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Demand Analysis & Forecasting: Unit 2

This document provides an overview of demand analysis and forecasting techniques. It discusses demand functions, elasticities of demand including price, income, cross, and advertising elasticities. It also covers the uses of elasticities in managerial decision making regarding pricing, input costs, monopoly pricing, and more. The document then examines the concept, significance, and steps of demand forecasting. It outlines several techniques for demand forecasting including survey methods, time series analysis, and regression analysis. Finally, it discusses limitations to consider when forecasting demand.

Uploaded by

Khanal Nilambar
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© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
156 views

Demand Analysis & Forecasting: Unit 2

This document provides an overview of demand analysis and forecasting techniques. It discusses demand functions, elasticities of demand including price, income, cross, and advertising elasticities. It also covers the uses of elasticities in managerial decision making regarding pricing, input costs, monopoly pricing, and more. The document then examines the concept, significance, and steps of demand forecasting. It outlines several techniques for demand forecasting including survey methods, time series analysis, and regression analysis. Finally, it discusses limitations to consider when forecasting demand.

Uploaded by

Khanal Nilambar
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 44

Unit 2

Demand Analysis & Forecasting


1

Unit Contents
 Use of elasticities of demand in business decision-

making.
 Concept and significance of demand forecasting.

 Techniques of demand forecasting: Survey methods,

Market experiment, Time series analysis, Moving


average method, Regression analysis, Barometric
technique.
 Limitations of forecasting.
Demand Analysis
2

Demand Function
 A mathematical relationship between demand and its determinants.
i.e., Qx = f(Px) : Specific demand function
Qx = f(Px, M, Pr, T, A, .....) : General demand function
Types of Demand Function
 Linear demand function: A demand function with constant slope throughout the
demand curve.
Qx = a – bPx
where, a = intercept parameter
b = slope of the demand curve
 Non-linear Demand Function: A demand function with different slopes on the
given demand curve.
Qx = a.Px-b
3

Elasticity of Demand
 Rate of change in quantity demanded of a commodity due to
change in its determinants like price, consumer’s income, price
of related goods, advertisement expenditure, etc.
Price Elasticity of Demand (ep)
4

Two ways of calculation:


 Point Method:

 Arc Method:
Price Elasticity of Demand (ep)
5

Two ways of calculation:


 Point Method:

 Arc Method:
Types of Price Elasticity of Demand
6

 ep = 0 : Demand remains same with any change in price

 ep < 1 : % P > % Q (Demand is less sensitive to price)

 ep = 1 : % P = % Q

 ep > 1 : % P < % Q (Demand is more sensitive to price)

 ep =  : negligible change in price leads to substantial


change in demand
Uses of Price Elasticity of Demand in
Managerial Decision
7

 Product Pricing
 Elastic demand (ep > 1) : P
 Inelastic demand (ep < 1) : P
 Factor/Input Pricing
 Elastic factor : higher price
Example: skilled labor
 Inelastic factor : lower price
Example: unskilled labor
8

 Monopoly Price
A monopoly has control over price but not demand.
Thus, elastic market : P
inelastic market : P
 Price Discrimination
Total market (Airlines Company)

Inelastic sub-market
Elastic sub-market
(Business Class)
(Economy Class)
Higher Price
Lower Price
9

 Joint Product Pricing


 elastic product : P (husk)
 Inelastic product : P (rice)

 International Trade
 Competitive foreign market : P

 Monopoly foreign market : P

 Discount Decision
If ratio of rise in no. of consumers > the ratio of discount, it
is profitable to offer discount.
Income Elasticity of Demand (eY)
10

Two Ways of Calculation:


 Point Method

 Arc Method
Types of Income Elasticity of Demand
11

 eY = 0 : Demand remains same with any change in income

 eY < 1 : % Y > % Q

 eY = 1 : % Y = % Q

 eY > 1 : % Y < % Q

 eY < 0 : inverse relationship between income and demand


for commodity
Uses of Income Elasticity in Managerial Decision
12

 To determine the effect of change in economic


activities
 Marketing activity

 To design marketing strategy

 To classify goods into different categories


Cross Elasticity of Demand (eC)
13

Two Ways of Calculation:


 Point Method

eC

 Arc Method
Types of Cross Elasticity of Demand (eC)
14

 Positive cross elasticity of demand (eC > 0)


If two goods are substitutes of each other, eC > 0.
 Negative cross elasticity of demand (eC < 0)
If two goods are complements of each other, eC < 0.
 Zero cross elasticity of demand (eC = 0)
If two goods are independent, eC = 0.
Uses of Cross Elasticity in Managerial Decision
15

 To establish the inter relationship between


goods
 To classify industries

 To establish the inter-relationship between

industries
Advertising Elasticity of Demand (eA)
16

Two Ways of Calculation:


 Point Method

 Arc Method
Types of Advertising Elasticity of Demand
17

 EA > 1: % A < % Q

 EA< 1: % A > % Q

 EA = 1: % A = % Q
Uses of Advertising Elasticity in Managerial Decision
18

 Helps the management in deciding whether the outlay


on advertisement should be increased, decreased or
maintained at the present level.
 Helps the management in studying the effect of
advertisement on sales-revenue.
 Helps in evaluating the effectiveness of various media
of advertisement.
 Helps to formulate marketing strategies in competitive
environment.
Relationship between Price, Price Elasticity and
Revenue
19
Contd…
20
Contd…
21
Contd…
22
Demand Forecasting
23

