MANAGERIAL ECONOMICS

DEMAND ESTIMATION
AND FORECASTING
ACTIVE LEARNING PROJECT WORK

SUBMITTED TO
DR.V.VENU MADHAV (Associate Professor)
M.A, MBA, PGDPM, PhD

SUBMITTED BY

NAME OF STUDENT: TUMMALA NAGA SUPRIYA

ID NUMBER : 172510123

COURSE CODE : 17MB51C2

K L UNIVERSITY BUSINESS SCHOOL, GREENFIELDS, VADDESWARAM,

VIJAYAWADA CITY, GUNTUR DISTRICT, ANDHRA PRADESH

 INDEX
DEMAND ESTIMATION AND
METHODS
DEMAND FORECASTING
SIGNIFICANCE
OBJECTIVES
FACTORS
STEPS OF FORECASTING
METHODS
DESCRIPTION OF PRODUCT
DELL LAPTOP
CALCULATION OF DEMAND
FORECASTING
CONCLUSION
REFERENCE
DEMAND
Demand = Desire + Willingness to buy + Ability to pay

Demand is the quantity of good that a consumer is willing to buy at

different prices.

ESTIMATION
Estimation involves use of assumptions, judgements and trends for
valuation of an event.

DEMAND ESTIMATION
It is a process that involves the estimation amount of demand for a
product or service.

The estimate of demand is confined to a particular period of time, such

as month and year.

While this is definitely not a way to predict the future for your business,
it can be used to come up with fairly accurate estimates if the
assumptions made are correct.

METHODS OF DEMAND ESTIMATION

DEMAND
ESTIMATION
METHODS

CONSUMER VIRTUAL EXPERT STATISTICAL

MARKET OPINON TECHNIQUES
SURVEY
METHOD
FORECAST
A forecast is a prediction or estimation of future situation it is a
objective assessment of future course of action. Since future is uncertain
no forecast can be cent percent correct.

Forecast can be both physical as well as financial in nature. The more

realistic the forecast the more effective decisions can be taken for
tomorrow.

DEMAND FORECASTING
Demand forecasting refers to the process of predicting the future
demand for the firms product. In other words, demand forecasting is
comprised of a series of steps that involves the anticipation of demand
for a product in future under both controllable and non-controllable
facts.

The business world is categorized by risk and uncertainty and most of

the business decisions are taken under this scenario. An organization
comes across several risks both internal and external to the business
operations such as technology employee grievances, recession, inflation,
modifications in government loss etc.

SIGNIFICANCE OF DEMAND FORECASTING

Demand place an important role in the management of every business it
helps in organization to reduce risks involve in business activities and to take
important business decisions.

Apart from this demand forecasting helps in organizations capital

investments and expansion decisions.

Fulfilling objectives

Preparing the budget

Stabilizing employment and production

Expanding organization
 Taking management decision

Evaluating performance

Helping government

OBJECTIVES OF DEMAND FORECASTING

OBJECTIVES OF
DEMAND
FORECASTING

SHORT TERM LONG TERM

OBJECTIVES OBJECTIVES

FORMULAT FORMULAT DECIDING PLANNING

ING CONTROLLI ARRANGIN THE LONG
ING PRICE
PRODUCTI NG SALES G FINANCE PRODUCTIO TERM
POLICY
ON POLICY N CAPACITY ACTIVITIES
FACTORS INFLUENCING DEMAND FORECASTING:
Types of goods
Competition level
Price of goods
Level of technology
Economic vies point
Time period of forecasting

TYPES OF FORECASTING

Based on time period

Short period forecast (generally for 1 year)

Long period forecast (5-10 years)

Very long period (greater than 10years)

Based on level
Macro level (Based on general economic conditions )

Industry level (Based on statistical data)

Firm level (Based on specific policy of a firm)

STEPS OF DEMAND FORECASTING

SETTING THE
OBJECTIVE

DETERMINING
THE PERIOD

SELECTING A
METHOD FOR
DEMAND
FORECASTING

COLLECTING
DATA

ESTIMATING
RESULTS
 METHODS OF DEMAND FORECASTING
There are several methods of demand forecasting depending on purpose
of forecasting data required, data availability, and time frame within which the
demand is to be forecasted. Each method varies from one another and hence
the forecaster must select the method which best suits the requirements.

