# Broadly speaking, there are two approaches to demand forecasting- one is to obtain information about the likely purchase

behavior of the buyer through collecting expert¶s opinion or by conducting interviews with consumers, the other is to use past experience as a guide through a set of statistical techniques. Both these methods rely on varying degrees of judgment. The first method is usually found suitable for short-term forecasting, the latter for long-term forecasting. There are specific techniques which fall under each of these broad methods. Simple Survey Method: For forecasting the demand for existing product, such survey methods are often employed. In this set of methods, we may undertake the following exercise. 1) Experts Opinion Poll: In this method, the experts on the particular product whose demand is under study are requested to give their µopinion¶ or µfeel¶ about the product. These experts, dealing in the same or similar product, are able to predict the likely sales of a given product in future periods under different conditions based on their experience. If the number of such experts is large and their experience-based reactions are different, then an average-simple or weighted ± is found to lead to unique forecasts. Sometimes this method is also called the µhunch method¶ but it replaces analysis by opinions and it can thus turn out to be highly subjective in nature. 2) Reasoned Opinion-Delphi Technique: This is a variant of the opinion poll method. Here is an attempt to arrive at a consensus in an uncertain area by questioning a group of experts repeatedly until the responses appear to converge along a single line. The participants are supplied with responses to previous questions (including seasonings from others in the group by a coordinator or a leader or operator of some sort). Such feedback may result in an expert revising his earlier opinion. This may lead to a narrowing down of the divergent views (of the experts) expressed earlier. The Delphi Techniques, followed by the Greeks earlier, thus generates ³reasoned opinion´ in place of ³unstructured opinion´; but this is still a poor proxy for market behavior of economic variables. 3) Consumers Survey- Complete Enumeration Method: Under this, the forecaster undertakes a complete survey of all consumers whose demand he intends to forecast, Once this information is collected, the sales forecasts are obtained by simply adding the probable demands of all consumers. The principle merit of this method is that the forecaster does not introduce any bias or value judgment of his own. He simply records the data and aggregates. But it is a very tedious and cumbersome process; it is not feasible where a large number of consumers are involved. Moreover if the data are wrongly recorded, this method will be totally useless. 4) Consumer Survey-Sample Survey Method: Under this method, the forecaster selects a few consuming units out of the relevant population and then collects data on their probable demands for the product during the forecast period. The total demand of sample units is finally blown up to generate the total demand forecast. Compared to the former survey, this method is less tedious and less costly, and subject to less data error; but the choice of sample is very critical. If the sample is properly chosen, then it will yield dependable results; otherwise there may be sampling error. The sampling error can decrease with every increase in sample size

but the same may not be true for the future. Generally. the time series data on the under forecast are used to fit a trend line or curve either graphically or through statistical method of Least Squares. one can predict the direction of movement of tractors¶ sale (ST) for the next year. it may not be always possible to find out the leading. but inappropriate for short-run forecasts. (2) Barometric Techniques or Lead-Lag indicators method: This consists in discovering a set of series of some variables which exhibit a close association in their movement over a period or time. The demands for final consumption and exports net of imports are estimated through some other forecasting method. Complex Statistical Methods: We shall now move from simple to complex set of methods of demand forecasting. The leading indicator method does not tell you anything about the magnitude of the change that can be expected in the lagging series. The movement of AY is similar to that of ST.5) End-user Method of Consumers Survey: Under this method. A product is used for final consumption or as an intermediate product in the production of other goods in the domestic market. The trend line is worked out by fitting a trend equation to time series data with the aid of an estimation method. it only needs the time series data. Finally. Thus if one knows the direction of the movement in agriculture income (AY). The only limitation in this method is that it assumes that the past is repeated in future. As such. this barometric method has been used in some of the developed countries for predicting business cycles situation. but the movement in ST takes place after a year¶s time lag compared to the movement in AY. The trend method outlined above often yields a dependable forecast. The advantage in this method is that it does not require the formal knowledge of economic theory and the market. it shows the movement of agricultural income (AY series) and the sale of tractors (ST series). Also. (1) Time series analysis or trend method: Under this method. For example. as a part of quantitative methods for business decisions. Sometimes the time series analysis may not reveal a significant trend of any kind. it is an appropriate method for long-run forecasts.
. In that case. but only the direction of change. Also. and its demand for intermediate use is estimated through a survey of its user industries. you may be quite familiar with some the statistical tools and techniques. lagging or coincident indicators of the variable for which a demand forecast is being attempted. Some of the limitations of this method may be noted however. or it may be exported as well as imported. the moving average method or exponentially weighted moving average method is used to smoothen the series. some countries construct what are known as µdiffusion indices¶ by combining the movement of a number of leading series in the economy so that turning points in business activity could be discovered well in advance. the sales of a product are projected through a survey of its end-users. The trend equation could take either a linear or any kind of nonlinear form. Thus agricultural income (AY) may be used as a barometer (a leading indicator) to help the short-term forecast for the sale of tractors. Such methods are taken usually from statistics. Through our estimation we may find out the best-fitted lag period on the past data. For this purpose. the lead period itself may change overtime.

