Answer to Question #105659 in Microeconomics for karisma

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. With using the diagram.

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. 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.