E-LESSON-4 MICRO ECONOMICS

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BBA/BCOM 2 All right are reserved with CU-IDOL Microeconomics Course Code: BBA103/BCM103 Semester: First e-Lesson: 4 SLM Unit: 4 www.cuidol.in Unit-4(BBA103/BCM-103)

MICRO ECONOMICS 33 OBJECTIVES INTRODUCTION Student will be able to understand the concept of In this unit we are going to learn about the Demand forecasting. concept of forecasting. Student will be able to understand the types of Under this you will be understand the demand forecast. motives ,need and types of forecasting. Student will be understand various methods of Students will be able to use different forecasting . method of demand forecasting. Student will be able to analyze the suitable method of forecasting to be used . www.cuidol.in Unit-4(BBA103/BCM-103) INSTITUTE OF DISTANACEll ArNigDhtOaNrLeINreEsLeErAvRedNIwNiGth CU-IDOL

TOPICS TO BE COVERED 4  Demand Forecasting  Types of forecasting.  Methods of Forecasting  Limitations of forecasting www.cuidol.in Unit-4(BBA103/BCM-103) All right are reserved with CU-IDOL

WHAT IS MEANT BY 5 FORECASTING AND WHY?  Forecasting is the process of estimating a variable, such as the sale of the firm at some future date.  Forecasting is important to business firm, government, and non-profit organization as a method of reducing the risk and uncertainty inherent in most managerial decisions.  A firm must decide how much of each product to produce, what price to charge, and how much to spend on advertising, and planning for the growth of the firm. www.cuidol.in Unit-4(BBA103/BCM103) All right are reserved with CU-IDOL

DEMAND FORECASTING 6  The activity of estimating the quantity of a product or service that consumers will purchase  Demand forecasting may be used in making pricing decisions, in assessing future capacity requirements, or in making decisions on whether to enter a new market.  According to Evan J. Douglas, \"Demand forecasting may be defined as the process of finding values for demand in future time periods.\" www.cuidol.in Unit-4(BBA103/BCM103) All right are reserved with CU-IDOL

THE MOTIVES OF 7 FORECASTING The motive of forecasting is to reduce the risk or uncertainty that the firm faces in its short-term operational decision making and in planning for its long term growth. Forecasting the demand and sales of the firm’s product usually begins with macroeconomic forecast of general level of economic activity for the economy as a whole. The firm uses the macro-forecasts of general economic activity as inputs for their micro-forecasts of the industry’s and firm’s demand and sales. The firm’s demand and sales are usually forecasted on the basis of its historical market share and its planned marketing strategy (i.e., forecasting by product line and region). The firm uses long-term forecasts for the economy and the industry to forecast expenditure on plant and equipment to meet its long-term growth plan and strategy. www.cuidol.in Unit-4(BBA103/BCM103) All right are reserved with CU-IDOL

ELEMENTS OF A GOOD FORECAST 8 Timely Reliable Accurate www.cuidol.in Written All right are reserved with CU-IDOL Unit-4(BBA103/BCM103)

STEPS IN THE FORECASTING PROCESS 9 “The forecast” Step 6 Monitor the forecast Step 5 Make the forecast Step 4 Obtain, clean and analyze data Step 3 Select a forecasting technique Step 2 Establish a time horizon Step 1 Determine purpose of forecast www.cuidol.in Unit-4(BBA103/BCM103) All right are reserved with CU-IDOL

NEED OF DEMAND FORECASTING 10  New facility planning  Production planning  Workforce scheduling  Financial planning  Marketing Planning www.cuidol.in Unit-4(BBA103/BCM103) All right are reserved with CU-IDOL

TYPES OF FORECAST 11  Short-range forecast  Up to 1 year (usually less than 3 months)  Job scheduling, worker assignments, plan for purchasing  Medium-range forecast  1 Year to 3 years  Sales & production planning, budgeting  Long-range forecast  3 years, or more  New product planning, facility location www.cuidol.in Unit-4(BBA103/BCM103) All right are reserved with CU-IDOL

METHODS OF DEMAND FORECASTING 12 Quantitative Qualitative Methods Methods www.cuidol.in Unit-4(BBA103/BCM103) All right are reserved with CU-IDOL

