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Estimating expected demand

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A number of empirical studies of automobile demand yielded the following estimates of income and price elasticities

Study Income elasticity Price elasticity

Chow +3.0 -1.2
alkinson +2.5 -1.4
Roos and Von Szeliski +2.5 -1.5
suits +3.9 -1.2

Assume that income and price effects on automobile sales are independent and additive. Assume also that the auto companies intend to increase the average price of an automobile by about 6 percent in the next year and that next year's disposable personal income is expected to be 4 percent higher than this year's. If this year's automobile sales were 11 million units, how many would you expect to sold under each pair of price and income demand elasticity estimates.

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Solution Summary

Solution describes the steps to calculate effect of changes in income and price level on demand based upon elasticity estimates of 4 study groups.

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Income elasticity =+3.0
% change in income=+4%
Price elasticity of demand=-1.2
% change in price=+6%
Current Sales=11 million
Change in sales due to price change= current sales*price elasticity of demand*percent change in price
=11*(-1.2)*6%=-0.792 million
Change in sales due to Income change= current sales*Income elasticity of demand*percent change in Income
=11*3*4%=1.32 million
Expected Sales next year=11-0.792+1.32=11.528 ...

Solution provided by:
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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