Business Economics Unit 2: Demand Forecasting Notes [FYUGP BCom 2nd Sem. Gauhati University]

 In this post, we have provided Gauhati University BCom 2nd Semester NEP FYUGP Business Economics Unit 2: Theory of Demand and Analysis CHAPTER 4: DEMAND FORECASTING Notes  with most important questions and previous year questions (PYQs). Each question is answered perfectly to help you boost your preparation to the next level.

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Unit 2: Theory of Demand and Analysis

CHAPTER 4: DEMAND FORECASTING

Short Answer Type Questions

1. What is demand forecasting? (GU BCom 2016, 2015, 2019)
Answer:
Demand forecasting is the process of estimating the future demand for a product or service based on past data, market trends, and other relevant factors. It helps businesses in production planning, inventory management, and decision-making.

2. State two types of forecasting.
Answer:
i) Short-term forecasting – It predicts demand for a short period, usually up to one year, and helps in managing daily operations.
ii) Long-term forecasting – It estimates demand for a longer period, typically beyond one year, and is useful for strategic planning and investment decisions.

3. State two points for the need for forecasting.
Answer:
i) It helps businesses in making informed production and inventory decisions.
ii) It reduces uncertainty and minimizes the risks associated with demand fluctuations.

4. State two purposes of forecasting.
Answer:
i) To facilitate better decision-making in production, pricing, and marketing strategies.
ii) To ensure efficient allocation of resources and reduce wastage.

5. Name the steps involved in forecasting.
Answer:
i) Identifying the objective of forecasting.
ii) Collecting relevant data.
iii) Selecting an appropriate forecasting method.
iv) Analyzing data and making predictions.
v) Evaluating and reviewing the forecast.

6. Name various methods of demand forecasting.
Answer:
i) Survey methods (e.g., consumer survey, expert opinion).
ii) Statistical methods (e.g., trend analysis, regression analysis).
iii) Market experiments.
iv) Delphi method.

7. Mention any two advantages of demand forecasting. (GU BCom 2024)
Answer:
i) It helps businesses in efficient resource allocation and cost reduction.
ii) It improves decision-making in areas like production, pricing, and marketing.

Long Answer Type Questions

1. "Sound judgment and experience of the forecaster cannot be replaced by any of the techniques of forecasting." Discuss.

Answer:  Forecasting is a crucial process in business decision-making, helping organizations predict future demand, sales, and market trends. While various statistical and analytical techniques are used for forecasting, the role of human judgment and experience remains irreplaceable.

i) Limitations of Mathematical Models – Forecasting techniques such as trend analysis, regression models, and market surveys rely on past data and assumptions. However, these models cannot always account for sudden market changes, economic shifts, or consumer behavior variations, which an experienced forecaster can recognize.

ii) Understanding Market Dynamics – An experienced forecaster understands consumer preferences, competitor strategies, and industry-specific factors, which may not always be captured in quantitative models.

iii) Adaptability to Uncertainty – External factors such as government policies, natural disasters, or global economic conditions can impact demand unpredictably. A forecaster with sound judgment can adjust predictions based on intuition and past experiences.

iv) Combination of Methods – Most organizations use a combination of statistical techniques and expert judgment. Even in methods like the Delphi technique, expert opinions are sought to refine statistical forecasts.

v) Case Example – Suppose an economic downturn occurs. A forecasting model may predict a steady demand trend based on past data, but an experienced forecaster might foresee a decline based on economic indicators and consumer sentiment analysis.

Thus, while forecasting techniques provide a structured approach, they should be complemented by the judgment and experience of the forecaster for more accurate predictions.

2. How will you go about forecasting the demand for a new product like plastic tea cups and saucers in the market? In this context, discuss the suitability of each technique of forecasting that you know.

