Demand Forecasting

Demand Forecasting in Managerial Economics

One of the crucial aspects in which managerial economics differs from pure economic theory lies in the treatment of risk and uncertainty. Traditional economic theory assumes a risk-free world of certainty; but the real world business is full of all sorts of risk and uncertainty. A manager cannot, therefore, afford to ignore risk and uncertainty. The element of risk is associated with future which is indefinite and uncertain. To cope with future risk and uncertainty, the manager needs to predict the future event. Thus, business forecasting is an essential ingredient of corporate planning. Such forecasting enables the manager to minimize the element of risk and uncertainty. Demand forecasting is a specific type of business forecasting.

Need for Demand Forecasting

Demand forecasting is essential for a firm because it must plan its output to meet the forecasted demand according to the quantities demanded and the time at which these are demanded. The forecasting demand helps a firm to arrange for the supplies of the necessary inputs without any wastage of materials and time and also helps a firm to diversify its output to stabilize its income overtime. 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 where large-scale production is being planned and production involves a long gestation period.

The type of forecasting

The purpose of the Short term forecasting:
Appropriate scheduling of production to avoid problems of over production and under- production. Proper management of inventories Evolving suitable price strategy to maintain consistent sales Formulating a suitable sales strategy in accordance with the changing pattern of demand and extent of competition among the firms. Forecasting financial requirements for the short period.

Contd.
The purpose of long- term forecasting: Planning for a new project, expansion and modernization of an existing unit, diversification and technological up gradation. Assessing long term financial needs. It takes time to raise financial resources. Arranging suitable manpower. It can help a firm to arrange for specialized labour force and personnel. Evolving a suitable strategy for changing pattern of consumption.

Steps in Demand Forecasting

1) Nature of forecast 2) Nature of product 3) Determinants of demand 4) Analysis of factors &determinants 5) Choice of techniques 6) Testing accuracy

Techniques of Demand Forecasting

Simple Survey Methods
1) Experts Opinion Poll 2) Reasoned Opinion-Delphi Technique 3) Consumers Survey- Complete Enumeration Method 4) Consumer Survey-Sample Survey Method 5) End-user Method of Consumers Survey- Input-Output Analysis

Complex Statistical Methods

(1) Time series analysis or trend method

(2) Barometric Techniques or Lead-Lag indicators method 3) Correlation and Regression (4) Simultaneous Equations Method