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Chapter four

Demand and demand forecasting

4.1. Introduction

Demand forecasting is predicting future demand for a product. The information regarding future demand

is essential for planning and scheduling production, purchase of raw materials, acquisition of finance and

advertising, it is much more important where a large-scale production is being planned and production

involves a long gestation period. The information regarding future demand is essential also confronted

with the question as to what would be the future demand for their product. For, they will have to acquire

inputs and plan their production accordingly: the firms are hence required to estimate the future demand

for their product. Otherwise, their functioning will be masked with uncertainty and their objective may be

defeated.

This problem may not be of a serious nature for the small firms which supply a very small fraction of total

demand, and whose product caters to the short-term, seasonal demand or to demand of a routine nature.

Their past experience and business skill may suffice for their purpose in planning and production. But, the

firms working on a large scale find extremely difficult to obtain fairly accurate information regarding

future market demand, in some situation, it is very difficult to obtain information needed make even

short-term demand forecasts, and extremely difficult to make long term forecasts or to determine how

changes in specific demand variables like price, advertisement expenditure, credit terms, prices of

competing products etc, will affect demand. It is nevertheless indispensable for the large firms to have at

least a rough estimate of the demand prospects. For demand forecast plays an important role in planning

to acquire inputs, men and material (raw material, and capital goods), organizing production, advertising

the product, and in organizing sales channels. These functions can hardly be performed satisfactorily in an

atmosphere of uncertainty regarding demand prospects for the product. The prior knowledge of market-

size becomes therefore an extremely important element of decision-making by the large scale firms.

The techniques of forecasting are many, but the choice of a suitable method is a matter of experience and

expertise. To a large extent, it depends also in the nature of the data available for the purpose. In

economic forecasting, classical methods use historical data in rather rigorous statistical manner for

making the future projections. There are also less formal methods where analyst’s own judgment plays a

greater part in picking, choosing and interpreting the available data than the statistical tools.

Information about demand is essential for making pricing and production decisions. Empirical estimates

of demand play pivotal role in making how many units of pa product to produce and what prices to charge

for different products. In fact, it may not mean that forecasting of demand solves all of the management ’s

pricing problems. It can however, provide managers with valuable information about demand, which

should improve any manager’s price setting skills.

Forecasting techniques:

Section 1. Survey methods

Survey methods are generally used where purpose is to make short-run forecast of demand.

Under this method, surveys are conducted to collect information about consumers’ intentions and

their future purchase-plans. This method includes:

(i) Survey of potential consumers to elicit information on their intentions and plans; and

(ii) Opinion polling of experts, i.e., opinion survey of market experts and sales

representatives, and through market studies and experiments.

The following methods are used to conduct the survey of consumers and experts.

1.1. Consumer survey methods

The consumer survey method of demand forecasting involves direct interview of the

potential consumers. It may be in the form of complete enumeration, sample survey, or end-

use method. These consumer survey methods are used under different conditions and for

different purposes. Their advantages and disadvantages are described below.

1.1.1. Direct interview method: the most direct and simple way of assessing future demand

for a product is to interview the potential consumers or users and to ask them what

quantity of the product they would be willing to buy at different prices over a given

period, say, one year. This method is known as direct interview method. This method

may be done in three different ways. These are:

• Complete enumeration method- in this method, almost all potential users of the product

are contacted and are asked about their future plan of purchasing the product in question.

The quantities indicated by the consumers are added together to obtain the probable

demand for the product. For example, if only n out of m number of households in a city

report the quantity (d) they are willing to purchase of a commodity, then total probable

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Chapter four Demand and demand forecasting 4.1. Introduction Demand forecasting is predicting future demand for a product. The information regarding future demand is essential for planning and scheduling production, purchase of raw materials, acquisition of finance and advertising, it is much more important where a large-scale production is being planned and production involves a long gestation period. The information regarding future demand is essential also confronted with the question as to what would be the future demand for their product. For, they will have to acquire inputs and plan their production accordingly: the firms are hence required to estimate the future demand for their product. Otherwise, their functioning will be masked with uncertainty and their objective may be defeated. This problem may not be of a serious nature for the small firms which supply a very small fraction of total demand, and whose product caters to the short-term, seasonal demand or to demand of a routine nature. Their past experience and business skill may suffice for their purpose in planning and production. But, the firms working on a large scale find extremely difficult to obtain fairly accurate information regarding future market demand, in some situation, it is very difficult to obtain information needed make even short-term demand forecasts, and extremely difficult to make long term forecasts or to determine how changes in specific demand variables like price, advertisement expenditur ...
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