Managerial Economics in a Global Economy, 5th Edition by Dominick Salvatore

Chapter 5 Demand Forecasting

Prepared by Robert F. Brooker, Ph.D.

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 1

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
Prepared by Robert F. Brooker, Ph.D. Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 2

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

Prepared by Robert F. Brooker, Ph.D. Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3

Prepared by Robert F. Brooker, Ph.D.

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 4

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)
Prepared by Robert F. Brooker, Ph.D. Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 5

Seasonal Variation
Ratio to Trend Method
Actual Ratio = Trend Forecast Seasonal Average of Ratios for = Adjustment Each Seasonal Period Adjusted Forecast
Prepared by Robert F. Brooker, Ph.D.

Trend = Forecast

Seasonal Adjustment
Slide 6

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

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

Prepared by Robert F. Brooker, Ph.D.

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

Slide 7

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

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

Prepared by Robert F. Brooker, Ph.D.

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 8

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
Prepared by Robert F. Brooker, Ph.D. Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 9

Root Mean Square Error

Measures the Accuracy of a Forecasting Method

RMSE

(A F )
t t

Prepared by Robert F. Brooker, Ph.D.

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 10

Barometric Methods
National Bureau of Economic Research Department of Commerce Leading Indicators Lagging Indicators Coincident Indicators Composite Index Diffusion Index
Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 11

Prepared by Robert F. Brooker, Ph.D.

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
Prepared by Robert F. Brooker, Ph.D.

A = Advertising
e = Random Error
Slide 12

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Econometric Models
Multiple Equation Model of GNP
Ct a1 b1GNPt u1t I t a2 b2 t 1 u2t GNPt Ct I t Gt

GNPt
Prepared by Robert F. Brooker, Ph.D.

Reduced Form Equation Gt a1 a2 b2 t 1

1 b1 1 b1 1 b1
Slide 13 Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Input-Output Forecasting
Three-Sector Input-Output Flow Table
Producing Industry Supplying Industry A B C Value Added Total A 20 80 40 60 200 B 60 90 30 120 300 C 30 20 10 40 100 Final Demand 90 110 20 220 Total 200 300 100 220

Prepared by Robert F. Brooker, Ph.D.

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 14

Input-Output Forecasting
Direct Requirements Matrix
Direct Requirements
=

Input Requirements Column Total

Producing Industry

Supplying Industry A B C

A 0.1 0.4 0.2

B 0.2 0.3 0.1

C 0.3 0.2 0.1

Prepared by Robert F. Brooker, Ph.D.

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 15

Input-Output Forecasting
Total Requirements Matrix
Producing Industry Supplying Industry A B C A 1.47 0.96 0.43 B 0.51 1.81 0.31 C 0.60 0.72 1.33

Prepared by Robert F. Brooker, Ph.D.

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 16

Input-Output Forecasting
Total Requirements Matrix
1.47 0.96 0.43 0.51 1.81 0.31 0.60 0.72 1.33

Final Total Demand Demand Vector Vector

90 110 20

200 300 100

Prepared by Robert F. Brooker, Ph.D.

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 17

Input-Output Forecasting
Revised Input-Output Flow Table
Producing Industry Supplying Industry A B C A 22 88 43 B 62 93 31 C 31 21 10 Final Demand 100 110 20 Total 215 310 104

Prepared by Robert F. Brooker, Ph.D.

Copyright 2004 by South-Western, a division of Thomson Learning. All rights reserved.

Slide 18