Demand Function for Sugar in India

Demand Function for Sugar in India

Following demand function for sugar in India was estimated with the help of annual time series data for India for the years 1953-54 to 1970-71.

Ds, = -106.7 + 3.80Y -163.3 Ps -11.0Pt

R2 = 0.92

where, Ds = sugar demand in tons

Y = disposable real income in million of rupees

Ps=sugar price index with base 1961–62 = 100

Pt = tea price index with base 1961-62 = 100

R2 = coefficient or determination.*

Suppose the sugar price index increases by 10 from 156 in 1970-71 to 165 in 1975-76, disposable real income and tea price remaining at their 1970-71 level, the demand for sugar in 1975-76 would be less by 1,633 tons than its level in 1970-71 (40,190 tons). Similarly, if sugar manufacturers or the government desire to have, say, a 10,000 tons increase in sugar demand, the alternative ways open to them are to

(a)     ensure that disposable real income increases by Rs 26,320 millions (10,000/3.80),

(b)     ensure that the sugar price index falls by 61 (10,000/ 163.6),

(c)     ensure that tea price index falls by 909 (10,000/11.0), and

(d)     ensure any linear combination of (a), (b) and (c)

Tags: Macroeconomics, Managerial Economics

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