Question #105659

When estimating a demand function, explain why fitting a line of best fit through observed price and quantity combinations over time is not likely to yield good estimates. With using the diagram.

Expert's answer

Demand curve represents the relationship between the quantity of a product demanded and its price. It is almost always downward-sloping, as more people are willing to buy the product as it becomes cheaper. For a given product, a demand curve may be estimated by first conducting a survey and then performing a regression analysis. A demand curve helps small business owners decipher which price is most suitable for their products.

The simplest time-series forecast is a linear trend forecast where the generating process is assumed to be the linear model Qt = a + bt. Using time-series data on Q, regression analysis is used to estimate the trend line that best fits the data.

If b is greater (less) than 0, sales are increasing (decreasing) over time. If b equals 0, sales are constant over time.

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