demand estimation

demand estimation

CONTENTS:


Serial No Topic Page no
1. Introduction of demand estimation 3
2. Meaning of demand estimation 3
3. Definition of demand estimation 3
4. Scope of demand estimation 4
5. Determinant of demand estimation 7
6. Method of demand estimation 8
7. Criteria of demand
estimation 10




Introduction

Demand estimation or forecasting occupies a crucial place in a business activity. This view may be optimistic or pessimistic based on hunches. Estimation can be both physical as well as financial in nature and is used mostly for planning.



Meaning

Demand estimation/forecasting are predicting future demand for the product. In other words, it refers to the prediction of probable demand for a product or a service based on the past events.


Definition

According to evan j. donglas, “demand estimation may be defined as the process of finding values for demand in future time periods.”



Scope


1. Period of forecasting
As a first step, one has to decide about the length of period for the forecast. The time periods usually divided three parts

(a) Short run forecasting
It refers to a period of upto 3 months. These factor include weather conditions, tastes, fashion etc.

(b) Medium-term forecasting
It covers a period between 3 months and one year. In case of medium-term forecasts, experience and sound judgement are more than important statistical estimation.

(c) Long run forecasting
It refers to period more than one year. In this we include like structural changes, socio-economic changes, government fiscal and monetary policy etc.


2. Level of forecasting

(a) Macro-economic forecasting
It is concerned with business conditions over the whole economy. These business conditions are measured with the help of some indicators like those relating to national income, industrial production and wholesale prices etc.

(b) Industry Demand forecasting
The firm may use such estimates for its output, sale, capacity etc.

(c) Firm demand forecasting
A big firm like tata and birla, will like to do forecasting of its own products independent of the rest of the firms in the industry.

(d) Product-line forecasting
It helps the firm decide which of the product or products should have priority in the allocation of firm’s limited resources.


(e) International level forecasting
International events influence national economy through international trade.



3. General purpose forecasting
It will helpful if the general estimate is broken down into specific estimate with respect to commodities, area of sale, domestic and export market etc.


4. Forecast of established market
Problems and methods of estimation differ in these two cases. For the establish products, past sale trend and competitive condition are known, while this is not so for the ‘new’ product.

Determinants of demand

Goods can be broadly classified into three categories:

(a) Capital goods
These are those goods which help in the further production of consumer and producer goods. These include factory building, machinery equipment, tools etc. demand for a capital goods is a derived demand.

(b) Durable consumer goods
These consumer goods which are used again and again over a period of time are called durable consumer goods like residential buildings, car, refrigerator, furniture etc.



(c) Non-durable goods
These include those consumer goods which can be used only once, e.g. , food, milk, fruits etc.


Methods of demand estimation

(1) Opinion polling methods
In these methods of demand estimation the opinion of the buyers, sale force and experts can be sought to analyse the developing trend in the market demand:

• Consumer survey
In this method, the intention of the buyers or potential buyers are recorded, by trained, reliable and experienced investigators.

These are two types:

(a) Complete enumeration
The survey covers all the potential consumers in the market and their interviews are conducted to find out the probable demand.

(b) Sample survey
In this method, only a few consumers are interviewed and then average demand is calculated on the basis of the consumers interviewed.

• Collective opinion method
It is presumed that salesman, being the closest to the consumers, have the most accurate information about their liking, disliking, consumption pattern, consumers.

• Expert’s opinion
This method is also known as Delphi method of investigation. In this method, instead of depending upon the opinions of consumers and sellers, firm can obtain views of specialists or experts in their respective fields.



(2) Statistical method
This method have proved to be very useful in estimating demand.


(a) Trend projection method
This method also known as time series method. Time series refer to the data over a period of time, during which time fluctuation may occur.


(b) Graphic method
In this method a trend line can be fitted through a series graphically.


(c) Least square method
This method is based on the assumption that the past rate of change of the variable under study will continue in the future.


(d) Regression analysis
In this method we are using the relationship between the two variables.


Criteria of a good estimation method

There is a practical difficulty in selecting the appropriate method for demand estimation:

1. Accuracy
It is necessary to check the accuracy of past estimates against present performance and of present estimates against future performance.

2. Simplicity
Firms must be able to understand and have the confidence in the techniques used.

3. Economy
A firm has to strike a balance between the benefits from increased accuracy and the extra cost of providing the improved estimation.

4. Timeliness
There is a time gap between the occurrence of an event and its estimate-known as ‘lead time’.

5. Effective
It is quite easy to judge the existing trends