The OLS linear regression analysis is a crucial statistics tool to estimate the relationship between variables. Usually, the estimator indicates the causality between one variable and the other (A Sykes, 1993) (e.g the product price and its demand quantity). This report will analyzes the product ‘Supa-clean’, a new cleaning agent in Cleano-max PLC, though two model: a demand function and a multivariate demand function. After analysing the estimator, the weakness and the room of improvement of this statistics tool will be discussed.
Ⅱ Constant-price elasticity demand estimation
ⅰ.The tables below demonstrate the calculation of the key values about the estimation of the demand function for Supa-clean.
ⅱ. When Explain how fundamental the OLS linear regression analysis plays in the own-price elasticity estimator, three aspects needed to be taken into consideration: the analysis of two objects, the relationship between them, and the diagnostic methods used for consequences.
Generally speaking, elasticity measures how a dependent variable varies with n independent variable (n = 1 in demand function). Therefore, the elasticity of demand measures the change in quantity with respect to the change in price. The formula of it is: η= (percentage change in price / percentage change in price) (2.4)
Percentage changes of Q or P means that the proportion of change in Q or change in P occupied total Q or P. and stand for change in quantity and price, respectively, which could be calculated as: η= = * (2.5)
= the slope of demand function
The equation (2.5) indicates that is the slope coefficient of the demand function. In own-price elasticity, this formula (2.5) would on...
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...e plausible than model
Generally speaking, this report uses OLS linear regression to estimate two models: a demand function and a multivariate demand function of ‘Supa-clean’. In addition to this, several weaknesses of two models as well as this methodology also are indicated, such as: the omitted variables problem or the multicollinearity problem. Finally, the plausibility of the model of multivariate demand function has been proven better than the demand function’s.
Works Cited
A Sykes, 1993, An introduction to regression analysis
BR Beattie, CR Taylor, MJ Watts – 1985, The economics of production
DR Anderson, DJ Sweeney, TA Williams, 2011, Statistics for business and economics
SN Goodman,1999, Toward Evidence-Based Medical Statistics
I Dobbs, 2000, Managerial economics
M Shalev, 2007, Limits and alternatives to multiple regression in comparative research
Demand refers to how much of a product or service is desired by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as the demand relationship. Supply represents how much the market can offer. In other words, supply is the producer's side of the market while demand is the consumer's side.
Elasticity is the responsiveness of demand or supply to the changes in prices or income. There are various formulas and guidelines to follow when trying to calculate these responses. For instance, when the percentage of change of the quantity demanded is greater then the percentage change in price, the demand is known to be price elastic. On the other hand, if the percentage change in demand is less than then the percentage change in price; Like that of demand, supply works in a similar way. When the percentage change of quantity supplied is greater than the percentage change in price, supply is know to be elastic. When the percentage change of quantity supplied is less then the percentage change in price, then the supply then demand is known to be price inelastic.
α is the intercept of the regression line, and β is the slope of the regression line. e is the random disturbance term. The equation Y = α + βX (ignoring the disturbance term “e”) gives the average relationship between the values of Y and X.
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Price Elasticity is the measure in responsiveness of consumers to changes in the price of a product or service. The evaluation and consideration of this measure is a useful tool in firms making decisions about pricing and production, and in governments making decisions about revenue and regulation. “Price Elasticity is impacted by measurable factors that allow managers to understand demand and pricing for their product or service; including the availability of substitutes, the consumer budgets for the product or service, and the time period for demand adjustments.” The proper consideration of Price Elasticity allows managers to set pricing such that the effect on Total Revenue is predictable and adjustments to production are timely. The concept of Price Elasticity is employed in the management of commercial firms and government.
Using All Possible Subsets Regression Models, there are 2p -1 models, where p is the number of predictors in the full model . There are 23 -1 = 7 possible subsets for these data. Regression models with 1 variable are X1,X2 and X3 , with two variables X1X2, X1X3 and X2X3 and with three variables, X1X2X3. The results for the model selection criterion for each of the subset with classical method using OLS for both original and clean data and Robust MAD using LTS for original data are shown below:
When demand is elastic as with Coca Cola products price changes affect total revenue. When the price increases revenue decreases and when the price decreases revenue increases. For Coca Cola if they notice a decrease in revenue they would offer products at a discount to increase revenue. They do this quite often with sales such buy 2 20 oz. bottles for $3 instead of the normal $1.89 each price
The law of demand states that if everything remains constant (ceteris paribus) when the price is high the lower the quantity demanded. A demand curve displays quantity demanded as the independent variable (the x-axis) and the price as the dependent variable (the y-axis). http://www.netmba.com/econ/micro/demand/curve/
A vehicle is one of the biggest purchases a person will ever make. Over the years, the prices of an automobile have increased due to the rise of inflation. Due to a price index, the price of an automobile changes over a certain period of time. Economists compare averages of automobiles to calculate the cost of each vehicle that presents itself on a car lot. When all of the above is calculated within the purchase of an automobile, it affects every area of making the automobile to selling the automobile. All of these factors are impacted together for the automobile industry as a whole.
When a suppliers' costs changes for a given output, the supply curve shifts in the same direction. For example, assume that someone invents a better way of growing corn so that the cost of corn that can be grown for a given quantity will decrease. Basically producers will be willing to supply more corn at every price and this shifts the supply curve outward, an increase in supply. This increase in supply...
Elasticity is also prominent to businesses. The price elasticity of demand is very important for companies to determine the price of their products and their total sales and revenue. Newell showed that by cutting the price of the Left 4 Dead game in half to $25 during a Valve promotion, its sales increased by 3000 percent (Irwin, 2009)viii.
A change in quantity supplied is just a movement from one point to another in the supply curve. In opposite, the cause of a change in supply is a change in one the determinants of supply that shifts the curve either to the left or the right. These determinants are the resource prices, technology, taxes and subsidies, producer expectations, and number of sellers. An equilibrium price is required to produce an equilibrium quantity and a price below that amount is referred as quantity supplied of zero no firms that are entering that particular business. If the coefficient of price is greater than zero, as the price of the output goes up, firms wants to produce more of that output. As the price of the output goes up it becomes more appealing for the firms to shift resources into the production of that output. Therefore, the slope of a supply curve is the change in price divided by the change in quantity. The constant in this equation is something less (negative number always) than zero because it requires strictly a positive...
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Figure I I .4 illustrates the effects of an increase in demand. OD is the original demand curve so that the equilibrium price is P and quantity Q is demanded and supplied.
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