ESTIMATION OF DEMAND FOR ORANGES (CASE STUDY)

The science and art of converting the qualitative
understandings of a market into quantitative data e.g.
regression method, market experiments etc.
 It is a prediction focusing on future consumer behavior.
 Demand estimation for the firm’s product is essential
and continuing.
 It provides managers with accurate way to predict the
future demand as well as set of elasticities.

DEFINITION:
The act of conducting such an
investigation or test. It is testing
a market that is segmented to
discover new opportunities for
organizations.

Method
1
Select several markets with similar
socio-economic characteristics and
change the commodity price in some
markets/ stores.

Method
2
By using census data / surveys data
various markets /firms can also
determine effects such as age, family
size etc.

Method
3
Alternatively, firms could change 1 at a
time each of the determinants of
demand such as: price of the good or
service, income of buyers, tastes or
preferences of consumers.

 Conducted on a large scale to
ensure validity.
 Consumers are not aware of the
experiment.
 Determine best pricing strategy.
 Testing different packaging.
 Using statistical technique to
estimate demand.

 Too limited scale and fairly short
period of time.
 Extraneous occurrences may
result in uncontrolled
experiments.
 Competitors could try to
sabotage the experiment.
 Competitors could gain useful
information.
 Firm might permanently lose
customers.

DEFINITION :
It is the change in quantity demand due to the change in
prices in terms of percentage.
TYPES :
 Point Elasticity.
 Arc Elasticity.
 Income Elasticity.
 Cross price Elasticity.

FORMULA:
Change in Qd/change in price * Price/Qd
EXAMPLE:
ELABORATION:
• A rise in price of apple by 5 leads to a decrease in its quantity
demanded by 6.
• Similarly, a decrease in price of bananas by 6 leads to an
increase in its quantity demanded by 7.
Commodity Before
Price Quantity
After
Price Quantity
Apple 5 10 10 4
Bananas 12 5 6 12

CATEGORY CHARACTERISTICS
Elastic Value between 1 and infinity,
demand responds strongly to
price
Unitary Elastic Value 1, demand responds in
exact proportion as price,
price changes do not affect
revenue
Inelastic Value between 0 and 1,
demand responds weakly to
the price

 Nature of commodity(necessity inelastic, luxury elastic)
 Substitutes(can be used for the same purpose like Pepsi
and coke)
 Complements(used together like hockey sticks n hockey
balls)
 Income(increase and decrease)
 Taste and Fashion
 Weather Conditions(cold or hot)

DEFINITION:
“The demand for a commodity also depends on the price of related (i.e.
Substitute and Complimentary Commodities”
CATEGORIZING OF CROSS PRICE ELASTICITY OF
DEMAND:
SUBSTITUTE GOODS:
Are goods that can be used in exchange for one another.

FOR EXAMPLES:
Pepsi and Coca Cola
COMPLIMENTS GOODS:
Are goods that people tend to consume hand in hand.
FOR EXAMPLES:
Mobile Phone and Recharge
Boots and Laces
Tennis Balls and Tennis Rackets

INDEPENDENT GOODS:
These are goods that show no relationship.
FOR EXAMPLES:
Increase in Price of Car does not effect the
Demand of Cloth.
FORMULA:
Exy = Qx X Py
Py X Qxz
FOR EXAMPLE:
If there is an increase in the Price of Tea by 10%
and the Quantity Demand for Coffee increased by 2%, then
Cross Elasticity of Demand = 2/10 = 0.2

CATEGORY CHARACTERISTICS
SUBSTITUTES E>0) When goods are Substitute of
each other then Cross Price Elasticity
of Demand is Positive
COMPLIMENTS (E<0) In case of Complimentary
goods, Cross Price Elasticity of
Demand is Negative.
INDEPENDENT E=0) When Cross Price Elasticity of
Demand is Zero

INTRODUCTION:
 University of Florida conducted a market experiment.
 To determine price elasticity and cross price elasticity
of demand.
 For three types of oranges:
1.Florida Indian
2.Florida Interior
3.California
 Grand Rapids was chosen as the site for market
experiment because of its demographic characteristics.

 Nine super market participated in the experiment.
 The experiment was conducted by changing the
price each day for 31 consecutive days.
 More than 9250 dozen oranges were sold .
 Each super market provided with an adequate
supply, therefore effect of supply should be ignored.
 Time period of experiment was short, therefore no
effect on determinants of demand other than price.

TYPE OF
ORANGES
FLORIDA
INDIAN RIVER
FLORIDA
INTERIOR
CALIFORNIA
FLORIDA
INDIAN RIVER
-3.07 +1.56 +0.01
FLORIDA
INTERIOR
+1.16 -3.01 +0.14
CALIFORNIA 10.18 +0.09 -2.76

 The elasticity of demand for all three types of
oranges was fairly high.
 The off diagonal entries in the table shows the
cross price elasticities of demand.
 The price elasticity of demand for the Indian
River oranges of -3.07, indicates that 1%
increase in price leads to 3.07% decline in
quantity demand.
 Cross price elasticity of demand between two
types of Florida oranges were larger than 1
and close to zero with respect to California
oranges.

 For 1% change in price of Florida Indian River
oranges; there is a high change in demand for
Florida and vice versa.
 Consumer regarded the two types of Florida
oranges as close substitute, they did not view
California as such.
 While pricing, the producers of the two Florida
varieties must carefully consider the price of each
other but need not be concerned with the price
of California oranges.

 The article is about estimating the demand of medicam
toothpaste.
 To determine price elasticity and cross price elasticity of
demand.
 For three types of toothpastes.
 Medicam toothpaste.
 Shield toothbrush.
 Colgate toothpaste.

To examine the determinants of demand, we have
formulated following linear demand function:
Qm = f(pm,ps,pc,adv,tr)
Qm=demand of medicam toothpaste in units
Pm=price of medicam in Pakistani rupees
ps=price of shield toothbrush in Pakistani rupees
Pc=price of Colgate in Pakistani rupees
Adv=expenditure of advertisement in Pakistani rupees
TR=total revenue of the firm in Pakistani rupees

Variable Co-
Efficient
T. Statistics Probability
Price of medicam -372.32 -2.87 0.00
Price of shield
brush
Price of Colgate
-342.97
32.27
-2.81
0.28
0.00
0.77
Advertisement 0.01 1.78 0.08
Total revenue 0.001 1.98 0.05
R.Squared 0.81 T. Statistics 0.00

Variable Coefficient
Price elasticity of demand -0.15
Cross price elasticity of demand with respect to price
of shield toothbrush (complementary commodity)
-0.05
Cross price elasticity of demand with respect to price
of Colgate toothpaste (substitute commodity)
0.01
Advertisement elasticity
of demand
0.07
0.02
Total sales elasticity of
demand

 The first variable is price of medicam toothpaste that is
endogenous.
 Negative relationship between price of medicam toothpaste
and demand for medicam toothpaste.
 Negative sign show price of medicam increase its demand
will decrease.
 Coefficient show price of medicam decrease by 1 rupee.
 Price of toothbrush increase the demand of toothpaste will
decrease due to complementary nature
 It may 1 rupee decline.

 Negative related.
 Substitute commodity .
 Positive direct relationship.

ESTIMATION OF DEMAND FOR ORANGES (CASE STUDY)

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