MANAGERIAL ECONOMICS M.DIVYA,B.

TECH(CSE), MBA, ASSISTANT PROFESSOR, SMVEC

UNIT II

DEMAND ANALYSIS AND FORECASTING

Demand - Determinants of Demand - Law of Demand - Exceptions to the Law – Demand Distinction -
Elasticity of Demand - Price Elasticity - Income Elasticity - Cross Elasticity – Demand forecasting –
Meaning – Methods of forecasting.

QUESTION BANK

2 MARKS:
1. Define demand.
2. What is law of demand.
3. Write note on demand function
4. What do you mean by demand schedule.
5. Define elasticity of demand.
6. What is price elasticity.
7. What is income elasticity
8. What is cross elasticity.
9. What is demand forecasting.
10. Write note on verblen good and giffen good.
11. What is Delphi method?
12. What is expert opinion method?
13. What is barometric method?

5/10 MARKS

1. Explain the determinants of demand in detail

2. Discuss the goods which is exception to the law with suitable example.
3. Briefly explain the demand distinction.
4. Explain the elasticity of demand in detail
5. Discuss the various methods in demand forecasting?
MANAGERIAL ECONOMICS M.DIVYA,B.TECH(CSE), MBA, ASSISTANT PROFESSOR, SMVEC

Demand
In our daily life, we often hear the word ‘demand’ for goods or services. In the business world,
the demand of a product determines its value and the profit or loss of a company. So, today in
this article, we will understand ‘what actually is demand? and ‘why is it so important for a
business?’

What is demand?
Demand simply means a consumer’s desire to buy goods and services without any hesitation
and pay the price for it. In simple words, demand is the number of goods that the customers are
ready and willing to buy at several prices during a given time frame. Preferences and choices
are the basics of demand, and can be described in terms of the cost, benefits, profit, and other
variables.
The amount of goods that the customers pick, modestly relies on the cost of the commodity, the
cost of other commodities, the customer’s earnings, and his or her tastes and proclivity. The
amount of a commodity that a customer is ready to purchase, is able to manage and afford at
provided prices of goods, and customer’s tastes and preferences are known as demand for the
commodity.
The demand curve is a graphical depiction of the association between the price of a commodity
or the service and the number demanded for a given time frame. In a typical depiction, the cost
will appear on the left vertical axis. The number (quantity) demanded on the horizontal axis is
known as a demand curve.

DEMAND FUNCTION
The demand function is an algebraic expression of the relationship between demand for
a commodity and its various determinants that affect this quantity.
There are two types of demand functions:
(i) Individual Demand Function:
An individual’s demand function refers to the quantities of a commodity demanded at
various prices, given his income, prices of related goods and tastes.
It is expressed as:
D = f(P)

(ii) Market Demand Function:

An individual demand function is the basis of demand theory. But it is the market
demand function that is main interest to managers. It refers to the total demand for a
good or service of all the buyers taken together.
MANAGERIAL ECONOMICS M.DIVYA,B.TECH(CSE), MBA, ASSISTANT PROFESSOR, SMVEC

The market demand function may be expressed mathematically thus:

Dx = f(Px, Py, M, T, A, U)
Where
Dx = Quantity demanded for commodity x
f = functional relation
Px = Price of commodity x
Pr = Prices of related commodities i.e. substitutes and complementaries
M = The money income of the consumer
T = The taste of the consumer
A = The advertisement effect
U = Unknown variables

DETERMINANTS OF DEMAND

A) Determinants of Individual Demand

When an individual intends to purchase a particular product, he/she may take into
consideration various factors, such as the price of the product, the price of substitutes,
level of income, tastes and preferences, and the features of the product.
These considerations determine the individual demand of the product. Let us now
discuss the factors that influence individual demand as follows:

1. Price of a commodity
The price of a commodity or service is generally inversely proportional to the quantity
demanded while other factors are constant. As per the law of demand, it implies that
when the price of the commodity or service rises, its demand falls and vice versa.
MANAGERIAL ECONOMICS M.DIVYA,B.TECH(CSE), MBA, ASSISTANT PROFESSOR, SMVEC

2. Price of related goods

The demand for a good or service not only depends on its own price but also on the
price of related goods. Two items are said to be related to each other if the change in
price of one item affects the demand for the other item. Related goods can be
categorised as follow
 Substitute or competitive goods: These goods can be used interchangeably
as they serve the same purpose; thus, are the competitors of each other.
For example, tea and coffee, cold drink and juice, etc. The demand for a good
or service is directly proportional to the price of its substitute.

