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 Chapter 5
Demand
Forecasting
Prof. Dr. Elisabet Siahaan, SE, M.Ec
Department of Management
Faculty of Economics and
Business
University of North Sumatra
 Learning Objectives
Learning objectives upon completion of this lesson, students should be
able to :
1. Specify the components of a regression model that can be used to
estimate a demand equation
2. Interpret the regression results (explain the quantitative impact that
changes in the determinants have on the quantity demanded.
3. Explain the meaning of R2
4. Evaluate the statistical significance of the regression coefficients using
the t-test and the statistical significance of R2 using the F-test.
3
Prof. Dr. Elisabeth Siahaan, SE, M.ec
 OUTLINE OF THE SESSION

1. Introduction
2. Problem Identification
3. A Marketing Research Approach to Demand
Estimation
4. Introduction to Regression Analysis
5. Simple Linear Regression Analysis
6. Multiple Linear Regression Analysis

4
Prof. Dr. Elisabeth Siahaan, SE, M.ec
 1. INTRODUCTION

In the previous chapter we discussed the theory of demand, supply,

equilibrium point, elasticity of demand with respect to price,
elasticity of demand with respect to income, elasticity of supply.
Managers who intend to increase the price of their product want to
know the impact of the price increase on:
(1) demand amount
(2) total income
(3)advantages

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 2. PROBLEM IDENTIFICATION

• Over time or across different individuals and markets, the

demand for a commodity is always shifting, moving or
changing due to changes in: a. tastes; b. income; c. prices
of related commodities, d. product prices, e. population.

• Supply curves also shift due to changes in technology,

prices of factors of production, and weather conditions,
etc.

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 PROBLEM
IDENTIFICATION
Price-Quantity Observations
DO NOT DIRECTLY generate
the Demand curve of a
commodity

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 2. MARKETING RESEARCH APPROACH TO
DEMAND ESTIMATION

Consumer Surveys
Observational Research
Consumer Clinics
Market Experiments
Virtual Shopping
Virtual Management

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 1. Consumer Survey
• Consumer survey is a method used to determine the attitudes and perceptions of
customers by interviewing directly or providing questionnaires that have been
prepared in advance.
• Consumer surveys involve asking a sample of consumers how they would react to
certain changes in the price of a commodity, income, prices of related commodities,
advertising expenditures, credit incentives, and other determinants.
• Involves a sample of consumers on how they react to changes in the price of a
commodity, income, of related commodities, expenditure.
• Consumer surveys are conducted by providing questionnaires to consumers to
question people at the shopping center to obtain information on possible responses
from consumers.
• Consumer survey methods are biased because consumers do not provide accurate
answers

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 Weaknesses of Consumer Surveys
• In reality, many are biased because consumers are unwilling or
unable to provide accurate answers.
• For example, do you know how much your consumption of
restaurant lunches would change if the tax on restaurant meals
increased to 15 percent? If the price of soft drinks increased by 15
percent? If your income increased by 10 percent? If the restaurant
owner increases his advertising costs? Even if you try to answer
the question as accurately as possible, your reaction may be
completely different if you face a real situation of the above
possibilities.

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 Weaknesses of Consumer Surveys

• Sometimes consumers give answers that they find more acceptable

than expressing their true preferences.
• For example, no one would admit to drinking 200 bottles of beer per
month. Depending on the sample size selected and the completeness
and analysis, consumer surveys can also be very expensive.
• The disadvantages of this method include: the cost is relatively
expensive (large), and the survey results are unrealistic because
consumers do not give accurate answers (cover up their shortcomings).
The limitations of consumer surveys have led many companies to
replace or supplement them with observational research.

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 2. Observation
Research
Penelitian Observasi merupakan pengumpulan
informasi ttt pengalaman dan pendapat konsumen
dgn mengamati bagaimana mrk membeli dan
menggunakan berbagai produk

Penelitian observasi suatu metode yang digunakan

untuk mengetahui perilaku konsumen dengan cara
pengamatan yang dilakukan oleh salesman yang
ditugaskan oleh manager perusahaan.

Kelemahan dari metode ini adalah hasil dari

pengamatan seringkali tidak memberikan
gambaran yang objektif dari konsumen, tapi
gambaran justru subjektif dari salesman.
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 Observation Research

Mengacu pada pengumpulan informasi tentang preferensi

konsumen dengan mengamati bagaimana mereka membeli dan
menggunakan berbagai produk.

Sebagai contoh, penelitian observasi bisa dilakukan dengan

bantuan scanner yang banyak digunakan di supermarket-
supermarket. Berdasarkan hasil scanner bahwa konsumen
cenderung memilih beberapa jenis obat masuk angin dan tidak
hanya satu. Hal ini memungkinkan suatu perusahaan
mempelajari dalam waktu singkat mengenai produk yang akan
dijual dan efektivitas dan iklan dan juga pola menonton TV.

