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Managerial Economics: Class 13 Demand Forecasting

The document discusses various techniques for demand forecasting, including: qualitative forecasts using surveys and opinion polls; time-series analysis of trends, cycles, and seasonal variations; moving averages; exponential smoothing; econometric models using economic variables; input-output models using industry interdependencies; and barometric methods using economic indicators. Accurate demand forecasting is important for business planning, budgeting, management decision making, and performance evaluation.

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49 views

Managerial Economics: Class 13 Demand Forecasting

The document discusses various techniques for demand forecasting, including: qualitative forecasts using surveys and opinion polls; time-series analysis of trends, cycles, and seasonal variations; moving averages; exponential smoothing; econometric models using economic variables; input-output models using industry interdependencies; and barometric methods using economic indicators. Accurate demand forecasting is important for business planning, budgeting, management decision making, and performance evaluation.

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ڈاکٹرعدنان يوسفزئ
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Managerial Economics

CLASS 13
DEMAND FORECASTING

INSTRUCTOR: ADNAN AHMAD


 Demand forecasting is a combination of two words; the
first one is Demand and another forecasting.
 Demand means outside requirements of a product or
service.
 In general, forecasting means making an estimation in
the present for a future occurring event.
 It is a technique for estimation of probable demand for
a product or services in the future.
 It is based on the analysis of past demand for that
product or service in the present market condition.
 Demand forecasting should be done on a scientific
basis and facts and events related to forecasting should
be considered.
 In simple words, we can say that after gathering
information about various aspect of the market and
demand based on the past, an attempt may be made to
estimate future demand. This concept is called
forecasting of demand.
 For example, suppose we sold 200, 250, 300 units of
product X in the month of January, February, and March
respectively. Now we can say that there will be a
demand for 350 units approx. of product X in the month
of April, if the market condition remains the same.
 Importance 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
decision and make planning for future events related to business
like a sale, 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 business for achieving
its objectives.
 Many decisions of business depend on demand like production,
sales, staff requirement, etc.
 Forecasting is the necessity of business at an international level
as well as 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.
 A good forecasting helps a firm in better planning related to
business goals.
 There is a huge role of forecasting in functional areas of
accounting. Good forecast helps in appropriate production
planning, process selection, capacity planning, facility layout
planning, and inventory management, etc.
 Demand forecasting provides reasonable data for the
organization’s capital investment and expansion decision.
 It also provides a way for the formulation of suitable pricing
and advertisement strategies.
 Significance of Demand Forecasting:

 Fulfilling objectives of the business


 Preparing the budget
 Taking management decision
 Evaluating performance etc.
 The Scope of Demand Forecasting:
 The scope of demand forecasting depends upon the
operated area of the firm, 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 in the local
market then forecasting will be at local level.
 The scope should be decided considering the time and cost
involved in relation to the benefit of the information
acquired through the study of demand.
 Cost of forecasting and benefit flows from such
forecasting should be in a balanced manner.
Qualitative Forecasts
 Survey Techniques
 Planned Plant and Equipment Spending
 Expected Sales and Inventory Changes
 Consumers’ Expenditure Plans
 Opinion Polls
 Business Executives
 Sales Force
 Consumer Intentions
Time-Series Analysis

 Secular Trend
 Long-Run Increase or Decrease in Data
 Cyclical Fluctuations
 Long-Run Cycles of Expansion and
Contraction
 Seasonal Variation
 Regularly Occurring Fluctuations
 Irregular or Random Influences
Trend Projection

 Linear Trend:
St = S0 + b t
b = Growth per time period
 Constant Growth Rate
St = S0 (1 + g)t
g = Growth rate
 Estimation of Growth Rate
lnSt = lnS0 + t ln(1 + g)
Seasonal Variation

Ratio to Trend Method


Actual
Ratio =
Trend Forecast
Seasonal Average of Ratios for
=
Adjustment Each Seasonal Period
Adjusted Trend Seasonal
Forecast = Forecast Adjustment
Seasonal Variation
Ratio to Trend Method:
Example Calculation for Quarter 1
Trend Forecast for 1996.1 = 11.90 + (0.394)(17) = 18.60
Seasonally Adjusted Forecast for 1996.1 = (18.60)(0.8869) = 16.50

Trend
Year Forecast Actual Ratio
1992.1 12.29 11.00 0.8950
1993.1 13.87 12.00 0.8652
1994.1 15.45 14.00 0.9061
1995.1 17.02 15.00 0.8813
Seasonal Adjustment = 0.8869
Moving Average Forecasts

Forecast is the average of data from w


periods prior to the forecast data point.

w
At i
Ft  
i 1 w
Exponential Smoothing Forecasts

Forecast is the weighted average of of the


forecast and the actual value from the
prior period.

Ft 1  wAt  (1  w) Ft

0  w 1
Root Mean Square Error

Measures the Accuracy of


a Forecasting Method

RMSE 
(A  F )
t t
2

n
Barometric Methods

 National Bureau of Economic Research


 Department of Commerce
 Leading Indicators
 Lagging Indicators
 Coincident Indicators
 Composite Index
 Diffusion Index
Econometric Models

Single Equation Model of the


Demand For Cereal (Good X)
QX = a0 + a1PX + a2Y + a3N + a4PS + a5PC + a6A + e

QX = Quantity of X PS = Price of Muffins


PX = Price of Good X PC = Price of Milk
Y = Consumer Income A = Advertising
N = Size of Population e = Random Error
Econometric Models
Multiple Equation Model of GNP
Ct  a1  b1GNPt  u1t
I t  a2  b2 t 1  u2t
GNPt  Ct  I t  Gt

Reduced Form Equation


a1  a2 b2 t 1 Gt
GNPt    b1 
1  b1 1 1  b1
Input-Output Forecasting

Three-Sector Input-Output Flow Table

Producing Industry
Supplying Final
Industry A B C Demand Total
A 20 60 30 90 200
B 80 90 20 110 300
C 40 30 10 20 100
Value Added 60 120 40 220
Total 200 300 100 220
Input-Output Forecasting

Direct Requirements Matrix

Direct = Input Requirements


Requirements Column Total

Producing Industry
Supplying
Industry A B C
A 0.1 0.2 0.3
B 0.4 0.3 0.2
C 0.2 0.1 0.1
Input-Output Forecasting

Total Requirements Matrix

Producing Industry
Supplying
Industry A B C
A 1.47 0.51 0.60
B 0.96 1.81 0.72
C 0.43 0.31 1.33
Input-Output Forecasting

Total Final Total


Requirements Demand Demand
Matrix Vector Vector
1.47 0.51 0.60 90 200
0.96 1.81 0.72 110 = 300
0.43 0.31 1.33 20 100
Input-Output Forecasting

Revised Input-Output Flow Table

Producing Industry
Supplying Final
Industry A B C Demand Total
A 22 62 31 100 215
B 88 93 21 110 310
C 43 31 10 20 104
Thank you

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