DEMAND

ESTIMATION
AND
FORECASTING
MANAGERIAL ECONOMICS
 WHAT IS DEMAND
ESTIMATION
refers to predicting how consumers will
behave in relation to your products and
services in the future.
Demand estimation in managerial
economics is an important way for you to
determine the short-term and long-term
course of your business.
DEMAND ESTIMATION AND
FORECASTING
 WHAT IS UTILITY
THEORY?
The ability of goods and services
to satisfy consumer wants is the
basis for consumer demand.

DEMAND ESTIMATION AND

FORECASTING
 MORE IS BETTER

BASIC PREFERENCES ARE

ASSUMPTIONS COMPLETE

PREFERENCES ARE
TRANSITIVE
DEMAND ESTIMATION AND
FORECASTING
 MORE IS BETTER
• CONSUMER ALWAYS PREFER MORE
TO LESS OF ANY GOODS OR SERVICE.

• THIS IS ALSO THE NONSATIATION

PRINCIPLE IN ECONOMICS.

DEMAND ESTIMATION AND

FORECASTING
 PREFERENCES ARE
TRANSITIVE
• CONSUMERS ARE ABLE TO RANK-
ORDER THE DESIRE ABILITY OF
VARIOUS GOODS AND SERVICES.

• ORDINAL UTILITY- RANK-

ORDERING OF PREFERENCES.
• CARDINAL UTILITY-
UNDERSTANDING OF THE
INTENSITY OF PREFERENCE.
DEMAND ESTIMATION AND
FORECASTING
 PREFERENCES ARE
COMPLETE
• CONSUMERS ARE ABLE TO RANK AND
COMPARE BENEFITS TIED TO
CONSUMPTION.
• IF BOTH PROVIDES THE SAME AMOUNT
OF SATISFACTION OR UTILITY, THE
CONSUMER IS SAID TO DISPLAY
INDIFFERENCE BETWEEN THE TWO.

DEMAND ESTIMATION AND

FORECASTING
 WHAT IS UTILITY
FUNCTION?
A descriptive statement that
relates well-being to the
consumption of goods and
services.
DEMAND ESTIMATION AND
FORECASTING
 WHAT IS MARGINAL
UTILITY?

It measures the added

satisfaction derived from 1 -unit
increase in consumption.

DEMAND ESTIMATION AND

FORECASTING
 LAW OF DIMINISHING
MARGINAL UTILITY
IT EXPLAINS THAT AS A PERSON
CONSUMES AN ITEM OR A PRODUCT, THE
SATISFACTION OR UTILITY THAT THEY
DERIVE FROM THE PRODUCT DECLINES AS
THEY CONSUME MORE AND MORE OF
THAT PRODUCT.

DEMAND ESTIMATION AND

FORECASTING
HIGHER INDIFFERENCE
INDIFFERENCE
CURVES ARE BETTER CURVE
INDIFFERENCE CURVES DO An indifference curve is a graph
NOT INTERSECT that shows a combination of
two goods that give a
consumer equal satisfaction
and utility, thereby making the
INDIFFERENCE CURVES SLOPE consumer indifferent.
DOWNWARD

INDIFFERENCE CURVES BEND

INWARD
Demand Estimation and
Forecasting
 SUBSTITUTES

Perfect Products that serve the same purpose.

Ex. Coke and Pepsi

Substitutes and COMPLEMENTARY

Perfect Products that are best consumed together.

Ex. Coffee and Sugar

Complements PERFECT SUBSTITUTES

Goods and services that satisfy the same
need or desire.
Ex. Gold from two different mines.
Wheat from two different countries.

PERFECT COMPLEMENTS
Goods and services consumed together in
the same combination.
Ex. Car and Fuel
Left and right shoes
Portable gaming devices and batteries
DEMAND ESTIMATION A
 BUDGET CONSTRAINTS

A BUDGET CONSTRAINT REPRESENTS ALL

THE COMBINATIONS OF GOODS AND
SERVICES THAT A CONSUMER MAY
PURCHASE GIVEN CURRENT PRICES
WITHIN HIS OR HER GIVEN INCOME.

DEMAND ESTIMATION AND

FORECASTING
 INCOME EFFECT

INCOME EFFECT OF THE PRICE CHANGE IS

THE INCREASE IN OVERALL CONSUMPTION
MADE POSSIBLE BY A PRICE CUT, OR
DECREASE IN OVERALL CONSUMPTION
THAT FOLLOWS A PRICE INCREASE.

DEMAND ESTIMATION AND

FORECASTING
 SUBSTITUTE EFFECT

SUBSTITUTION EFFECT OF A PRICE

CHANGE DESCRIBE THE CHANGE IN
RELATIVE CONSUMPTION THAT OCCURS
AS CONSUMER SUBSTITUTE CHEAPER
PRODUCTS FOR MORE EXPENSIVE
PRODUCTS.

