Demand Projections

Presented by

Prof Tarun Das

IILM, New Delhi
 Contents of Presentation
1. Purpose and Use of Demand Projections
2. Dimensions of Demand Projections
3. Factors Influencing Demand Projections
4. Forecasting techniques
5. Methods of demand Projection
6. Econometric Demand Functions
7. Concluding Observations
8. Review Questions

Demand Projection- Prof.Tarun Das 2

 1. Purpose and Use of
Demand Projections
1. Demand projections form the basic foundations
of corporate planning.
2. These are essential for production, pricing and
employment decisions and planning.
3. Every big corporate house employs statisticians
and econometricians for analyzing and
forecasting market demand .
4. Basic building block of statistical demand
analysis is the empirical demand functions.
5. However, as in other cases, they are subject to
identification and specification problems.

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 2 Dimensions of Demand
Projections
Macro models (National level)
Meso (Middle level- States)
Spatial (over space)
Regional (over regions)
Industrial (over industries)
Sectoral (sectors- rural, urban)
Micro (at unit/firm levels)
Inter temporal (over time)
Intergenerational (over generations)

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 3. Factors Influencing Demand
projection
Overall objective and purpose- a part
of corporate plan
Planning horizon
Product disaggregation
Regional disaggregation
Quantifiable variables influencing
demand and their perspectives in the
short and medium term
Constraints in the system
Expected change in environment

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4.1         Forecasting techniques

1. Opinion polls- collecting opinions of those

who are knowledgeable about the markets such
as sales representatives, sales executives,
professional marketing experts and consultants.
The opinion poll methods include:
2. (a) Expert opinions- although the method is
simple and less expensive, it has limitations due
to subjective judgments and may lead to either
over-estimation or under-estimation.

Demand Projection- Prof.Tarun Das 6

 4.2         Forecasting techniques
 (b) Delfi method- Similar to expert opinion, but
here experts are provided with alternative
forecasts and asked to give their expert
opinions and revisions, with explanations, if any.
These unstructured opinions of experts can be
used to cross check results obtained from more
sophisticated and statistical techniques.
(c)Market surveys- widely used to estimate and
forecast demand.

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4.3 Barometer Method and Leading indicators
1. Barometer method and Economic indicators-
Barometer method is generally used for forecasting
weather. The essence of the technique can be used
to forecast demand. The basic approach is to use a
set of economic indicators to project demand.
2. (a) Leading indicators- those indicators which move
up or down ahead of some other series such as net
investments, new constructions and transport links,
prices of materials, contracts and orders, change of
inventories, net corporate profits etc.

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4.4 Barometer Method and Leading indicators
(b)    Coincidental indicators- those which move
up or down simultaneously with the level of
economic activity such as employees and
payrolls, rate of unemployment, gross national
product, sales by manufacturing, trading and
retail sectors, personal incomes etc.
(c) Lagging indicators- those which follow after
some time lag such as wage rates and
inflation, consumer credits, lending rates,
outstanding loans etc.

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 5 Methods of Demand
Projections
a)Average growth approach
b)Demand Intensity approach
c)Per capita demand approach
d)Elasticity approach
e)End-Use/ Input-output approach
f)Material balance approach
g)Trend method
h)Engel curves
i)Econometric approach- multiple
regression approach
Demand Projection- Prof.Tarun Das 10
 5.0 An Example – S =Sales,
Y=GDP at current MP, P=Population
Y e a r T i m e S (R s. b lnY ) (R s. b l n )P (m l n )
2000 1 1200 21043 1019
2001 2 1300 22960 1037
2002 3 1400 24510 1055
2003 4 1550 26900 1072
2004 5 1680 29514 1088
2005 6 1800 32465 1104
T o ta l 6 8930 157392 6375
A v e ra g e 1 4 8 8 .3 2 6 2 3 2 1 0 6 2 .5

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 Fig-5.1 Trends of Sales,
National Income and
Population
4000
3000
2000
1000
0
1 2 3 4 5 6

S ( Rs .b ln ) Y ( Rs .1 0 b ln ) P ( m ln )