METHODS OF DEMAND FORECASTING 13  Qualitative Methods  Survey Method  Historical Analogies  Collective Opinion (sale force opinion Method)  Delphi Technique  Test marketing  Quantitative techniques  Time Series Analysis:  Moving Average  Barometric Analysis:  Linear Regression www.cuidol.in Unit-4(BBA103/BCM103) All right are reserved with CU-IDOL

SURVEY 14  Information can also be collected through surveys. Surveys can be carried out through mail, e-mail, telephone or by directly speaking to respondents.  Survey bye-mail an phone survey are conducted for prospective customers who are not using a particular product or service of a company.  A firm can determine the demand for its products through a market survey. It may launch new products, if the survey indicates that there is a demand for that particular product in the market.  For example, Coke in India expanded its product range beyond carbonated drinks, after the company conducted a nationwide survey. The survey revealed that about 80% of the youth preferred to drink tea or coffee rather than carbonated drinks at regular intervals. The remaining 20% preferred to have milk products, while only 2% preferred to drink carbonated drinks like Coke.  The survey results helped Coke to expand its product range. Coke introduced coffee and tea in the www.cuidol.in Unit-4(BBA103/BCM103) All right are reserved with CU-IDOL

EXPERT OPINION 15  The expert opinion method, also known as expert consensus method, is being widely used for demand forecasting.  This method utilizes the findings of market research and the opinions of management executives, consultants, and trade association officials, trade journal editors and sector analysts.  When done by an expert, qualitative techniques provide reasonably good forecasts for a short term because of the expert's familiarity with the issues and the problems involved.  There are various methods of confirming the opinion regarding future demand by experts. One of these methods is the Delphi method. www.cuidol.in Unit-4(BBA103/BCM103) All right are reserved with CU-IDOL

DELPHI METHOD 16  In the Delphi method, the opinion of number of experts is gathered individually.  An analyst combines these forecasts using same weighting system and passes on the combined forecast to the forecasters.  The forecasters make a new round of forecasts with this information. The process continues till an overall consensus is arrived at from all the panel members.  The Delphi method is primarily used to forecast the demand for new products. Though it provides valuable insights, it is rather expensive as the experts may charge a high fee for their opinion. www.cuidol.in Unit-4(BBA103/BCM103) All right are reserved with CU-IDOL

MARKET EXPERIMENT 17  One major problem with the survey method is that people may not reveal their true likes and dislikes while giving responses.  Responses to direct questions may not always be correct. Market experiments can help to overcome these problems as they generate data before introducing a product or implementing a policy.  Market experiments are of two types: 1. Test Marketing , & 2. Controlled Experiments. www.cuidol.in Unit-4(BBA103/BCM103) All right are reserved with CU-IDOL

TEST MARKETING 18  In this case, a test area is selected, which should be a representative of the whole market in which the new product is to be launched.  A test area may include several cities and towns, or a particular region of a country or even a sample of consumers.  By introducing the new product in the test area consumers' response about the product can be judged. More than one test area can be selected if the firm wants to assess the effects on demand due to various alternative marketing mix i.e. changes in price, advertising or packaging can be done in various market areas.  Then the demand for the product can be compared at different levels of price and advertising expenditure. In this way, consumer's response to change in price or advertising can be judged. www.cuidol.in Unit-4(BBA103/BCM103) All right are reserved with CU-IDOL

TEST MARKETING 19  Some of the drawbacks of test experiments are that they are very costly and much time consuming. If in a test market prices are raised, consumers may switch to the competitor's products. It may be difficult to regain lost customers even if the price is reduced to the previous level.  Controlled experiments: Controlled experiments are conducted to test the demand for a new product launched or to test the demands for various brands of a product.  In this method, a sample of consumers which are representative of the target market are selected. They are requested to visit the store of that firm where various varieties or brands of the product are kept for sale. www.cuidol.in Unit-4(BBA103/BCM103) All right are reserved with CU-IDOL