 Complementary goods: Complementary goods are used jointly; for example,

car and petrol.There is an inverse relationship between the demand and price
of complementary goods. This implies that an increase in the price of one good
will result in fall in the demand of the other good.
For example, an increase in the price of mobile phones not only would lead to
fall in the quantity demanded but also lower the demand for mobile cover or
scratch guards.
3. Income of consumers
The level of income of individuals determines their purchasing power. Generally,
income and demand are directly proportional to each other. This implies that rise in the
consumers’ income results in rise in the demand for a commodity.
However, the relationship depends on the type of commodities, which are listed below:

Let us discuss different types of commodities in detail.

 Normal goods: These are goods whose demand rises with an increase in the
level of income of consumers.
For example, the demand for clothes, furniture, cars, mobiles, etc. rises with an
increase in individuals’ income.
 Inferior goods: These are goods whose demand falls with an increase in
consumers’ income.
For example, the demand for cheaper grains, such as maize and barley, falls
when individuals’ income increases as they prefer to purchase higher quality
grains. These goods are known as Giffen goods in economic parlance,
 Inexpensive goods or necessities of life: These are basic necessities in an
individual’s life, such as salt, matchbox, soap, and detergent. The demand for
inexpensive goods rises with an increase in consumers’ income until a certain
level after that it becomes constant.

4. Tastes and preferences of consumers

The demand for commodity changes with changes in the tastes and preferences of
consumers (which depend on customers’ customs, traditions, beliefs, habits, and
lifestyles).
For example, the demand for burqas is high in gulf countries. In such countries, there
may be less or no demand for short skirts.

5. Consumers expectations
MANAGERIAL ECONOMICS M.DIVYA,B.TECH(CSE), MBA, ASSISTANT PROFESSOR, SMVEC

Demand for commodities also depends on the consumers’ expectations regarding the future
price of a commodity, availability of the commodity, changes in income, etc. Such expectations
usually cause rise in demand for a product.
For example, if a consumer expects a rise in the price of a commodity in the future, he/she
may purchase larger quantities of the commodity in order to stock it. Similarly, if a consumer
expects a rise in his/her income, he/she may purchase a commodity that was relatively
unaffordable earlier.

6. Credit policy
It refers to terms and conditions for supplying various commodities on credit. The credit policy
of suppliers or banks also affects the demand for a commodity. This is because favourable
credit policies generally result in the purchase of commodities that consumers may not have
purchased otherwise.Favourable credit policies generally increase the demand for expensive
durable goods such as cars and houses.
For example, easy home and car loans offered by banks have led to a steep rise in the demand
for homes and cars respectively.

B) Determinants of Market Demand

Market demand is the sum total of all household (individual) demands. Therefore, all the
factors that affect individual demand also affect market demand as well. However, there are
certain other factors that affect market demand, which is as follows:

1. Size and composition of the population

Population size refers to the actual number of individuals in a population. An increase in the
size of a population increases the demand for commodities as the number of consumers would
increase.
Population composition refers to the structure of the population based on characteristics, such
as age, sex, and race. The composition of a population affects the demand for commodities as
different individuals would have different demands.
For example, a population with more youngsters will have higher demand for commodities
like t-shirts, jeans, guitars, bikes, etc. compared to the population with more elderly people.

2. Income distribution
Income distribution shows how the national income is divided among groups of individuals,
households, social classes, or factors of production. Unequal distribution of income results in
differences in the income status of different individuals in a nation.
For example, luxury goods will have higher demand. On the other hand, nations having evenly
distributed income would have higher demand for essential goods.

3. Climatic factors
The demand for commodities depends on the climatic conditions of a region such as cold, hot,
humid, and dry.
For example, the demand for air coolers and air conditioners is higher during summer while
the demand for umbrellas tends to rise during monsoon.
MANAGERIAL ECONOMICS M.DIVYA,B.TECH(CSE), MBA, ASSISTANT PROFESSOR, SMVEC

4. Government policy
This includes the actions taken by the government to determine the fiscal policy and monetary
policy such as taxation levels, budgets, money supply, and interest rates. Government policies
have direct impact on the demand for various commodities.
For example, if the government imposes high taxes (sales tax, VAT, etc.) on commodities,
their prices would increase, which would lead to a fall in their demand.

On the contrary, if the government invests in building of roads, bridges, schools, and hospitals,
the demand for bricks, cement, labour, etc., would rise.
LAW OF DEMAND

Definition: The law of demand states that other factors being constant (cetris peribus),
price and quantity demand of any good and service are inversely related to each other.
When the price of a product increases, the demand for the same product will fall.

