DEMAND FORECASTING:

i) Meaning ii) Objectives of Demand Forecasting iii) Purpose of demand Forecasting. a) On the basis of Time Period b) On the basis of Levels c) On the basis of Category of Goods. iv) Approaches to Demand Forecasting. a) Steps in the Process of Demand Forecasting. b) Techniques / Methods of Demand Forecasting. v) Criteria for Good Forecasting Method. vi) Demand Forecasting for New Products, Established Products and Producers goods. vii) Limitations of Demand Forecasting.

i)

MEANING:
Demand forecasting means expectation about the future course of the market demand for a product. This enables the firm to make necessary plans for production and sales by keeping in view the market conditions. The demand forecasting is an estimate of the future demand. It cannot be hundred percent precise. But, it

gives a reliable approximation regarding possible

outcome, with a reasonable accuracy, if it is based on the mathematical laws of probability.

ii) OBJECTIVES OF DEMAND FORECASTING

Demand forecasting has several objectives. The following are some of the important objectives. a) To reduce cost of raw materials and control inventories, to stock enough raw materials according to demand estimates. b) To arrange for short-term financial requirements such as working capital.

c) To fix sales targets based on demand estimation and

to provide incentives to sales people.

d) To arrange for appropriate promotional efforts such as advertising and sales campaigns. e) To prepare proper price policies for achieving desired results. f) To plan production programmes so that there is neither over-production nor underproduction. iii) PURPOSES OF DEMAND FORECASTING The demand forecast can have different interpretations and applications, depending on the purposes of the forecast. The purposes of the forecast can be understood in a systematic way by classifying them (i) on the basis of the time period (ii) on the basis of levels of forecast; and (iii) on the basis of category of goods

a) Demand Forecasting on the basis of time period

On the basis of time period the sale predictions can relate to any one of the following: i) Short-term; ii) Medium-term; and iii) Long-term. i) Short-term Forecasting: Short-term forecasting

serves the following purposes: a) To evolve a suitable policy in view of the seasonal variations of demand and so as to

avoid the problem of short supply or overproduction of the firms product in the market.

b) To evolve a suitable policy in view of the

seasonal variations of demand and so as to avoid the problem of short supply or overproduction of the firms product in the market. c) To determine the suitable price policy to clear off the stocks during offseason and to take advantage in the peak season. d) To evolve a rational purchase policy for

buying raw materials and control its inventory

stock with a greater economy.

e) To set the sales targets and for establishing control over the business. f) To enable the firm to have a short-term financial policy to make use of the surplus cash and / or to arrange for cash in times of need. ii) Medium-term: In case of medium term forecast, experience and sound judgment are more important than statistical forecasting. The medium term forecast can assist in the decisions about timing of an activity, like advertising expenditure. These forecasts also contribute to control or revision of the decisions based on long-term forecast.

iii) Long-term Forecasting:

A long-term forecasting relates to the informations which are vital for undertaking strategic

decisions of the business pertaining to its expansion

or contraction. In general the long-term demand forecasting serves the following purposes.

a) Long-term demand potential will provide

the required guidelines for planning of a new business unit of for the expansion of

the existing one. Capital budgeting by a

firm is based on the long-term demand forecasting.

b) It is essential to determine long-term sales

forecast for an appropriate manpower planning by the firm in view of its longterm growth and progress of the business. c) In view of the long-term demand

forecasting and the production planning, it

becomes easier for the firm to determine its long-term financial planning and

programmes for raising the funds from the

capital market.

b) Demand forecasting on the basis of levels

Demand forecasting may be undertaken at any one of the following levels: a) Macro economic forecasting b) Industry demand forecasting

c) Firm demand forecasting and

d) Product line forecasting

c) Demand forecasting on the basis of category

of goods Economists broadly classify the goods into capital goods, consumer durable goods and nondurable goods. For each of these categories of

goods there would be distinctive pattern of

demand. Forecasting based on this classification servers any or all the purposes mentioned above under two classifications.

APPROACHES TO DEMAND FORECASTING

i) Steps in the process of demand forecasting: The following steps are necessary to have an

efficient forecast of demand:

a) Identification of objectives: The first step is to identify and clearly lay down the objectives of

forecasting, whether it is short-term forecast,

forecast of market shares or a general industry forecast. The purpose of this exercise may be

the estimate of one or more than one aspects,

like quantity and composition of demand, price to be quoted, sales planning, inventory control, etc.

b) Determining the nature of good: There are

three important categories of goods, viz., Capital

goods, Consumers durable goods, Consumers

non-durable goods. Demand determinants of

these categories are also different. Hence, the

determining variables of the demand function for

the product are to be ascertained.

c) Selecting a proper method of forecasting:

Another step is to select suitable methods of forecasting in view of the objectives, availability of data, etc. for example if the data shows cyclic fluctuations, the use of linear trend will be suitable. Similarly, general trend may be more useful for long-term forecasting, while seasonal

patterns will be more important for the short-term

forecast.

d) Interpretation of results: Mere preparation of

forecast does of not help the is management. of equal Interpretation results also

importance. Once the data are collected and

statistical estimates are made, their implications are to be judged for policy making. Interpretation

of demand forecasting is an art. It is very

significant for business decision-making. For that, we need to frequently revise the forecast in

the light of changing circumstances because

forecasts are, in the first instance, made on the assumption of continuation of past events.

b) Techniques / Methods of demand forecasting

It is to be noted here that there is no easy method or a simple formula, which enables the manager to predict the uncertainty of future with cent per cent accuracy. There are various

methods to estimate potential demand. Some

people rely on personal judgment or statistical calculations.

