Republic of the Philippines

Laguna State Polytechnic University

Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited

LSPU Self-Paced Learning Module (SLM)

Course Managerial Economics
Sem/AY First Semester/2023-2024
Module No. 2
Lesson Title Demand Analysis and Demand Forecasting
Week Duration 6-9
Date September 25 – October 20, 2023
Description of
This lesson discusses Demand Analysis and Demand Forecasting.
the Lesson

Learning Outcomes
Intended Students should be able to meet the following intended learning outcomes:
Learning • Understand demand analysis.
Outcomes • Understand demand forecasting.

Targets/ At the end of the lesson, students should be able to:

Objectives • Identify the determinants of demands.
• Discuss why business and economic forecasting is important.

Student Learning Strategies

A. Face-to-face Discussion and Asynchronous Class
Refer to your COR for the subject schedule.
Online Activities
(Synchronous/ B. Learning Guide Questions:
• What is demand theory?
Asynchronous)
• What is Demand forecasting?
• What is the importance of demand forecasting?
• What is demand analysis?
• What is the importance of demand analysis?

LSPU SELF-PACED LEARNING MODULE: Managerial Economics

 Republic of the Philippines
Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited

Lecture Guide

Review on:

Demand Theory: Definition in Economics, Meaning, and Examples

What Is Demand Theory?

Demand theory is an economic principle relating to the relationship between

consumer demand for goods and services and their prices in the market. Demand
theory forms the basis for the demand curve, which relates consumer desire to the
amount of goods available. As more of a good or service is available, demand drops
and so does the equilibrium price.

Demand theory highlights the role that demand plays in price formation, while
supply-side theory favors the role of supply in the market.

Understanding Demand Theory

Offline Activities
(e-Learning/Self- Demand is simply the quantity of a good or service that consumers are willing and
Paced) able to buy at a given price in each period. People demand goods and services in an
economy to satisfy their wants, such as food, healthcare, clothing, entertainment,
shelter, etc. The demand for a product at a certain price reflects the satisfaction that
an individual expects from consuming the product. This level of satisfaction is
referred to as utility and it differs from consumer to consumer. The demand for a
good or service depends on two factors: (1) its utility to satisfy a want or need, and
(2) the consumer’s ability to pay for the good or service. In effect, real demand is
when the readiness to satisfy a want is backed up by the individual’s ability and
willingness to pay.

Demand theory is one of the core theories of microeconomics. It aims to answer basic
questions about how badly people want things, and how demand is impacted by
income levels and satisfaction (utility). Based on the perceived utility of goods and
services by consumers, companies adjust the supply available, and the prices
charged.

Built into demand are factors such as consumer preferences, tastes, choices, etc.
Evaluating demand in an economy is, therefore, one of the most important decision-
making variables that a business must analyze if it is to survive and grow in a
competitive market. The market system is governed by the laws of supply and
demand, which determine the prices of goods and services. When supply equals

LSPU SELF-PACED LEARNING MODULE: Managerial Economics

 Republic of the Philippines
Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited
demand, prices are said to be in a state of equilibrium. When demand is higher than
supply, prices increase to reflect scarcity. Conversely, when demand is lower than
supply, prices fall due to the surplus.

The Law of Demand and the Demand Curve

The law of demand introduces an inverse relationship between price and demand
for a good or service. It simply states that as the price of a commodity increases,
demand decreases, provided other factors remain constant. Also, as the price
decreases, demand increases. This relationship can be illustrated graphically using a
tool known as the demand curve.

The demand curve has a negative slope as it charts downward from left to right to
reflect the inverse relationship between the price of an item and the quantity
demanded over some time. An expansion or contraction of demand occurs because
of the income effect or substitution effect. When the price of a commodity falls, an
individual can get the same level of satisfaction for less expenditure, provided it’s a
normal good. In this case, the consumer can purchase more of the goods on a given
budget. This is the income effect. The substitution effect is observed when
consumers switch from more costly goods to substitutes that have fallen in price. As
more people buy the good at a lower price, demand increases.

Sometimes, consumers buy more or less of a good or service due to factors other
than price. This is referred to as a change in demand. A change in demand refers to a
shift in the demand curve to the right or left following a change in consumers’
preferences, tastes, income, etc. For example, a consumer who receives an income
raise at work will have more disposable income to spend on goods in the markets,
regardless of whether prices fall, leading to a shift to the right of the demand curve.

The law of demand is violated when dealing with Giffen or inferior goods. Giffen
goods are inferior goods that people consume more of as prices rise, and vice versa.
Since a Giffen good does not have easily available substitutes, the income effect
dominates the substitution effect.

Supply and Demand

The law of supply and demand is an economic theory that explains how supply and
demand are related to each other and how that relationship affects the price of goods
and services. It's a fundamental economic principle that when supply exceeds
demand for a good or service, prices fall. When demand exceeds supply, prices tend
to rise.

