Demand forecasting is the activity of estimating the quantity of a product or service that consumers will purchase.

Demand forecasting involves techniques including both informal methods and quantitative methods. Demand forecasting may be used in making pricing decisions, in assessing future capacity requirements, or in making decisions on whether to enter a new market.

Need of Demand forecasting One of the crucial aspects in which managerial economics differs from pure economic theory lies in the treatment of risk and uncertainty. Traditional economic theory assumes a risk-free world of certainty; but the real world business is full of all sorts of risk and uncertainty. A manager cannot, therefore, afford to ignore risk and uncertainty. To cope with it, he needs to predict the future event. The likely future event has to be given form and content in terms of projected course of variables, i.e. forecasting. Thus, business forecasting is an essential ingredient of corporate planning.

Demand forecasting is essential for a firm because it must plan its output to meet the forecasted demand according to the quantities demanded and the time at which these are demanded. The forecasting demand helps a firm to arrange for the supplies of the necessary inputs without any wastage of materials and time and also helps a firm to diversify its output to stabilize its income overtime.
Broadly speaking, there are two approaches to demand forecastingone is to obtain information about the likely purchase behavior of the buyer through collecting experts opinion or by conducting interviews with consumers, the other is to use past experience as a guide through a set of statistical techniques. Both these methods rely on varying degrees of judgment. The first method is usually found suitable for short-term forecasting, the latter for long-term forecasting. There are specific techniques which fall under each of these broad methods. Simple Survey Method: 1) Experts Opinion Poll: In this method, the experts are requested to give their opinion or feel about the product. These experts are able to predict the likely sales of a given product in future periods under

different conditions based on their experience. If the number of such experts is large and their experience-based reactions are different, then an average-simple or weighted is found to lead to unique forecasts. 2) Delphi Technique: Here is an attempt to arrive at a consensus in an uncertain area by questioning a group of experts repeatedly until the responses appear to converge along a single line. The participants are supplied with responses to previous questions. Such feedback may result in an expert revising his earlier opinion. This may lead to a narrowing down of the divergent views (of the experts) expressed earlier. 3) Consumers Survey- Complete Enumeration Method: Under this, the sales forecasts are obtained by simply adding the probable demands of all consumers. The principle merit of this method is that the forecaster does not introduce any bias or value judgment of his own. He simply records the data and aggregates. 4) Consumer Survey-Sample Survey Method: Under this method, the forecaster selects a few consuming units out of the relevant population and then collects data on their probable demands for the product during the forecast period. The total demand of sample units is finally blown up to generate the total demand forecast 5) End-user Method of Consumers Survey: Under this method, the sales of a product are projected through a survey of its end-users. The demands for final consumption and exports net of imports are estimated through some other forecasting method, and its demand for intermediate use is estimated through a survey of its user industries.

Complex Statistical Methods: (1) Time series analysis or trend method: Under this method, the time series data on the under forecast are used to fit a trend line or curve either graphically or through statistical method of Least Squares. The advantage in this method is that it does not require the formal knowledge of economic theory and the market. The only limitation in this method is that it assumes that the past is repeated in future. Also, it is an appropriate method for long-run forecasts, but inappropriate for short-run forecasts. (2) Barometric Techniques method: This consists in discovering a set of series of some variables which exhibit a close association in their

movement over a period or time. Generally, it has been used in some of the developed countries for predicting business cycles situation. For this diffusion indices are constructed by combining the movement of a number of leading series in the economy so that turning points in business activity could be discovered well in advance. 3) Correlation and Regression: These involve the use of econometric methods to determine the nature and degree of association between/among a set of variables. The relationship may be expressed in the form of a demand function.The principle advantage of this method is that it is prescriptive as well descriptive. That is, besides generating demand forecast, it explains why the demand is what it is. (4) Simultaneous Equations Method: It is also known as the complete system approach or econometric model building. This method is normally used in macro-level forecasting for the economy as a whole. The principle advantage in this method is that the forecaster needs to estimate the future values of only the exogenous variables unlike the regression method where he has to predict the future values of all, endogenous and exogenous variables affecting the variable under forecast.