Description: Law of demand explains consumer choice behavior when the price
changes. In the market, assuming other factors affecting demand being constant, when
the price of a good rises, it leads to a fall in the demand of that good. This is the natural
consumer choice behavior. This happens because a consumer hesitates to spend more
for the good with the fear of going out of cash.

The above diagram shows the demand curve which is downward sloping. Clearly when
the price of the commodity increases from price p3 to p2, then its quantity demand
comes down from Q3 to Q2 and then to Q3 and vice versa.
Demand schedule:
 MANAGERIAL ECONOMICS M.DIVYA,B.TECH(CSE), MBA, ASSISTANT PROFESSOR, SMVEC

Exceptions to the Law of Demand

Definition: There are certain situations where the law of demand does not
apply or becomes ineffective, i.e. with a fall in the price the demand falls and
with the rise in price the demand rises are called as the exceptions to the law
of demand.

1. Giffen Goods: Giffen goods are the inferior goods whose demand increases with the
increase in its prices. There are several inferior commodities, much cheaper than the
superior substitutes often consumed by the poor households as an essential
commodity. Whenever the price of the Giffen goods increases its quantity demanded
also increases because, with an increase in the price, and the income remaining the
same, the poor people cut the consumption of superior substitute and buy more
quantities of Giffen goods to meet their basic needs.
For Example, Suppose the minimum monthly consumption of food grains by a poor
household is 20 Kg Bajra (Inferior good) and 10 Kg Rice (superior good). The selling
price of Bajra is Rs 5 per kg, and the rice is Rs 10 per kg, and the household spends its
total income of Rs 200 on the purchase of these items. Suppose, the price of Bajra rose
to Rs 6 per kg then the household will be forced to reduce the consumption of rice by 5
Kg and increase the quantity of Bajra to 25 Kg in order to meet the minimum monthly
requirement of food grains of 30 kg.

2. Veblen Goods: Another exception to the law of demand is given by the economist
Thorstein Veblen, who proposed the concept of “Conspicuous
Consumption.” According to Veblen, there are a certain group of people who measure
the utility of the commodity purely by its price, which means, they think that higher priced
goods and services derive more utility than the lesser priced commodities.
For example, goods like a diamond, platinum, ruby, etc. are bought by the upper
echelons of the society (rich class) for whom the higher the price of these goods, the
higher is the prestige value and ultimately the higher is the utility or desirability of them.
 MANAGERIAL ECONOMICS M.DIVYA,B.TECH(CSE), MBA, ASSISTANT PROFESSOR, SMVEC

3. Expectation of Price Change in Future: When the consumer expects that the price of
a commodity is likely to further increase in the future, then he will buy more of it despite
its increased price in order to escape himself from the pinch of much higher price in the
future.
On the other hand, if the consumer expects the price of the commodity to further fall in
the future, then he will likely postpone his purchase despite less price of the commodity
in order to avail the benefits of much lower prices in the future.

4. Ignorance: Often people are misconceived as high-priced commodities are better than
the low-priced commodities and rest their purchase decision on such a notion. They buy
those commodities whose price are relatively higher than the substitutes.
5. Emergencies: During emergencies such as war, natural calamity- flood, drought,
earthquake, etc., the law of demand becomes ineffective. In such situations, people
often fear the shortage of the essentials and hence demand more goods and services
even at higher prices.
6. Change in fashion and Tastes & Preferences: The change in fashion trend and tastes
and preferences of the consumers negates the effect of law of demand. The consumer
tends to buy those commodities which are very much ‘in’ in the market even at higher
prices.
7. Conspicuous Necessities: There are certain commodities which have become
essentials of the modern life. These are the goods which consumer buys irrespective of
an increase in the price. For example TV, refrigerator, automobiles, washing machines,
air conditioners, etc.
8. Bandwagon Effect: This is the most common type of exception to the law of demand
wherein the consumer tries to purchase those commodities which are bought by his
friends, relatives or neighbors. Here, the person tries to emulate the buying behavior
and patterns of the group to which he belongs irrespective of the price of the commodity.
For example, if the majority of group members have smart phones then the consumer
will also demand for the smartphone even if the prices are high.
Thus, these are some of the exceptions to the law of demand where the demand curve
is upward sloping, i.e. the demand increases with an increase in the price and decreases
with the decrease in price.

