8 AEC101 – Managerial Economics

Estimating and Forecasting Demand

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Demand Forecasting Methods
Some estimates of elasticity
• Forecasting demand
• The marketing approach to
demand measurement
Demand Forecasting Methods
1. Survey of Buyer’s Intentions
2. Collective Opinion or Sales Force Composite Method
3. Trend Projection
4. Executive Judgment Method
5. Economic Indicators
6. Controlled Experiments
7. Expert’s Opinions.
1. Survey of Buyer’s-Intentions:
Advantages
• Short-term method of knowing and estimating customer’s demand.
• Direct method of estimating demand of customers as to what they intend
to buy for the forthcoming time—usually a year.
• Burden of forecasting goes to the buyer.
• Method is useful for bulk producers of goods.

Disadvantages
• Customer responses are not entirely dependable.
• Household consumers are unpredictable when they see alternatives
products.
• Too many consumers to survey which makes this method costly.
• It does not expose and measure the variables under management control.
2. Collective Opinion or Sales Force Competitive Method:
Advantages:
• Simple, common sense method involving no mathematical calculations.
• Based on the first-hand knowledge of salespeople
• Method is particularly useful for sales of new product.
• Anchored on the salesman’s judgment.
Disadvantages:
• Subjective approach.
• For short-term forecasting only.
• Not useful for long-term planning.
3. Trend Projection or Time Trend of the Time Series:
4. Executive Judgment Method:
In this method, opinions are sought from the executives of different discipline i.e.,
marketing, finance, production etc. and estimates for future demands are made. Thus,
this is a process of combining, averaging or evaluating in some other way the opinions
and views of the top executives.

Advantages:
• The forecasts can be made speedily by analyzing the opinions and views of top
executives.
• No need of elaborate statistics
• Only feasible method to follow:

Disadvantages:
• No factual basis of such forecast:
• Not completely reliable
• Responsibility for the accuracy of data cannot be fixed on any one.
5. Economic Indicators:
This method has its base for demand forecasting on few economic indicators.

Construction boom:
For demand towards building materials sanctioned for Cement.

Personal Income:
Towards demand of consumer goods.

Agricultural Income:
Towards demand of agricultural imports instruments, fertilizers, manner etc.

Automobiles Registration:
Towards demand of car parts and petrol.
6. Controlled Experiments:

In this method, an effort is made to ascertain separately certain determinants of

demand which can be maintained, e.g., price, advertising etc. and conducting the
experiment, assuming etc., and conducting the experiment, assuming that the
other factors remain constant.

Thus, the effect of demand determinants like price, advertisement packing etc., on
sales can be assessed by either varying them over different markets or by varying
them over different time periods in the same market.
7. Expert’s Opinions:
Under this method expert’s opinions are sought from specialists in the field, outside the
organizations or the organization collects opinions from such specialists; views of
expert’s published in the newspaper and journals for the trade, wholesalers and
distributors for the company’s products, agencies and professional experts.
These opinions and views are analyzed and deductions are made therefrom to arrive at
the figure of demand forecasts.

Advantages:
• Forecasts can be done easily and speedily.
• It is based on expert’s views and opinions hence estimates are nearly accurate.
• The method is suitable where past records of sales are not available.
• The method is economical because survey is done to collect the data. The expenses
of seeking the opinions and views of experts are much less than the expenses of
actual survey.

Disadvantages:
• Estimates for a market segment cannot be possible.
• The reliability of forecasting is always subjective because forecasting is not based on
facts.
Some
Estimates of
Elasticity
The marketing approach to demand measurement

• Market potential is a quantitative estimate of the total possible

sales by all firms selling the same product in a given market. It
gives an indication of the ultimate potential for the product for
the industry as a whole.
• Company potential refers to a part of the market potential
representing what an individual firm can achieve at the
maximum in a given market.
• Market demand and company demand refer to those portions
of market potential and company potential that are achievable
under existing conditions.
Measuring Market Demand
Firms need to assess,
• Current market demand
• Future market demand.

Measuring Current Market Demand

Firms need to assess
• Total demand.
• Area demand.
Measuring area market demand:
Area market demand refers to the demand within a particular city, district,
municipality, province, or region.

The two main methods used for estimating area market demand are:
1. The market-buildup method which calls for identifying how many potential
buyers there are in each market and estimating the size of their potential
purchases.
2. The market factor index method identifies market factors that correlate with
market potential and then combines them into a weighted index, such as the
index of buying power.

Forecasting future market demand

Two components in forecasting future market demand:
1. Forecasting total demand.
2. Forecasting area demand.

Once total demand is forecast, area demand can be forecast, using the same principles
as in the case of measuring current demand.
Forecasting Company Sales
Current company sales are already known from internal records. So, firms need to find
out/forecast only the likely sales in a future (specified) period.

This is what one means by the term, sales forecasting. The sales forecast indicates how
much of a product is likely to be sold during a specified future period in a specified
market, at specified prices.

All business firms would like to know the current as well as the likely demand for their
products. More specifically, they would like to know how much of a given product they
would sell in a given market in a given period; whether the sales would increase or
decrease from the current levels and by how much; and what would be their market
share. This knowledge is very essential for a firm. Without this knowledge, it cannot
plan any of its activities.