LSPU SELF-PACED LEARNING MODULE: Managerial Economics

 Republic of the Philippines
Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited
There is an inverse relationship between the supply and prices of goods and services
when demand is unchanged. If there is an increase in the supply of goods and
services while demand remains the same, prices tend to fall to a lower equilibrium
price and a higher equilibrium quantity of goods and services. If there is a decrease
in the supply of goods and services while demand remains the same, prices tend to
rise to a higher equilibrium price and a lower quantity of goods and services.

The same inverse relationship holds for the demand for goods and services.
However, when demand increases and supply remains the same, the higher demand
leads to a higher equilibrium price and vice versa.

Supply and demand rise and fall until an equilibrium price is reached. For example,
suppose a luxury car company sets the price of its new car model at $200,000. While
the initial demand may be high, due to the company hyping and creating buzz for the
car, most consumers are not willing to spend $200,000 for an auto. As a result, the
sales of the new model quickly fall, creating an oversupply and driving down demand
for the car. In response, the company reduces the price of the car to $150,000 to
balance the supply and the demand for the car to ultimately reach an equilibrium
price.

Unit 3. Demand Analysis and Demand Forecasting

What will happen when a product's market demand radically changes?

In business, forecasting is key to making sound decisions. Forecasting the impact of

sudden changes in demand can be difficult, but it's an important skill for decision-
makers. When the market demand for a product suddenly changes, it can have a
significant impact on company profits and operations.

Companies must be prepared for sudden changes in demand by monitoring their

supply chains and their inventory levels. Additionally, it's critical to have backup
strategies in place in case of unexpected sales decline. This allows companies to
adapt quickly and minimize disruption to their operations.

Demand Forecasting Definition

A technique for anticipating future demand for a product is demand forecasting.

However, the strength of the projection is significantly influenced by the quantity
and quality of the data, the methods used to calculate it, and the user's level of
competence.

LSPU SELF-PACED LEARNING MODULE: Managerial Economics

 Republic of the Philippines
Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited
To predict demand forecasting methods more accurately, supply chain managers
usually use a variety of sales predictions. And each of those uses a different demand
forecasting approach.

The forecast's accuracy is dependent on the validity of the demand planning data
and the extent to which outside circumstances corroborate the demand plan's
underlying assumptions.

The first step in creating a demand prediction is to have a firm understanding of the
challenges. It would further help to look for accurate solutions to it. The best demand
forecasting models and methods will be determined in this step.

Moreover, it is important to look for questions such as does being mindful of seasonal
demand assist you in controlling inventory levels year-round. Or is it necessary to
use supply chain analytics to find weak points in your supply chain? and so on.

Planning for upcoming events requires much more input than planning for current
events, even though past demand projections may serve as a starting point. It's not
the only indication, by any means.

The usefulness of Demand Forecasting

Demand plays a vital role in the decision-making of a business. In competitive market

conditions, there is a need to take correct decisions and make plans for future events
related to business like sales, production, etc. The effectiveness of a decision taken
by business managers depends upon the accuracy of the decision taken by them.

Demand is the most important aspect for a business to achieve its objectives. Many
decisions of business depend on demand like production, sales, staff requirement,
etc. Forecasting is a necessity of business at an international level as well as a
domestic level.

Demand forecasting reduces risk related to business activities and helps it to take
efficient decisions. For firms having production at the mass level, the importance of
forecasting had increased more. Good forecasting helps a firm in better planning
related to business goals.

There is a huge role in forecasting in functional areas of accounting. Good forecast

helps in appropriate production planning, process selection, capacity planning,
facility layout planning, inventory management, etc.

LSPU SELF-PACED LEARNING MODULE: Managerial Economics

 Republic of the Philippines
Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited

Demand forecasting provides reasonable data for the organization’s capital

investment and expansion decisions. It also provides a way for the formulation of
suitable pricing and advertising strategies.

Following is the significance of Demand Forecasting:

• Fulfilling objectives of the business

• Preparing the budget
• Taking management decision
• Evaluating performance etc.

Moreover, forecasting is not full of proof and correct. It thus helps in evaluating
various factors which affect demand and enables management staff to know about
various forces relevant to the study of demand behavior.

The Scope of Demand Forecasting

The scope of demand forecasting depends upon the operated area of the firm at
present as well as what is proposed in the future. Forecasting can be at an
international level if the area of operation is international. If the firm supplies, its
products and services to the local market then forecasting will be at the local level.

The scope should be decided considering the time and cost involved in the benefit of
the information acquired through the study of demand. The cost of forecasting and
benefit flows from such forecasting should be in a balanced manner.

Types of Forecasting

There are two types of forecasting:

• Based on Economy

• Based on the period

LSPU SELF-PACED LEARNING MODULE: Managerial Economics

 Republic of the Philippines
Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited

1. Based on the Economy

There are three types of forecasting based on the economy:

i. Macro-level forecasting: It deals with the general

economic environment relating to the economy as measured by the Index
of Industrial Production(IIP), national income, and general level of
employment, etc.

ii. Industry-level forecasting: Industry-level forecasting deals with the

demand for the industry’s products. For example, the demand for cement
in India, the demand for clothes in India, etc.

iii. Firm-level forecasting: It means forecasting the demand for a particular

firm’s product. For example, demand for Birla cement, demand for
Raymond clothes, etc.

