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Demand Forecasting
Demand Forecasting
Demand analysis is essential for a business firm in the following ways. 1. 2. 3. 4. 5. 6. Demand analysis is required to identify and measure the forces that determine sales. Extent of production and cost allocation depend upon demand analysis. Demand analysis is essential for pricing and inventory holdings. Demand analysis helps in sales forecasting and profit planning. New product policy and advertisement policy cannot be drawn without the analysis of demand. Research and development strategy cannot be framed without demand analysis. Demand analysis is the basis of tracing the trend of the firms competitive analysis.
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b c a D1 D
Q3 Q2 Q1 Quantity
In the case of the elastic demand curve D, there is relatively rise in price and relatively fall in quantity, equilibrium is at point b. In the case of the more elastic demand curve, there is a relatively small rise in price but a relatively larger fall in quantity. Thus, equilibrium is at point c.
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Determination of Prices of Public Utilities-Where the demand for services is inelastic, a high price is charged, while in the case of elastic demand a lower price is charged. That is why, household consumers are charged a high rate of electricity than industrial or agricultural customers. International Trade-Those exports with inelastic demand will fetch high price. The knowledge of income elasticity can be useful in forecasting demand, when a change in personal incomes is expected. It thus helps in avoiding over production or under production. The concept of cross elasticity is of vital importance in changing price of products having substitutes and complementary goods. If cross elasticity in response to the price of substitutes is greater than 1, it would be inadvisable to increase the price; rather, reducing the price may prove more benecial.
Survey of Consumers Intention: In this method consumers are contacted personally to disclose their future purchase plans. For survey of consumers intentions, these methods are used. 1. Census Survey Method: This is also known as Complete Enumeration Method. In this method interviews are conducted either orally or through questionnaire. The probable demand so collected from all the consumers is summed up. 2. Sample Survey Method: In this method only a few consumers out of the population are selected for study through interviews which are conducted either orally or through questionnaire. Test Marketing: This is done mainly for estimating demand of new products or estimating sales potential of existing products in new geographical areas. In this method a test area is selected which truly represents the market. The product is launched in this area exactly in the manner in which it is intended to be launched in the market.
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Regression Analysis : It is a statistical technique by which demand is estimated with the help of certain independent variables such as income, price of the commodity, price of related goods, advertisement etc. Regression analysis can be of two types:
1. Simple Regression Analysis: It is used when the quantity demanded is taken as a function of a single independent variable such as income of the consumers. Multiple Regression Analysis: Multiple regression analysis is used to estimate demand as a function of two or more independent variables that may vary simultaneously.
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DEMAND FORECASTING
Demand forecasting for a product is the technique of estimating its demand in the immediate or distant future. Demand forecast is important basis for formulating inventory policy, production policy, marketing policy, sales strategy etc. by a production unit or a selling organization. Demand forecasts are also used to plan personnel requirements of a firm. Purposes of Demand Forecasting: a) Purposes of Short-term Forecasting: It is difficult to define short-run for a firm because its duration may differ according to the nature of the commodity. Time duration may be set for demand forecasting depending upon how frequent the fluctuations in demand are.
i) ii) iii) iv) v) For evolving appropriate production policy to avoid problems of overproduction and underproduction. Proper management of inventories, i.e. purchasing raw materials at appropriate time, when their prices are low, and avoid over stocking. To set up reasonable sales targets. Formulating a suitable sales strategy in accordance with the changing pattern of demand and extent of competition among the firms. Forecasting financial requirements for the short run.
b) Purposes of Short-term Forecasting: The concept of demand forecasting is more relevant to the long run than the short run. It is comparatively easy to forecast the immediate future than to forecast the distant future.
i) ii) iii) iv) Planning for a new project, expansion and modernization of an existing unit, diversification and technology up gradation. Assessing long term financial needs. Arranging suitable manpower. Arranging a suitable strategy for changing pattern of consumption. The emerging pattern of industrialization, urbanization, education, degree of contact with the rest of the world could be closely studied by a firm for forecasting demand.
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Barometric Techniques
End-Use Survey
Index Number
Composite Indicators
Exponential Smoothing
ARIMA Method
Marshallian equilibrium of the consumer. (Equi-marginal Utility) Hicks-Allen approach of consumer equilibrium. (Income and Price effect)