A Simple Example for the Teaching of Demand Theory: Aggregate Demand Estimation for Onions in India

Empirical examples of demand estimation using real data are not often found in managerial economics textbooks. In classical papers on demand, estimation economists looked at coupled demand systems. Estimation of such demand systems requires a sophisticated understanding of economics and econometrics, which are beyond the scope of typical introductory texts. Our aim in this study was to estimate the demand curve for a single commodity, viz onions. We chose onions for this illustrative study because of the unique nature of the demand for onions in India, as described below.

In estimating demand from price-volume data, one encounters the “identification problem”. It is not known whether the observed price-volume points lie on the same demand curve, or at the intersections of different pairs of supply and demand curves. Since the onion has no substitutes, is not prone to fluctuating tastes, and is not susceptible to changes in technology, one may assume that its demand curve does not shift within a short time. Thus, any changes in price and volume must occur due to shifts in the supply, and the price-volume points lie on the same demand curve.

We collected daily price-volume data for onions over a short period of time from all listed mandis in India from the website www.agmarknet.in.  A scatter plot of price vs volume indicates that the demand curve had two distinct regimes.  A piecewise linear fit to the data was computed and the break-point was identified at a wholesale price of about Rs  per quintal. The estimated demand curve was horizontal below this price indicating inelastic demand. Above this price, the demand curve was negatively sloped with a price elasticity of -1. In other words, at low prices, the aggregate quantity of onions consumed remains roughly constant. However, at higher prices, the total expenditure on onions remains roughly constant.