DEMAND FORECASTING

3 W’s: Weather, Work and Women are

unpredictable
In modern business, production is often made in
anticipation of demand.
Anticipation of demand implies “Demand
Forecasting”.
It means expectation about the future course of
development which is uncertain, but not entirely so.
Hence, one can hopefully predict the future events and
reasonably gain.
In particular, the demand forecasting means expectation
about the future course of the market demand for a
product.
It based on the statistical data about past behavior and
empirical relationships of the demand determinants.
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Demand forecasting may be undertaken at the following
levels:
1. Micro level: it refers to the demand forecasting by the
individual business firm for estimating the demand for its
product.
2. Industry Level: it refers to the demand estimate for the
product of the industry as a whole. It is under taken by an
industrial or trade association. It relates to the market
demand as a whole.
3. Macro Level: it refers to the aggregate demand for the
industrial output by the nation a whole.
 It is based on the National income or the aggregate
expenditure of the country.
 Country’s consumption function provides an estimate for
the demand forecasting at macro level.
 With the growth of national income, consumption
expenditure increases, as such, overall demand for goods
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and services in general may tend to rise.
Methods of Demand Forecasting:
1. Sources of Data Collection for Demand Forecasting:
(a) Primary Data: Primary data or information are original in character
which are collected for the first time for the purpose of analysis.
Primary data are raw data and require statistical processing.
Sources of Primary data:
(i). Market Survey or Survey Method: the market survey is the most direct
approach to demand forecasting in short run. It may be conducted
through Consumer survey and collective Opinions.
Consumer Survey:
 A sample survey of the consumer may be undertaken questioning them
about what they are planning or intending to buy.
 A questionnaire may be prepared in this regard.
 This may be mailed to the consumer or can be sent through the field
investigator.
 The informations collected through questionnaire are to be thoroughly
scrutinized and edited to check the inconsistencies, inaccuracy and
incorrectness of the data supplied.
 The data may be classified and tabulated for systematic presentation
and analysis. 3
 Sometime, personal observations or the personal
interviews method may also be adopted to collect
informations when there is a small sample size of
consumer survey.
 On the basis of data/informations collected in the
consumer survey, the managerial economist/manager
construct important demand relationships, such as, price-
demand, income-demand, advertisement-demand, cross
demand etc.
Drawbacks:
1. Expensive
2. Time Consuming
3. It is likely that the consumers may not be able to give
correct answers and may not also cooperate in the
process.
4. Informations may not be complete.
5. Cheating on the part of enumerators may also vitiate the
result of the survey.
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Through Collective Opinion:
 Under this method, the sales man have to report to the head
office with their estimates on expectations of sales in their
territories.
 Such informations cal be obtained from the retailers and
whole sellers by the company.
 By aggregating these forecasts a generalization on an
average is made, which is also based on the value judgment
and collective wisdom of the top level sales executive,
marketing manager, business/managerial economist all
together.
 The opinion method is cheaper and easy to handle. It is less
time consuming also.
 Its main draw back, however, is that it is subjective and
subject to the high element of bias of the reporting agency.
 It is also called “hunch” method of forecasting as it is based
on the hunches of the high level experts.
 It can not be relied on the long term business planning.
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(ii) Market Experimentation:
There may be two types of market experimentation such
as (a) Experiments in Laboratory and (b) Test marketing.
Experiment in Laboratory:
 In this method, a consumer clinic or small laboratory is
formed by creating an artificial market situation.
 To study consumers reaction to a change in demand
variables, in the controlled conditions of the consumer
clinic, the selected consumers are given a small amount
of money and asked to buy certain item.
 The consumer behaviour in the clinic is thus observed
and inferences are drawn.
Drawbacks:
o It is expensive and time consuming method.
o The stimulated market situation may not be fully
representing the actual market situation. 6
Test Marketing:
 In this method, a a market experiment is performed under actual
market conditions.
 First, a choice of the market for experiment is made and is
segregated from the rest.
 The business firm then conducts the experiments in this market,
under controlled conditions, by varying one or more of demand
determinants like price, advertisement, package etc.
 Consumer behaviour in this market is then observed and recorded.
 This may help in assessing the effect of change in the determining
variables on the consumer demands for the product.
 Unlike consumer survey, in case market test, demand is estimated
on the basis of actual purchases (and not intentions and
expectations) of the consumer under the given partially known
conditions.
 Drawbacks:
o Very expensive
o It is difficult to plan market experimentation under heterogeneous
market conditions.
o It is often conducted in developed countries like USA, not in India
so far. 7
(b) Secondary Sources of Data:
 There are ample secondary sources for collecting the required
information for market and demand analysis. The main source of such
data are:
(i) Official Publication of the central, state and local govt. such planned
documents, census of India, Statistical abstracts of the Indian
union, annual survey of industries, annual bulletin of statistics of
exports and imports, monthly studies of productions of selected
industries, economic survey, National Sample Survey reports etc.
(ii) Trade and technical or economic journals and publications like the
EPW, Indian Economic journal, stock exchange directory, basic
statistics and other informations supplied by the centre for
monitoring Indian economy etc.
(iii) Official publications like the reserve bank of India, i.e. annual report
and currency and finance, monthly bulletin of reserve bank of India
etc.
(iv) Publications brought out by research institutions, universities,
associations etc.
(v) Unpublished data such as firms account books showing data about
sales, profits etc. 8
2. Statistical Methods of Forecasting
Demand:
 Once market demand data are collected by the market
survey or from sales record of the farm demand forecasting
can be possible from such information.
 In statistical analysis, economists usually resort to two types
of data for demand estimation, 1. time series data, 2. Cross
section data and 3. Pooled or panel data.
Time Series data: time series data refer to data collected
over a period of time recording historical changes in price,
income and other relevant variables influencing demand for a
commodity.
 Time series analysis relates to the determination of change in
a variable in relation to time.
 Usually trend projections are important in this regard. 9
Cross-Section Data: cross-sectional analysis is
undertaken to determine the effects of changes in
determining variables like price, income etc. on the
demand for a commodity, at a point of time.
 In time series analysis for instance, for measuring
income elasticity of demand, a sales income
relationship may be established from the historical
data and their past variations.
 In cross-sectional analysis, however, different levels
of sales among different income groups may be
compared at a specific point of time.
 The income elasticity is then estimated on the basis
of differences so measured.
Pooled or Panel Data:
Data It implies a combination and time
series and cross sectional data.
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Criteria of a Good Forecasting Method:
Joel Dean (1976) lays down the following criteria of a
good forecasting method:
 Accuracy: Forecast should be accurate as far as possible.
Its accuracy must be judged by examining the past forecasts
in the light of the present situations.
 Plausibility: it implies managements understanding of the
method used for forecasting. It is essential for a correct
interpretation of the results.
 Simplicity: A simpler method is always more comprehensive
than a complicated one.
 Economy: it should involve lesser costs as far as possible.
Its costs must be compared with the benefits of forecasting.
 Quickness: It should yield quick results. A time consuming
method may delay the decision making process.
 Flexibility: Not only the forecast has to maintained up to
date, there should be possibility of changes should be
incorporated in the relationship entitled in forecast procedure,
time to time. 11