METHODS OF DEMAND
FORECASTING

SURVEY STATISTICAL
METHODS METHODS

CONSUMER OPINION TREND BAROMETRIC ECONOMETRIC

SERVEY POLL PROJECTION METHODS METHODS
METHODS

SURVEY METHODS
1.Consumer survey method
It is one of the techniques of demand forecasting that involves direct
interview of potential consumers.

Consumer survey method include further three methods that can be

used to interview the consumer
 CONSUMER
SURVEY
METHODS

SAMPLE END USE

COMPLETE
SURVEY METHOD
ENUMERATION
METHOD

a).COMPLETE ENUMERATION METHOD

Under this method a forecaster contact all most all the potential users of the
product and ask them about their future purchase plan. The probable demand
for a product can be obtained by adding all the quantities indicated by
consumers. Such as the majority of children in a city report the quantity of a
chocolate (Q) they are willing to purchase, then total probable demand (Dp)
for chocolate can be determined as : Dp =Q1+Q2+Q3++ Qn .

Where Q1, Q2, Q3 denoted the demand indicated by children 1, 2 ,3

LIMITATIONS

It can only be applied where the consumers are concentrated in a

certain region or locality.

Consumer may give a hypothetical answer which leads to by us

according to their own expectations regarding market conditions.

b).SAMBLE SURVEY
This sample survey method is often used when the target population under
study is large. Only the sample of potential consumers is selected for the
interview. A sample of consumers is selected through a sampling method. Here
the method of survey may be a direct interview or mailed questionnaires to
the selected sample consumers. The probable demand, indicating the response
of consumers can be estimated by using following formula

Dp =HR/HS(H.AD)

Where,

Dp = Probable demand forecast

H = census number of household from relevant market

HS = number of households surveyed or sample households

HR = number of households reporting demand for a product

AD = average expected consumption by the reporting households (total

quantity consumed by reporting households/number of households)

ADVANTAGES

This method is simple, less costly and less time consuming.

Used to estimate short run demand of business firms, households,

government agencies, who plan their future purchases.

LIMITATION

The forecaster cannot attribute more reliability to the forecast than

warranted.

c). END-USE METHOD

It is mainly used to forecast the demand for inputs. This method of demand
forecasting has a considerable theoretical and practical value. Under this
method, a forecaster builds the schedule of probable aggregate future demand
for inputs by consuming industries and several other sectors. In this method
during the estimation of a demand the changes in technological, structural and
other factors that influence the demand is taken into consideration.
ADVANTAGES

It helps to determine future demand for an industrial product in detail

by type and size.

A forecaster can pinpoint or trace at any time in the future as to where,

why and how the actual consumption has been deviated from the
estimated demand.

2. OPINION POLL METHOD

Opinion poll methods are used to collect opinions of those who possess the
knowledge about the market, such as sales representatives, professional
marketing experts, sales executives, and marketing consultants.

OPINION
POLL
METHODS

EXPERT MARKET
DELPHI
OPINION STUDIES AND
METHOD
METHOD EXPERMENTS

a).EXPERT OPINION METHOD

Companies with an adequate network of sales representatives can
capitalize on them in assessing the demand for a target product in a
particular region or locality that they represent. Since sales representatives
are in direct touch with the customer, are supposed to know the future
purchase plans of their customers, their preference for the product, their
reactions to the market changes and the demand for rival products.
 Thus sales representatives are likely to provide an approximate, if not
accurate, estimation of for a target product in their respective regions or
areas. In the case of firms, which lack in sales representatives can collect
information regarding the demand for a product through professional
market experts or consultants, who can predict the future demand on the
basis of their expertise and experience.

Advantages

Too simple

Inexpensive

Limitations

Reliability of estimation provided by sales representatives or

professionals depends on their skill and expertise to anayze the market
and their experience.

There is a chance of over or under estimation of demand due to the

subjective judgement of the assessor.

The evaluation of market demand is often based on inadequate

information available to the sales representatives since they have a
narrow view of the market.

b).DELPHI METHOD
The Delphi method is the extension of expert opinion method where in
the divergent expert opinions are consolidated to estimate a future demand.
The process of Delphi technique is very simple. Under this method, the experts
are provided with the information related to estimates of forecasts of other
experts along with the underlying assumptions.

