CHANDIGARH UNIVERSITY

DEPARTMENT OF COMMERCE
University Business School- Commerce
Micro Economics 24CMT103
By: Dr. Sukhmani kaur

Demand Forecasting DISCOVER . LEARN .

EMPOWER
 Demand
Forecasti
ng
Course Outcome Will be covered in
CO Title Level this lecture
Number

CO1 Explain the Relationship Between TU and Rememb

MU er

CO2 Show the graphical relationship between Understa

TU and MU nd

CO3 Explain the Law of Diminishing Marginal Understa

Utility nd
CO4 Show the assumptions of Law of Understa
Diminishing Marginal Utility nd
2
 • Space for visual (size 24)
Demand
Forecasti
ng

Demand Forecasting is the process in

which historical sales data is used to
develop an estimate of an
expected forecast of
customer demand. To
businesses, Demand
Forecasting provides an estimate of
the amount of goods and services
that its customers will purchase in
the foreseeable future.

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 Demand Forecasting
It is a technique for estimation of probable demand for a product or services in the future. It is
based on the analysis of past demand for that product or service in the present market
condition. Demand forecasting should be done on a scientific basis and facts and events related
to forecasting should be considered.
Therefore, in simple words, we can say that after gathering information about various aspect of
the market and demand based on the past, an attempt may be made to estimate future
demand. This concept is called forecasting of demand.
For example, suppose we sold 200, 250, 300 units of product X in the month of January,
February, and March respectively. Now we can say that there will be a demand for 250 units
approx. of product X in the month of April, if the market condition remains the same.
 Usefulness of Demand
Forecasting
Demand plays a vital role in the decision making of a business. In competitive market conditions,
there is a need to take correct decision and make planning for future events related to business
like a sale, production, etc. The effectiveness of a decision taken by business managers depends
upon the accuracy of the decision taken by them.
Demand is the most important aspect for business for achieving its objectives. Many decisions of
business depend on demand like production, sales, staff requirement, etc. Forecasting is the
necessity of business at an international level as well as domestic level.
Demand forecasting reduces risk related to business activities and helps it to take efficient
decisions. For firms having production at the mass level, the importance of forecasting had
increased more. A good forecasting helps a firm in better planning related to business goals.
There is a huge role of forecasting in functional areas of accounting. Good forecast helps in
appropriate production planning, process selection, capacity planning, facility layout planning,
and inventory management, etc.
Demand forecasting provides reasonable data for the organization’s capital investment and
expansion decision. It also provides a way for the formulation of suitable pricing and
advertisement strategies.
 Significance of Demand
Forecasting
•Fulfilling objectives of the business
•Preparing the budget
•Taking management decision
•Evaluating performance etc.
Moreover, forecasting is not completely full of proof and correct. It thus helps in
evaluating various factors which affect demand and enables management staff to
know about various forces relevant to the study of demand behavior.
 Scope of Demand
Forecasting
The scope of demand forecasting depends upon the operated area of the firm, present as well as
what is proposed in the future. Forecasting can be at an international level if the area of
operation is international. If the firm supplies its products and services in the local market then
forecasting will be at local level.
The scope should be decided considering the time and cost involved in relation to the benefit of
the information acquired through the study of demand. Cost of forecasting and benefit flows
from such forecasting should be in a balanced manner.
 Types of Demand
Forecasting
There are two types of forecasting:
•Based on Economy
•Based on the time period

1. Based on Economy
There are three types of forecasting based on the economy:
Macro-level forecasting: It deals with the general economic environment relating to the
economy as measured by the Index of Industrial Production(IIP), national income and general
level of employment, etc.
Industry level forecasting: Industry level forecasting deals with the demand for the industry’s
products as a whole. For example demand for cement in India, demand for clothes in India, etc.
Firm-level forecasting: It means forecasting the demand for a particular firm’s product. For
example, demand for Birla cement, demand for Raymond clothes, etc.
 Types of Demand
Forecasting
2. Based on the Time Period

Forecasting based on time may be short-term forecasting and long-term forecasting

Short-term forecasting: It covers a short period of time, depending upon the nature of the
industry. It is done generally for six months or less than one year. Short-term forecasting is
generally useful in tactical decisions.
Long-term forecasting casting: Long-term forecasts are for a longer period of time say, two to
five years or more. It gives information for major strategic decisions of the firm. For example,
expansion of plant capacity, opening a new unit of business, etc.
 Methods of Demand
Forecasting
Demand forecasting is the art as well as the science of predicting the likely demand for a product
or service in the future. This prediction is based on past behavior patterns and the continuing
trends in the present. Hence, it is not simply guessing the future demand but is estimating the
demand scientifically and objectively. Thus, there are various methods of demand forecasting
which we will discuss here.
Methods of Demand Forecasting
There is no easy or simple formula to forecast the demand. Proper judgment along with the
scientific formula is needed to correctly predict the future demand for a product or service.
Some methods of demand forecasting are discussed below:

1] Survey of Buyer’s Choice

When the demand needs to be forecasted in the short run, say a year, then the most feasible
method is to ask the customers directly that what are they intending to buy in the forthcoming
time period. Thus, under this method, potential customers are directly interviewed. This survey
can be done in any of the following ways:
 Methods of Demand
Forecasting
Complete Enumeration Method: Under this method, nearly all the potential buyers are asked
about their future purchase plans.
Sample Survey Method: Under this method, a sample of potential buyers are chosen
scientifically and only those chosen are interviewed.
End-use Method: It is especially used for forecasting the demand of the inputs. Under this
method, the final users i.e. the consuming industries and other sectors are identified. The
desirable norms of consumption of the product are fixed, the targeted output levels are
estimated and these norms are applied to forecast the future demand of the inputs.

