Managerial Economics in a

Global Economy, 5th Edition

by
Dominick Salvatore
Chapter 5
Demand Forecasting

Prepared by Robert F. Brooker, Ph.D.

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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
Prepared by Robert F. Brooker, Ph.D.

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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

Prepared by Robert F. Brooker, Ph.D.

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Prepared by Robert F. Brooker, Ph.D.

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Trend Projection
Linear Trend:
St = S0 + b t
b = Growth per time period
Constant Growth Rate
St = S0 (1 + g)t
g = Growth rate
Estimation of Growth Rate
lnSt = lnS0 + t ln(1 + g)
Prepared by Robert F. Brooker, Ph.D.

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Seasonal Variation
Ratio to Trend Method
Actual
Ratio =
Trend Forecast
Seasonal
Average of Ratios for
=
Adjustment
Each Seasonal Period
Adjusted
Forecast

Trend
= Forecast

Prepared by Robert F. Brooker, Ph.D.

Seasonal
Adjustment

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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

Year
1992.1
1993.1
1994.1
1995.1

Trend
Forecast
Actual
12.29
11.00
13.87
12.00
15.45
14.00
17.02
15.00
Seasonal Adjustment =

Prepared by Robert F. Brooker, Ph.D.

Ratio
0.8950
0.8652
0.9061
0.8813
0.8869

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Moving Average Forecasts

Forecast is the average of data from w
periods prior to the forecast data point.
w

At i
Ft
i 1 w

Prepared by Robert F. Brooker, Ph.D.

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Exponential Smoothing
Forecasts
Forecast is the weighted average of of
the forecast and the actual value from
the prior period.
Ft 1 wAt (1 w) Ft

0 w 1
Prepared by Robert F. Brooker, Ph.D.

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Root Mean Square Error

Measures the Accuracy
of a Forecasting Method

RMSE

(A F )
t

Prepared by Robert F. Brooker, Ph.D.

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Barometric Methods

National Bureau of Economic Research

Department of Commerce
Leading Indicators
Lagging Indicators
Coincident Indicators
Composite Index
Diffusion Index

Prepared by Robert F. Brooker, Ph.D.

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Econometric Models
Single Equation Model of the
Demand For Cereal (Good X)
QX = a0 + a1PX + a2Y + a3N + a4PS + a5PC + a6A + e
QX = Quantity of X

PS = Price of Muffins

PX = Price of Good X

PC = Price of Milk

Y = Consumer Income

A = Advertising

N = Size of Population

e = Random Error

Prepared by Robert F. Brooker, Ph.D.

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Econometric Models
Multiple Equation Model of GNP
Ct a1 b1GNPt u1t
I t a2 b2 t 1 u2t
GNPt Ct I t Gt

Reduced Form Equation

Gt
a1 a2 b2 t 1

GNPt

1 b1

Prepared by Robert F. Brooker, Ph.D.

b1

1 b1

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Input-Output Forecasting
Three-Sector Input-Output Flow Table
Producing Industry
Supplying
Industry
A
B
C
Value Added
Total

A
20
80
40
60
200

B
60
90
30
120
300

C
30
20
10
40
100

Prepared by Robert F. Brooker, Ph.D.

Final
Demand
90
110
20

Total
200
300
100
220

220

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Input-Output Forecasting
Direct Requirements Matrix
Direct
Requirements

Input Requirements
Column Total
Producing Industry

Supplying
Industry
A
B
C

A
0.1
0.4
0.2

B
0.2
0.3
0.1

Prepared by Robert F. Brooker, Ph.D.

C
0.3
0.2
0.1

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Input-Output Forecasting
Total Requirements Matrix
Producing Industry
Supplying
Industry
A
B
C

A
1.47
0.96
0.43

B
0.51
1.81
0.31

Prepared by Robert F. Brooker, Ph.D.

C
0.60
0.72
1.33

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Input-Output Forecasting
Total
Requirements
Matrix
1.47
0.96
0.43

0.51
1.81
0.31

Final
Total
Demand Demand
Vector
Vector

0.60
0.72
1.33

Prepared by Robert F. Brooker, Ph.D.

90
110
20

200
300
100

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Input-Output Forecasting
Revised Input-Output Flow Table
Producing Industry
Supplying
Industry
A
B
C

A
22
88
43

B
62
93
31

C
31
21
10

Prepared by Robert F. Brooker, Ph.D.

Final
Demand
100
110
20

Total
215
310
104

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