The experts can revise their estimates in the light of demand forecasts
made by the other group of experts regarding the forecast results in a
final forecast.
c). MARKET STUDIES AND EXPERIMENTS
Another alternative method to collect information regarding the current
as well as future demand for a product is to conduct market studies and
experiments on the consumer behaviour under actual , but controlled market
conditions. This method is commonly known as Market Experiment Method.

Under this method, a firm select some areas of representative markets,

such as three or four cities having the similar characteristics in terms of
population, income levels, social and cultural background, choices and
preferences of consumers and occupational distribution. Then market
experiments are carried out by changing prices., advertisement expenditure
and all other controllable factors under demand function, other things
remaining the same. Once these changes are introduced in the market, the
consequent changes in demand for a product are recorded. On the basis of
these recorded estimates, the elasticity coefficients are calculated. These
computed coefficients along with the demand function variables are used to
assess the future demand for a product.

The alternative method to market experiments is the Consumer Clinics or

Controlled Laboratory Method wherein the consumers are given some money
to make purchases in stipulated store goods with different prices, packages,
displays, etc. This experiment displays the responsiveness towards the changes
made in the prices, packaging and a display of the product.

Limitations

It is too expensive and cannot be afforded by small firms.

This method is based on short-term controlled conditions which might

not exist in the uncontrolled market.

Therefore, the results may not be applicable in the long term uncontrolled
conditions.
 STATISTICAL METHODS
The statistical methods are often used when the forecasting of demand is to
be done for a longer period. The statistical methods utilize the time-series
(historical) and cross-sectional data to estimate the long-term demand for a
product. The statistical methods are used more often and are considered
superior than the other techniques of demand forecasting due to the following
reasons:
There is a minimum element of subjectivity in the statistical methods.
The estimation method is scientific and depends on the relationship
between the dependent and independent variables.
The estimates are more reliable
Also, the cost involved in the estimation of demand is the minimum

STATISTICAL
METHODS

TREND ECONOMETRIC BAROMETRIC

PROJECTION METHOD METHOD
METHOD

1. TREND PROJECTION METHOD

The Trend Projection Method is the most classical method of business
forecasting, which is concerned with the movement of variables through time.
This method requires a long time-series data.

The trend projection method is based on the assumption that the factors
liable for the past trends in the variables to be projected shall continue to play
their role in the future in the same manner and to the same extent as they did
in the past while determining the variables magnitude and direction.

In predicting demand for a product, the trend projection method is applied

to the long time-series data. A long-standing firm can obtain such data from its
departments (such as sales) and the books of accounts. While the new firms
can obtain data from the old firms operating in the same industry. The trend
projection method includes three techniques based on the time-series data.

TREND
PROJECTION
METHOD

GRAPHICAL TREND BOX JENKINS

METHOD EQUATION METHOD
METHOD

a). GRAPHICAL METHOD

It is the most simple statistical method in which the annual sales data
are plotted on a graph, and a line is drawn through these plotted points. A
free hand line is drawn in such a way that the distance between points and the
line is the minimum. Under this method, it is assumed that future sales will
assume the same trend as followed by the past sales records.

Advantages

simple and inexpensive

Limitations

It is not considered to be reliable. This is because the extension of the

trend line may involve subjectivity and personal bias of the researcher.
b).LEAST SQUARE OR FITTING TREND EQUATION METHOD
The least square method is a formal technique in which the trend-line is
fitted in the time-series using the statistical data to determine the trend of
demand. The form of trend equation that can be fitted to the time-series data
can be determined either by plotting the sales data or trying different forms of
the equation that best fits the data. Once the data is plotted, it shows several
trends. The most common types of trend equations are:
Linear Trend: when the time-series data reveals a rising or a linear trend
in sales, the following straight line equation is fitted:
S = a + bT
Where S = annual sales; T = time (years); a and b are constants.
Exponential Trend: The exponential trend is used when the data reveal
that the total sales have increased over the past years either at an
increasing rate or at a constant rate per unit time.
c).BOX JENKINS METHOD
Box-Jenkins method is yet another forecasting method used for short-
term predictions and projections. This method is often used with stationary
time-series sales data. A stationary time-series data is the one which does not
reveal a long term trend. In other words, Box-Jenkins method is used when the
time-series data reveal monthly or seasonal variations that reappear with
some degree of regularity.
Thus, these are the commonly used trend-projection methods that tell about
the trend of demand for a product and are based on a long and reliable time-
series data.

