Demand Estimation and Forcasting

Chapter 5
Demand Estimation and Forecasting

Managerial Economics: Economic Tools for Todays Decision Makers, 5/e By Paul Keat and Philip Young
Demand Estimation and Forecasting
Regression Analysis Problems in Use of Regression Analysis Subjects of Forecasts Prerequisites of a Good Forecast Forecasting Techniques
2006 Prentice Hall Business Publishing
Managerial Economics, 5/e
Keat/Young
Learning Objectives Specify components of a regression model that can be used to estimate a demand equation Interpret regression results Explain meaning of R2 Evaluate statistical significance of regression coefficients using t-test and statistical significance of R2 using F-test
2006 Prentice Hall Business Publishing Managerial Economics, 5/e Keat/Young
Learning Objectives Recognize challenges of obtaining reliable cross-sectional and time series data on consumer behavior that can be used in regression models of demand Understand importance of forecasting in business Describe six different forecasting techniques
Learning Objectives Show how to carry out least squares projections and decompose them into trends, seasonal, cyclical, and irregular movements Explain basic smoothing methods of forecasting, such as moving average and exponential smoothing
Data Collection
Data for studies pertaining to countries, regions, or industries are readily available and reliable. Data for analysis of specific product categories may be more difficult to obtain.
Buy from data providers (e.g. ACNielsen, IRI) Perform a consumer survey Focus groups Technology: Point-of-sale, bar codes, RFID
Managerial Economics, 5/e Keat/Young
Regression Analysis Regression Analysis: A procedure commonly used by economists to estimate consumer demand with available data.
Cross-Sectional Data: provide information on variables for a given period of time. Time Series Data: give information about variables over a number of periods of time.
Regression Analysis
Regression equation: linear, additive
Y = a + b1X1 + b2X2 + b3X3 + b4X4 Y: dependent variable, amount to be determined a: constant value, y-intercept Xn: independent, explanatory variables, used to explain the variation in the dependent variable bn: regression coefficients (measure impact of independent variables)
Keat/Young
Regression Analysis
Regression Results
Negative coefficient shows that as the independent variable (Xn) changes, the quantity demanded changes in the opposite direction. Positive coefficient shows that as the independent variable (Xn) changes, the quantity demanded changes in the same direction. Magnitude of regression coefficients is measured by elasticity of each variable.
Regression Analysis
Statistical evaluation of regression results
t-test: test of statistical significance of each estimated regression coefficient b t SE b b: estimated coefficient SEb: standard error of the estimated coefficient Rule of 2: if absolute value of t is greater than 2, estimated coefficient is significant at the 5% level If coefficient passes t-test, the variable has a true impact on demand
Regression Analysis
Statistical evaluation of regression results
Coefficient of determination (R2): percentage of variation in the dependent variable (Y) accounted for by variation in all explanatory variables (Xn)
Value ranges from 0.0 to 1.0 Closer to 1.0, the greater the explanatory power of the regression equation
F-test: measures statistical significance of the entire regression as a whole (not each coefficient)
Regression Results Steps for analyzing regression results

Check signs and magnitudes Compute elasticity coefficients Determine statistical significance
Keat/Young
Regression Problems
Identification Problem: The estimation of demand may produce biased results due to simultaneous shifting of supply and demand curves. Advanced estimation techniques, such as twostage least squares and indirect least squares, are used to correct this problem.
Keat/Young
Regression Problems
Multicollinearity: two or more independent variables are highly correlated, thus it is difficult to separate the effect each has on the dependent variable. Passing the F-test as a whole, but failing the ttest for each coefficient is a sign that multicollinearity exists. A standard remedy is to drop one of the closely related independent variables from the regression.
Problems
Autocorrelation: also known as serial correlation, occurs when the dependent variable relates to the independent variable according to a certain pattern. Possible causes:
Effects on dependent variable exist that are not accounted for by the independent variables. The relationship may be non-linear
The Durbin-Watson statistic is used to identify the presence of autocorrelation. To correct autocorrelation consider:
Transforming the data into a different order of magnitude Introducing leading or lagging data
Subjects of Forecasts Gross Domestic Product (GDP) Components of GDP

E.g. consumption expenditure, producer durable equipment expenditure, residential construction
Industry Forecasts
Sales of products across an industry
Sales of a specific product

