Chapter 6

Forecasting
Managerial Economics:
Economic Tools for Today’s
Decision Makers, 4/e By Paul
Keat and Philip Young
 Forecasting
• Introduction
• Good Forecasts
• Forecasting Techniques
• Opinions
• Surveys & Market research
• Economic indicators
• Projections & Econometric Models

2003 Prentice Hall Business Publishing Managerial Economics, 4/e Keat/Young

 Introduction
All organizations conduct their activities
in an uncertain environment. The major
role of forecasting is to reduce this
uncertainty.
Why? (Class Discussion)
• Set reasonable targets for its objectives
• Construct business plans
Allows Rational Decision Making: Expected Costs vs.
Expected Return
SBA Business Plan Guideline
2003 Prentice Hall Business Publishing Managerial Economics, 4/e Keat/Young
 Prerequisites of a Good Forecast
A good forecast should… (What?)
• Be based on good knowledge of the business model (&
industry)
• Principle resumes
• Success keys
• take into consideration the economic and political
environment.
• Market research
• Competition analysis
• be time appropriate
• Financial plan XXX Global
Partners – Case
Study
2003 Prentice Hall Business Publishing Managerial Economics, 4/e Keat/Young
 Forecasting Techniques
Underlying Assumption
Given 1, 2, 3, what is your forecast for
the next number? And, why?
• 3…
• 2…
• 4… Underlying Assumptions
Dictate Forecasting
Techniques!

2003 Prentice Hall Business Publishing Managerial Economics, 4/e Keat/Young

 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.
• Naïve methods project past data without explaining future trends.
• Causal (or explanatory) forecasting attempts to explain the
functional relationships between the dependent variable and the
independent variables

2003 Prentice Hall Business Publishing Managerial Economics, 4/e Keat/Young

 Forecasting Techniques
Choosing the right technique
depends on various factors.
1. the item or subject to be forecast
2. the relation between the item and
its environment
3. the quantity of historical data
available
4. the time allowed to prepare the
forecast
2003 Prentice Hall Business Publishing Managerial Economics, 4/e Keat/Young
 Expert Opinion
Jury of Executive Opinion: A forecast
generated by experts (e.g, corporate
executives)
• The major drawback is that:
• Persons with strong personalities may exercise
disproportionate influence
• Herd behavior may dominate

2003 Prentice Hall Business Publishing Managerial Economics, 4/e Keat/Young

 Expert Opinion
Delphi Method: A form of expert opinion
forecasting that uses a series of written
questions and answers to obtain a consensus
forecast
• The major drawback is that:
• Your thoughts?

2003 Prentice Hall Business Publishing Managerial Economics, 4/e Keat/Young

 Opinion Polls

Opinion Polls: A forecasting method in

which sample populations are surveyed to
determine trends.
• The major drawback is that:
• Your thoughts?

2003 Prentice Hall Business Publishing Managerial Economics, 4/e Keat/Young

 Surveys

Surveys seek information about “macro-

type” data relating to the economy (e.g. Survey
of Consumers & Consumer Confidence)
• The major drawback is that:
• Your thoughts?

2003 Prentice Hall Business Publishing Managerial Economics, 4/e Keat/Young

 Market Research

Market research is closely related to

opinion polling but indicate underlying
determinants (e.g. income, age & etc.)
• The major drawback is that:
• Your thoughts?

2003 Prentice Hall Business Publishing Managerial Economics, 4/e Keat/Young

 Economic Indicators
Economic Indicators: A barometric
(index) method of forecasting in which
economic data to reflect the state of the
economy (e.g. Indexes of leading, coincident &
lagging indicators)
• The major drawback is that:
• Your thoughts?

2003 Prentice Hall Business Publishing Managerial Economics, 4/e Keat/Young

 Projections
Trend projections: A form of naïve
forecasting that projects trends from
past data.
1. Compound growth rate
2. (Least Squares) time series projection

2003 Prentice Hall Business Publishing Managerial Economics, 4/e Keat/Young

 Projections
Compound growth rate: Forecasting by
projecting the average growth rate of the
past into the future.
• Calculate the constant (compounding) growth rate using
available data.
i = (E/B)1/n –1 (Textbook Table C1.a)

• Project this constant growth rate into the future.

E = B(1+i)n
E = final value n = years in the series
B = beginning value i = constant growth rate

2003 Prentice Hall Business Publishing Managerial Economics, 4/e Keat/Young

 Projections
Time series forecasting: A naïve method of
forecasting from past data by using least squares
statistical methods (particularly for short run).
• Straight line: Y = a + b(t)
• Exponential: Y = abt
• Quadratic: Y = a + b(t) + c(t)2

2003 Prentice Hall Business Publishing Managerial Economics, 4/e Keat/Young

 Time Series Projections
To the isolate cyclical component
another smoothing operation can be
preformed with a moving average.
• The length of the moving-average period
is determined individually for each case.

Quantitative Economic
Research – Methodology &
Forecasts
2003 Prentice Hall Business Publishing Managerial Economics, 4/e Keat/Young
 In-Class Group Problems
• Which forecasting techniques are most
appropriate for estimating the student
enrollment – for next three years? Why?

• Math problems (Page 262)

Problem 1
Problem 3

2003 Prentice Hall Business Publishing Managerial Economics, 4/e Keat/Young