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 3. Consumer Clinic

• It is a laboratory experiment in which a number of participants are given a fixed

amount of money to spend in a simulated store and see how they react to
changes in commodity prices, product packaging, displays, competitor product
prices, and other factors that affect demand.
• Consumer clinics can generate useful information on the demand for a
particular product, especially if the consumer clinic is supplemented by a
consumer survey.
• Participants in these experiments can be selected as closely as possible to
represent the socioeconomic characteristics and the intended market.
• Participants have an incentive to buy the commodity they want because they are
usually allowed to keep buying the item. Thus, consumer clinics are more
realistic than consumer surveys.
• With the ability to control the environment, consumer clinics also avoid flaws
and market experiments, which can distort the real event.
 4. Market Experiment

Held in a real market.

• By selecting several markets with similar socioeconomic characteristics

and changing the prices of commodities in some stores or markets,
changing the packaging in others, and changing the number and type of
promotions in others, then recording the responses (purchases) made by
consumers in these markets.
• The advantages of market experiments are that they can be conducted on a
large scale to be more confident about the validity of the results and that
consumers are not aware that they are part of an experiment.

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 Disadvantages of Market Experiments

In order to keep costs low, experiments are usually kept to a limited scale
and over a relatively short period of time, so their applicability to the entire
market and over a longer period of time is questionable.
Despite these drawbacks, market experiments can be useful for companies
in determining the best pricing strategy and testing different types of
packaging, promotional campaigns, and product quality.

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 Introduction to Regression Analysis

Regression analysis is a statistical technique

for estimating the quantitative effect between
an economic variable of interest (dependent
variable) and one or more independent
variables.
For example, a manager wants to know the
effect between advertising expenditure (X) and
sales revenue (Y).
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 Introduction to Regression Analysis
Year X Y
1 10 44
2 9 40
3 11 42
4 12 46
5 11 48
6 12 52
7 13 54
8 13 58
9 14 56
10 15 60
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 Simple Linear Regression Analysis
• Regression analysis is a statistical
technique that can produce a line that
best fits the data according to objective
statistical criteria.
• Regression line  a line generated by
minimizing the sum of the squared
deviations on the vertical axis from each
point of the regression line.
• This method is also called the Ordinary
Least Squares (OLS) method.

Model: Yt  a  bX t  et Simple linear regression analysis is the goal:

1. To calculate the value of a (vertical intersection point)
ˆ
Yˆt  aˆ  bX t 2. Value of b (slope coefficient)
et  Yt  Yˆt 3. Create confidence intervals for the true parameters
4. Calculating R2 (strength of variable X on variable Y)
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 Ordinary Least Squares (OLS)

The purpose  is to estimate the values of a (vertical cut-off point) and b (slope)
of the regression line in order to minimize the sum of squared deviations.

n n n

 e   (Yt  Yˆt )2   (Yt  aˆ  bX

t 1
2
t
t 1
ˆ )2
t
t 1

Estimation n

Procedure (X t  X )(Yt  Y )

bˆ  t 1
n

(X
t 1
t  X )2

ˆ
â  Y  bX

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 Coefficient of Determination

R 
2 Explained Variation

 (Yˆ  Y ) 2

TotalVariation  t
(Y  Y ) 2

373.84
R 
2
 0.85
440.00

This means that 85% of the variation in the

company's total sales is influenced by
advertising.
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 Coefficient of Correlation

r  R 2 with the sign of bˆ

1  r  1

r  0.85  0.92

This means that variables X and Y changed

together 92% of the time.

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 4.5 Multiple Linear Regression Analysis
(Multiple Regression Analysis)

Model: Y  a  b1 X1  b2 X 2    bk ' X k '

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 Multiple Regression Analysis

Adjusted Coefficient of Determination

(n  1)
R 2  1  (1  R 2 )
(n  k )

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 Multiple Regression Analysis

Analysis of Variance and F Statistic

Explained Variation /(k  1)

F
Unexplained Variation /(n  k )

R 2 /(k  1)
F
(1  R 2 ) /( n  k )

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 Problems in Regression Analysis
Multicollinearity: arises when two or more explanatory variables in a
regression have a high relationship, making many coefficients insignificant
despite a high R2 .
Heteroscedasticity: arises in cross-sectional data when the error factor is
not constant, making the error term biased and the statistical test
incorrect.
Autocorrelation: often appears in time-series data, when successive errors
have the same sign or alternate signs each time. This leads to very large t
statistics and unreliable values of F and R statistics 2 .

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 Durbin-Watson Statistic

Test for Autocorrelation

n

 t t 1
( e  e ) 2

d t 2
n

t
e 2

t 1

If d=2, autocorrelation is absent.

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