Prerequisites of a Good Forecast A good forecast should:

be consistent with other parts of the business be based on knowledge of the relevant past consider the economic and political environment as well as changes be timely
Forecasting Techniques Factors in choosing the right forecasting technique:

Item to be forecast Interaction of the situation with the characteristics of available forecasting methods Amount of historical data available Time allowed to prepare forecast
Forecasting Techniques Expert opinion Opinion polls and market research Surveys of spending plans Economic indicators Projections Econometric models
Forecasting Techniques
Qualitative forecasting is based on judgments of individuals or groups. Quantitative forecasting utilizes significant amounts of prior data as a basis for prediction. Nave forecasting projects past data without explaining future trends. Causal (or explanatory) forecasting attempts to explain the functional relationships between the dependent variable and the independent variables.
Expert opinion techniques
Jury of executive opinion: Forecasts generated by a group of corporate executives assembled together. The major drawback is that persons with strong personalities may exercise disproportionate influence. The Delphi Method: A form of expert opinion forecasting that uses a series of questions and answers to obtain a consensus forecast, where experts do not meet.
Opinion polls: Sample populations are surveyed to determine consumption trends.
may identify changes in trends choice of sample is important questions must be simple and clear
Market research is closely related to opinion polling.

Market research will indicate not only why the consumer is or is not buying, but also who the consumer is, how he or she is using the product, and what characteristics the consumer thinks are most important in the purchasing decision.
Surveys of spending plans: seek information about macro-type data relating to the economy. Consumer intentions
Survey of Consumers, Survey Research Center, University of Michigan Consumer Confidence Survey, The Conference Board
Inventories and sales expectations

Forecasting Techniques Economic Indicators: A barometric method of forecasting designed to alert business to changes in economic conditions.
Leading, coincident, and lagging indicators One indicator may not be very reliable, but a composite of leading indicators may be used for prediction.
Leading Indicators predict changes in future economic activity
Average hours, manufacturing Initial claims for unemployment insurance Manufacturers new orders for consumer goods and materials Vendor performance, slower deliveries diffusion index Manufacturers new orders, nondefense capital goods Building permits, new private housing units Stock prices, 500 common stocks Money supply, M2 Interest rate spread, 10-year Treasury bonds minus federal funds Index of consumer expectations
Keat/Young
Coincident Indicators identify peaks and troughs in economic activity
Employees on nonagricultural payrolls Personal income less transfer payments Industrial production Manufacturing and trade sales
Lagging Indicators confirm upturns and downturns in economic activity

Average duration of unemployment, weeks Ratio, manufacturing and trade inventories to sales Change in labor cost per unit of output, manufacturing (%) Average prime rate charged by banks Commercial and industrial loans outstanding Ratio, consumer installment credit outstanding to personal income Change in consumer price index for services
Forecasting Techniques General rule of thumb: if, after a period of increases, the leading indicator index sustains three consecutive declines, a recession (or a slowing) will follow. Economic indicators have predicted each recession since 1948.
Keat/Young
Forecasting Techniques Economic Indicators Drawbacks

Leading indicator index has forecast a recession when none ensued. A change in the index does not indicate the precise size of the decline or increase. The data are subject to revision in the ensuing months.
Keat/Young
Forecasting Techniques Trend projections: A form of nave forecasting that projects trends from past data without taking into consideration reasons for the change.
Compound growth rate Visual time series projections Least squares time series projection
Compound growth rate: Forecasting by projecting the average growth rate of the past into the future.
Calculate the constant growth rate using available data, then project this constant growth rate into the future. Provides a relatively simple and timely forecast Appropriate when the variable to be predicted increases at a constant percentage
General compound growth rate formula: E = B(1+i)n E = final value n = years in the series B = beginning value i = constant growth rate
Forecasting Techniques Visual Time Series Projections: plotting observations on a graph and viewing the shape of the data and any trends.
Keat/Young
Time series analysis: A nave method of forecasting from past data by using least squares statistical methods. Data collected of a number of periods usually exhibit certain characteristics:
Trends Cyclical fluctuations Seasonal fluctuations Irregular movements
Forecasting Techniques Time Series Analysis Advantages