Concept
 Demand forecasting is the process of translating past experiences
of the firm regarding sales into future expectation.
 Phillip Kotler: Company's sales forecast is an expected level of
company's sales based on a chosen marketing plan and assumed
environment conditions.
 Reckie and Crook: Forecasting aims to reduce uncertainty about
tomorrow so that effective decisions can be made today by
providing predictions of future values of variables from past and
present information.
24

Significance/Purposes of Forecasting
 Short-term Objectives
i. Formulation of appropriate production policy
ii. Regular supply of raw materials
iii. Appropriate pricing policy
iv. Determination of sales
v. Short-term financial forecasting
vi. Regular supply of labour
vii. Maximum utilization of machines
25

 Long-term Objectives
i. Determination of production capacity
ii. Long-term financial forecasting
iii.Manpower planning
iv. Planning of new product and the expansion of existing
product
v. Guide to related industries
vi. Guide to the government
26

Steps in Demand Forecasting


i. Identification of forecasting objectives
ii. Ascertaining the determinants of demand
iii. Determination of relationship between demand and its
determinants
iv. Collection of relevant data
v. Selection of appropriate method of forecasting
vi. Presentation of results in readable form
27

Techniques Forecasting
28

A. Survey/Non-statistical Technique
 Applicable for short-term forecasting.
 Suitable in forecasting demand for new product
 Also known as ‘subjective/Qualitative method’
 In the absence of historical data, survey method is relevant.
Two Methods:
i. Consumer survey method
ii. Opinion poll method
29

i. Consumer Survey Method


Also known as “Buyer’s Intention Survey”
Direct and short-run method of forecasting
Three Methods:
 Complete Enumeration Method

All the targeted consumers are interviewed about how many units of
the good they think to consume.
In this method,
Probable demand = Sum of individual demands for the product.
i.e. Dp = X1 + X2 + X3 + ….. + Xn

or, Dp =
30

 Sample Survey Method


A representative number (Sample) from total population is considered.
After determining the sample size, the future demand is surveyed.
Formula:

Where
DP = Probable demand
H = Estimated number of households
HR = Number of households reporting demand
HS = Number of sample households
AD = Average expected consumption
31

 End Use Method


– Demand forecasting is prepared assuming the sales of good
as final use.
– Some goods may be final consumption goods and some may
be intermediate goods.
– Forecasting the demand for intermediate goods depends on
the survey of the production plan of industries.
32

ii. Opinion poll method


Consists of collecting the opinions of scholars, experts,
sales representatives etc.
Three Techniques
 Expert Opinion Method
– Collection of opinions of various experts who have sound
knowledge regarding the product.
– Such experts may be from inside or outside the business.
– Retailers, wholesalers, distributors, professional experts can
be considered while collecting opinions.
33

 Sales Force Method


– Since sales persons are closely associated with
customers, they are considered for collecting
opinions regarding the demand for the product.
– It is based on the preliminary knowledge and
experience of sales persons relating to sales.
34

 Market Studies and Experiment


Steps:
– Total market is classified into different categories.
– Then, a representative market is selected from total market
which is termed as ‘Test Market’.
– The product to be forecasted is kept in the test market for sale.
– Any one factor among various determinant of demand is
changed and the effect on demand is analyzed.
35

B. Statistical Technique
– Applicable for long-term forecasting.
– It is used when historical data are available.
– Also known as “Quantitative Technique”.
Four Methods:
i. Time Series Analysis
ii. Moving Average Method
iii. Regression Analysis
iv. Barometric Method
36

i. Time Series Analysis


– Series of data collected serially on the basis of given time period
is time series analysis.
– Also known as “Trend Projection Method”.
– It shows the trend of past sales of a product.
Steps:
Let Y = f(X)
Where,
Y = Sales/demand
X = Time period
37

The Trend line/Time Series Equation is


Y = a + bx .....................(i)
where,
a = Constant parameter
b = Slope
Least square equations/Normal equation are
Y = na + bx ............. (ii)
xY = ax + bx2 ........... (iii)
– If x = 0,

– If x  0, we solve (ii) and (iii) to calculate a and b


Putting the values of a and b in equation (i), we get the trend line and sales (Y) can be
predicted if X (time period) is given.
38

ii. Moving Average Method


– Moving average is predetermined average value derived from
observations.
– Depends on past sales data and no need of complex mathematical
calculation.
– Trend values as well as sales forecast can be determined by this
method.

Note:
For numerical illustration, please refer to mathematical examples in
the book.
39

iii. Regression Analysis


– Regression is the trend of the result of any study approaching
towards the average.
– Least square method is employed while forecasting demand through
Regression Analysis.
Simple Regression Model
– Consists of a single independent variable.
Y = f(X)
Multiple Regression Model
Consists of two or more independent variables.
Y = f(X1, X2, .........., Xn)
40

Steps in Regression Analysis


 Development of a theoretical model
 Data collection
 Choice of the form of equation
 Estimation and interpretation of results

Note:
Please refer to the book for mathematical examples.
41

iv. Barometric Method


– Related to time series.
– Also known as ‘Economic Indicator Method’
– Time series method assumed future as an expanded form of the past
whereas barometric method assumes future as an expanded from of
present.
Three Basic Indicators
– Leading indicator: The indicator that changes before other indicators.
– Coincident indicator: Indicator that changes simultaneously with
leading indicator.
– Lagging Indicator: Indicator that changes after the changes in all
other indicators.
42

Leading Indicator
43

Limitations of Forecasting
i. Use of Technique
ii.Economic Errors
iii. Limitation of Measurability
iv. Statistical Errors

Note:
Please refer to the book for mathematical examples of
the Chapter.
End of Chapter 2
44

Thank You!!!

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