Estimating Car Demand

• Demand Function for Car Industry

Q = a1P + a2Px + a3I + a4Pop + a5i + a6A

• Demand Equation for Car Industry

Q = -500P + 210Px + 200I + 20,000Pop - 1,000,000i + 600A

Estimating Industry Demand for New Cars

Independent Variable Parameter Estimate

(i)

Estimated Value for Independent Variable During the Coming Year (ii)

Estimated Demand

(i x ii)

Average Price for New Cars in $ (P)

-500 $25,000 -12,500,000

Average Price for New Import Luxury Cars in $ (Px)

210 $50,000 10,500,000

Disposable Income per Household in $ (I)

200 $45,000 9,000,000

Population in millions (pop)

20,000 300 6,000,000

Average Interest Rate in % (i)

-1,000,000 8% -8,000,000

Industry Advertising Expenditures in $ millions (A)

600 $5,000 3,000,000

Total Demand (cars) 8,000,000

• Demand function specifies relation between Quantity Demanded and all variables affecting Demand

• Demand Curve – relation between price and quantity demanded, holding all else constant

• Q = - 500P + 210 (50,000) + 200(45,000) + 20,000 (300) - 1,000,000(8) + 600(5,000)

• Equation of Demand Curve Q = 20,500,000 - 500P