2. Based on the Period

Forecasting based on time may be short-term forecasting or long-term forecasting.

i. Short-term forecasting: It covers a short period of time, depending upon

the nature of the industry. It is done generally for six months or less than
one year. Short-term forecasting is generally useful in tactical decisions.

ii. Long-term forecasting casting: Long-term forecasts are for a longer

period say, two to five years or more. It gives information for major
strategic decisions of the firm. For example, expansion of plant capacity,
opening a new unit of business, etc.

Significance of Demand Forecasting

Demand forecasting is crucial because it helps organizations foresee customers'

wants and make plans appropriately. Furthermore, demand forecasting planning
helps businesses plan production and inventory management, set pricing, and adjust
marketing and sales efforts.

LSPU SELF-PACED LEARNING MODULE: Managerial Economics

 Republic of the Philippines
Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited
This further enables companies to meet client demand and manage short- and long-
term objectives in a proactive manner more effectively. Accurate forecasting helps
businesses minimize costs associated with over- or under-stocking, reduce lost sales
due to stock-outs, and ensure that customer orders are fulfilled on time.

Factors Affecting Demand Forecasting

Following, we’ve discussed several factors that influence demand forecasting. Let’s learn:

1. Economic Conditions:

Economic conditions such as GDP, unemployment rate, inflation rate, and consumer
confidence are key factors that affect the level of demand for products or services.

2. Competition:

The level of competition in a market can influence the demand for a product or service.
There may be less demand for a good or service if there is greater competition.

3. Consumer Trends:

Consumer trends can have a major impact on the demand for a product or service. If
consumers are gravitating toward certain products or services, it can affect the demand
for other products or services.

4. Price:

Price is a major factor affecting demand. The demand for a good or service may decline if
its price rises.

5. Availability:

Demand may also be impacted by a product or service's availability. The demand for a
good or service may rise if it is unavailable or in short supply.

6. Advertising:

Advertising can also have a major impact on demand. A product or service's demand may
rise if it receives extensive advertising.

LSPU SELF-PACED LEARNING MODULE: Managerial Economics

 Republic of the Philippines
Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited
Levels of Demand Forecasting

Demand forecasting in managerial economics can be at the level of a firm or industry

or the national or national or international level:

Firm Level: If the exercise aims at forecasting the demand for a firm’s product locally
at the state, regional, or national level, it is a micro-level of demand forecasting.
Sometimes, forecasts are required for a company’s products in a specific industry or
market segment.

Industry Level: Such a demand forecasting exercise focuses on the industry for the
region and/or national level. These forecasts may be undertaken by a group of
companies or by industry/trade associations.

National Level: Demand forecasts at the national level include parameters like
national income, expenditure, index of industrial and/or agricultural production, etc.
Estimating aggregate demand for products at the national level facilitates
governmental decisions for imports, exports, pricing policy, etc.

International Level: Companies operating in multinational markets would require

similar forecasting of demands for its products, trends in consumption, etc. at the
international level Managerial Economists play a leading role in masterminding
these forecasts at firm, industry, national, and international levels. The time horizon
of these demand forecasts usually varies from 1 to S years and in rare instances up
to 10 years.

Need for Demand Forecasting

Business managers, depending on their functional area, need various forecasts. They
need to forecast demand, supply, price, profit, costs, and returns from investments.

The question may arise: Why have we chosen demand forecasting as a model? What
is the use of demand forecasting?

The significance of demand or sales forecasting in the context of business policy

decisions can hardly be overemphasized. Sales constitute the primary source of
revenue for the corporate unit and reduction in sales gives rise to most of the costs
incurred by the firm.

Demand forecasting is essential for a firm because it must plan its output to meet the
forecasted demand according to the quantities demanded and the time at which
these are demanded. The forecasting demand helps a firm to arrange for the supplies

LSPU SELF-PACED LEARNING MODULE: Managerial Economics

 Republic of the Philippines
Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited
of the necessary inputs without any wastage of materials and time and helps a firm
to diversify its output to stabilize its income over time.

The purpose of demand forecasting differs according to the type of forecasting.

1. The Purpose of the Short-Term Forecasting

It is difficult to define short runs for a firm because its duration may differ according
to the nature of the commodity. For a highly sophisticated automatic plant, 3 months
may be considered as a short run, while for another plant duration may extend to 6
months or one year. Time duration may be set for demand forecasting depending
upon how frequent the fluctuations in demand are, short- term forecasting can be
undertaken by affirming for the following purpose:

• Appropriate scheduling of production to avoid problems of over-production

and under-production.
• Proper management of inventories
• Evolving suitable price strategy to maintain consistent sales.
• Formulating a suitable sales strategy by the changing pattern of demand and
extent of competition among the firms.
• Forecasting financial requirements for the short period.

