The matrix approach to evaluating demand equations

Abstract

As there is a plethora of demand models, which one should be used to estimate income and price elasticities? The paper sheds light on this important practical problem by developing a matrix approach to simulating (MAS) demand equations to analyse their performance under idealised circumstances. Artificial data on the dependent variable are generated by one model, and these are then used for the estimation of another model. Using four popular models, a 4 x 4 matrix is generated which gives all pair-wise comparisons. The performance of the models is then evaluated on the basis of the quality of the income and own-price elasticity estimates. The overall results indicate that, among the four models, E. A. Selvanathan' s (1985) model performs the best, followed by Working's model under substitution independence (Keller, 1984).

A time preference measure of the social discount rate for the UK

“…Finally, a crosscountry study by Clements et al (2001) covering 42 countries and eight commodity groups yields average income and price elasticities for the demand for food of 0.77 and ± 0.32, respectively. These maximum-likelihood estimates are based on the constant elasticity model and produce an absolute e value of just over 2.…”