Chapter 5 Demand Forecasting 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 Cyclical Fluctuations 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 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

Average of Ratios for Each Seasonal Period Seasonal Variation Ratio to Trend Method Actual Trend Forecast Ratio = Seasonal Adjustment = Average of Ratios for Each Seasonal Period Adjusted Forecast Trend Forecast Seasonal Adjustment = Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 6

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 Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 7

Example Time period 2003.1 2003.2 2003.3 2003.4 2004.1 2004.2 2004.3 2004.4 Quantity 11 15 12 14 17 13 16 Time Period 2005.1 2005.2 2005.3 2005.4 2006.1 2006.2 2006.3 2006.4 18 20 19 Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 8

Moving Average Forecasts Forecast is the average of data from w periods prior to the forecast data point. Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 9

Exponential Smoothing Forecasts Forecast is the weighted average of of the forecast and the actual value from the prior period. Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 10

Measures the Accuracy of a Forecasting Method Root Mean Square Error Measures the Accuracy of a Forecasting Method Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 11

Moving Average Three-Quarter & Five Quarter Forecast & Comparison Firm’s Actual Market Share (A) Three Quarter MA Forecast (F) A-F (A-F)^2 1 20 - 2 22 3 23 4 24 21.67 2.33 5.4289 5 18 23.00 -5 6 7 19 8 17 9 10 11 12 21.0 Total 78.3534 13 21.33 20.6 Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 12

Exponential Smoothing Quarter Firm’s Actual Market Share (A) Forecast with w = 0.3 (F) A-F (A-F)^2 Forecast with w=0.5 1 20 21 -1.0 1.0 2 22 20.7 1.3 1.7 3 23 21.1 1.9 3.6 4 24 21.7 2.3 5.5 5 18 22.4 -4.4 19.0 6 3.8 7 19 21.6 -2.6 7.0 8 17 20.8 -3.8 14.8 9 19.7 5.3 10 20.4 2.6 6.8 11 21.2 -3.2 10.0 12 20.2 2.8 7.7 13 Total 86.3 RMSE 2.682215 Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 13

Barometric Methods National Bureau of Economic Research Department of Commerce Leading Indicators Lagging Indicators Coincident Indicators Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 14

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 Y = Consumer Income N = Size of Population PS = Price of Muffins PC = Price of Milk A = Advertising e = Random Error Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 15

Multiple Equation Model of GNP Econometric Models Multiple Equation Model of GNP Reduced Form Equation Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 16