(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 164

CHAPTER 4 • Individual and Market Demand 139

TABLE 4.5

FACEBOOK USERS

YEAR

FACEBOOK USERS (MILLIONS)

HOURS PER USER PER MONTH

2004

1

2005

5.5

2006

12

<1

2007

50

2

2008

100

3

2009

350

5.5

2010

500

7

Source: www.facebook.com/press/info.php?timeline

*4.6 Empirical Estimation of Demand
Later in this book, we will explain how demand information is used as input
into a firm’s economic decision-making process. General Motors, for example,
must understand automobile demand to decide whether to offer rebates or
below-market-rate loans for new cars. Knowledge about demand is also important for public policy decisions. Understanding the demand for oil, for instance,
can help Congress decide whether to pass an oil import tax. You may wonder
how it is that economists determine the shape of demand curves and how price
and income elasticities of demand are actually calculated. In this starred section,
we will briefly examine some methods for evaluating and forecasting demand.

The section is starred not only because the material is more advanced, but also
because it is not essential for much of the later analysis in the book. Nonetheless,
this material is instructive and will help you appreciate the empirical foundation of the theory of consumer behavior. The basic statistical tools for estimating
demand curves and demand elasticities are described in the appendix to this
book, entitled “The Basics of Regression.”

The Statistical Approach to Demand Estimation
Firms often rely on market information based on actual studies of demand.
Properly applied, the statistical approach to demand estimation can help
researchers sort out the effects of variables, such as income and the prices of
other products, on the quantity of a product demanded. Here we outline some
of the conceptual issues involved in the statistical approach.
Table 4.6 shows the quantity of raspberries sold in a market each year.
Information about the market demand for raspberries would be valuable to an
organization representing growers because it would allow them to predict sales
on the basis of their own estimates of price and other demand-determining variables. Let’s suppose that, focusing on demand, researchers find that the quantity
of raspberries produced is sensitive to weather conditions but not to the current market price (because farmers make their planting decisions based on last
year’s price).