2. BAROMETRIC METHOD
The Barometric Method of Forecasting was developed to forecast the
trend in the overall economic activities. This method can nevertheless be used
in forecasting the demand prospects, not necessarily the actual quantity
expected to be demanded.

Often, the barometric method of forecasting is used by the meteorologists

in weather forecasting. The weather conditions are forecasted on the basis of
the movement of mercury in a barometer. Based on this logic, economists use
economic indicators as a barometer to forecast the overall trend in the
business activities.
 The Barometric Method of forecasting was first developed in 1920s, but,
however, was abandoned due to its failure to predict the Great Depression in
1930s. The Barometric technique was, however, revived, reformed and
developed further by the National Bureau of Economic Research (NBER),
USA in the late 1930s.

The barometric method is based on the approach of developing an index

of relevant economic indicators and forecasting the future trends by analyzing
the movements in these indicators. A time-series of several indicators is
developed to study the future trend. These can be classified as:

BAROMETRIC
METHOD

LEADING COINCIDENTAL LAGGING

SERIES SERIES SERIES

a).LEADING SERIES
The leading series is comprised of indicators which move up or down
ahead of some other series The most common examples of leading indicators
are- net business investment index, a new order for durable goods, change in
the value of inventories, corporate profits after tax, etc.

b).COINCIDENTAL SERIES
The coincidental series include indicators which move up and down
simultaneously with the general level of economic activities. The examples of
coincidental series the rate of unemployment, the number of employees in
the non-agricultural sector, sales recorded by manufacturing, retail, and
trading sectors, gross national product at constant prices.

c).LAGGING SERIES
A series consisting of those indicators, which after some time-lag follows
the change. Some of the lagging series are- outstanding loan, labor cost per
unit production, lending rate for short-term loans, etc.

The following are the criteria on which the indicators are chosen:

The economic significance of the indicator; such as greater the

significance the greater is the score of the indicator.

Time Series- statistical adequacy; a higher score is given to the indicator

provided with adequate statistics.

Conformity with the movement in overall economic activities.

Immediate availability of the time series.

The consistency of the series to the turning points in overall economic

activities.

Smoothness of the series.

The problem of indicator selection may arise if some indicators appear in more
than one class of the indicators.

Aadvantages

The barometric method of forecasting is that is helps to overcome the

problem of finding the value of an independent variable under
regression analysis.
Limitations

The leading indicator of the variable to be forecasted is difficult to find

out or is not easily available.

The barometric technique can be used only for a short-term forecasting.

3.ECONOMETRIC METHODS

The Econometric Methods make use of statistical tools and economic

theories in combination to estimate the economic variables and to forecast the
intended variables.

The econometric model can either be a single-equation regression

model or may consist a system of simultaneous equations. In most
commodities, the single-equation regression model serves the purpose.

But, however, in the case where the explanatory economic variables are
so interdependent or interrelated to each other that unless one is defined the
other variable cannot be determined, a single-equation regression model does
not serve the purpose. And, therefore in such situation, the system of
simultaneous equations is used to forecast the variable.

ECONOMETRIC
METHODS

REGRESSION SIMULTANEOUS
METHOD EQUATION
METHOD
 a).REGRESSION METHOD
The regression analysis is the most common method used to forecast
the demand for a product. This method combines the economic theory with
statistical tools of estimation. The economic theory is applied to specify the
demand determinants and the nature of the relationship between products
demand and its determinants. Thus, through an economic theory, a general
form of a demand function is determined. While the statistical techniques are
applied to estimate the values of parameters in the projected equation.
Under the regression method, the first and the foremost thing is to determine
the demand function. While specifying the demand functions for several
commodities, one may come across many commodities whose demand
depends by or large, on a single independent variable. For example, suppose in
a city, the demand for items like tea and coffee is found to depend largely on
the population of the city, then the demand functions of these items are said
to be single-variable demand functions.

On the other hand, if it is found out that the demand for commodities
like sweets, ice-creams, fruits, vegetables, etc., depends on a number of
variables like commoditys own price, the price of substitute goods, household
incomes, population, etc. Then such demand functions are called as multi-
variable demand functions.