DEMAND ESTIMATION AND

FORECASTING
 ENGLE CURVES

A PLOT OF THE RELATIONSHIP BETWEEN

NCOME AND THE QUANTITY CONSUMED OF
A GOOD OR SERVICE.

￭ NORMAL GOODS- GOODS AND

SERVICES WITH RISING CONSUMPTION
AT HIGHER LEVELS OF INCOME.
￭ INFERIOR GOODS- GOODS AND
SERVICES WITH FALLING
CONSUMPTION AT HIGHER LEVELS OF
INCOME.
DEMAND ESTIMATION AND
FORECASTING
WHAT IS THE NORMAL GOOD
DIFFERENCE A normal good acts just the
opposite of an inferior good;
BETWEEN demand increases when income
NORMAL GOODS increases.
AND INFERIOR
GOODS? INFERIOR GOOD
An inferior good is a type of good
that declines in demand when
income rises.
DEMAND ESTIMATION AND
FORECASTING
 WHAT IS
DEMAND
FORECASTING?
Demand Forecasting refers to the process of
predicting the future demand for the firm’s
product. In other words, demand forecasting
is comprised of a series of steps that involves
the anticipation of demand for a product in
future under both controllable and non-
controllable factors.

DEMAND FORECASTING
 MACROECONOMIC
FORECASTING

Involves the prediction of

economic data at the industry,
firm, plant, or product levels.

DEMAND ESTIMATION AND

FORECASTING
 QUALITATIVE
ANALYSIS

TREND ANALYSIS
FORECASTING AND PROJECTION
TECHNIQUES EXPONENTIAL
SMOOTHING

ECONOMETRIC
METHODS
DEMAND ESTIMATION A
QUALITATIVE ANALYSIS
IT IS AN INTUITIVE APPROACH TO
FORECASTING THAT CAN BE USEFUL IF IT
ALLOWS FOR THE SYSTEMATIC
COLLECTION OF DATA FROM UNBIASED
AND INFORMED OPINION.

DEMAND ESTIMATION AND

FORECASTING
PERSONAL INSIGHTS- A METHOD THAT IS
ONE IN WHICH AN INFORMED INDIVIDUAL
USES PERSONAL OR ORGANIZATIONAL
EXPERIENCE AS A BASIS FOR DEVELOPING
FUTURE EXPECTATIONS.

SURVEY TECHNIQUES- THAT USE

INTERVIEWS OR MAILED QUESTIONNAIRES
CONSTITUTE ANOTHER IMPORTANT
FORECASTING TOOL, ESPECIALLY FOR
SHORT-TERM PROJECTIONS.
DEMAND ESTIMATION AND
FORECASTING

WHAT IS TREND
ANALYSIS?
Involves characterizing the
historical pattern of an economic
variable and then projecting its
future path based on experience.
Hypelane Clothing Co. 2020
CYCLICAL FLUNCTUATION
Describes the rhythmic variation in
economic series that is due to a pattern of
expansion or contraction in the overall
economy.
SEASONAL VARIATION
Is a rhythmic annual pattern in sales or
profits caused by weather, habit, or social
custom.
IRREGULAR OR RANDOM
INFLUENCES
Are unpredictable shocks to the
economic system and the pace of
economic activity caused by war,
strikes, natural catasthrophes and so on.
 LINEAR TREND
ANALYSIS

Assumes a constant period-by-

period unit change in an
important economic variable over
time.
DEMAND ESTIMATION AND
FORECASTING
 GROWTH TREND
ANALYSIS

Assumes a constant period-by-

period percentage change in an
important economic variable over
time.
DEMAND ESTIMATION AND
FORECASTING
 WHAT IS EXPONENTIAL
SMOOTHING?
TECHNIQUES ARE AMONG THE MOST
WIDELY USED FORECASTING METHODS.

DEMAND ESTIMATION AND

FORECASTING
TWO-PARAMETER (HOLT) EXPONENTIAL
SMOOTHING- THE DATA ARE ASSUMED TO
CONSIST OF FLUNCTUATIONS ABOUT A LEVEL
THAT IS CHANGING WITH SOME CONSTANT
OR SLOWLY DRIFTING LINEAR TREND.

THREE-PARAMETER (WINTERS)
EXPONENTIAL SMOOTHING- METHOD
EXTENDS THE TWO-PARAMETER TECHNIQUE
BY INCLUDING A SMOOTHED MULTIPLICATIVE
SEASONAL BEHAVIOR OF THE FORECAST
SERIES.

DEMAND ESTIMATION AND

FORECASTING
 WHAT IS ECONOMETRIC
METHODS?

Econometric methods use

economic theory and
mathematical and statistical tools
to forecast economic relations.

DEMAND ESTIMATION AND

FORECASTING
IDENTITIES- are economic
relations that are true by
definition.

BEHAVIORAL EQUATIONS-
are hypothesized economic
relations that are estimated
by using econometric
methods.
END