Managerial Economics in a

Global Economy, 5th Edition

by
Dominick Salvatore
Chapter 5
Demand Forecasting
Qualitative Forecasts

 Survey Techniques
 Planned Plant and Equipment Spending
 Expected Sales and Inventory Changes
 Consumers’ Expenditure Plans
 Opinion Polls
 Business Executives
 Sales Force
 Consumer Intentions
Time-Series Analysis

 Secular Trend
 Long-Run Increase or Decrease in Data
 Cyclical Fluctuations
 Long-Run Cycles of Expansion and Contraction
 Seasonal Variation
 Regularly Occurring Fluctuations
 Irregular or Random Influences
Trend Projection

 Linear Trend:
St = S0 + b t
b = Growth per time period
 Constant Growth Rate
St = S0 (1 + g)t
g = Growth rate
 Estimation of Growth Rate
lnSt = lnS0 + t ln(1 + g)
Seasonal Variation

Ratio to Trend Method

Actual
Ratio =
Trend Forecast
Seasonal Average of Ratios for
=
Adjustment Each Seasonal Period
Adjusted Trend Seasonal
Forecast = Forecast Adjustment
Seasonal Variation

Ratio to Trend Method:

Example Calculation for Quarter 1
Trend Forecast for 1996.1 = 11.90 + (0.394)(17) = 18.60

Seasonally Adjusted Forecast for 1996.1 = (18.60)(0.8869) = 16.50

Trend
Year Forecast Actual Ratio
1992.1 12.29 11.00 0.8950
1993.1 13.87 12.00 0.8652
1994.1 15.45 14.00 0.9061
1995.1 17.02 15.00 0.8813
Seasonal Adjustment = 0.8869
Moving Average Forecasts

Forecast is the average of data from w

periods prior to the forecast data point.

w
At i
Ft  
i 1 w
Exponential Smoothing
Forecasts

Forecast is the weighted average of of

the forecast and the actual value from
the prior period.

Ft 1  wAt  (1  w) Ft

0  w 1
Root Mean Square Error

Measures the Accuracy

of a Forecasting Method

RMSE 
(A  F )
t t
2

n
Barometric Methods

 National Bureau of Economic Research

 Department of Commerce
 Leading Indicators
 Lagging Indicators
 Coincident Indicators
 Composite Index
 Diffusion Index
Econometric Models

Single Equation Model of the

Demand For Cereal (Good X)
QX = a0 + a1PX + a2Y + a3N + a4PS + a5PC + a6A + e

QX = Quantity of X PS = Price of Muffins

PX = Price of Good X PC = Price of Milk
Y = Consumer Income A = Advertising
N = Size of Population e = Random Error
 Example Transactions Table
Purchasing Sectors ($
million)
Agriculture Health Services Final Total
Demands Output
Selling Sectors
($ million)

Agriculture 10 6 2 18 36
Health 4 4 3 26 37
Services 6 2 1 35 44
Final 16 25 38 0 79
Payments

Total Input 36 37 44 79 196

Direct Requirements Table
(Technical Coefficients) aij


Technical
Efficiency
 Direct Requirements Table
Purchasing Sectors
Agriculture Health Services
Selling Sectors

Agriculture 0.278 0.162 0.045

Health 0.111 0.108 0.068
Services 0.167 0.054 0.023
Final Payments 0.444 0.676 0.864

Total 1.000 1.000 1.000

 Technology
status

In math, this is: X = (1-A)-1 Y

Policy Variable
 Total Requirements Table
(1-A)-1
Purchasing Sectors ($ million)
Agriculture Health Services
Selling Sectors
($ million)

Agriculture 1.446 0.268 0.085

Health 0.199 1.163 0.090

Services 0.258 0.110 1.043

Total 1.903 1.541 1.218

 agri health services FD
agri 1.446 0.268 0.085
18
health 0.199 1.163 0.09 26
services 0.258 0.11 1.043 35

(1-A)-1 * Y
Total Output

X= 36

37

44