2. The Purpose of Long-Term Forecasting

The concept of demand forecasting is more relevant to the long run that the short
run. It is comparatively easy to forecast the immediate future than to forecast the
distant future. Fluctuations of a larger magnitude may take place in the distant
future. In a fast-developing economy, the duration may go up to 5 or 10 years, while
in a stagnant economy, it may go up to 20 years. Moreover, the time duration also
depends upon the nature of the product for which demand forecasting is to be made.
The purposes are:

• Planning for a new project, expansion, and modernization of an existing unit,

diversification, and technological up gradation.
• Assessing long-term financial needs. It takes time to raise financial resources.
• Arranging suitable manpower. It can help a firm to arrange for a specialized
labor force and personnel.
• Evolving a suitable strategy for changing patterns of consumption.

LSPU SELF-PACED LEARNING MODULE: Managerial Economics

 Republic of the Philippines
Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited
8 Important Techniques for Demand Forecasting

The initial stage in the process is deciding the sort (or types) of demand forecasting and
demand forecasting you'll utilize for your organization. The method you'll use to make the
forecast must be chosen as the next stage.

Following, we’ve discussed eight effective techniques for predicting demand. Let's learn:

1. Market Research/Surveying:

The technique in market research is customer surveys are an essential instrument for
demand forecasting. Internet surveys have made it easier than ever to target your
audience, and survey software has greatly sped up analysis.

Survey results can teach forecasters a lot that a sales figure simply cannot. They may assist
with marketing initiatives, find opportunities, and improve your comprehension of the
requirements of your target audience.

The following surveys are some of the most well-liked ones among sales and marketing
teams:

• Sample surveys are conducted to learn more about the purchasing behaviors of
a small sample of potential clients.

• Complete enumeration surveys, which entail speaking with as many

prospective customers as is practical to collect a bigger amount of data.

• End-user research, which entails asking other businesses for their opinions on
what clients’ desire.

2. Statistical Approach:

The application of statistical approaches to demand forecasting is a reliable and

frequently cost-effective strategy. The following are some applications for the statistical
approach:

• Trend Projection: This is the easiest method for predicting demand. Simply put,
by studying the past, you can predict the future. Make sure to correct any errors.
For instance, you might have had a momentary fall in sales the year before because
of a breach into your eCommerce website, or you might have witnessed a
temporary spike in sales the year before because of a month-long viral article
about your product. Both events are extremely improbable to happen again, hence
they shouldn't be included when identifying a pattern.

LSPU SELF-PACED LEARNING MODULE: Managerial Economics

 Republic of the Philippines
Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited
• Regression Analysis: This technique can be used to identify relationships
between the demand for a product or service and external factors (such as price,
time of year, or advertising campaigns).

• Time Series Analysis: A quantitative forecasting method called time series

analysis uses historical data to forecast future demand. It is predicated on the idea
that current demand trends will hold going forward. It is used to predict short-
term and long-term demand.

• Market Segmentation: This method can be used to identify what market

segments are most likely to purchase a product or service.

• Decision Trees: This technique can be used to analyze how different variables
can affect the demand for a product or service.

• Simulation Modeling: This method can be used to forecast demand by simulating

different scenarios.

3. Econometric Models:

Econometric models are mathematical models used in economics and related fields to
describe economic systems. They are used to estimate relationships among economic
variables, such as prices, demand, supply, and consumption.

Econometric models are also used to examine the effects of economic policies. These
models are used by economists to forecast economic trends and to explain and predict
economic behavior.

Though it may appear straightforward in theory, the econometric demand forecasting

methodology can be extremely difficult. It is mainly because forecasters are rarely able to
run controlled trials where only one variable is changed and the subject's reaction to that
change is evaluated.

Instead, econometric calculations are made utilizing a complex network of connected

equations in which all variables are simultaneously changed. There is a reason that people
who aren't just forecasters adopt this strategy.

LSPU SELF-PACED LEARNING MODULE: Managerial Economics

 Republic of the Philippines
Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited
4. Composite Sales Force Approach:

Sales personnel predict demand in their territories using a demand forecasting technique
known as the sales force composite, sometimes known as the "collective view." This
information is combined at the branch, region, or area level, and an overall firm demand
projection is made by accounting for the total of all the variables.

This "bottom-up" approach is advantageous because salespeople are situated near the
market and frequently have first-hand knowledge of customers.

When using this strategy, it's crucial to bear in mind that variables like product price,
marketing campaigns, client affluence, and competition can vary by area. Sales leaders can
gather and distribute this data online using some inventory management solutions' built-
in tools, while others use market research questionnaires to gather data.

5. A/B Experiment:

There are times when it is possible to study consumer behavior through carefully
monitored market trials. This includes testing different campaigns, features, website
images or features, email subject lines, and many other things using A/B methods.

If customers strongly prefer one over the other and are more aware of their preferences,
businesses will be better able to predict demand. For instance, a study found that firms
enjoy a boost in sales when they offer prices with odd final numbers!

6. Delphi Method:

The Delphi method is a qualitative forecasting technique that relies on the opinions of
experts to predict future demand. In a series of rounds, specialists are questioned about
the anticipated demand for various products. The opinions are then consolidated and
used to make a prediction.

