Demand Forecasting

Demand forecasting is predicting future demand for a product.

The information regarding future demand is essential for planning
and scheduling production, purchase of raw materials,
acquisition of finance and advertising. It is much more important
where large-scale production is being planned and production
involves a long gestation period.

Demand forecasting is also helpful in better planning and

allocation of national resources. Because of unrealistic estimate
of projected demand and production. India had to spend in 1978
Rs. 1000 crores on imports of even essential goods.

Demand forecasting is an activity a company does internally

when it sets its sales budget. The demand forecast influences all

upstream commitments and decisions. Forecasting is important

and fundamental to any business. It is the act of looking ahead

and anticipating the future.

Forecasting provides lead time to do the following:

1. Respond to new situations (avoid surprises)

2. Make optimal, and proactive decisions, instead of doing

things by default, in a reactive mode.

Demand Forecasting – Its Significance

• Demand forecasting is very essential in

• Production Planning

• Sales Forecasting

• Control of Business

• Inventory Control

• Growth and Long-term Investment programmes

• Stability

• Economic Planning and Policy Making

Purpose of Long-term forecasting

• Planning of a new unit or expansion of an existing unit.

• This requires analysis of long-term potential of all the

products of the firm.

• Planning long-term financial requirements – Long-term

sales forecasts are quite essential for organizing long-
term financial requirements as arranging funds
involves considerable time and effort.

• Planning man-power requirements. Training and

personnel development are long-term propositions.
These take time and can be started well in advance on
the basis of estimates of man-power requirements
assessed based on sales forecasts.

• At macro level demand forecasts helps govt. in

determining import-export policy as well as taxation
policy.
Purpose of Short-term forecasting
• Appropriate production scheduling so as to avoid
problem of overproduction and the problem of short-
supply. Production schedules are geared to expected
sales.

• Cost reduction in raw materials purchase, inventory

control by determining future resource requirements.

• Determining appropriate pricing policy – avoiding

increase in a weak market and reduction in bull
market.

• Setting sales targets appropriately and establishing

controls and incentives.

• Evolving suitable advertising and promotional program.

• Forecasting short-term financial requirements – cash

requirements depends on sales level and production
operations. As it involves delay in arranging for
additional funds, sales forecasts enable arrangement
of funds well in advance.
TECHNIQUES OF FORECASTING DEMAND
The various techniques of demand forecasting are listed –

A. SURVEY METHODS
Survey methods are generally used where the purpose
is to make short-run forecast of demand. Under this
method, consumer surveys are conducted to collect
information about their intentions and future purchase
plans.

The following techniques are used to conduct the

survey of consumers and experts.

(I) CONSUMER SURVEY METHODS –

 COMPLETE ENUMERATION METHOD
 SAMPLE SURVEY METHOD
 THE END-USE METHOD

(II) OPINION POLL METHODS

 EXPERT-OPINION METHOD
 DELPHI METHOD
 MARKET STUDIES AND EXPERIMENTS

B. STATISTICAL METHODS
Statistical methods utilize historical (time-series) and
cross-section data for estimating long term demand.
Statistical methods are considered to be superior
techniques of demand estimation because the element
of subjectivity is minimum, estimates are relatively
more reliable and estimation involves smaller cost.
Statistical methods of demand projection include the
following techniques –

(I) TREND PROJECTION METHODS

 GRAPHICAL METHOD
 LEAST SQUARE METHOD
 BOX-JENKINS METHOD

(II) BAROMETRIC METHOD OF

FORECASTING
The barometric method of forecasting follows the
method meteorologists use in in weather
forecasting. Meteorologists use the barometer to
forecast weather conditions on the basis of
movements of mercury in the barometer. Following
the logic of this method, many economists use
economic indicators as a barometer to forecast
trends in business activities.

(iii) ECONOMETRIC METHODS

The econometric methods combine statistical
tools with economic theories to estimate economic
variables and to forecast the intended economic
variables. The forecasts made through econometric
methods are much more reliable than those made
through any other method.
Market demand function

The market demand function for a product is a function

showing the
relation between the quantity demanded and the factors
affecting the quantity of demand.

A demand function for the good X can be expressed as

follows:

Quantity of product X demanded = x Q = f (the price of X,

prices of related goods, expectations of price changes,
income, preferences,
advertising expenditures and so on. )

For use in managerial decision making, the relation between

quantity of demand and each demand determining variable
must be specified. To illustrate this, the demand function
for automobile industry is

Q = a 1 P + a 2 PI + a 3 I + a 4 POP + a 5 i +a 6 A

This equation states that the number of new domestic

automobiles
demanded during a given year (in millions), Q , is a linear
function of the average price of new domestic cars (in $), P ,
the average price of new import cars, PI , disposable income
per household (in $), population ( POP ), average interest rate
on car loans (in %), i , and industry advertising expenditures
(in million $).

Assume that the parameters of this demand function is

know and
shown in the following equation:

Q = - 500 P + 210 P x + 200 I + 20.000 POP +

1.000.000 i + 600 A

Q : the number of new domestic automobiles demanded

P : the average price of new domestic cars (in $),
Px : the average price of luxury cars,
I : disposable income per household (in $),
POP : population
I : average interest rate on car loans (in %),
A : industry advertising expenditures (in million $).

Interpretation of the coefficients:

dQ/dP = - 500 (automobile demand decrease by 500 for each

1$
increase)

dQ/dP x = 200 (a $1 increase in the average price of luxury

cars,
increases demand for the domestic cars by 200.)
Internal Assignment

Managerial Economics

Demand Forecasting

Name : Ranojoy Biswas

Class : BBA LLB

Division : B
PRN No. : 10010124101

Contact No. : 09665585115