Hence, it can be said that under this method the burden of demand forecasting is on the buyer.
However, the judgments of the buyers are not completely reliable and so the seller should take
decisions in the light of his judgment also.
The customer may misjudge their demands and may also change their decisions in the future
which in turn may mislead the survey. This method is suitable when goods are supplied in bulk
to industries but not in the case of household customers.
 Methods of Demand
Forecasting
2] Collective Opinion Method
Under this method, the salesperson of a firm predicts the estimated future sales in their region.
The individual estimates are aggregated to calculate the total estimated future sales. These
estimates are reviewed in the light of factors like future changes in the selling price, product
designs, changes in competition, advertisement campaigns, the purchasing power of the
consumers, employment opportunities, population, etc.
The principle underlying this method is that as the salesmen are closest to the consumers they
are more likely to understand the changes in their needs and demands. They can also easily find
out the reasons behind the change in their tastes.
Therefore, a firm having good sales personnel can utilize their experience to predict the
demands. Hence, this method is also known as Sales force opinion or Grassroots approach
method. However, this method depends on the personal opinions of the sales personnel and is
not purely scientific.
 Methods of Demand
Forecasting
3] Barometric Method
This method is based on the past demands of the product and tries to project the past into the
future. The economic indicators are used to predict the future trends of the business. Based on
future trends, the demand for the product is forecasted. An index of economic indicators is
formed. There are three types of economic indicators, viz. leading indicators, lagging indicators,
and coincidental indicators.
The leading indicators are those that move up or down ahead of some other series. The lagging
indicators are those that follow a change after some time lag. The coincidental indicators are
those that move up and down simultaneously with the level of economic activities.

4] Market Experiment Method

Another one of the methods of demand forecasting is the market experiment method. Under
this method, the demand is forecasted by conducting market studies and experiments on
consumer behavior under actual but controlled, market conditions.
Certain determinants of demand that can be varied are changed and the experiments are done
keeping other factors constant. However, this method is very expensive and time-consuming
 Methods of Demand
Forecasting
5] Expert Opinion Method
Usually, market experts have explicit knowledge about the factors affecting demand. Their
opinion can help in demand forecasting. The Delphi technique, developed by Olaf Helmer is one
such method.
Under this method, experts are given a series of carefully designed questionnaires and are asked
to forecast the demand. They are also required to give the suitable reasons. The opinions are
shared with the experts to arrive at a conclusion. This is a fast and cheap technique.
 Methods of Demand
Forecasting
6] Statistical Methods

The statistical method is one of the important methods of demand forecasting. Statistical
methods are scientific, reliable and free from biases. The major statistical methods used for
demand forecasting are:
Trend Projection Method: This method is useful where the organization has a sufficient amount
of accumulated past data of the sales. This date is arranged chronologically to obtain a time
series. Thus, the time series depicts the past trend and on the basis of it, the future market trend
can be predicted. It is assumed that the past trend will continue in the future. Thus, on the basis
of the predicted future trend, the demand for a product or service is forecasted.
Regression Analysis: This method establishes a relationship between the dependent variable
and the independent variables. In our case, the quantity demanded is the dependent variable
and income, the price of goods, the price of related goods, the price of substitute goods, etc. are
independent variables. The regression equation is derived assuming the relationship to be linear.
Regression Equation: Y = a + bX. Where Y is the forecasted demand for a product or service.
Assessment Pattern

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 APPLICATIONS
After going through this presentation,
• Students will get an insight into how the to determine the satisfaction in
terms of utils.
• They will also come to comprehend the different types in which we can
measure utility.
• Students will be mindful of the meaning of the term utility.

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 REFERENCES
WEBSITES
• https://byjus.com/commerce/difference-between-total-utility-and-marginal-utility/
https://ideas.repec.org/a/ora/journl/v1y2013i1p403-412.html
• https://www.toppr.com/guides/business-economics-cs/theory-of-consumer-behavior/mea
ning-and-concept-of-utility/#:~:text=Meaning%20and%20Concept%20of%20Utility,favourit
e%20food%2C%20or%20other%20goods.
• https://keydifferences.com/difference-between-cardinal-and-ordinal-utility.html
• BOOKS
. 1) T1 D.N. Dwivedi, “Managerial Economic”, Vikas Publications, New Delhi.
.2) R1 D. Salvatore, “Microeconomic Theory”, Tata McGraw Hill.
3) D.M. Mithani, Managerial Economics Theory and Applications, Himalaya
Publication, Bangalore.

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THANK YOU

For queries
Email: [email protected]