TEST MARKETING 20  Their preferences are recorded. They are then provided advertising materials for various brands.  The selected consumers are given some fixed money and are allowed to make purchases of different variety of products or various brands of a product.  The quantity of the product or particular brands of a product purchased by them is recorded. They are also requested to fill a questionnaire asking reasons for the choices they have made. The price of the product or its variety may be changed and the experiment is repeated.  Controlled experiments provide more accurate results than consumer surveys. This is because in this case, the consumers are asked to make actual decisions regarding their purchases, while the consumer surveys show their intention to buy.  Some of the drawbacks of controlled experiments are that they may be biased in the process of selection of a sample of consumers on which experiments is to be performed. www.cuidol.in Unit-4(BBA103/BCM103) All right are reserved with CU-IDOL

TIME SERIES ANALYSIS 21 (QUANTITATIVE TECHNIQUES) The time series analysis is divided into four categories - trends, seasonal variations, cyclical variations and random fluctuations. In trend analysis, past data is used to predict the future sales of a firm. A trend is a long term increase or decrease in the variable.  Seasonal variations take into account the variations in demand during different seasons. For example, the sale of the cotton dresses increases in summer, while the sale of woollen clothes increases in winter.  Cyclical variations are the variations in demand due to fluctuations in the business cycle - boom, recession and depression.  Random fluctuations may happen due to natural calamities like flood, earthquake, etc. which cannot be predicted accurately. www.cuidol.in Unit-4(BBA103/BCM103) All right are reserved with CU-IDOL

TIME SERIES ANALYSIS 22 (QUANTITATIVE TECHNIQUES) There are two types of time-series analysis - moving average and exponential smoothing. The moving average is a series of arithmetic averages and can be divided into simple moving average and weighted moving average. For example, to predict sales for the next period using a simple moving average. On the other hand, exponential smoothing works on a premise that the most recent occurrences are more indicative of the future than the past ones. www.cuidol.in Unit-4(BBA103/BCM103) All right are reserved with CU-IDOL

COMMONLY OBSERVED “NORMAL” 23 DEMAND PATTERNS Constant demand Linear trend D D t t Cyclic trend Seasonal pattern D D t t www.cuidol.in Unit-4(BBA103/BCM103) All right are reserved with CU-IDOL

MOVING AVERAGE 24  Short range time series type of forecasting model that forecasts sales for the next time period.  In this model the arithmetic average of the actual sales for a specific number of most recent past time periods is the forecast for the next time period. www.cuidol.in Unit-4(BBA103/BCM103) All right are reserved with CU-IDOL

CATEGORY OF FORECASTING METHOD 25 Moving Average Month Demand 3 Months MA 6 Months MA Jan Feb 500 562.50 Mar 578.33 Apr 525 592.33 May 612.50 Jun 575 533.33 634.17 Jul 650.83 Aug 560 553.33 698.33 Sept Oct 600 578.33 Nov Dec 615 591.67 www.cuidol.in 595 603.33 609 606.33 696 633.33 690 665.00 700 695.33 900 763.33 Unit-4(BBA103/BCM103) All right are reserved with CU-IDOL

BAROMETRIC ANALYSIS 26 Barometric analysis or forecasting can be defined as \"the prediction of turning points in one economic time series through the use of observations on another time series called the barometer or the indicator.\"  In barometric analysis, the economic time series are divided into three groups - leading indicators, coincident indicators and lagging indicators.  Leading indicators contain data that move ahead of the series in question. The growing number of senior citizens is a leading series for the demand for home for the aged. Leading indicators index includes such things as average weekly hours worked and claims for unemployment insurance, manufacturers' new orders, stock prices, orders for plant and equipment, index of consumer expectations etc., www.cuidol.in Unit-4(BBA103/BCM103) All right are reserved with CU-IDOL

BAROMETRIC ANALYSIS 27  Coincident Indicators use data that move up and down corresponding to some other series - for example, the relationship between national income and employment (in the short term). Components of an Index of Coincident indicators are employees on non agricultural payrolls, industrial production, personal income minus transfer payments, manufacturing and trade sales.  Lagging indicators move behind the series in question - for example, manufacturer's inventory is a lagging series for sales. The lagging indicator composite includes changes in labour costs per unit, ratio of inventory to sales, and figures on instalment credit and loans, among other items. www.cuidol.in Unit-4(BBA103/BCM103) All right are reserved with CU-IDOL

