Demand forecasting

Presented By :

Hidayat ullah Sardar ahmad khan Jamshaid Amir rahman Mukhtiar ahmad Mustaqeem khan

managerial economics

MBA (022), section (A)

Demand

Demand means desire to buy something and ability to pay for it.

Demand = desire + purchasing power

Demand schedule

Demand schedule is the table that shows the relationship between price of goods and quantity demand .

Price of sugar Rs/ kg

Quantity demand

40 200

35 300

30 400

25 500

20 600

15 700

Demand curve

Demand curve is a

graph showing the

relationship between

the price of goods

and quantity

demanded.

Elasticity

The responsiveness of one variable to an other variable is called elasticity.

Elasticity of demand

The percentage change in quantity divided by the percentage change in price.

Elastic demand

Elastic demand

A small change in price

cause a big change in

quantity demanded

Price Demand

10 100

9 150

Inelastic demand

A large change in

price has a small

effect on quantity

demanded.

Price Demand

10 100

5 110

Sardar ahmad khan MBA(022)A

MEASUREMENT OF ELASTICITY

MEASUREMENT OF ELASTICITY

Total expenditure method

Point elasticity method OR

(geometric method)

Arc elasticity method

Total expenditure method

The price elasticity can be

measured by noting the

changes in total expenditure

brought by changes in price

and quantity demanded.

there are three condition in

total expenditure method.

Increase in total exp

When % change in quantity demand is more then % change in price it cause increase in T E. the demand will be elastic (E>1)

prices Quantity expenditure

RS 20 10 pens RS 200

RS 10 30 pens RS 300

No change in exp

When % change in price occur and T E do not change. The demand will be unitary (E=1)

prices Quantity expenditure

RS 10 30 pens RS 300

RS 5 60 pens RS 300

Decrease in exp

The % change in quantity demand is less then % change in price it cause decrease in T E (E<1)

prices Quantity expenditure

RS 5 60 pens RS 300

RS 2 100 pens RS 200

Point elasticity of demand

The measurement of elasticity at a point of the demand curve is called point elasticity.

Point elasticity of demand is used when the change in quantity demand is occur from a very small change in price.

measurement on linear demand curve

measurement on non linear demand curve

On linear demand curve

the formula (ΔQ ÷ ΔP) x (P ÷

Q)

the point C shows

maximum revenue

On non linear demand curve

Elasticity at a point can be measured by drawing a tangent at the particular point.

Arc elasticity

Arc elasticity means measuring elasticity between any tow points on the demand curve E= (ΔQ ÷ ΔP) ÷(p1+p2) ÷ (Q1+Q2)

Jamshaid khan MBA(022)A

MEASUREMENT OF ELASTICITY

Income elasticity

Def: “income elasticity of demand is the rate of responsiveness of demand to

changes in the income of the consumer.”

It is calculated as the ratio of the percent change in demand to the percent change in income.

= %change in Qd

%change in consumer income

ie. If, in response to a 10%increase in income, the demand of a good increased by 20%, the income elasticity of demand would be 20%/10%=2%

Inferior good's demand falls as consumer income increases.

Negative income elasticity Positive income elasticity Zero income elasticity

Cross elasticity

def: the rate of responsiveness of Qd of commodity A to changes in price of commodity B.

CEAB= QA PB

PB QA

SUBTITUTE GOODS

PA QdB +

COMPLEMENT GOODS

PA QdB _

Amir rahman MBA(022)A

Demand forecasting

Demand Forecasting

Def: The process of predicting the values of a certain quantity, over a certain time horizon, based on past trends and/or a number of relevant factors.

Forecasting methods

Qualitative techniques

Quantitative techniques

Qualitative techniques

Qualitative forecasting techniques are generally more subjective than their quantitative counterparts. Qualitative techniques are more useful in the earlier stages of the product life cycle, when less past data exists for use in quantitative methods.

Qualitative methods include

Surveys techniques,

Opinion polls

Survey techniques

The survey is a non-experimental, descriptive research method. Surveys can be useful when a researcher wants to collect data on phenomena that cannot be directly observed (such as, consumer’s decisions to purchase houses, automobiles, TV sets etc.)

Surveys are used to forecast consumer demand in general and the level of consumer confidence in the economy.

Opinion polls

The opinion polls are used by firms to forecast its own sales by polling experts within and outside the firm.

Several polling techniques

Executive polling

Sales force polling

Consumers intention polling

Executive polling

The firm poll its top mgt of functional areas( sales, production, finance etc.) on their views on the sales outlook for the firm during the next year.

The Delphi method can also be used, where experts are polled separately, and the feedback is provided without identifying the experts. the procedure is repeated until they reach at some consensus forecast.

Sales force polling

This is a forecast of the firm's sales in each region and for each product line. it is based on the firm’s sale force. these are the people closest to the market. And their opinion can provide valuable information to the top mgt

Consumer intention polling

The customers are asked about their purchasing plans and their projected buying behavior. A large number of respondents is needed here to be able to generalize certain results.

Mukhtiar ahmad MBA(022)A

Time series analysis

Time series analysis

A time series is an arrangement of time series in accordance with its time of occurrence by time series data, we mean numerical data which are collected observed or recorded at successive period of time,

Examples of time series

The annual production of wheat in Pakistan over a number of years.

The hourly temperature recorded in a days

The monthly rain fall recorded at a particular place

Components of time series analysis

There are four components of time series Secular trend Secular trend is regular smooth and long term

movements of data series. some series may show an upward or downward trend, for example tea which shows an upward trend now a days. the population of Pakistan shows an upward trend, infant death in the world shows a downward trend

Seasonal variations

These variations are caused due to changes in seasons, seasonal fluctuation are regular up and down movements ,for example the sale of warm clothes increases in winter and decreases in summer,

Cyclical fluctuation

The long term trend one complete period is called cyclical there are the swing to prosperity ,recession, depression and recovery back again to prosperity in business and economic activities,

Irregular or random variation

These variations are irregular or random such as wars, floods, strikes, earthquakes, etc these movements are also called residual variations,

Mustaqeem khan MBA(022)A

Smoothing techniques

Smoothing techniques

These predict values of a time series on the bases of some average of its past values.

Smoothing techniques are useful when the time series has irregular or random variation :There are tow types of ST

Moving averages Exponential smoothing

Moving averages

The simplest smoothing techniques is moving averages. Here the forecasted value of a time series in a given period (month, year. Etc) is equal to the average value of the time series in a number of previous periods.

Three quarter & five quarter MV

Market share (A)

3 quarter MV (F)

A-F (A-F)2 5 quarter MV (F)

A-F (A-F)2

1 20 - - - - - -

2 22 - - - - - -

3 23 - - - - - -

4 24 21.67 2.33 5.43 - - -

5 18 23 -5 25 - - -

6 23 21.67 1,33 1.77 21.4 1.6 2.56

7 19 21.67 -2.67 7.13 22 -3 9

8 17 20 -3 9 21.4 -4.4 19.36

9 22 19.67 2.33 5.43 20.2 1.8 3.24

10 23 19.33 3.67 13.47 19.8 3.2 10.24

11 18 20.67 -2.67 7.13 20.8 -2.8 7.84

12 23 21 2 4 19.8 3.2 10.24

Total 78.35 Toital 62.48

13 - 21.33 20.6

Which quarter is best

Following formula will give answer RMSE (root mean square error)

RMSE = √ ∑(A-F)2 ÷n

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