Demand Estimation and Forecast

Demand Estimation

It is the process that involves coming up with an estimate of the amount of demand for a product or a service. It is confined to a particular period of time.

Methods

Market Experimentation

Actual Market

Market Stimulation

Survey of Consumers’ Intentions

Census

Sample

Regression Analysis

Identifying Demand Function

Collecting Historical Data

Select an Appropriate

Function

Estimation of Selected Function

Analyzing the Estimated

Demand Function

Actual Stimulation

Shops are opened in different localities and then consumer behavior is observed.

Reaction to the price changes can be observed from consumer’s income, cast, religion, gender, taste etc.

Disadvantages- expensive, small scale, non controllable variables.

It provides token money to a set of consumers.

Reaction to price changes can be observed from prices of various goods, packaging, quality etc.

Disadvantages- consciousness of the consumer.

Demand Estimation Market Experiment

Census Method Survey MethodAll the consumers are

contacted.

Disadvantages – costly, hesitant to disclose the plan because of personal/commercial privacy.

A few consumers out of the whole population are contacted.

Disadvantages – costly to carry the test marketing, selection of test area, rival action.

Demand Estimation Survey of Consumers’ Intention

Regression Analysis is a statistical process for estimating the relationships among variables.

Simple Regression Analysis – is used when the quantity demanded is taken as a function of a single independent variable.

Multiple Regression Analysis – is used to estimate demand as a function of two or more independent variables that vary simultaneously.

Specification of Variable

Data Collection

Demand Estimation

Choice of a Functional

Form

Interpretation

Steps for Regression Analysis

Demand Forecast

It is predicting future demand for the product.The prediction of probable demand for a product or a service on the basis of the past events and prevailing trends in the present. 

Forecast are broadly classified into two categories-

 Passive forecast - prediction about future is based on the assumption that the firm does not change the course of its action. 

Active forecast - prediction is done under the condition of likely future changes in the actions, by the firms.

Purposes of ForecastingPurposes of short-term forecastingSeasonal Patterns are of prime importance.a. Appropriate production scheduling.b. Determining appropriate price policyc. Evolving a suitable advertising and promotional

campaign.d. Forecasting short term financial requirements.

Purposes of long-term forecastingHelpful in Capital Planninga. Planning of a new unit or expansion of an existing unit.b. Planning long term financial requirements.c. Planning man-power requirements.

Identify the objective.

Determine the nature of

goods.

Select a proper

method.

Interpret the result.

Steps in Forecasting

Scope of ForecastingPeriod of forecast.Levels of forecast.General Purpose or specific purpose forecast.Forecast of established or new products.Type of commodity for which forecast is to be

undertaken.Miscellaneous factors to be included or not.

Short term forecasts refers to a period up to 3 months.

• Seasonal factors are the ingredients of short run forecasts.

Medium term forecasts refers to a period of 3 months to one year.• It is forecasted

by trends.

Long term forecasts refers to a period above one year.

• Statistical techniques are used to judge the long run forecasts.

Period of Forecasts

i. Macro Economic Forecasts – concerned with the business conditions all over the world.

ii. Industry Demand Forecasts – gives indication to a firm regarding direction in which the whole industry will be moving.

iii. Firm Demand Forecasting – a big firm will do forecasting of its own products independent of the rest of the firms.

iv. Product Line Forecasting – to decide which product should have the priority.

Levels of Forecasts

General/Specific Purpose – general forecast is broken into specific forecasts.

Forecasts of Established/New Product – for established, past sale trends and competitive conditions are used.

Type of Commodity – capital goods, consumer durable and non-durable goods.

Miscellaneous Factors – inclusion of sociological and psychological factors.

Determinants for Demand Forecasts

Replacement VS New Demand

Change in size and characteristic of population.

Saturation limit of market.

Existing stock of good.

Income level of consumers.

Consumer credit outstanding.

Taste and preference of consumers.

Consumer Durable Goods

Disposable Income.

Price

Size and characteristic of population.

Non-Durable Consumer Goods

Growth possibilities.Extent of excess

capacity.The forecasts of

demand for the good which producers’ good help producing.

Existing stock.Age distribution of

existing stock.

Rate of obsolescence.

Availability of funds.Nature of tax

provision.Prices of substitute

and complementary goods.

Market structure.

Capital Goods