We can classify the methods of demand forecasting in the following manner:

i) The Survey Method / Opinion polling method. ii) Trend Projection method / Extrapolation method iii) Economic Barometers. iv) The Statistical Methods.

I.

THE SURVEY METHOD

a) Survey of Buyers opinion b) Survey of Sales Force opinion

c) Survey of Experts opinion

d) Test Marketing.

II. TREND PROJECTION METHOD

A time series analysis of sales data over a period of time is considered to serve as a good guide for

demand

forecasting.

For

long-term

demand

forecasting, trend is computed from the time based demand function data. Trends refer to the long-term persistent movement of data in one direction upward or downward. The important methods used

for trend projections are: i) The Method of Moving

Averages, ii) Time Series Analysis.

III. ECONOMIC AROMETERS

Generally, the Barometric techniques involve

statistical indicators, usually time series which when combined in certain ways and provide indications of the direction in which the economy, or certain

industries in it, is going. They are Barometers of

market change. These can be classified as (i)

Leading indicators, (ii) Coincident indicators; (iii)

Lagging indicators.

IV. THE STATISTICAL METHODS

a) Simple Regression: b) Multiple Regression:

V. CRITERIA FOR A GOOD FORECASTING METHOD a) Accuracy: Forecast should be, as far as possible, accurate. Its accuracy must be judged by examining the degree of accuracy of the past

forecast.

b. Plausibility: The forecasting method must be

trustworthy and reliable. The management must be able to understand and have confidence in the

techniques
procedures

used.
become

Elaborate
less

mathematical
if the

desirable

management does not really understand what the forecaster is doing. c. Economy: The cost of forecasting must be less.

Its costs must be compared against the benefits

of forecast and a method with higher returns than its cost should be preferred.

d. Durability: The forecast made should hold good

for a certain period of time. e. Quickness: The technique employed should

produce quick results and the data required must

be easily available. VI. DEMAND FORECASTING FOR NEW PRODUCTS, ESTABLISHED PRODUCTS, PRODUCERS GOODS i) New Products: To forecast the demand for new products we can be use any of the following methods: a) Survey method; b) Test Marketing; c) Life Cycle Segmentation Analysis.

ii)

Established

Products:

Demand

can

be

forecast for established products by using any of the following methods.

a) Market Surveys
b) Opinion Surveys

c) Trend projection
d) Regression analysis.

VII LIMITATIONS OF DEMAND FORECASTING So far we have discussed various methods / techniques to forecast the demand. All the methods

may not be useful under all circumstances. Each

and every method has its own advantages and disadvantages.

Depending on the method chosen for demand

forecasting the disadvantages or limitations of that particular method may be normally applicable to

such forecasting. However, one can choose the

appropriate technique keeping in mind the purpose availability of data, cost and time for forecasting the demand with reasonable level of accuracy for taking various decisions.

Unit-8 : INDIFFERENCE CURVE ANALYSIS

8.1 8.2 8.3 8.4 8.5 Introduction What are Indifference Curves ? Assumptions of Indifference Curve Analysis Properties of Indifference Curves. Consumers Equilibrium 8.5.1 Price Line or Budget Line 8.5.2 Assumptions 8.5.3 Graphical Presentation Income, Substitution and Price Effects. 8.6.1 Income Effect 8.6.2 Substitution Effect 8.6.3 Price Effect Derivation of demand Curve from Indifference Curves

8.6

8.7

WHAT ARE INDIFFERENCE CURVES ?

To understand indifference curves, it is better to start with an indifference schedule. An indifferent schedule

may be defined as a schedule of various combinations

of the two commodities that will give an equal level of satisfaction to the consumer.

Indifference schedule
Schedule-I Goods X Goods Y Schedule-II Goods X Goods Y

1 2 3 4 5

15 11 8 6 5

1 2 3 4 5

17 14 11 8 6

PROPERTIES OF INDIFFERENCE CURVES

Based on the above assumptions we can proceed to deduce the properties of indifference curves, namely:

a) Indifference curves slope downwards from life to

right. b) Indifference curves are convex to the origin.

c) Indifference curves cannot intersect each other.

d) A higher indifference curve represents higher level of satisfaction than the indifference curve at the lower

level.
e) Indifference curves need not necessarily be parallel to each other.

PROPERTIES OF INDIFFERENCE CURVES Based on the above assumptions we can proceed to deduce the properties of indifference curves, namely: a) Indifference curves slope downwards from life to right. b) Indifference curves are convex to the origin. c) Indifference curves cannot intersect each other. d) A higher indifference curve represents higher level of satisfaction than the indifference curve at the lower level. e) Indifference curves need not necessarily be parallel to each other. f) Indifference curves do t touch axes. Now, let us explain these properties at length.

PROPERTIES OF INDIFFERENCE CURVES Based on the above assumptions we can proceed to deduce the properties of indifference curves, namely: a) Indifference curves slope downwards from life to right. b) Indifference curves are convex to the origin. c) Indifference curves cannot intersect each other. d) A higher indifference curve represents higher level of satisfaction than the indifference curve at the lower level. e) Indifference curves need not necessarily be parallel to each other. f) Indifference curves do t touch axes. Now, let us explain these properties at length.