Economic Analysis

A reference note of
Demand Forecasting compiled by Anjay Mishra ,nec College,
Kathmandu Nepal
Demand Forecasting
Forecasting of demand is the art of predicting demand for a product or service at some
future date on the basis of certain present and past behavior pattern of related events.
Forecasting is not simple guessing but it refers to estimating scientifically and objectively
on the basis of certain facts and events relevant to the art of forecasting.

Scope of Forecasting
Forecasting can be at the international level depending upon the area of operation of
given economic institution. It can also be confined to a given product or service supplied
by a small firm in local area. The scope of work will depend upon the area of operation in
the present and proposed in future. Moreover, the cost and time involved in relation to the
benefit of the information acquired through the study of demand.
OBJECTIVES OF DEMAND FORECASTING
-production scheduling
-raw materials purchase policy
-pricing policy
-sales policy
-financial planning

Techniques (Methods) of Forecasting

+survey techniques
+time series analysis
+ECONOMETRIC MODELS
+input output analysis
+Barometric models
-correlation & regression
-index number
Criteria for choosing method
The cost & benefit of the forecasting
Time period (short/long) of the forecast
The lead time decision making
The level of accuracy required
The nature of relationship involved in the forecasting
The quality & availability of the data
There is no easy or simple formula which enables an individual or a business to predict
the future with certainty or to escape the hard process of thinking. The firm has to apply a
proper mix of judgments and scientific formula in order to correctly predict the future
demand for a product. The following are commonly available techniques of demand
forecasting.

1.

Survey of Buyers Intentions Method

Survey of Buyers intentions is the direct method of estimating demand in short
run. It is to ask customers what they are planning to buy for the forthcoming time
period usually a year. Thus in this method the burden of forecasting is put on the

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customers. However, it would not be wise to depend wholly on the buyers
estimates and they should be used cautiously in the light of the sellers own
judgments. A number of biases may creep into the surveys. The customers may
themselves misjudge their requirements or may mislead the surveyors. This
method is useful when bulk of sale is made to industrial producers who generally
have firm future plans. In the case of household customers this method may not
prove very helpful for several reasons viz. irregularity in customers buying
intentions, their inability to foresee their choice when faced with multiple
alternatives and the possibility that the buyer plans may not be real but only
wishful thinking.

2.

Collective Opinion Poll Method

In this method, salesmen are required to estimate expected sales in their
respective territories. The rationale of this method is that salesmen being closest
to the customers are likely to have the most intimate feel of the market. These
estimates of salesmen are consolidated to find out the total estimated sales. These
estimates are reviewed to eliminate the biases of optimism on the part of some
salesmen and pessimism on the part of others. These revised estimates are further
examined in the light of factors like proposed changed in selling prices, product
designs and advertisement programs, expected changes in competition and change
in secular forces like purchasing power, income distribution, employment,
population etc. The final sales forecast would emerge after these factors have been
taken into account.
Although this method is simple and is based on first hand information of those
who are directly connected with sales but this method is subjective as personal
opinions can possibly influence the forecast. Moreover, salesmen may be unaware
of the broader economic changes having the impact on future demand. Therefore,
forecasting could be useful in the short run, for long run analysis however, a
better technique is to be applied.

3.

Expert Opinion Poll Method (Delphi Method)

Expert Opinion Poll method is also known as Delphi Method of investigation. In
this method, instead of depending upon the opinions of buyers and salesmen,
firms can obtain views of the specialists or experts in their respective fields.
Opinions of different experts are sought and their identity is kept secret. These
opinions are then exchanged among the various experts and their reactions are
sought and analyzed. The process goes on until some sort of unanimity is arrived
at among all the experts. This method is best suited in circumstances where
intractable changes are occurring. It also has the advantage of speed and
cheapness.

4.

