Welcome to Scribd, the world's digital library. Read, publish, and share books and documents. See more
Standard view
Full view
of .
Look up keyword
Like this
0 of .
Results for:
No results containing your search query
P. 1
Lecture 12

Lecture 12

Ratings: (0)|Views: 452 |Likes:
Published by praneix

More info:

Published by: praneix on Aug 11, 2009
Copyright:Attribution Non-commercial


Read on Scribd mobile: iPhone, iPad and Android.
download as PDF, TXT or read online from Scribd
See more
See less





Lesson 12
 Learning outcomes
After studying this unit, you should be able to:
‘forecasting’ in contrast to ‘projection’ and ‘ prediction’
between various types of forecasts
the techniques of demand forecasting
the uses and abuses of each technique
One of the crucial aspects in which managerial economics differs frompure economic theory lies in the treatment of risk and uncertainty. Traditionaleconomic theory assumes a risk-free world of certainty; but the real worldbusiness is full of all sorts of risk and uncertainty. A manager cannot, therefore,afford to ignore risk and uncertainty. The element of risk is associated with futurewhich is indefinite and uncertain. To cope with future risk and uncertainty, themanager needs to predict the future event. The likely future event has to be givenform and content in terms of projected course of variables, i.e. forecasting. Thus
,business forecasting is an
essential ingredient of corporate planning. Suchforecasting enables the manager to minimize the element of risk and uncertainty.Demand forecasting is a specific type of business forecasting.
The manager can conceptualize the future in definite terms. If he isconcerned with future event- its order, intensity and duration, he can predict thefuture. If he is concerned with the course of future variables- like demand, priceor profit, he can project the future. Thus prediction and projection-both havereference to future; in fact, one supplements the other. Suppose, it is predictedthat there will be inflation (event). To establish the nature of this event, oneneeds to consider the projected course of general price index (variable). Exactlyin the same way, the predicted event of business recession has to be establishedwith reference to the projected course of variables like sales, inventory etc.Projection is of two types – forward and backward. It is a forwardprojection of data variables, which is named forecasting. By contrast, thebackward projection of data may be named ‘back casting’, a tool used by the neweconomic historians. For practical managers concerned with futurology, what isrelevant is forecasting, the forward projection of data, which supports theprediction of an event.
 Thus, if a marketing manager fears demand recession, he mustestablish its basis in terms of trends in sales data; he can estimate such trendsthrough extrapolation of his available sales data. This trend estimation is anexercise in forecasting.
Business managers, depending upon their functional area, need variousforecasts. They need to forecast demand, supply, price, profit, costs, investment,and what have you. In this unit, we are concerned with only demand forecasting.The reason is, the concepts and techniques of demand forecasting discussedhere can be applied anywhere.The question may arise: Why have we chosen demand forecasting as amodel? What is the use of demand forecasting?The significance of demand or sales forecasting in the context of business policy decisions can hardly be overemphasized. Sales constitute theprimary source of revenue for the corporate unit and reduction for sales givesrise to most of the costs incurred by the fir. Thus sales forecasts are needed for 
production planning, inventory
planning, profit planning and so on
.Production itself requires the support of men, materials, machines, money andfinance, which will have to be arranged. Thus,
manpower planning,replacement or new investment planning, working capital management andfinancial planning—all depend on sales forecasts
. Thus demand forecastingis crucial for corporate planning. The survival and growth of a corporate unit hasto be planned, and for this sales forecasting is the most crucial activity. There isno choice between forecasting and no-forecasting. The choice exists only withregard to concepts and techniques of forecasting that we employ. It must benoted that the purpose of forecasting in general is not to provide an exact futuredata with perfect precision, the purpose is just to bring out the range of possibilities concerning the future under a given set of assumptions. In other words, it is not the ‘actual future’ but the ‘likely future’ that we build up throughforecasts. Such
forecasts do not eliminate, but only help you to reduce thedegree of risk and uncertainties of the future.
Forecasting is a step towardsthat kind of ‘gursstimation’; it is some sort of an approximation to reality. If thelikely state comes close to the actual state, it means that the forecast isdependable. If you do not meaningless. A sales forecast is meant to guidebusiness policy decision. Without forecasting, forward planning by a corporateunit will be directionless.
Demand or sales forecasting is a scientific exercise. It has to go through a number of steps. At each step, you have to make critical considerations. Such considerations arecategorically listed below:
1) Nature of forecast:
To begin with, you should be clear about the uses of forecast data- how it is related to forward planning and corporate planning by thefirm. Depending upon its use, you have to choose the type of forecasts: short-run or long-run, active or passive, conditional or non-conditional etc.
2) Nature of product:
The next important consideration is the nature of productfor which you are attempting a demand forecast. You have to examine carefullywhether the product is consumer goods or producer goods, perishable or durable, final or intermediate demand, new demand or replacement demand typeetc. A couple of examples may illustrate the importance of this factor. Thedemand for intermediate goods like basic chemicals is derived from the finaldemand for finished goods like detergents. While forecasting the demand for basic chemicals, it becomes essential to analyse the nature of demand for detergents. Promoting sales through advertising or price competition is muchless important in the case of intermediate goods compared to final goods. Theelasticity of demand for intermediate goods depends on their relative importancein the price of the final product.Time factor is a crucial determinant in demand forecasting. Perishablecommodities such as fresh vegetables and fruits can be sold over a limitedperiod of time. Here skilful demand forecasting is needed to avoid waste. If thereare storage facilities, then buyers can adjust their demand according toavailability, price and income. The time taken for such adjustment varies fromproduct to product. Goods of daily necessities that are bought more frequentlywill lead to quicker adjustments. Whereas in case of expensive equipment whichis worn out and replaced after a long period of time, adaptation of demand will bespread over a longer duration of time.
3) Determinants of demand:
Once you have identified the nature of product for which you are to build a forecast, your next task is to locate clearly thedeterminants of demand for the product. Depending on the nature of product andnature of forecasts, different determinants will assume different degree of importance in different demand functions. In the preceding unit, you have beenexposed to a number of price-income factors or determinants-own price, relatedprice, own income-disposable and discretionary, related income, advertisement,price expectation etc. In addition, it is important to consider socio-psychologicaldeterminants, specially demographic, sociological and psychological factorsaffecting demand. Without considering these factors, long-run demandforecasting is not possible.Such factors are particularly important for long-run active forecasts.The size of population, the age-composition, the location of household unit, thesex-composition-all these exercise influence on demand in. varying degrees. If more babies are born, more will be the demand for toys; if more youngstersmarry, more will be the demand for furniture; if more old people survive, more willbe the demand for sticks. In the same way buyers’ psychology-his need, socialstatus, ego, demonstration effect etc. –also effect demand. While forecasting,you cannot neglect these factors.

Activity (9)

You've already reviewed this. Edit your review.
1 hundred reads
1 thousand reads
Mai Khanh liked this
Shri Chatty liked this
vinfalco liked this
vinfalco liked this
bongi liked this
Harvinder Singh liked this

You're Reading a Free Preview

/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->