Managerial Economics

Demand Forecasting

Demand Forecasting

It means expectation about future course of the market demand for a product based on statistical data about past behavior and empirical relationships of demand determinants

Types/Objectives of Demand Forecasting Short term Long term

Short Term Forecasting

It normally relates to a period not exceeding a year

Benefits of Short term forecasting Drafting of Production Policy Evolving a Sales Policy Determining Price Policy Fixation of Sales Target

Long Term Forecasting

It refers to the forecasts prepared for long period during which the firm’s scale of operations or the production capacity may be expanded or reduced.

Benefits of Long term forecasting Business Planning Manpower Planning Long-Term Financial Planning

COMPONENTS OF DEMAND FORECASTING SYSTEM

Market research operations to procure relevant and reliable information about the trends in market.

A data processing and analysing system to estimate and evaluate the sales performance in various markets.

Proper co-ordination of steps (i) and (ii) above Placing the findings before the top management for

making final decisions.

Significance /Use/ Importance of Demand Forecasting

Production Planning Sales Forecasting Control of Business Inventory Control Growth and Long Term Investment Program Economic Planning and Policy Making Avoiding Surplus and Inadequate Production Quality and Quantity Controls

Sources of Data

Primary: which are collected for first time for purpose of analysis

Secondary : are those which are obtained from someone’s else records

Survey Methods

Consumer Survey Opinion PollMethods

Complete Enumeration

SampleSurvey

ExpertOpinion

Market Studies&

Experiments

DelphiMethod Market Test

LaboratoryTest

Techniques of Demand Forecasting

Consumer Survey Methods

Complete enumeration Method: All potential users of product are contacted and are asked about their future plan of purchasing the product in question

Limitations Very expensive in case of widely dispersed market Consumers may not know their actual demand and may

br unable to answer query Their plans may change with a change in factors not

included in questionnaire

Contd.…

Sample Survey: Only a few potential consumers and users selected from relevant market are surveyed

Method is simpler, less costly and less time consuming.

Surveys are done to understand market demand, tastes ad preferences, Consumer expectations etc

Opinion Poll Method

Aim at collecting opinions of those who are supposed to possess the knowledge of the market e.g sales representatives, sales executives, consultants and professional marketing experts

This method includes Expert opinion Delphi method

Expert opinion

Under this method each expert is asked independently to provide a confidential estimate and results could be averaged.

Experts may include executives directly involved in the market such as suppliers, distributors or dealers or marketing consultants, officers of trade association etc.

Advantage is that there is no danger that group of experts develop a group- think mentality. Moreover, forecasting is done quickly and easily without need of elaborate need of statistics.

Delphi Method

This method is an attempt to arrive at a consensus on some issues by questioning a group of experts repeatedly until the responses appear to converge along a single line or the issues causing disagreement are clearly defined.

Generally a panel consisting 9 to 12 experts A coordinator is required for the process

Market Experimentation

Test marketing A test area is selected, which should be a representative of the

whole market in which the new product is to be launched. A test area may include several cities having similar features i.e.

population, income levels, cultural and social background, choice and preferences of consumers

Market experiments are carried out by changing prices, advertisement expenditure and other controllable variables influencing demand

After such changes are introduced in the market, consequent changes in demand over a period of time are recorded.

Contd.…

Experiments in laboratory or consumer clinic method Under this method consumers are given some money to

buy in a stipulated store goods with varying prices, packages, displays etc.

They are also requested to fill a questionnaire asking reasons for the choices they have made

The experiment reveals the consumers responsiveness to the changes made in prices, packages and displays.

Limitations of market experiment methods

Very expensive Being costly, carried out on a scale too small to permit

generalization with a high degree of reliability Based on short term and controlled conditions which

may not exist in an uncontrolled market Tinkering with price increases may cause a permanent

loss of customers to competitive brands