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 5.1 Average Growth Method
Y e a r S (R s. b l Yn )(R s. b l n )P (m l n ) G R (S )
2000 1200 21043 1019 8 .5
2001 1300 22960 1037 8 .3
2002 1400 24510 1055 7 .7
2003 1550 26900 1072 10.7
2004 1680 29514 1088 8 .4
2005 1800 32465 1104 7 .1
T o ta l 8 9 3 0 1 5 7 3 9 2 6 3 7 5 50.8
A v e ra g e 1 4 8 8 .3 2 6 2 3 2 1 0 6 2 . 5 8 .5
P ro j . fo r 2 0 0 6 = 1 8 0 0 x 1 . 01 89 5 3=

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 5.2 Demand Intensity
Approach
Year S(Rs.bln) Y (Rs.bln) Intensity=S/Y
2000 1200 21043 0.0570
2001 1300 22960 0.0566
2002 1400 24510 0.0571
2003 1550 26900 0.0576
2004 1680 29514 0.0569
2005 1800 32465 0.0554
Total 8930 157392 0.0567
Average 1488.3 26232 0.0567
Ave. Sales Intensity w.r.t. GDP=0.0567
Assumption: GRof GDPin2006=10%
GDPin2006=32465x1.10= 35712
Proj. for 2006=35712x0.0567= 2026

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 5.3 Per capita demand approach
Year S (Rs.bln) Y (Rs.bln) P (mln) PC S=S/ P
2000 1200 21043 1019 1.18
2001 1300 22960 1037 1.25
2002 1400 24510 1055 1.33
2003 1550 26900 1072 1.45
2004 1680 29514 1088 1.54
2005 1800 32465 1104 1.63
Assuption Population GR in 2006 = 1.5%
Percapita sales = 1.75
Pop. in 2006= 1104 x 1.015 = 1121
Proj. for 2006 = 1121 x 1.75 = 1961

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 5.4 Elasticity Approach
Yea r S ( R s .b lnY) ( R s .b ln ) P ( m ln ) G R ( S ) GR (Y) G R (P)
2000 1200 21043 1019 8 .5 9 .2 1 .9
2001 1300 22960 1037 8 .3 9 .1 1 .8
2002 1400 24510 1055 7 .7 6 .8 1 .7
2003 1550 26900 1072 1 0 .7 9 .8 1 .6
2004 1680 29514 1088 8 .4 9 .7 1 .5
2005 1800 32465 1104 7 .1 1 0 .0 1 .5
T o ta l 8930 157392 6375 5 0 .8 5 4 .5 1 0 .0
A v e ra g e 1 4 8 8 .3 2 6 2 3 2 1 0 6 2 .5 8 .5 9 .1 1 .7
S a le s e la s t it ic it y w .r.t . Y & P = G R ( S ) / G R ( Y ) o0r.9G3R ( P ) 5 .0
S a le s p r o j .fo r 2 0 0 6 : A s s u m e G R ( Y ) = 1 0 % , G R ( P ) = 1 .5 %
( 1 ) S a le s G R = 1 0 x 0 .9 3 = 9 .3 % 1967
( 2 ) S a le s G R = 1 .5 x 5 = 7 .5 % 1935

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 5.5 End-Use Method- Planning
Commission Model for Five-Year Plans
Demand = Intermediate + Final Demand
=  aij Xj +Fi
Intermediate Demand = Use by other industries in
the process of production
=  aij Xj, where aij is the amount of ith good used
per unit of jth good in its production
Final Demand (Fi) = Private consumption (Ci)
+ Public consumption (Gi) + Investment (Ii)
+Stocks (Sti)+Exports (EXPi)– Imports (IMPi)
Fi = Ci + Gi + Ii + STi + EXPi - IMPi

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 5.6 PC Macroeconomic and Input
Output Model in Leontief Framework
Di= Xi =  aij Xj +Fi
Fi = Ci + Gi + Ii + STi + EXPi - IMPi
Xi = Supply of ith good
Di = demand for ith good
Ci estimated by Engel curves
Ii is estimated by a a distributed lag model on investment
Gi is estimated by minimum needs program and other public
distribution and welfare programs of the government.
Sti is estimated by fixed coefficients.
EXPi are exogenous.
IMPi = mj xj + ki Ci + bi Gi + hi Ii

