Demand Estimation & Forecasting
UNIT 6 DEMAND ESTIMATION AND FORECASTING
Objectives
By studying this unit, you should be able to: identify a wide range of demand estimation and forecasting methods; apply these methods and to understand the meaning of the results; understand the nature of a demand function; identify the strengths and weaknesses of the different methods; understand that demand estimation and forecasting is about minimising risk.
Structure
6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 Introduction Estimating Demand Using Regression Analysis Evaluating the Accuracy of the Regression Equation - Regression Statistics The Marketing Approach to Demand Measurement Demand Forecasting Techniques Barometric Forecasting Forecasting Methods: Regression Models Summary Key Words
6.10 Self-Assessment Questions 6.11 Further Readings
6.1 INTRODUCTION
The first question which arises is, what is the difference between demand estimation and demand forecasting? The answer is that estimation attempts to quantify the links between the level of demand and the variables which determine it. Forecasting, on the other hand, attempts to predict the overall level of future demand rather than looking at specific linkages. For this reason the set of techniques used may differ, although there will be some overlap between the two. In general, an estimation technique can be used to forecast demand but a forecasting technique cannot be used to estimate demand. A manager who wishes to know how high demand is likely to be in two years’ time might use a forecasting technique. A manager who wishes to know how the firm’s pricing policy could be used to generate a given increase in demand would use an estimation technique. The firm needs to have information about likely future demand in order to pursue optimal pricing strategy. It can only charge a price that the market will bear if it is to sell the product. On one hand, over-optimistic estimates of demand may lead to an excessively high price and lost sales. On the
Objectives
By studying this unit, you should be able to: identify a wide range of demand estimation and forecasting methods; apply these methods and to understand the meaning of the results; understand the nature of a demand function; identify the strengths and weaknesses of the different methods; understand that demand estimation and forecasting is about minimising risk.
Structure
6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 Introduction Estimating Demand Using Regression Analysis Evaluating the Accuracy of the Regression Equation - Regression Statistics The Marketing Approach to Demand Measurement Demand Forecasting Techniques Barometric Forecasting Forecasting Methods: Regression Models Summary Key Words
6.10 Self-Assessment Questions 6.11 Further Readings
6.1 INTRODUCTION
The first question which arises is, what is the difference between demand estimation and demand forecasting? The answer is that estimation attempts to quantify the links between the level of demand and the variables which determine it. Forecasting, on the other hand, attempts to predict the overall level of future demand rather than looking at specific linkages. For this reason the set of techniques used may differ, although there will be some overlap between the two. In general, an estimation technique can be used to forecast demand but a forecasting technique cannot be used to estimate demand. A manager who wishes to know how high demand is likely to be in two years’ time might use a forecasting technique. A manager who wishes to know how the firm’s pricing policy could be used to generate a given increase in demand would use an estimation technique. The firm needs to have information about likely future demand in order to pursue optimal pricing strategy. It can only charge a price that the market will bear if it is to sell the product. On one hand, over-optimistic estimates of demand may lead to an excessively high price and lost sales. On the