Answer to Question #117153 in Microeconomics for talia mitchell

Question

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.

Answer 1

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.

The simplest time-series forecast is a linear trend forecast where the generating process is assumed to be the linear model. But in this case if the demand is a curve, fitting a line of best fit through observed price and quantity combinations is not likely to yield good estimates, because we can observe the incorrect equilibrium price and quantity in the point of intersection with the supply curve.