Thus, for a single variable demand function, the simple regression

equation is used while for multiple variable functions, a multi-variable
equation is used for estimating the demand for a product.

b).SIMULTANEOUS EQUATION METHOD

Under simultaneous equation model, demand forecasting involves the
estimation of several simultaneous equations. These equations are often the
behavioural equations, market-clearing equations, and mathematical
identities.

The regression technique is based on the assumption of one-way

causation, which means independent variables cause variations in the
dependent variables, and not vice-versa. In simple terms, the independent
variable is in no way affected by the dependent variable. For example,
 D = a bP

Which shows that price affects demand, but demand does not affect the price,
which is an unrealistic assumption.

On the contrary, the simultaneous equations model enables a forecaster to

study the simultaneous interaction between the dependent and independent
variables. Thus, simultaneous equation model is a systematic and complete
approach to forecasting. This method employs several mathematical and
statistical tools of estimation.
 PRODUCT DELL LAPTOP

LOGO

DELL HEADQUARTERS IN ROUND ROCK , TEXAS

Dell is eponymously named after its founder Michael Dell. It was founded
in 1984, at the age of 19, with $1000 capital.

With the market share of 15.9%, Dell was the third largest PC vendor in the
world in the first quarter of 2017, after Lenovo and HP Inc.
 In the first quarter of 2016, Dell was the largest manufacturer of computer
monitors in the world, with a market share of 16.8%

PROCESS OF DEMAND FORECASTING

STEP 1: SETTING OBJECTIVE

Forecasting the future demand of Dell Laptop.

STEP 2: DETERMINING THE PERIOD

2017 2021
STEP 3: SELECTING THE METHOD FOR DEMAND FORECASTING

Least Square or Fitting Trend Equation Method

STEP 4 : COLLECTING DATA

SALES DATA OF DELL LAPTOPS

SALES IN BILLION U.S
FISCAL YEAR
DOLLARS
2007 57.4
2008 61.1
2009 61.1
2010 52.9
2011 61.5
2012 62.1
2013 56.9
2014 55.58
2015 54.1
2016 50.9
 SALES

61.1 61.1 61.5 62.1

57.4 56.9 55.58
52.9 54.1
50.9

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

STEP 5: ESTIMATION OF RESULTS

Procedure:

Table for finding trend equation

YEAR SALES IN BILLION

(t) DOLLARS tYt t2
(Past 10years) (Yt)
1 57.4 57.4 1
2 61.1 122.2 4
3 61.1 183.3 9
4 52.9 211.6 16
5 61.5 307.5 25
6 62.1 372.6 36
7 56.9 398.3 49
8 55.58 444.64 64
9 54.1 486.9 81
10 50.9 509 100
t = 55 Yt = 573.58 tYt = 3093.44 t2 = 385
STEP 1:
ntYt tYt
b1 =
nt 2 (t)2

103093.4455573.58
b1 =
10385(55)2

b1 = -0.74242

STEP 2:
b1
b0 =

Ybar = =

=573.58/10 = 55/10

= 57.358 = 5.5
b0 = 57.358 (-0.74242)(5.5)
= 61.44131

STEP 3:

Tt = b0 + b1t
Trend equation
b0 =61.44131, b1 = -0.74242
 Tt = 61.44131 + (-0.74242)t
T11 = 61.44131 + (-0.74242) 11

= 53.27

T12 = 61.44131 + (-0.74242) 12

= 52.53
T13 = 61.44131 + (-0.74242) 13
= 51.79
T14 = 61.44131 + (-0.74242) 14
=51.05
T15 = 61.44131 + (-0.74242) 15
= 50.31

DEMAND FORECASTING TABLE

SALES IN BILLION U.S

FISCAL YEAR
DOLLARS
2017 53.27
2018 52.53
2019 51.79
2020 51.05
2021 50.31
 CHART

SALES
53.27

52.53

51.79

51.05

50.31

2017 2018 2019 2020 2021

CONCLUSION:
It is showing downward trend because b1 value is
negative i.e. b1 = -0.74242

REFERENCES
http://businessjargon.com/methods-of-demand-
forecasting.html
http://www.statista.com/topics/2285/dell/
http://www.economicdiscussion.net/demand-
forecasting/demand-forecasting-concept-significance-
objectives-and-factors/3557