1. Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide 1 Managerial Economics in a Global Economy, 5th Edition by Dominick Salvatore Chapter 5 Demand Forecasting

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

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

4. Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide 4

5. Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide 5 Trend Projection Linear Trend: S t = S 0 + b t b = Growth per time period Constant Growth Rate S t = S 0 (1 + g) t g = Growth rate Estimation of Growth Rate lnS t = lnS 0 + t ln(1 + g)

6. 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 Actual Trend Forecast Ratio = Seasonal Adjustment = Average of Ratios for Each Seasonal Period Adjusted Forecast = Trend Forecast Seasonal Adjustment

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

8. 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.

9. 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.

10. Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide 10 Root Mean Square Error Measures the Accuracy of a Forecasting Method

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

12. Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide 12 Econometric Models Single Equation Model of the Demand For Cereal (Good X) Q X = a 0 + a 1 P X + a 2 Y + a 3 N + a 4 P S + a 5 P C + a 6 A + e Q X = Quantity of X P X = Price of Good X Y = Consumer Income N = Size of Population P S = Price of Muffins P C = Price of Milk A = Advertising e = Random Error

13. Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide 13 Econometric Models Multiple Equation Model of GNP Reduced Form Equation

14. 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 Three-Sector Input-Output Flow Table

15. 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 Direct Requirements Matrix Direct Requirements Input Requirements Column Total =

16. 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

17. 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 = Total Requirements Matrix Final Demand Vector Total Demand Vector

18. Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved.Slide 18 Input-Output Forecasting Revised Input-Output Flow Table