9. Snob Effect:
Some buyers have a desire to own unusual or unique products to show that they are different
from others. In this situation even when the price rises the demand for the commodity will be
more.
10. Speculative Goods/ Outdated Goods/ Seasonal Goods:

Speculative goods such as shares do not follow the law of demand. Whenever the prices rise,
the traders expect the prices to rise further so they buy more.
Goods that go out of use due to advancement in the underlying technology are called outdated
goods. The demand for such goods does not rise even with fall in price
MANAGERIAL ECONOMICS M.DIVYA,B.TECH(CSE), MBA, ASSISTANT PROFESSOR, SMVEC

DEMAND DISTINCTION (TYPES)

Types Of Demand:

1.Direct and indirect demand: (or) Producers’ goods and consumers’ goods: demand for
goods that are directly used for consumption by the ultimate consumer is known as direct
demand (example: Demand for T shirts). On the other hand demand for goods that are used by
producers for producing goods and services. (example: Demand for cotton by a textile mill)

2.Derived demand and autonomous demand: when a produce derives its usage from the use
of some primary product it is known as derived demand. (example: demand for tyres derived
from demand for car) Autonomous demand is the demand for a product that can be
independently used. (example: demand for a washing machine)

3.Durable and non durable goods demand: durable goods are those that can be used more
than once, over a period of time (example: Microwave oven) Non durable goods can be used
only once (example: Band-aid)

4.Firm and industry demand: firm demand is the demand for the product of a particular firm.
(example: Dove soap) The demand for the product of a particular industry is industry demand
(example: demand for steel in India )

5.Total market and market segment demand: a particular segment of the markets demand is
called as segment demand (example: demand for laptops by engineering students) the sum total
of the demand for laptops by various segments in India is the total market demand. (example:
demand for laptops in India)
MANAGERIAL ECONOMICS M.DIVYA,B.TECH(CSE), MBA, ASSISTANT PROFESSOR, SMVEC

6.Short run and long run demand: short run demand refers to demand with its immediate
reaction to price changes and income fluctuations. Long run demand is that which will
ultimately exist as a result of the changes in pricing, promotion or product improvement after
market adjustment with sufficient time.

7.Joint demand and Composite demand: when two goods are demanded in conjunction with
one another at the same time to satisfy a single want, it is called as joint or complementary
demand. (example: demand for petrol and two wheelers) A composite demand is one in which
a good is wanted for several different uses. ( example: demand for iron rods for various
purposes)

8.Price demand, income demand and cross demand: demand for commodities by the
consumers at alternative prices are called as price demand. Quantity demanded by the
consumers at alternative levels of income is income demand. Cross demand refers to the
quantity demanded of commodity ‘X’ at a price of a related commodity ‘Y’ which may be a
substitute or complementary to X.

Price Demand: The ability and willingness to buy specific quantities of a good at the
prevailing price in a given time period.
Income Demand: The ability and willingness to buy a commodity at the available income in a
given period of time.

Market Demand: The total quantity of a good or service that people are willing and able to
buy at prevailing prices in a given time period. It is the sum of individual demands.

Cross Demand: The ability and willingness to buy a commodity or service at the prevailing
price of the related commodity i.e. substitutes or complementary products. For example,
people buy more of wheat when the price of rice increases.

Elasticity Of Demand - Demand Analysis

In economics, the term elasticity means a proportionate (percentage) change in one

variable relative to a proportionate (percentage) change in another variable.

Elasticity Of Demand
In economics, the term elasticity means a proportionate (percentage) change in one variable
relative to a proportionate (percentage) change in another variable. The quantity demanded of a
good is affected by changes in the price of the good, changes in price of other goods, changes
in income and changes in other factors. Elasticity is a measure of just how much of the quantity
demanded will be affected due to a change in price or income.

Elasticity of Demand is a technical term used by economists to describe the degree of

responsiveness of the demand for a commodity due to a fall in its price. A fall in price leads to
an increase in quantity demanded and vice versa.

The elasticity of demand may be as follows:

1. Price Elasticity
2. Income Elasticity and
3. Cross Elasticity
MANAGERIAL ECONOMICS M.DIVYA,B.TECH(CSE), MBA, ASSISTANT PROFESSOR, SMVEC

Price Elasticity - Demand Analysis

The response of the consumers to a change in the price of a commodity is measured
by the price elasticity of the commodity demand.

Price Elasticity
The response of the consumers to a change in the price of a commodity is measured by the
price elasticity of the commodity demand. The responsiveness of changes in quantity
demanded due to changes in price is referred to as price elasticity of demand. The price
elasticity of demand is measured by dividing the percentage change in quantity demanded by
the percentage change in price.

