CHAPTER THREEMETHODOLOGY3.0 IntroductionThis chapter outlines the study methodology. The theoretical and the empirical econometric models will be constructed with all variables being defined and justified. In addition, the estimation procedure, the unit root tests and the model diagnostic tests are briefly outlined. The study’s time period and data sources for all variables will be specified in this chapter.
3.1 The Model Specification3.1.1 The Theoretical ModelAccording to the micro-economic theory of supply, the major determinant of supply is the commodity’s own price. Changes in the determinants of supply either result in movement along or a shift in the supply curve and the major shifters
of supply are input prices, expected product prices, expected prices of substitutes, expected
prices of joint products, advances in technology, entrants of new firms in the market, environmental conditions such as weather and institutional factors such as production quotas and government intervention.
In conjunction with this, the Cobweb and the Nerlove (1958) theories stated that current output supplied is a function of expected market prices, lagged output supplied and other exogenous supply shifters. Therefore,
being guided by these theories, the theoretical model can be presented as follows:
Total tobacco output = f (real price of tobacco, expected tobacco price, expected
price of competing crops, lagged tobacco output, institutional factors, state of technology, population of tobacco growers) …………………………………………………………………………....(3.1)
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