What happens when a tax is imposed?

If the tax is imposed on buyers, the demand

curve shifts DOWN.

If the tax is imposed on sellers, the supply curve

shifts UP

1
 Price per
gallon (P)
S2

S1 S1

B
$2.00
C
P2 = $1.80 Consumer burden = $0.30

P1 = $1.50
A

$0.50 Supplier burden = $0.20

Q2 = 90 Quantity in billions
of gallons2 (Q)
 The economic
Price per
burden of the
gallon (P)tax S
is identical to the Imagine imposing
previous case. the tax on
TheThe new is
quantity
demanders rather
equilibrium
identical toprice
the
than suppliers.
is $1.30,
case whenandthethe
tax
quantity
was is 90.
imposed on
Consumer burden the supplier.
P1 = $1.50 A
Supplier burden
P2 = $1.30 C

$1.00 B
$0.50

D2 D1

Q2 = 90 Q1 = 100 Quantity in billions

of gallons (Q)
Copyright 2011 Pearson 3
Education, Inc. Publishing
Chapter Five as Prentice Hall. 3
 Principle #3: Inelasticity is expensive.

The burden of a tax is borne by the side of the

market (demand or supply) that is less elastic
(i.e., less price sensitive).
In an extreme case of perfectly inelastic demand,
the burden of the tax is borne by buyers entirely
(and not at all by sellers).
In the opposite extreme of perfectly elastic
demand, the burden of the tax is borne by sellers
entirely. (Note that consumers do not bear the
burden of the tax even though they wind up
reducing their purchases).

4
 Price per
gallon (P) D S S1
2

P2 = With perfectly inelastic

Consumer burden
$2.00 demand, consumers bear the
full burden.
P1 =
$1.50 $0.50

Quantity in billions
Q1 = of gallons (Q)

100 5
 Price per S2
gallon (P) S1

$0.50

With perfectly elastic demand,

producers bear the full burden.
P1 = D
$1.50
Supplier burden
$1.00

Q2 = 90 Q1 = Quantity in billions
of gallons (Q)
100

6
 More inelastic supply, smaller
More elastic
consumersupply, larger
burden.
consumer burden.

(a) Tax on steel producer (b) Tax on street vendor

P P
S2
S1
Tax
S2
B
B P2
P2 Tax
Consumer burden A Consumer burden S1
P1 A
P1

D D
Q Q
Q2 Q1 Q2 Q1
 Chapter 5

Demand Estimation
and Forecasting

Copyright 2011 Pearson Education, Inc.

Chapter Five 8
Publishing as Prentice Hall.
 Overview

Regression analysis
Hazards with use of regression
analysis
Subjects of forecasts
Prerequisites of a good forecast
Forecasting techniques

Copyright 2011 Pearson Education, Inc.

Chapter Five 9
Publishing as Prentice Hall.
 Learning objectives

understand importance of forecasting

in business

describe six different forecasting

techniques

know how to specify and interpret a

regression
Copyright 2011 Pearson Education, Inc.
Chapter Five 10
Publishing as Prentice Hall.
 Learning objectives

recognize limitations of consumer

data

use seasonal and smoothing

methods

Copyright 2011 Pearson Education, Inc.

Chapter Five 11
Publishing as Prentice Hall.
 Data collection
Data for studies pertaining to countries,
regions, or industries are readily available

Data for analysis of specific product

categories may be more difficult to obtain
buy from data providers (e.g. ACNielsen, IRI)
perform a consumer survey
focus groups
technology: point-of-sale, bar codes

Copyright 2011 Pearson Education, Inc.

Chapter Five 12
Publishing as Prentice Hall.
 Regression analysis
Regression analysis: a procedure
commonly used by economists to
estimate consumer demand with
available data

Two types of regression:

cross-sectional: analyze several variables
for a single period of time
time series data: analyze a single variable
over multiple periods of time
Copyright 2011 Pearson Education, Inc.
Chapter Five 13
Publishing as Prentice Hall.
 Regression analysis
Regression equation: linear, additive

eg: Y = a + b1X1 + b2X2 + b3X3 + b4X4

Y: dependent variable
a: constant value, y-intercept
Xn: independent variables, used to explain Y
bn: regression coefficients (measure impact
of
independent variables)
Copyright 2011 Pearson Education, Inc.
Chapter Five 14
Publishing as Prentice Hall.
 Regression analysis
Interpreting the regression results:

coefficients:
negative coefficient shows that as the
independent variable (Xn) changes, the
variable (Y) changes in the opposite direction
positive coefficient shows that as the
independent variable (Xn) changes, the
dependent variable (Y) changes in the same
direction
magnitude of regression coefficients is a
measure of elasticity of each variable

Copyright 2011 Pearson Education, Inc.

Chapter Five 15
Publishing as Prentice Hall.
 Example
Y = 26.67 0.88X1 + 0.138X2 0.076X3 0.544X4
(0.018) (0.087) (0.020) (0.884)

Where Y = Qty of cell phones demanded per month by students

X1 = Average price of cell phone
X2 = Annual tuition (in thousands of rupees) proxy for income
X3 = Average price of a call for 1 min (in paise)
X4 = location of campus (1 if located in urban area, 0 if rural) dummy
variable

R square = 0.717 Adjusted R square = 0.67

Std. error = 1.64 F = 15.8

Copyright 2011 Pearson Education, Inc.

Chapter Five 16
Publishing as Prentice Hall.
 Regression analysis
Statistical evaluation of regression results:

t-test: test of statistical significance of each

estimated coefficient
b
t
SE b
b = estimated coefficient
SEb = standard error of estimated coefficient

Copyright 2011 Pearson Education, Inc.

Chapter Five 17
Publishing as Prentice Hall.
 Regression analysis
Statistical evaluation of regression
results:

rule of 2: if absolute value of t is

greater than 2, estimated coefficient is
significant at the 5% level

if coefficient passes t-test, the

variable has a true impact on demand

Copyright 2011 Pearson Education, Inc.

Chapter Five 18
Publishing as Prentice Hall.
 Regression analysis
Statistical evaluation of regression
results

R2 (coefficient of determination): percentage

of variation in the variable (Y) accounted for
by variation in all explanatory variables (Xn)
R2 value ranges from 0.0 to 1.0
the closer to 1.0, the greater the
explanatory power of the regression

Copyright 2011 Pearson Education, Inc.

Chapter Five 19
Publishing as Prentice Hall.
 Regression analysis
Statistical evaluation of regression
results

F-test: measures statistical significance

of the entire regression as a whole (not
each coefficient)

Copyright 2011 Pearson Education, Inc.

Chapter Five 20
Publishing as Prentice Hall.
 Example
Y = 26.67 0.88X1 + 0.138X2 0.076X3 0.544X4

Price of cellphone (X1) = Rs.10000

Annual college tuition (X2) = Rs.1,00,000
Average price of a call for 1 min (X3) = 60 paise
Location of campus (X4) = urban

Copyright 2011 Pearson Education, Inc.

Chapter Five 21
Publishing as Prentice Hall.
 Regression results

Steps for analyzing regression results

check coefficient signs and magnitudes

compute implied elasticities

determine statistical significance

Copyright 2011 Pearson Education, Inc.
Chapter Five 22
Publishing as Prentice Hall.