For example:

Quantity demanded is 20 units at a price of Rs.500. When there is a fall in price to Rs. 400 it
results in a rise in demand to 32 units. Therefore the change in quantity demanded is12 units
resulting from the change in price of Rs.100.

The Price Elasticity of Demand is = 500 / 20 x 12/100 = 3

The following are the possible combination of changes in Price and Quantity demanded. The
slope of each combination is depicted in the following graphs.

1.Relatively Elastic Demand (Ed >1) a small percentage change in price leading to a larger
change in Quantity demanded.
MANAGERIAL ECONOMICS M.DIVYA,B.TECH(CSE), MBA, ASSISTANT PROFESSOR, SMVEC

2.Perfectly Elastic Demand (Ed = ∞) a small change in price will change the quantity
demanded by an infinite amount.

3.Relatively Inelastic Demand (Ed < 1) a change in price leads to a smaller percentage change
in quantity demanded.

4.Perfectly Inelastic Demand (Ed = 0) the quantity demanded does not change regardless of
the percentage change in price.

5.Unit Elasticity of Demand (Ed =1) the percentage change in quantity demanded is the same
as the percentage change in price that caused it.
MANAGERIAL ECONOMICS M.DIVYA,B.TECH(CSE), MBA, ASSISTANT PROFESSOR, SMVEC

Income Elasticity - Demand Analysis

Income elasticity of demand measures the responsiveness of quantity demanded to a
change in income.

Income Elasticity
Income elasticity of demand measures the responsiveness of quantity demanded to a change in
income. It is measured by dividing the percentage change in quantity demanded by the
percentage change in income. If the demand for a commodity increases by 20% when income
increases by 10% then the income elasticity of that commodity is said to be positive and
relatively high. If the demand for food were unchanged when income increases, the income
elasticity would be zero. A fall in demand for a commodity when income rises results in a
negative income elasticity of demand.

The following are the various types of income elasticity:

Zero Income Elasticity: The increase in income of the individual does not make any
difference in the demand for that commodity. ( Ei = 0)
Negative Income Elasticity: The increase in the income of consumers leads to less purchase of
those goods. ( Ei < 0).
Unitary Income Elasticity: The change in income leads to the same percentage of change in
the demand for the good. ( Ei = 1).
Income Elasticity is Greater than 1: The change in income increases the demand for that
commodity more than the change in the income. ( Ei > 1).
Income Elasticity is Less than 1: The change in income increases the demand for the
commodity but at a lesser percentage than the change in the Income. ( Ei < 1

Cross Elasticiy - Demand Analysis

The quantity demanded of a particular commodity varies according to the price of
other commodities.
Cross Elasticiy
The quantity demanded of a particular commodity varies according to the price of other
commodities. Cross elasticity measures the responsiveness of the quantity demanded of a
commodity due to changes in the price of another commodity. For example the demand for tea
increases when the price of coffee goes up. Here the cross elasticity of demand for tea is high.
If two goods are substitutes then they will have a positive cross elasticity of demand. In other
words if two goods are complementary to each other then negative income elasticity may arise.
The responsiveness of the quantity of one commodity demanded to a change in the price of
another good is calculated with the following formula.

If two commodities are unrelated goods, the increase in the price of one good does not result in
any change in the demand for the other goods. For example the price fall in Tata salt does not
make any change in the demand for Tata Nano.
 MANAGERIAL ECONOMICS M.DIVYA,B.TECH(CSE), MBA, ASSISTANT PROFESSOR, SMVEC

METHODS OF DEMAND FORECASTING

Definition: Demand Forecasting is a systematic and scientific estimation of future

demand for a product. Simply, estimating the sales proceeds or demand for a product
in the future is called as demand forecasting.

METHODS OF DEMAND FORECASTING:

1. Survey Methods: Under the survey method, the consumers are contacted directly
and are asked about their intentions for a product and their future purchase plans.
This method is often used when the forecasting of a demand is to be done for a short
period of time. The survey method includes:
a) Consumer Survey Method
Consumer Survey Method is one of the techniques of demand forecasting that
involves direct interview of the potential consumers.

