Managerial Economics

By

Abhishek MukherjeeM.Phil., UGC NET, MBA, BBA

What is Demand Forecasting?

Meaning of Demand Forecasting:

• Demand Forecasting is a projection of a firm’s expected level of sales based

on a chosen marketing plan and environment.

• Forecasting of demand is the art of predicting demand for a product or a

service at some future date on the basis of certain present and past

behaviour patterns of some related events.

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Levels of Demand Forecasting

• There are three levels of Demand Forecasting:

1. Micro Level

2. Industry Level

3. Macro Level

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Micro Level, Industry Level, Macro Level

Micro Level:

• This can be for existing products of the firm or for any product that the

firm wishes to introduce in future.

Industry Level:

• Economic planners and industry leaders may like to forecast the demand

for a specific industry so that steps may be taken to meet this demand in

future. Therefore, demand estimate for the inputs or raw materials for the

final product.

• For e.g.: The demand for steel, cement, textile, computers, etc.

Macro Level:

• Economics planners may like to know the future demand for the economy

as a whole, so that economic planning and policies can be tuned

accordingly.

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Objectives of Demand Forecasting

Short Term Objectives

• Regular availability of Labour.

• Price policy formulation.

• Proper control of sales.

• Arrangement of finance.

• Regular supply of raw

materials.

• Formulation of production

policy.

Long Term Objectives

• Labour requirements.

• Arrangement of finance.

• To decide about future

expansion.

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Methods of Demand Forecasting

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Methods of Demand Estimation

Survey Methods Statistical Methods

Survey of Buyer’s Intension

Collective Opinion Method

Trend Projection Method

Economic Indicators Method

Survey Method

• Survey method is one of the direct methods of forecasting

demand in the short term. This method includes the future

purchase plans of consumers and their intentions.

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Survey of Buyer’s Intension

• Demand forecasting by consumer survey methods is done by taking the

view of consumers directly about their future plans about a product.

• Various methods are adopted for surveying the consumer.

• This method uses the most direct approach to demand forecasting by

directly asking the consumers about their future consumption plans.

• They are excepted to give answers to questions like what items they intend

to buy, in what quantity, why, where, when, what quality they expect, how

much money they are planning to spend, etc.

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Collect Opinion Method

• Under this method, salesmen, professional experts, the market experts,

and others are asked to give their opinions about the capacity of sales

expected in the future.

• Salesmen are needed to estimate expected sales in their areas.

• Salesmen being the closest to customers, have most personal feel of the

market.

• The evaluation of individual salesmen is consolidated to find out the total

estimated sales.

• These estimates are reviewed to eliminate the cross of optimism or

pessimism.

• Thereafter, they are further revised in the light of factors proposed for

change in prices, product design, advertising, budget, expected change in

competition, changes in purchasing power, income distribution,

employment, population, etc.

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Statistical Methods

• Statistical methods are methods of demand forecasting used to forecast

demand in the long term. In this method, demand is forecast on the basis

of historical data and cross-sectional data.

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Trend Projection Method

• An old firm can use its own data of past years regarding its sales in the past

years.

• This data is known as time series of sales.

• A firm can predict sales of its product by fitting trend to the time series of

sales.

• A trend line can be fit by graphic method or algebraic equations. Equations

method is more appropriate.

• Trend can be estimated by using any one of the following methods:

• Graphical method

• Least square method

• Time series data

• Moving average method

• Exponential smoothing

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Economic Indicators

• The demand for a product can be assessed based on certain economic

indicators.

• These economic indicators are given by the specialised economic and

statistical organisations like Central Statistical Organisation or National

Council of Applied Economic Research.

• According to this method, the forecaster should establish the relationship

between the sale of the product and economic indicators to assess correct

demand and to measure to what extent these indicators affect the demand.

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Economic Indicators

• Construction contract sanctioned for demand towards building materials

like cement.

• Personal income towards demand for consumer goods.

• Agriculture income towards the demand for agricultural inputs,

instruments,fertilizers, etc.

• Automobile registration towards demand for car spare parts, petrol, etc.

• Personal income, consumer price index, money supply, etc., towards

demand for consumption

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Forecasting for a New Product

• Joel Dean has classified a number of possible approaches as follows:

• The new goods may be considered as an outgrowth of an existing goods,

and the demand for the new goods may be taken as an outgrowth of the

demand for the existing goods.

• The new goods may be taken as a substitute for the existing goods, and the

demand for new goods may be estimated properly.

• • The manager should analyse carefully the basis of growth of the existing

goods and then estimate the rate of growth and the possible quantity of

demand for new goods.

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Forecasting for a New Product

• The manager can arrange to contact the ultimate consumers directly or

through the use of samples of new goods, find out their responses, and

make an estimate of the demand for new product.

• He can seek to find out the consumers responses to the new goods

indirectly through getting in touch with some specialised and informed

dealers who have good knowledge about the market and different varieties

of the goods already available in the market, consumer’s preference, etc.

• The company can test market the goods in a sample market, find out the

reactions of the market and then make an estimate of demand for the

whole country for the short period

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Conditions for Good Forecasting Method

1. Accuracy in method forecast.

2. Plausible.

3. Economy.

4. Quick results.

5. Availability and timeliness.

6. Durability.

7. Flexibility.

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EXERCISE

Q1. In which of the following forecasting technique, data obtained

from past experience is analyzed?

• Judgemental forecast

• Time series forecast

• Associative model

• All of the above

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EXERCISE

Q2. Short term regular variations related to the calendar or time of day

is known as:

• Trend

• Seasonality

• Cycles

• Random variations

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EXERCISE

Q3. Operations generated forecasts often not to do with:

a) Inventory requirements

b) Resource needs

c) Time requirements

d) Sales

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THANK YOU

HAVE A GREAT DAY AHEAD!!!

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