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DF- predicting future demand for a product Planning & scheduling production purchase of raw material, finances, ad. Sales forecasting-To avoid under or overproduction Inventory control- raw material, spare parts, semi finished parts, etc. Long term investment plans, growth plans Stability smoothening business operations through counter cyclical & seasonally adjusted business programmes. Economic planning & Policy making
Demand Forecasting
Micro level: Firm, specific product, etc Industry level: Demand forecasting for the industry- Industry association, Trade associations Macro level: Macro indicators such as agg demand, cons exp, etc
Forecasting Techniques
Qualitative forecasting is based on judgments of individuals or groups. Quantitative forecasting utilizes significant amounts of prior data as a basis for prediction. Nave forecasting projects past data without explaining future trends. Causal (or explanatory) forecasting attempts to explain the functional relationships between the dependent variable and the independent variables.
Forecasting Techniques
Economic Indicators: A barometric method of forecasting designed to alert business to changes in economic conditions.
Leading, coincident, and lagging indicators One indicator may not be very reliable, but a composite of leading indicators may be used for prediction.
Forecasting Techniques
Leading Indicators predict changes in future economic activity
Average hours, manufacturing Initial claims for unemployment insurance Manufacturers new orders for consumer goods and materials Building permits, new private housing units Stock prices, 500 common stocks Interest rate
Forecasting Techniques
Coincident Indicators identify peaks and troughs in economic activity
Employees on nonagricultural payrolls Industrial production Manufacturing and trade sales
b=
( X
t= 1 n
)(Y Y) X t
1
X ( X t )
t= 1
1 a =Y bX
T im e
1 1 1 1 1 1 1 1 1 11
n =1 1 X =
n n
Xt
11 1 11 11 11 11 11 11 11 11 111
1 X t = 11
t =1 n
Xt X
-1 -1 -1 1 -1 1 1 1 1 1
Yt Y
-1 -1 1 -1 -1 -1 1 1 1 1 11
X ) 1 = 11 X )(Yt Y ) = 111
( X t X )(Yt
11 11 1 1 1 1 1 1 11 11 111
Y ) ( X t X1 )
1 1 1 1 1 1 1 1 1 1 11
(X
t =1 n
X t 11 1 = =1 1 1 1 t =1 n
Y =
Yt 11 1 = =1 1 1 1 t =1 n
(X
t =1
X
t =1
n t =1 n
= 11 1
1
Y
t =1
= 11 1
Y =
Yt 11 1 = =1 1 1 1 t =1 n
(X (X
t =1
X ) = 11 X )(Yt Y ) = 111
1 = 11 1 1 b = .11 1 1
1 .111) a = 1 (1 1)( 1 = 1 1 .1
Statistical Method
Regression equation: linear, additive
Y = a + b1X1 + b2X2 + b3X3 + b4X4 Y: dependent variable, amount to be determined a: constant value, y-intercept Xn: independent, explanatory variables, used to explain the variation in the dependent variable bn: regression coefficients (measure impact of independent variables)
Regression Results
Regression Results
Negative coefficient shows that as the independent variable (Xn) changes, the quantity demanded changes in the opposite direction. Positive coefficient shows that as the independent variable (Xn) changes, the quantity demanded changes in the same direction. Magnitude of regression coefficients is measured by elasticity of each variable.
Regression Results
Steps for analyzing regression results
Check signs and magnitudes Compute elasticity coefficients Determine statistical significance
Forecasting:Regression Analysis
Year 1 1 1 1 1 1 1 1 1 1 1 X 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 Y 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
Scatter Diagram
Regression Analysis
Goodness of Fit
Correlation shows degree of concurrence.
r = 1 means perfect correlation. r = 0 means no correlation.
Goodness of fit
R2 = Variations Explained by Regression Total Variations of Y It seldom equals 0 or 100. R2 = 87.8 % means 87.8% of the variations are explained by the variations in independent variables covered in the equation.
Class activity
Forecast the demand for X for next two years by using least square method. Year Sales of X 1991 45 1992 56 1993 78 1994 46 1995 75