The Delphi Method, which was developed by the RAND Corporation and is still commonly
utilized today, is frequently employed in conjunction with an expert opinion. The Delphi
method of forecasting utilizes the expertise of subject-matter experts to anticipate
demand.

Briefly, this is how it operates:

• There is a team of subject-matter specialists.

• A questionnaire is given to every expert panelist on the panel.
• Each panelist receives a copy of the questionnaire back after the facilitator
summarizes the results.

LSPU SELF-PACED LEARNING MODULE: Managerial Economics

 Republic of the Philippines
Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited
• The panel is once more questioned over their forecasts, and they are exhorted to
reconsider their initial comments considering the panelists' responses.
• There might be one or two more rounds of this.

As a result of the Delphi method's capacity to enable the experts to build on one another's
expertise and viewpoints, the conclusion is considered a more well-informed consensus.

7. Barometric:

Three indicators are used in this forecasting technique to identify trends.

• Leading indicators attempt to predict future events. For instance, a surge in

complaints from customers about shipping delays or backorders could lead to a
decline in sales.

• Lagging indicators look back at prior outcomes. For inventory management

purposes, a rise in sales over the previous month can indicate a tendency that has
to be continuously monitored.

• Coincidental indications are used to gauge what is happening right now. As an

example, real-time inventory turnover displays continuous sales activity.

Each indicator has the potential to improve inventory planning and supply chain
management.

8. Expert Opinion:

Qualitative demand forecasting is a method that relies on expert opinion and judgment to
predict the future demand for a product or service. It involves collecting opinions from
experts in the field and using them to estimate future demand. It is used when there is no
historical data to use for forecasting.

Important Advantages of Demand Forecasting

All businesses, whether they are fast eCommerce startups or well-established retail
behemoths, can benefit from demand forecasting in several ways.

Following, we've discussed some crucial advantages of demand forecasting. Let's learn:

LSPU SELF-PACED LEARNING MODULE: Managerial Economics

 Republic of the Philippines
Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited
Helps in Preparing your Budget:

Making a budget is tough without demand forecasting. How else might you plan for
upcoming purchases?

Consider the case where inadequate demand projections cause you to overestimate the
quantity of inventory you will require. Less money is required when you invest more in
inventory.

As a result, the cash flow to do so may be constrained in inventory when there is a chance
to invest in a new product line or when it is time to create that new advertising campaign.

Determining a Pricing Plan:

Considering the on-demand strategy can help you determine an appropriate price for
your good or service. This might be very profitable but will also demand knowledge of the
market and your competitors.

For instance, if you have a large amount of inventory and know a newer model is on the
way, you may swiftly clear what you already have by dropping the price and making room
for the new models. Alternatively, if a product is in high demand and short supply, you
might increase the price by applying the exclusivity concept.

Reduction in Backorders:

Effective demand forecasting can help reduce backorders even though unexpected
increases in demand are always possible (for example, when a product that was
previously in low demand becomes popular, is advertised on television, or is sponsored
by a powerful person).

When you don't have enough inventory to meet demand, backorders occur. They might
make customers angry and lead them to seek out a competitor. You run the risk of losing
them permanently if they end up enjoying the competitor. Preparing for demand reduces
the possibility that you will run out of popular products (and running off your customers).

Storing Inventory:

Inventory management is an important factor in demand forecasting. Stockpiling

inventory can assist lower the likelihood of stockouts and guarantee that there are
adequate goods on hand to satisfy client demand.

Companies should use an inventory management system to track their inventory levels
and ensure they have the right amount of stock on hand at any given time. An inventory

LSPU SELF-PACED LEARNING MODULE: Managerial Economics

 Republic of the Philippines
Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited
management system can help companies monitor stock levels, keep track of sales orders,
and forecast future demand.

Additionally, having enough inventory on hand can help companies avoid lost sales and
maximize customer satisfaction.

Saving on Restocking:

There are various ways to save money when it comes to refilling. The most crucial thing
to keep in mind is that restocking is a continuous process that calls for both patience and
preparation. Purchasing in bulk is one of the best strategies to reduce the cost of refilling.

Buying in bulk typically allows you to get better prices and discounts on items, which can
result in substantial savings over time. Additionally, it is important to shop around and
compare prices between different stores and suppliers to ensure you are getting the best
deal possible.

Finally, you should look for sales and special offers available from retailers and
manufacturers, as these can provide additional savings.

How to Start with Demand Forecasting?

Below are some tips on how to begin demand forecasting:

1. Assemble Historical Data & Information:

Gathering historical data, which can be used to examine historical trends and patterns, is
the first step in demand forecasting. Furthermore, the list such as sales figures, customer
reviews, market research findings, competitor information, etc. should all be included in
this data.

2. Analyze the Relevant Data:

The analysis of historical data after it has been gathered is necessary to spot trends,
patterns, and seasonality. Statistical methods like regression analysis and time series
analysis can be used to do this.