LINEAR REGRESSION 28  A model uses least-square method to identify the relationship between a dependent variable and one or more independent variables that are present in a set of historical observations.  In simple regression there is only one independent variable.  In multiple regression there is more than one independent variable.  In this method we fit the data on demand and time in the form of equations and then project the demand for future period. These equations are termed as “Normal Equations” and the task of least square method is to find out the values of the coefficients in these equations. www.cuidol.in Unit-4(BBA103/BCM103) All right are reserved with CU-IDOL

29 www.cuidol.in Unit-4(BBA103/BCM103) All right are reserved with CU-IDOL

EXPONENTIAL SMOOTHING 30 This method is an improved version of moving average method of estimation. In this method, past data is not used very much. This method assigns greater weights to the most recent data, in order to have a more realistic estimate of the fluctuations. Exponential smoothing forecast is calculated by using the following equation: www.cuidol.in Unit-4(BBA103/BCM103) All right are reserved with CU-IDOL

LIMITATIONS OF DEMAND FORECASTING 31  Change in Fashion  Consumers’ Psychology  Uneconomical  Lack of experts  Lack of data www.cuidol.in Unit-4(BBA103/BCM103) All right are reserved with CU-IDOL

Multiple Choice Questions 32 1. Which one of the following does not fall under qualitative forecasting method? a)Life cycle analogy b)Moving average methods c)Market research d)Delphi method 2. Which of the following is not a forecasting technique? a)Judgemental b)Time series c)Time horizon d)Associative Answers: 1. b) 2. c) www.cuidol.in Unit-4(BBA103/BCM103) All right are reserved with CU-IDOL

Multiple Choice Questions 33 3. _________contain data that move ahead of the series in question.? a) leading indicators b) coincident indicators c) lagging indicators d)none of the above 4. Delphi method is used for b)Time series forecast a)Judgemental forecast d) All of the above c)Associative model Answers: 3.a) 4.a) www.cuidol.in Unit-4(BBA103/BCM103) All right are reserved with CU-IDOL

SUMMARY 34  Demand Forecasting -Demand Forecasting is a forecast is a prediction about most likely future event under assumed conditions. Demand forecasting is an estimate of future demand based upon reasonable judgment of future probabilities of events affecting business supported by scientific evidence.  Levels of Demand Forecasting-When each individual production or service organization estimate demand for their products or services, it is called micro level demand forecasting. When demand as estimated for a group of similar production or service organizations, it is called industry level demand forecasting. When aggregate demand for industrial output by the whole country is carried out, it is called macro level demand forecasting. Macro level demand forecasting is based upon national income or aggregate expenditure of the nation.  Type of Forecasting-Short Term Forecasting: When forecasting is carried out for a period upto a year, it is referred to as short term forecasting.. Long Term Forecasting: When time period of forecasting is more than one year it is called long term forecasting. The time period may be 3 – 5 years or even more than a decade. Such forecasts are useful for long term policy making like growth, manpower planning, capital and financial planning etc. www.cuidol.in Unit-4(BBA103/BCM103) All right are reserved with CU-IDOL

FAQ’s 35 1 What is meant by Forecasting ? Ans: Forecasting is the process of estimating a variable, such as the sale of the firm at some future date. 2.List down the methods of Demand Forecasting ? Ans :Quantitative and Qualitative method .For details refer to SLM 3. What is Delphi method of Forecasting? Ans: Delphi method is a group (members) process and aims at achieving a `single opinion of the members on the subject. Herein experts in the field of marketing research and demand forecasting are engaged in analyzing economic conditions, carrying out sample surveys of market ,conducting opinion polls . For Details refer to SLM www.cuidol.in Unit-4(BBA103/BCM103) All right are reserved with CU-IDOL

REFERENCES 36 1. Dwivedi D.N. , Managerial Economic, Vikas Publications, New Delhi. 2. Mithani D.M. , Managerial Economics Theory and Applications, Himalaya Publication, Mumbai. 3. https://www.toppr.com/guides/business-economics/theory-of-demand/demand-forecasting/ 4. http://www.economicsdiscussion.net/demand-forecasting/demand-forecasting-concept-significance- objectives-and-factors/3557 www.cuidol.in Unit-4(BBA103/BCM103) All right are reserved with CU-IDOL

37 THANK YOU For queries Email: [email protected] www.cuidol.in Unit-4(BBA103/BCM103) All right are reserved with CU-IDOL