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 5.7 Time Trend Method
Year Time (T) S (Rs.bln) Log (S)
2000 1 1200 7.09
2001 2 1300 7.17
2002 3 1400 7.24
2003 4 1550 7.35
2004 5 1680 7.43
2005 6 1800 7.50
Fitted Time Trends
Type a b R-SQ
Linear S = α + β T 1059.3 122.6
0.996
Exponential Log S = α + β T 7.006 0.083
0.998
Projection for 2006 (Time=7)
Linear S = α + β T 1917
Exponential Log S = α + β T 1969

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 5.8 Engel Curves
• Engel curves show the relationship between per
capita consumption demand and per capita
income.
• There are various forms of Engel curves.
Linear C =  +  Y
Loglinear Log C =  +  Log Y
Semi log Log C =  +  Y
Log Inverse Log C =  +  / Y
Log Log Inverse Log C =  + 1 Log Y+ 2 / Y
• These are estimated on the basis of
consumption data obtained from the household
expenditure surveys.

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 5.9 Fitting of Engel Curves
Year T im e S ( R s . b ln ) Y ( R s . b ln )lo g ( s ) lo g ( Y )
2000 1 1200 2 1 0 4 3 7 .0 9 9 .9 5
2001 2 1300 2 2 9 6 0 7 .1 7 1 0 .0 4
2002 3 1400 2 4 5 1 0 7 .2 4 1 0 .1 1
2003 4 1550 2 6 9 0 0 7 .3 5 1 0 .2 0
2004 5 1680 2 9 5 1 4 7 .4 3 1 0 .2 9
2005 6 1800 3 2 4 6 5 7 .5 0 1 0 .3 9
 

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 5.10 Fitting of Engel Curves
Assumption: GR of income =10%, Income (Y) in
2006 = 1.10 x 32465 = 35712
Sales Projections for 2006
Linear 1998
Log-linear 2001
Semi log 2075
Log-inverse 1936
Type Linear Loglinear semilog log-inverse
α 77.17 -2.45 6.35 8.27
β 0.05 0.96 3.6E-05 -24916
R-SQ 0.994 0.995 0.984 0.998

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 5.11 Alternative Sales projections in
2006
Method Rs. Billion

1. Average growth rate (8.5%) 1953

2.Ave.sales intensity in GDP 2026
(0.0567)
3.Percapita sales (1.75) 1961
4.Sales elasticity w.r.t. GDP (0.93) 1967
4.Sales elasticity w.r.t. population 1935
(5)

5.Linear trend: 1059.5 + 122.6 T 1917

5. Exponential trend: exp 1969
Demand Projection- Prof.Tarun Das 23
(7.006+0.083 T)
 5.12 Alternative Sales projections in
2006
Engel Curves Rs. Billion

1. Linear St=77.17+0.05t 1998

Log-linear LogSt=- 2001

2.45+0.96Log(t)
Semi log logSt=6.35+0.00036t 2075

Log-inverse LogSt=8.27-24916/t 1936

Range of projections 1917 to
Demand Projection- Prof.Tarun Das
2075 24
6.1 Econometric Demand Functions

Econometric Demand Functions

help to establish statistical
relations between demand and
major factors that influence
demand.
 Demand functions can be
specified, calibrated, tested,
monitored, updated, simulated
and predicted with certain degree
of confidence.
Demand Projection- Prof.Tarun Das 25
6.2 Steps in Econometric Demand Analysis

Identify potential variables

 Have a sound theoretical basis
 Specify equations
 Identify equations
 Calibration of parameters
 Testing- Various goodness of fit
statistics- R-sq, -sq, Theil index
etc.
 Simulation, projections and
planning
 Monitoring, review and updating
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 6.3 General Empirical Demand Equation
D = a + b P + c Y+ d Pr + e N
Where D = demand of a good or service
P = Price of the good or service
Y = Consumer’s income
Pr = Price of a related good or service
N = A catch-all variable to take care of
omitted variables (could be time for time
series data)
b<0 for normal, b>0 for inferior good
c>0 for normal, b<0 for Giffen good
d>0 for substitute d<0 for complement

