ECONOMICS ASSIGNMENT 1

y Explain the meaning of the term demand forecasting? It is an activity used in order to estimate the quantity of a certain product or service that the consumers will be willing to purchase. Demand forecasting encompasses the usage of both informal methods (educated guesses) and quantitative methods (historical sales data or data from test markets). Demand forecasting is used by production houses in order to make various decisions such as pricing decision, future capacity requirements, or decisions to advance a new product or to enter a new product etc. It is a proactive process of determining what products are needed where, when and in what quantities; demand forecasting is therefore a customer-focused activity. Demand forecasting is the foundation of a company s entire logistics process. There are two methods of demand forecasting:  Passive forecasts: where the factors being forecasted are assumed to be constant over a period of time and changes are ignored.  Active forecasts: where the factors being forecasted are taken as flexible and are subject to change.

y Explain the significance of demand forecasting? Demand forecasting is an essential for maximization of profits in business. Demand forecasting makes it easy for a retailer to optimize revenue along with a timely replacement of goods and products. Accurate demand forecasting is essential for a firm to enable it to produce the required quantities at the right time and arrange well in advance for the various factors of production, such as, raw materials, equipment, machine accessories, labor, buildings, etc. demand forecasting is used for various other reasons which are outlined below:

 Appropriate production scheduling.  Reducing costs of purchasing raw materials.  Determining appropriate price policy  Setting sales targets and establishing controls and

incentives.

 Evolving a suitable advertising and promotional campaign.  Forecasting short-term financial requirements.  Purposes of long-term forecasting  Planning of a new unit or expansion of an existing unit.  Planning long-term financial requirements.  Planning manpower requirements.  Demand forecasts of particular products form guidelines for related industries (e.g., cotton and textiles).
y Demand forecasting methods? The demand forecasting method is not one, which is 100% accurate. A combination both quantitative and qualitative methods, reduce the risk of making mistakes which may be a huge liability for production houses.

Quantitative methods: this is based on statistical data that is acquired by the business in order to formulate a near perfect demand forecast.
1. Discrete Event Simulation: the operation of a system is represented as a chronological sequence of events. Each event occurs at an instant in time and marks a change of state in the system. 2. Extrapolation: is the process of constructing new data points outside a discrete set of known data points. 3. Quantitative analogies: A business or financial analysis technique that seeks to understand behavior by using complex mathematical and statistical modeling, measurement and research. By assigning a numerical value to variables, quantitative analysts try to replicate reality mathematically. 4. Rule-based forecasting: integrates statistics and domain knowledge to deliver more accurate forecasting techniques. RBF is an expert system that uses features of time series to select and weight extrapolation techniques.

5. Data mining: branch of computer science and artificial intelligence is the process of extracting patterns from data. Data mining is seen as an increasingly important tool by modern business to transform data into business intelligence giving an informational advantage. It is currently used in a wide range of profiling practices, such as marketing, surveillance, fraud detection, and scientific discovery. 6. Causal models: is an abstract model that uses cause and effect logic to describe the behavior of a system. 7. Segmentation: Market segmentation is a concept in economics and marketing. A market segment is a sub-set of a market made up of people or organizations with one or more characteristics that cause them to demand similar product and/or services based on qualities of those products such as price or function.

 Qualitative methods: takes into account the changes in human trends and therefore are based on the opinion of people that make up a particular market segment. This method also holds a great value for expert opinion.

1. Delphi technique: involves a group of experts who eventually develop a consensus. They usually make long-range forecasts for future technologies or a future sale of a particular product. 2. Sales force composite: sales persons are good source of information with regard to customer s future intentions to buy a product. 3. Customer surveys: by using surveys, a firm can base its demand forecasts on the customers purchasing plans. 4. Executive committee method: develop long -medium forecasts by asking a group of knowledgeable executives their opinion with regard to future values of the items being forecasted. The negative aspect of this that the presence of a powerful member in the group will hinder he reaching of a consensus. 5. Game theory: is a branch of applied mathematics that is used in the social sciences, most notably in economics. Game

theory attempts to mathematically capture behavior in strategic situations, or games, in which an individual's success in making choices depends on the choices of others. 6. Judgmental bootstrapping: is a type of expert system. It translates an expert s rules into a qualitative model by regressing the expert s forecasts against the information that he used. Bootstrapping models apply an expert s rules consistently. 7. Conjoint analysis: is a statistical technique used in market research
to determine how people value different features that make up an individual product or service. The objective of conjoint analysis is to determine what combination of a limited number of attributes is most influential on respondent choice or decision -making.

y Choose a product and create a demand function for it with explanation? The demand function of a particular product explains how the demand for a commodity by an individual consumer in the market is related to its various determinants in this case the product I have chosen is coke.  The demand function: D (coke) = f (P (coke), P (Pepsi), Y, T, E) To sum up the function stated above we see that the demand for coke is an amalgamation of the combination of the price of commodity (P (coke) ), price of the substitute (P (Pepsi) ), income of the consumer (Y), taste and preference of the consumers (T) and the expectations.

 Factors that affect the demand of a commodity: 1. Price of our own commodity: the price of a commodity and the quantity demanded of a product are inversely related, ceteris paribus (all other determinants of demand are kept constant), this is commonly known as the law of demand.

PRICE

2. 3. 4.
P1

5. 6.
P2

DD1

2. 2.Price of substitute goods: substitute goods area QUANTITY Q1 Q2 those goods which can be used in the place of each other to satisfy the demand of a particular individual in the society. With a constant income, a change in the price of a given substitute will lead to a change in the demand for the other. The demand for a particular commodity is affected if the price of its rises or falls. For example the product in question here which is coke and its substitute Pepsi that happen to be substitutes of each other. Both these drinks fall under the category of aerated cola drinks and therefore area substitutes of each other. The demand for coke will increase if the price of Pepsi rises and the demand for coke will fall if the price for Pepsi decreases.

Coke Pepsi
S2
PRICE PRICE

S1

D1 D2

S1

P2 P1 D1

P1 P2

Q2

Q1

QUANTITY

Q2

Q1

QUANTITY

*Note: A fall in the supply of coke will lead to a rise in the price of coke and therefore a fall in the demand , which will eventually lead to an increase in the quantity, demanded of Pepsi, which is a substitute. 3. Changes in the income of the consumers: there is a positive relationship between the income of the consumer and the demand for the consumer. The more the real income that is held by a consumer the more his purchasing power will increase and therefore the quantity demanded of a product will increase. 4.Chnages in tastes and preferences of the consumer: usually the taste of a consumer is fixed, but changes in fashion, advertisement and other factors lead to a change in the taste and preference. A favorable change in tastes and preferences shifts the demand curve outwards or to the right therefore indicating an increase in the demand, but an unfavorable change in the tastes and preferences of the consumers will lead to an inwards shift of the curve, which indicates a decrease in the demand of a prod uct. 5.changes in technology: in the fast changing era that we live in there are new breakthroughs in terms of technology and this lead to various changes in the demand and even may lead to the development of new and improved technology that would even outdate the older products.

6. Changes in the weather: weather plays an important role in the demand for the product. It is because if the weather deteriorates the supply for a product will fall which will in turn lead to a rise in the demand of the product in turn leading to a sharp rise in the price of the product.