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Estimate the Market Demand Curve

If you were asked to estimate the market demand curve and figure the existing Price elasticity of demand for a business' product, what steps would you need to take and what problems might you come across in collecting the data?Would you need to make any simplifing assumptions and what would those be? Would you have problems in getting the data in the real world? Does time play any role in this analysis and what would be the sources of your data, etc?

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The most precise way to compute elasticity is with calculus but at the undergraduate level we rely on an algebraic approximation. Elasticity is closely related to slope. To calculate slope we use the familiar "rise over run" formula. The result can be interpreted as "a one unit increase in X leads to a (???) unit change in Y" where (???) = Slope. Elasticity can be interpreted as "a one percent increase in X leads to a (???) percent change in Y" where (???) = Elasticiyty. I should also note here that in Economics the X variable "P" is on the vertical axis and the Y variable "Q" is on the horizontal axis. This is opposite of the typical math course where X and Y are Horizontal and Vertical ...

Solution Summary

This posting explains how to estimate the market demand curve and figure the existing Price elasticity of demand for a business' product.

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