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6.4 Types of Econometric Models
a)Static (at a particular time period)
and dynamic (takes care of change
of time and business environment)
b) Consistent (consistency among the
systems equations), behavioral (on
the basis of consumers, producers
and traders behavior) and optimizing
(maximizing revenue, market share,
profits or minimizing costs etc.)
c) Partial equilibrium (deals with
specific good) or general equilibrium
(considers equilibrium in the whole
system)
d) sectoral model (deals with a sector)
or the economy-wide model (all
Demand Projection- Prof.Tarun Das 28
sectors)
 6.5 Types of Data
for Econometric Modeling
• Time series (over time- inter-temporal)
• Cross section (across consumers, regions,
countries etc. at a particular time)
• Pooled- Pooling of consumers and sectors
(All consumers in urban, rural and all
regions etc.)
• Panel - Combination of time series and
cross section data

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 6.6 Types of variables
Ct =  +  Yt +  Wt +  Ct-1 +  Dt+λ T
Dt = 1 if t is 1991 to 2003, 0 otherwise
• Endogenous variables (determined
within the model) Ct, Yt
• Exogenous/ predetermined variable
Wt
• Parameters  , , , , , λ
• Lagged variable Ct-1
• Instrumental variable Wt
• Dummy (binary, categorical,
indicative, qualitative, dichotomous)
variable Dt
• Catch all variable (Time T to take
care of all omitted variables)
Demand Projection- Prof.Tarun Das 30
7.1 General Agreements by Modelers
-1
• State your biases, intuitive arguments and
limitations of the model.
• Econometric equations provide guideposts
and should not be expected to produce
precise results.
• Econometric results should be supplemented
by qualitative judgements for useful policy
formulation and corporate planning.
• Social environment and political economy
may be treated as given in the model.
• Models should be tested rigorously for the
real world with full range of policies.

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7.2 General Agreements by Modelers
-2
• Sufficient resources should be used for
full documentation of the model, so that
any other group can test, calibrate and
run the model.
• Documentation should be clear and free
from jargons for general understanding
by the non-technical audience.
• Modelers should specify data sources
and share their data.
• It is necessary to continually review,
monitor, update, upgrade, and simulate
the model.
Demand Projection- Prof.Tarun Das 32
 7.3 “Let all the flowers
• flourish”
However, limited purpose model is better
than general purpose model.
• Descriptive model is better than
normative and subjective model.
• Policy oriented model is better than
general understanding model.
• Short run and medium term models are
better than long term models.
• Sectoral model is better than economy
wide model.
• To guess crucial missing data rather than
leaving out.
• Try to deal with future economic agents,
technology change, prices and
population.
Demand Projection- Prof.Tarun Das 33
 8.1 Review Questions
1. Why is demand forecasting essential for
corporate planning? Discuss critically the
different opinion poll methods for demand
forecasting.
2. Define leading indicators, coincidental
indicators and lagging indicators for demand
projections. What would be the appropriate
leading indicators, coincidental indicators
and lagging indicators for forecasting
demands for steel?
3. What is meant by an Engel curve?
Distinguish between time series, cross
section, pooled and panel data and their
uses for estimation of Engel curves.

Demand Projection- Prof.Tarun Das 34

 8.2 Review Questions
4. You are given the following data:
Year Car Sales GDP Population
(Million) (Rs. billion) (Million)
2004 10 100 1000
2005 11.5 110 1016
Further assume that GDP is expected to grow
at the rare of 10% and population at 1.5% in
2006. Forecast demand for cars in 2006 under
the following methods:
(a) Elasticity of demand with respect to GDP,
(b) Average demand intensity in GDP,
(c ) Average per capita demand for cars and
(d) Past growth rate of cars .

Demand Projection- Prof.Tarun Das 35

 Thank you
Have a Good Day

Demand Projection- Prof.Tarun Das 36