easy to calculate does not require much judgment or analytical skill describes the best possible fit for past data usually reasonably reliable in the short run
Keat/Young
Yt = f(Tt, Ct, St, Rt) Yt = Actual value of the data at time t Tt = Trend component at t Ct = Cyclical component at t St = Seasonal component at t Rt = Random component at t Additive form: Yt = Tt + Ct + St + Rt Multiplicative form: Yt = (Tt)(Ct)(St)(Rt)
Forecasting Techniques Must decompose the time series into its four components
Remove seasonality Compute trend Isolate cycle Cannot do anything with random component
Forecasting Techniques Seasonality: need to identify and remove seasonal factors, using moving averages to isolate those factors. Remove seasonality by dividing data by seasonal factor
Keat/Young
Forecasting Techniques Trend Line: use least squares method Possible best-fit line styles:
Straight Line: Y = a + b(t) Exponential Line: Y = abt Quadratic Line: Y = a + b(t) + c(t)2
Choose style with a balance of high R2 and high t-statistics

Forecasting Techniques Cycle and Random Elements

Random factors cannot be predicted and should be ignored Isolate cycle by smoothing with a moving average
Keat/Young
Forecasting Techniques Smoothing Techniques

Moving Average Exponential Smoothing
Work best when:

No strong trend in series Infrequent changes in direction of series Fluctuations are random rather than seasonal or cyclical
Moving Average: average of actual past results used to forecast one period ahead
Et+1 = (Xt + Xt-1 + + Xt-N+1)/N
Et+1 : forecast for next period Xt, Xt-1 : actual values at their respective times N: number of observations included in average
Exponential Smoothing: allows for decreasing importance of information in the more distant past, through geometric progression
Et+1 = wXt + (1-w) Et
w: weight assigned to an actual observation at period t

Forecasting Techniques Econometric Models: causal or explanatory models of forecasting

Regression analysis Multiple equation systems
Endogenous variables: comparable to dependent variables of single-equation model, but may influence other endogenous variables Exogenous variables: from outside the system, truly independent variables

Demand Estimation and Forcasting

Hochgeladen von

Dokumentinformationen

Originalbeschreibung:

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Demand Estimation and Forcasting

Hochgeladen von

Copyright:

Verfügbare Formate

Chapter 5

Demand Estimation and Forecasting

Demand Estimation and Forecasting

2006 Prentice Hall Business Publishing

Managerial Economics, 5/e

2006 Prentice Hall Business Publishing

2006 Prentice Hall Business Publishing

Managerial Economics, 5/e

Regression Results Steps for analyzing regression results

2006 Prentice Hall Business Publishing

Managerial Economics, 5/e

2006 Prentice Hall Business Publishing

Managerial Economics, 5/e

Subjects of Forecasts Gross Domestic Product (GDP) Components of GDP

Sales of a specific product

Prerequisites of a Good Forecast A good forecast should:

Forecasting Techniques Factors in choosing the right forecasting technique:

2006 Prentice Hall Business Publishing

Market research is closely related to opinion polling.

Inventories and sales expectations

2006 Prentice Hall Business Publishing

Managerial Economics, 5/e

Lagging Indicators confirm upturns and downturns in economic activity

2006 Prentice Hall Business Publishing

2006 Prentice Hall Business Publishing

Managerial Economics, 5/e

Forecasting Techniques Economic Indicators Drawbacks

2006 Prentice Hall Business Publishing

Managerial Economics, 5/e

2006 Prentice Hall Business Publishing

2006 Prentice Hall Business Publishing

Managerial Economics, 5/e

2006 Prentice Hall Business Publishing

Forecasting Techniques Time Series Analysis Advantages

2006 Prentice Hall Business Publishing

Managerial Economics, 5/e

2006 Prentice Hall Business Publishing

2006 Prentice Hall Business Publishing

2006 Prentice Hall Business Publishing

Managerial Economics, 5/e

Choose style with a balance of high R2 and high t-statistics

Forecasting Techniques Cycle and Random Elements

2006 Prentice Hall Business Publishing

Managerial Economics, 5/e

Forecasting Techniques Smoothing Techniques

Work best when:

w: weight assigned to an actual observation at period t

Forecasting Techniques Econometric Models: causal or explanatory models of forecasting

Das könnte Ihnen auch gefallen