3. Create Forecasts:

After analyzing the data, forecasts should be created for the future. This can be done using
various methods such as trend extrapolation, simple average, moving average, weighted
average, and exponential smoothing.

LSPU SELF-PACED LEARNING MODULE: Managerial Economics

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Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited
4. Monitor Forecasts:

After forecasts are created, they should be monitored to make sure they are accurate. This
can be accomplished by contrasting the actual outcomes with the anticipated outcomes.
If the forecasts are not accurate, adjustments should be made to the forecasting methods
used.

Demand Forecasting Challenges in Most Businesses

Following, we've discussed demand forecasting challenges that are faced by most
businesses. Let's learn:

1. Lack of Data:

Many companies lack the necessary data to accurately forecast demand, leading to
inaccurate results.

2. Over-Reliance on Past Data:

Companies tend to rely too heavily on past data when forecasting demand, which can lead
to inaccurate predictions.

3. Limited Visibility into the Future:

Companies cannot accurately predict what the future holds, making it difficult to
accurately predict demand.

4. Inaccurate Demand Models:

Companies often use inaccurate models for forecasting demand, which can lead to
inaccurate predictions.

5. Poor Forecasting Processes:

Companies often lack the proper processes and tools to effectively forecast demand,
leading to inaccurate results.

6. Insufficient Resources:

Companies often lack the resources, such as data analysts, to accurately forecast demand.

LSPU SELF-PACED LEARNING MODULE: Managerial Economics

 Republic of the Philippines
Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited
7. Unpredictable External Factors:

External factors, such as changes in the economy, can make it difficult to accurately predict
demand.

Requirements of a Good Forecast

A good forecast should satisfy the following criteria:

• Time frame: The first factor that can influence the choice of forecasting is the
time frame of the forecasting situation. Forecasts are generally for points in
time that may be several days, weeks, months, quarters, or years in the future.
This length of time is called the time frame or time horizon. The length of the
time frame is usually categorized as Immediate, Short term, Medium, or Long
term. In general, the length of the time frame will influence the choice of
the forecasting technique. Typically a longer time frame makes accurate
forecasting more difficult with qualitative forecasting techniques becoming
more useful as the time frame lengthens.

• The pattern of the data: The pattern of the data must also be considered
when choosing a forecasting model. The components present i.e. trend, cycle,
seasonal or some combination of these will help determine the forecasting
model that will be used. Thus it is extremely important to identify the existing
data pattern.

• Cost/Economy of forecasting: Though the firm is interested in accurate

forecasts, the benefits of accurate results must be weighed against the cost of
the method. When choosing a forecasting technique, several costs are
relevant. First, the cost of developing the model must be considered. Second,
the cost of storing the necessary data must be considered. Some forecasting
methods require the storage of a relatively small amount of data, while other
methods require the storage of large amounts of data. Last, the cost of the
actual operation of the forecasting technique is very important.
Some forecasting methods are operationally simple, while others are very
complex. The degree of complexity can have a definite influence on the total
cost of forecasting.

• Accuracy desired: Accuracy in forecasting is very important. The previous

method must be checked for want of accuracy by observing whether the
predictions made in the past are accurate or not. The accuracy of past
forecasting can be checked against present performance and of present
forecasts against future performance. In some situations, a forecast that is in
error by as much as 20% may be acceptable. In other situations, a forecast

LSPU SELF-PACED LEARNING MODULE: Managerial Economics

 Republic of the Philippines
Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited
that is in error by 1% might be disastrous. The accuracy that can be obtained
using any particular forecasting method is always an important
consideration.

• Availability of data: Immediate availability of data is an important

requirement and the method employed should be able to produce good
results quickly. The technique which takes much time to produce useful
information is of no use. Historical data on the variable of interest are used
when quantitative forecasting methods are employed. The availability of this
information is a factor that may determine the forecasting method to be used.
Since various forecasting methods require different amounts of historical
data, the quantity of data available is important. Beyond this, the accuracy and
the timeliness of the available data must be examined, since the use of
inaccurate or outdated historical data will yield inaccurate predictions. If the
needed historical data are not available, special data-collection procedures
may be necessary.

• Plausibility/Ease of operation and understanding: The ease with which

the forecasting method is operated and understood is important.
Management must be able to understand and have confidence in the
technique used. It has to understand clearly how the estimate was made.
Mathematical and statistical techniques should be avoided if the management
cannot understand what the forecaster does. Managers are held responsible
for the decisions they make and if they are to be expected to base their
decisions on predictions, they must be able to understand the techniques
used to obtain these predictions. A manager simply will not have confidence
in the predictions obtained from a forecasting technique he or she does not
understand, and if the manager does not have confidence in these predictions,
they will not be used in the decision-making process. Thus, the manager's
understanding of the forecasting system is of crucial importance.

• Durability: The forecast should be durable and should not be changed

frequently. The durability of the forecasts depends on the simplicity and ease
of comprehension as well as on the continuous link between the past and the
present and between the present and the future.

• Flexibility: The technique used in forecasting must be able to accommodate

and absorb frequent changes occurring in the economy.

