1. 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

2. 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

3. 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

4. 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

5. 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

6. 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

7. Seasonal Variation
Ratio to Trend Method: Example Calculation for Quarter 1
Trend Forecast for = (0.394)(17) = 18.60
Seasonally Adjusted Forecast for = (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

8. 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

9. 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

10. 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

11. 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

12. 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 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

13. 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
Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 13

14. 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

15. 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

16. 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