What are the principal methods of demand estimation?

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For businesses, it is important to be able to estimate demand.  A knowledge of the shape of the demand curve for one's products can be very useful.  Basic methods of demand estimation can be divided into two categories:

  • Interview and experimental
  • Statistical

For the first category, interviewers can ask about...

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For businesses, it is important to be able to estimate demand.  A knowledge of the shape of the demand curve for one's products can be very useful.  Basic methods of demand estimation can be divided into two categories:

  • Interview and experimental
  • Statistical

For the first category, interviewers can ask about consumers' current buying habits.  They can ask how those habits would change given various price changes.  This method is not very reliable because it doesn't actually test the truth of the responses.

A more empirical test is an experiment.  A firm can change their prices and see what happens to the quantity of goods they sell.  This is not a great method either.  There can be intervening variables that distort the effect of price.  Also, choosing the wrong price can lose a lot of money.

The second group of methods is statistical.  Here, one looks at actual statistics regarding sales at various prices.  This method is limited of course by whether data are available.  Someone doing this must also be very careful to think of intervening variables that may have affected various of the data points.

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There are many ways to estimate something and I am sure that the ways will differ based on discipline. In other words, estimation in sales may be different than estimation is science. However, it seems to be that one principle is constant. All estimates are comparative. In other words, if you know the fact of something or a few things, then this serves as the basis for comparing other things. In this way, your estimations have some grounding. You can estimate that something is bigger, smaller, heavier, more expensive based on a reference point.

 

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