LSPU SELF-PACED LEARNING MODULE: Managerial Economics

 Republic of the Philippines
Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited

Demand Analysis

The Demand Analysis is a process whereby the management makes decisions

concerning production, cost allocation, advertising, inventory holding, pricing, etc.
Although, how much a firm produces depends on its production capacity but how much
it must endeavor to produce depends on the potential demand for its product.

Demand analysis is the research conducted by companies that aim at

understanding customer demand for a certain product. Businesses generally use it
to determine whether they can successfully enter the market and obtain the
expected profit. During this process, the management decides on cost allocation,
production, advertising, pricing, etc.

A new firm can easily figure out if there's a significant demand for the product they
offer and receive information about the number of competitors, the growth of the
industry, etc. Demand analysis techniques allow entrepreneurs to determine the
main business areas with the highest demand.

Low demand for a specific product indicates that it does not fulfill customers' needs
and perhaps has little value for them. Some of the causes of low demand include the
incompatibility of products with the market, poor digital marketing, competitors
that offer better alternatives, etc.

Thus, the manager is required to analyze properly the demand for its product in the
market and must hold inventory accordingly. Such as if there is a potential demand
in the future, then the firm should hold more inventories and in case there is no
demand, then the production remains unwarranted, and hence, lesser inventories
are held.

There is a possibility that production might exceed the demand, then the marketer
must use alternative ways such as better advertisements to create a new demand.

The demand shows the relationship between two economic variables, the price of
the product and the quantity of product that a consumer is willing to buy for a given
period, other things being equal.

LSPU SELF-PACED LEARNING MODULE: Managerial Economics

 Republic of the Philippines
Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited
Features/Characteristics of Demand

The following are the main features or characteristics of demand that the marketer
must keep in mind while analyzing the demand for its product:

• The demand is the specific quantity that a consumer is willing to purchase.

Thus, it is expressed in numbers.
• The demand must mean the demand per unit of time, per month, per week,
per day.
• The demand is always at a price, e. any change in the price of a commodity
will bring about a certain change in its quantity demanded.
• The demand is always in a market, a place where a set of buyers and sellers
meet. The market needs not be a geographical area.

Thus, demand plays a crucial role in the success of any business enterprise. And it
must be remembered that demand is always at a price and a particular period in
which it is created. Such as the demand for woolen clothes will be more in winter
than in any other season. Hence, demand analysis is always done in terms of the price
and the relevant period.

Why is demand analysis important?

A company's success or failure depends on the ability to identify and satisfy
customers' needs. In today's market, every business needs to understand consumer
behavior and hold inventory accordingly. Demand analysis brings many insights
essential for the decision-making process. After conducting research, companies
obtain knowledge crucial for sales forecasting, product pricing, costs of marketing
and advertising, financial decisions, and production.

Let's take financial decisions, for example. The demand for a product affects the
financial decisions of a specific company. Suppose there's a high demand for a firm's
product, and it's constantly growing. In that case, it requires additional costs to
produce more products and quality improvement, advertising to reach more
customers, and boosting the marketing team's capabilities.

The pricing policy of a company also depends on consumer demand. Understanding

the trend of customer demand helps businesses decide whether to increase or
decrease the price of their product.

LSPU SELF-PACED LEARNING MODULE: Managerial Economics

 Republic of the Philippines
Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited
If you aim to understand your leads and customers and succeed in your industry,
demand analysis should be an integral part of your business. We've already revealed
the importance of this process, so now let's look at its objectives.

Objectives of Demand Analysis

• Evaluating customers' response toward a product

• Formulating a pricing policy
• Sales forecasting
• Establishing a production policy

Any business can fail when they don't fulfill consumer demand. Hence, some of the
decisions a company makes can be at risk. If your company aims to eliminate this
possibility, you can use demand analysis to determine customer demand for a
particular product. This process has several objectives.

• Evaluating customers' responses towards a product. Gaining and

monitoring customer feedback is vital if your goal is to see customers'
reactions to your new product. This is a great way to find out whether
consumers are satisfied with your goods or if there's still something you can
improve.
• Formulating a pricing policy. You can set the prices after having analyzed
the demand thoroughly. Understanding the trend of consumer demand
allows you to quickly decide whether to increase or decrease the price of a
particular product. Remember, companies can't set prices without
understanding the inclinations of their target audience.
• Sales forecasting. It enables you to make informed business decisions and
predict your company's performance. With a detailed analysis, you can
estimate your future sales. Sales forecasting can give you insights and tips on
managing your firm's cash flow, resources, and workforce. Besides the proper
allocation of resources, it helps you predict sales revenue.
• Establishing a production policy. It enables you to define the gap between
demand and supply. You can estimate the necessary number of raw materials
to maintain the regular supply. Besides, your company can utilize resources
to the maximum if your operations are based on forecasts.

LSPU SELF-PACED LEARNING MODULE: Managerial Economics

 Republic of the Philippines
Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited

How to Do Demand Analysis

1. Identify the market.
2. Assess the business cycle.
3. Create a product that meets a particular niche.
4. Define your advantage.
5. Determine your competitors.

