the sample size has to be large.

It can also look at the macro factors such as the growth rate of a country, how is it expected to grow and what are the contributing factors. For eg, if a country is growing exponentially and there are major investments in the economy, then the firm would realise that people are going to spend a certain amount on products. Looking at how the peers are growing can also help him understand how much will be the demand curve.

The growth of a particular sector also plays an important role. If oil prices are very low, than people are going to buy automobiles, if the firm is a automobile manufacturer then it is going to benefit it. Thus the raw material prices also play an important role in estimating the demand curve for a product. It could use raw material prices to estimate the demand curve.