MANAGERIAL ECONOMICS

Quantitative Methods of
Demand Forecasting
Biplab Sarkar
Department of Management Studies
MANAGERIAL ECONOMICS

Quantitative Methods of Demand

Forecasting 1

Biplab Sarkar
Department of Management Studies
MANAGERIAL ECONOMICS
Quantitative Methods of Demand Forecasting

✓ The basic limitation of subjective methods is the

element of bias, time and cost of collecting information
and uncertainty of accuracy.
✓ Therefore, these methods should be used only when past
data is not available, as in the case of new products, new
price, and new market.
✓ When past data is available it is advisable that firms use
quantitative tools, as they are more scientific and cost
effective.
✓ These techniques depend on the time series of past
sales.
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Time-Series Data

✓ Time-series data refers to a response variable (Yt),

observed at different time points (t). Such as demand for
a spare parts of a capital equipment, market share of a
product/service/brand.

✓ In quantitative methods of demand forecasting, we will

be using a time series data.

✓ Univariate time series: If the time series data contains

observations of just a single variable.

✓ Multivariate time series: If the time series data contains

observations of more than one variable.
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Components of Time-Series Data

✓ Trend Component (Tt): Trend is the consistent long-term

upward or downward movement of the data over a period of
time.
✓ Seasonal Component (St): Refers to the repetitive upward or
downward movement (or fluctuations) from the trend that
occurs within a calendar year such as seasons, quarters,
months, days of the week, etc.

✓ Cyclical Component (Ct): Refers to fluctuations around the

trend line that happens due to macro-economic changes such
as recession, unemployment etc.
✓ Irregular Component (It): Refers to the white noise or random
uncorrelated changes that follow a normal distribution with
mean value of 0 and constant variance.
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Time-Series Components: Additive or Multiplicative Form

✓ The components of time series may be written in additive

form or multiplicative form.

✓ In additive form, it is assumed that each of these

components acts independently.

Yt = Tt + St + Ct + It

✓ The multiplicative form can be written as:

log Yt = log Tt + log St + log Ct + log It

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Decomposition of Time Series Components
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Quantitative Methods of Demand Forecasting

Smoothing Techniques
Quantitative Methods of
Demand Forecasting

Trend Projection

Barometric Techniques

Econometric Methods
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Smoothing Techniques

Moving Average Method

Smoothing Techniques

Single Exponential Smoothing

Double Exponential Smoothing

Triple Exponential Smoothing

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Moving Average Method

✓ Moving average is one of the simplest forecasting

techniques which forecasts the future value of a time
series data using average (or weighted average) of the
past N observations.

✓ Simple moving average is calculated by:

✓ Weighted moving average is calculated by:

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Moving Average Method

Compute three Quarter and five Quarter Moving average

Forecast for the below data.
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Moving Averages: Root Mean Square Error

• In the previous problem, which of the two forecasts- three

quarter or five quarter - should be used for forecasting
purposes?
• The forecast with the lower Root mean square error (RMSE)
should be used

RMSE =
 t t
( A − F ) 2

n
• At is the actual value of time series data in period t
• Ft is the forecast for period t
• n is the number of observations in the forecasted series
THANK YOU

Biplab Sarkar
Department of Management Studies
biplabsarkar@pes.edu
+91 80 6666 3333 Extn 337