Answer: Forecasting the demand for a new product like plastic tea cups and saucers is challenging due to the lack of historical data. However, several methods can be used:

i) Market Research Method – Conducting surveys and interviews with potential customers, retailers, and distributors can provide insights into expected demand. This method is suitable for new products as it directly assesses consumer preferences.

ii) Expert Opinion Method – Consulting industry experts, wholesalers, or marketing professionals can help predict demand based on their experience. The Delphi technique, where multiple experts provide independent forecasts, can refine predictions.

iii) Test Market Method – Introducing the product in a small, specific market and analyzing sales performance can help estimate future demand. This method is reliable but time-consuming and costly.

iv) Consumer Survey Method – Directly asking potential customers about their willingness to buy the product can provide valuable data. However, responses may not always translate into actual purchases.

v) Trend Projection Method – If similar products (e.g., plastic plates or disposable cups) have been introduced earlier, analyzing their sales trends can help forecast demand for plastic tea cups and saucers. However, since the product is new, its accuracy may be limited.

vi) Regression Analysis – If related products (such as disposable cups) have historical sales data, a regression model can be used to estimate the demand for plastic tea cups and saucers based on factors like price, income levels, and market size.

In conclusion, for a new product, primary research methods like market surveys, expert opinions, and test marketing are more suitable, while statistical techniques may have limited applicability due to the lack of past data.

3. Outline the trend projection method of demand forecasting.

Answer: The trend projection method is a widely used statistical technique for demand forecasting that relies on historical sales data to predict future demand. This method assumes that past trends will continue into the future.

Steps in Trend Projection Method

i) Collection of Data – Past sales data is gathered over a specific period.
ii) Plotting Data on a Graph – The data is plotted on a time-series graph to visualize trends. iii) Identifying the Trend Line – A trend line is fitted to the data, showing whether sales are increasing, decreasing, or stable.
iv) Choosing the Projection Method – Common methods include:

• Linear Trend Analysis – A straight-line equation is used when sales grow at a constant rate.

• Exponential Trend Analysis – Used when sales grow at an increasing rate.
  v) Forecasting Future Demand – The trend equation is extended to predict future sales.

Example : If the sales data for the last five years shows an increasing trend, a linear equation such as:
Y = a + bX (where Y is demand, X is time, a is the intercept, and b is the slope)  can be used to project demand for future years.

Advantages

i) Simple and easy to use if historical data is available.
ii) Helps in long-term demand forecasting.

Disadvantages

i) Assumes that past trends will continue, which may not always be true.
ii) Cannot account for sudden market changes or external factors.

The trend projection method is suitable for stable markets but may not be reliable for highly dynamic industries.

4. Discuss the different methods of demand forecasting.

Answer: Demand forecasting methods can be broadly classified into qualitative and quantitative techniques.

A. Qualitative Methods (Subjective Methods)

i) Survey Method – Directly collecting opinions from customers or experts to estimate future demand.

• Consumer Survey: Consumers are asked about their future purchasing plans.

• Expert Opinion: Industry specialists provide demand estimates.

ii) Delphi Method – A structured forecasting method where experts give independent predictions, and consensus is reached through multiple rounds.

iii) Market Experiment Method – A small-scale introduction of a product in select markets to study demand patterns before full-scale launch.

B. Quantitative Methods (Statistical Methods)

i) Trend Projection Method – Uses past sales data to identify trends and project future demand.

ii) Regression Analysis – Establishes relationships between demand and influencing factors (e.g., price, income, advertising).

iii) Moving Averages Method – Averages past sales over a specific period to smooth fluctuations and identify trends.

iv) Exponential Smoothing – Assigns more weight to recent data to make forecasts more responsive to recent changes.

Comparison of Methods

• Qualitative methods are useful when historical data is unavailable, such as for new products.

• Quantitative methods are preferred for products with stable historical sales patterns.

Conclusion

Different forecasting methods have their advantages and limitations. A combination of qualitative and quantitative techniques is often the best approach for accurate demand forecasting.

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