Statistical Method
Statistical methods have proved to be very useful in forecasting demand. The
important statistical methods of demand forecasting are as follows;
(a) Trend Analysis
A firm which has been in existence for sometime will have accumulated
considerable data on sales pertaining to different time periods. Such data when
arranged chronologically yield time series. The time series relating to sales

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represents the past pattern of effective demand for a particular product. Such
data can be used to project the trend of the time series. This can be done either
through graph or through least square method.
(b) Graphical Method
A trend line can be fitted through a series graphically. Old values of sales for
different areas are plotted on a graph and a free hand curve is drawn passing
through as many points as possible. The direction of this free hand curve
shows the trend. The main drawback of this method is that it may show the
trend but not measure it.
(c) Least Square Method
The least square method is based on the assumption that the past rate of
change of the variable under study will continue in the future. It is a
mathematical procedure for fitting a line to a set of observed data points in
such a manner that the sum of the squared differences between the calculated
and observed value is minimized. This technique is used to find a trend line
which best fit the available data. This trend is then used to project dependent
variable in the future. This method is very popular because it is simple and inexpensive.
(d) Regression Analysis
This is a very common method of forecasting demand. Under this method a
relationship is established between quantities demanded (dependent variable)
and independent variables such as income, price of the good, prices of the
related goods etc. Once the relationship is established, we derive regression
equation assuming relationship to be linear. The equation will be of the form
Y = a + bX. There could also be a curvy linear relationship between
dependent and independent variables. Once the regression equation is derived
the value of Y i.e. quantity demanded can be estimated for nay given value
of X.

5.

Controlled Experiments
Under this method, an effort is made to vary separately certain determinants of
demand which can be manipulated for example, price, advertising etc, and
conduct the experiments assuming that the other factors remains constant. Thus,
the effect of demand determinants like price, advertisement, packaging etc. on
sales can be assessed by either varying them over different market or by varying
them over different time periods in the same market. For example, different prices
would be associated with different sales and on that basis the price quantity
relationship is estimated in the form of regression equation and used for
forecasting purposes. It should be noted however that the market divisions here
must be homogeneous with regard to income, tastes etc. The methods of
controlled experiments is used relatively less because this method of demand
forecasting is expensive as well as time consuming. Moreover, controlled
experiments are risky too because they may lead to unfavorable reactions from
dealers, consumers and competitors. It is also difficult to determine what
conditions should be taken as constant and what factors should be regarded as

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variable so as to segregate and measure their influence on demand. Besides, it is
difficult to satisfy the condition of homogeneity of markets.

6.

Study of General Economic Environments

The various methods suggested till now are related with the product concerned.
These methods are based on past experience trying to project the past into the
future. Such projection is not effective when there are economic ups and downs.
Particularly the projection of trend cant indicate the turning point from slump to
recovery or from boom to recession. Therefore in order to find out these turning
points it is necessary to find out the general behavior of the economy. For this
purpose, an eye should be kept on certain indicators. There are certain lead
indicators and there are others which appear after a lag. For example the heavy
advance orders for capital goods give an advance indication of economic
prosperity. Similarly, the heavy household electrical connection confirms the fact
of heavy construction work was undertaken during the past with a lag of some
period. It is necessary to understand the behavior of various indicators in order to
form an idea about the likely economic environment in the near future.

Importance/Uses of forecasting
Forecasting a demand plays a vital role in the process of planning and decision making
whether at the national level or at the level of a firm. The importance of demand
forecasting has increased all the more on account of mass production and production in
response to demand. No useful business planning can be done without proper estimates
of demand forecast. It would not be an exaggeration to say that all business planning
starts with forecasting of demand because capital investment, production scheduling etc.
has to be related with expected demand. Although it is said no forecast is completely
fool-proof and correct but the very process of forecasting helps in evaluating various
forces which affect demand and is in itself a reward because it enables the forecasting
authority to know about various forces relevant to the study of demand behavior.

Summary
Forecasting of demand is the art of predicting demand for a product or service at some
future date on the basis of certain present and past behavior pattern of related events.
The scope of demand forecasting is determined by nature of the product, time period
covered and levels of forecasting.
The various techniques of forecasting demand are opinion survey, trend analysis,
regression analysis, lead-lag factor etc. The choice depends upon a number of factors like
nature of the product, cost and time requirements, nature of the study etc.