Empirical demand functions
The demand function given in (equation 1) is derived from the economic theory existing today. It helps the managers in identifying the variables influencing demand for a good and their relationship to demand. However, empirical demand functions are of equal importance to managers as they provide quantitative relationship between demand for his product and its determinants that enables him to:
- quantify the direction and magnitude of change in demand as a result of likely' changes in decision variables, and
- control and manage the demand for his product.
For example, the manager will be concerned with the amount of change in demand for his product if the price of his good increases or decreases. Likewise, if a firm has excess capacity, the likely impact of say, a 10 per cent increase in sales, on advertisement budget will be useful to the manager.
Some empirical demand functions are reproduced here so as to help in managerial decision making of the nature listed above. These functions have been estimated with the help of historical data and econometric techniques. Variables that are not measurable are approximated through use of proxy and dummy variables.
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