it explains why the demand is what it is. you must have covered those statistical techniques as a part of quantitative methods. sales) and one or more independent variables (like price. b3 > 0 suggest that x is a normal commodity with commodity with positive income-effect. in this course. b1 is a component of price elasticity of demand. Given the estimated value of and bi. b4 > 0 suggest that x and y are substitutes. Here we shall not get into the methods of finding out µcorrelation coefficient¶ or µregression equation¶. The principle advantage of this method is that it is prescriptive as well descriptive. Such relationships. and that way you get a more reliable forecast. For example. you may forecast the expected sales (DX). we have made reference to such econometric models. we shall not go into the question of economic theory. We shall concentrate simply on the use of these econometric techniques in forecasting. For example. as corporate managers. In other words. Lastly. this technique has got both explanatory and predictive value. The relationship may be expressed in the form of a demand function. advertisement etc.). should know the basic elements in such an approach. Econometrics. income. income (B) and advertisement (A). It is also known as the µcomplete system approach¶ or µeconometric model building¶. as we have seen earlier. The only precaution you need to take is that data analysis should be based on the logic of economic theory. That is. Similarly. b2. you.
. In your earlier units. We are on the realm of multiple regression and multiple correlation. besides generating demand forecast. this method is normally used in macro-level forecasting for the economy as a whole. if you know the future values of explanatory variables like own price (PX). is the use of economic theory. you may also recall that the statistics R2 (Co-efficient of determination) gives the measure of goodness of fit. statistical analysis and mathematical functions to determine the relationship between a dependent variable (say. Presently we do not intend to get into the details of this method because it is a subject by itself. The reflect the direction as well as proportion of change in demand for x as a result of a change in any of its explanatory variables. our focus is limited to micro elements only. The form of the equation may be: DX = a + b1 A + b2PX + b3Py You know that the regression coefficients b1. b3 and b4 are the components of relevant elasticity of demand. The closer it is to unity. Moreover. related price (Py). based on past data can be used for forecasting.3) Correlation and Regression: These involve the use of econometric methods to determine the nature and degree of association between/among a set of variables. In this method of forecasting. b2< 0 suggest that DX and PX are inversely related. (4) Simultaneous Equations Method: Here is a very sophisticated method of forecasting. the better is the fit. The regression method is neither mechanistic like the trend method nor subjective like the opinion poll method. Of course. you may use not only time-series data but also cross section data. you may recall. The analysis can be carried with varying degrees of complexity.

However. similar to that of regression method. such econometric models have limitations. However. in the days of computer. endogenous and exogenous variables affecting the variable under forecast. when package programmes are available. The values of exogenous variables are easier to predict than those of the endogenous variables. this method can be used easily to derive meaningful forecasts. The principle advantage in this method is that the forecaster needs to estimate the future values of only the exogenous variables unlike the regression method where he has to predict the future values of all.
.The method is indeed very complicated.