To define whether a company can easily enter the market and obtain the expected
profits, businesses use demand analysis that helps understand the customer’s need
for a product or service. There are five steps to consider.

1. Identify the market. The first thing you should do is to identify the market
you would like to target with your new goods. For this purpose, firms conduct
market surveys to receive feedback from customers about the product and
understand the level of customer satisfaction. If clients demonstrate
dissatisfaction with it, companies try to develop a product so that it meets the
customer demand.
2. Assess the business cycle. Once a market is defined, you can proceed to
evaluate the stage of the business cycle. It has three stages. In the first,
emerging stage, there’s high customer demand and a low supply of goods. In
the second, plateau stage, the supply of products meets the market demand.
In the third, declining stage, the demand for the products is lagging.
3. Create a product that meets a particular niche. You need to create a
product that suits a certain niche within the market. Develop your products
so that they can meet the needs of your consumers. Also, customers should
be able to distinguish your goods from competitors’ alternatives.
4. Define your advantage. Developing products that can resolve customers’
problems allows you to create a sense of usefulness and increase demand.
Let’s take iPods or iPhones, for example. These products increased the
demand by entering the personal electronics market because they were
perceived by customers as useful products.
5. Determine your competitors. Define the number of your competitors and
their market share. It depends on the stage of the business cycle you’re in. For
example, in the emerging stage, you’ll have fewer competitors which will
allow you to obtain a higher profit margin.

LSPU SELF-PACED LEARNING MODULE: Managerial Economics

 Republic of the Philippines
Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited
To sum it up, demand analysis is an essential step before making any business
decisions. Companies should understand consumer behavior that defines the
demand for a specific product within the market.

Demand Analysis Parameters

The key drivers while determining demand are:

1. Product's price

The price of the product plays an important role in demand analysis. If the price is
high as compared to competitors or what the customer can pay, the demand would
be affected.

It can be low or high depending upon the price point of the product or service.

2. Customer income

The buying power of customers would impact the demand for a product. If the
product or service is offered at a price point more than the affordability of a customer
group, then the demand would be low hence customer income needs to be analyzed
for demand.

LSPU SELF-PACED LEARNING MODULE: Managerial Economics

 Republic of the Philippines
Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited

3. Price of competitor goods

As we discussed in the first 2 points about price and buying power, a competitor's
price adds to the equation and can affect the demand for a product/service. If the
competitor is priced lower, then the demand for that particular product would be
more and vice versa. It can be a different scenario in the case of luxury niche
products.

4. Tastes & requirements of the customer

Consumer behavior must be considered. The product or service has to align with the
customer's preferences else there would be no demand for the product.

5. Expectations

Sometimes the customer has expectations from a new or existing product based on
the overall industry landscape. e.g., if every competitor in the market is offering free
warranty service but one company doesn't then most likely it would not be able to
meet the customer expectations.

6. Number of customers in the market

The potential market is an important parameter for demand analysis as the

customers drive the demand. if the customers are too low then even though the first
5 points are in favor still the demand would never rise as the customer base is too
small for a viable business.

LSPU SELF-PACED LEARNING MODULE: Managerial Economics

 Republic of the Philippines
Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited
Demand Analysis Example

Below is the demand analysis for the US restaurant industry (Source: Dun &
Bradstreet)

It shows that market activity is highest in the East North Central area. The figures
are arrived at by tracking the annual sales in each region. So, for offering a particular
product in this market, a company needs to analyze if they can do business in
multiple sub-markets with decent demand or focus on sub-markets or areas with
high demand. Both aspects are part of the demand analysis to be done by the
company based on product or service parameters.

Engaging Activity:

Write an essay about how you can fully maximize using demand forecasting and
demand analysis in the job that you will be working in the future. What measures
will you do for the demand forecasting and demand analysis to be beneficial to the
company?

LSPU SELF-PACED LEARNING MODULE: Managerial Economics

 Republic of the Philippines
Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited

Performance Tasks

Performance Task

Research more about demand forecasting types, methods, and examples. Attach photos or documents
on how a business/company applied demand forecasting. Give your reaction and discuss what you must
do to apply what you have learned in this module.

LSPU SELF-PACED LEARNING MODULE: Managerial Economics

 Republic of the Philippines
Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited

Understanding Directed Assess

Adopted from: [Link]

LSPU SELF-PACED LEARNING MODULE: Managerial Economics

 Republic of the Philippines
Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited

Learning Resources

a. Salvatore, Dominick (2015), Managerial Economics in A Global Economy 8th Ed., NY

Oxford University Press
b. Samuelson, William F. & Marks, Stephen G. (2012). Managerial Economics, 7th Ed., John
Wiley & Sons, Inc.
c. McConnel, Brue, & Flynn. (2012). Microeconomics: Principles, Problems, and Policies. 19th
edition, McGraw Hill-Irwin

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[Link]

LSPU SELF-PACED LEARNING MODULE: Managerial Economics