Estimation of demand parameters : an empirical analysis of consumer behavior in the United States
Authors:   , Hassan Zuhair A 
Published: May 2024

Demand analysis is a key element of economics. It has the attractive feature of being important in theory as well as in application. Its purpose is to explain consumer behavior in the market place, i.e., demand analysis is designed to explain what commodities the consumer will purchase and in what quantities and how the consumer can be expected to respond to changes in commodity prices and income. Since the parameters of demand functions can be extremely valuable for both public and private decision makers, it is important to obtain concise and accurate estimates of them. Public policy makers must have reliable estimates of demand parameters for the scientific study of economic growth and development and for the rational formulation of economic policies. Farm policies directed towards commodity programs like price supports, production controls, and payment programs for the major farm crops, would no doubt benefit from more accurate information in regard to market demand functions. Private business models for forecasting future markets, planning merchandising and advertising, and devising promotional programs can be improved with demand analysis. Traditionally, most of the estimates of demand parameters in empirical analysis were based on single equation least squares approach. Theoretically, however, the estimation of demand parameters calls for the complete set of demand functions to be considered as a whole. One of the major reasons for the relatively few studies devoted to the estimation of the full set of demand parameters is the existence of a gap between demand theory and empirical analysis, i.e., the classical theory of consumer behavior has not provided workable relationships for estimation purposes due to the fact that available data is insufficient for the estimation of a large number of the required parameters. Recent studies of the theory of consumer behavior have provided a number of empirically useful hypotheses concerning the separability of the consumers utility functions. These hypotheses imply certain empirically meaningful conditions on the parameters of demand functions. More specifically, these conditions reduce the number of parameters to be estimated in a complete system of demand functions and thus make estimation of all the parameters more feasible. In this study an attempt is made to examine consumer behavior in the United States for the period 1929-1969, by assuming an additive preference specification and by using a complete system of demand functions. Briefly, the plan of this study is as follows: a historical note on demand analysis is given below. In Chapter II a review of the classical theory of consumer demand is presented. The assumptions of additivity and separability are then introduced and examined in terms of their consequences for estimation. Chapter III provides a statistical model for obtaining estimates of demand parameters under the assumption of an additive preference specification. Chapters IV, V, and VI contain the main results of this study. In Chapter IV estimates of demand elasticities (price and income) for major commodity groups, e.g., food, clothing, etc. are reported. Chapter V contains estimates of price and income elasticities of demand for food and non-food commodity groups. The statistical information available is then used to obtain estimates of demand elasticities (price and income) for nine food groups. The empirical evidence which suggests that the demand for food at retail level is becoming more elastic is examined in Chapter VI. Concluding remarks are offered in Chapter VII.