Managerial Economics in a Global Economy

Chapter 5 Demand Forecasting

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Qualitative Forecasts
Survey Techniques
Planned Plant and Equipment Spending Expected Sales and Inventory Changes Consumers Expenditure Plans

Opinion Polls
Business Executives Sales Force Consumer Intentions
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Time-Series Analysis
Secular Trend
Long-Run Increase or Decrease in Data

Cyclical Fluctuations
Long-Run Cycles of Expansion and Contraction

Seasonal Variation
Regularly Occurring Fluctuations

Irregular or Random Influences

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PowerPoint Slides by Robert F. Brooker

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Trend Projection
Linear Trend: St = S0 + b t b = Growth per time period Constant Growth Rate St = S0 (1 + g)t g = Growth rate Estimation of Growth Rate lnSt = lnS0 + t ln(1 + g)
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Seasonal Variation
Ratio to Trend Method
Actual Ratio = Trend Forecast Seasonal Average of Ratios for = Adjustment Each Seasonal Period Adjusted Forecast
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Trend = Forecast

Seasonal Adjustment

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Seasonal Variation
Ratio to Trend Method: Example Calculation for Quarter 1
Trend Forecast for 1996.1 = 11.90 + (0.394)(17) = 18.60 Seasonally Adjusted Forecast for 1996.1 = (18.60)(0.8869) = 16.50

Year 1992.1 1993.1 1994.1 1995.1

Trend Forecast Actual 12.29 11.00 13.87 12.00 15.45 14.00 17.02 15.00 Seasonal Adjustment =

Ratio 0.8950 0.8652 0.9061 0.8813 0.8869

PowerPoint Slides by Robert F. Brooker

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Moving Average Forecasts

Forecast is the average of data from w periods prior to the forecast data point.
w

Ft
i 1

At i w

PowerPoint Slides by Robert F. Brooker

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Exponential Smoothing Forecasts

Forecast is the weighted average of of the forecast and the actual value from the prior period.
Ft 1 wAt (1 w) Ft

0 w 1
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Root Mean Square Error

Measures the Accuracy of a Forecasting Method

RMSE

(A F )
t t

PowerPoint Slides by Robert F. Brooker

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Barometric Methods
National Bureau of Economic Research Department of Commerce Leading Indicators Lagging Indicators Coincident Indicators Composite Index Diffusion Index
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Econometric Models
Single Equation Model of the Demand For Cereal (Good X)
QX = a0 + a1PX + a2Y + a3N + a4PS + a5PC + a6A + e QX = Quantity of X PX = Price of Good X PS = Price of Muffins PC = Price of Milk

Y = Consumer Income
N = Size of Population
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A = Advertising
e = Random Error
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Econometric Models
Multiple Equation Model of GNP
Ct a1 b1GNPt u1t I t a2 b2 t 1 u2t GNPt Ct I t Gt

GNPt

Reduced Form Equation Gt a1 a2 b2 t 1

1 b1 1 b1 1 b1
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PowerPoint Slides by Robert F. Brooker