Page 143 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes constant and errors are eliminated so that for simplification T D and u are not taken into the equation. Like
1
this exponential demand function is an option for linear demand function which can be written as:

Q = P P P y d
b

c

a

c s
In this form, a, b, c and d variables are exponentials and are the logarithms for the above demand
function.
It can be written in a linear form as:
log = Q = a . log P + b. log. P + c. log P + d. log
c s
The various elasticity of demand, of this equation, can be estimated and the techniques of multiple
regressions can be used to estimate this.
Self Assessment
Fill in the blanks:
1. Constant regression ............... is used to study statistical studies.
2. The formation of indexes is related to various ................
3. While estimating demand curve ............... problem arises.
Empirical Demand Curve: An empirical demand curve is fitted or derived by various prices over
demanded quantity of the product observed market figures, assuming this that price of related and
substitute goods and income of the consumer and interests are constant.

Fig. 7.2

Y

D
1
D
D 2
Price D 1

D
D
2
X
O Quantity Demanded

This is shown in Fig. 7.2 with DD demand curve. The demand curve can go downwards on
D D or D , if the price of substitution product and the income of consumer are changed.
1
2
Limitations of Demand Functions
In the behavioural notion of demand theory, the above mentioned demand functions estimation has
many limitations:
(1) The problem of agglutination between products and people arises because of which use of indexes
is required. But the creation of index creates a lot of trouble.
(2) Estimation of the demand curve is also difficult, when the change occurs in the determinants of
demand at the same time. Because of this it becomes very difficult to evaluate the effect of every
determinant individually.

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