 Sample Survey: The sample survey method is often used when the target
population under study is large. Only the sample of potential consumers is
selected for the interview.
 Complete Enumeration Method: Under this method, a forecaster contact almost
all the potential users of the product and ask them about their future purchase
plan.
 MANAGERIAL ECONOMICS M.DIVYA,B.TECH(CSE), MBA, ASSISTANT PROFESSOR, SMVEC

 End-use Method: The end-use method is mainly used to forecast the demand for
inputs. This method of demand forecasting has a considerable theoretical and
practical value. Under this method, a forecaster builds the schedule of probable
aggregate future demand for inputs by consuming industries and several other
sectors.

b) Opinion Poll Methods

Definition: The Opinion Poll Methods are used to collect opinions of those who
possess the knowledge about the market, such as sales representatives, professional
marketing experts, sales executives and marketing consultants.

 Expert-Opinion Method: Companies with an adequate network of sales

representatives can capitalize on them in assessing the demand for a target
product in a particular region or locality that they represent. Since sales
representatives are in direct touch with the customer, are supposed to know the
future purchase plans of their customers, their preference for the product, their
reaction to the introduction of a new product, their reactions to the market changes
and the demand for rival products.
Thus, sales representatives are likely to provide an approximate, if not accurate,
estimation of demand for a target product in their respective regions or areas. In
the case of firms, which lack in sales representatives can collect information
regarding the demand for a product through professional market experts or
consultants, who can predict the future demand on the basis of their expertise
and experience.
Although the expert opinion method is too simple and inexpensive, it suffers
from serious limitations. First, The extent to which the estimates provided by
the sales representatives or professionals are reliable depends on their skill and
expertise to analyze the market and their experience. Secondly, There are
chances of over or under-estimation of demand due to the subjective judgment
of the assessor. Thirdly, the evaluation of market demand is often based on
inadequate information available to the sales representatives since they have a
narrow view of the market.

 Delphi Method: The Delphi method is the extension of the expert opinion method
wherein the divergent expert opinions are consolidated to estimate a future
demand. The process of the Delphi technique is very simple. Under this method, the
experts are provided with the information related to estimates of forecasts of other
experts along with the underlying assumptions. The experts can revise their estimates
in the light of demand forecasts made by the other group of experts. The consensus of
experts regarding the forecast results in a final forecast.
 MANAGERIAL ECONOMICS M.DIVYA,B.TECH(CSE), MBA, ASSISTANT PROFESSOR, SMVEC

 Market Studies and Experiments: Another alternative method to collect information

regarding the current as well as future demand for a product is to conduct market
studies and experiments on the consumer behavior under actual, but controlled
market conditions. This method is commonly known as Market Experiment Method.
Under this method, a firm select some areas of representative markets, such as three
or four cities having the similar characteristics in terms of the population income levels,
social and cultural background, choices and preferences of consumers and
occupational distribution. Then the market experiments are carried out by changing
the prices, advertisement expenditure and all other controllable factors under demand
function, other things remaining the same. Once these changes are introduced in the
market, the consequent changes in the demand for a product are recorded. On the
basis of these recorded estimates, the elasticity coefficients are calculated. These
computed coefficients along with the demand function variables are used to assess
the future demand for a product.
The alternative method to market experiments is the Consumer Clinics or
Controlled Laboratory Method wherein the consumers are given some money to
make purchases in stipulated store goods with different prices, packages, displays,
etc. This experiment displays the responsiveness towards the changes made in the
prices, packaging and a display of the product.One of the major limitations of market
experiment method is that it is too expensive and cannot be afforded by small firms.
Also, this method is based on short-term controlled conditions which might not exist in
the uncontrolled market. Therefore, the results may not be applicable in the long term
uncontrolled conditions.

Statistical Methods: The statistical methods are often used when the forecasting of
demand is to be done for a longer period. The statistical methods utilize the time-
series (historical) and cross-sectional data to estimate the long-term demand for a
product. The statistical methods are used more often and are considered superior than
the other techniques of demand forecasting due to the following reasons:

 There is a minimum element of subjectivity in the statistical methods.

 The estimation method is scientific and depends on the relationship between
the dependent and independent variables.
 The estimates are more reliable
 Also, the cost involved in the estimation of demand is the minimum.
The statistical methods include:
 Trend Projection Methods
Definition: The Trend Projection Method is the most classical method of
business forecasting, which is concerned with the movement of variables
through time. This method requires a long time-series data
 Barometric Methods
The Barometric Method of Forecasting was developed to forecast the trend
in the overall economic activities. This method can nevertheless be used in
forecasting the demand prospects, not necessarily the actual quantity expected
to be demanded.
 Econometric Methods
The Econometric Methods make use of statistical tools and economic
theories in combination to estimate the economic variables and to forecast the
intended variables