Demand:

In the ordinary usage, the term demand means desire for a thing but in economics, demand for
a product implies the following:

(i) desire of the consumer to buy the product.

(ii) adequate purchasing power to buy the product, that is, the capacity to buy.

(iii) willingness to buy the product.

Besides, the term demand for the product has always a reference to its quantity, price, period
of time and place. Any statement regarding the demand for a product without reference to all
these, is of little importance. Thus, for example, to say that the demand for television sets is
50,000 carries no meaning for a businessman nor it has any use in other kinds of economic
analysis. A meaningful statement of the demand for a product should contain information
regarding the quantity demanded, price, place and period of time. Thus, the complete statement
would be like this: the annual demand is for televison sets in Surat at the price of Rs. 12,000
per piece is 30,000 sets.

Demand Distinctions or Types of Demand :

The demand for goods can broadly the classified as follows:

1. Demand for consumer goods and demand for producer goods.

2. Demand for perishable goods and demand for durable goods.

3. Derived demand and autonomous demand.

4. Company demand and industry demand.

5. Demand by total market and demand by market segments.

6. Short run demand and long run demand.

We discusss below these various concepts in brief:

 1. Demand for Consumers' Goods and Demand for Producers' Goods:

Consumer goods are those goods which satisfy, human wants directly; these goods are used for
final consumption. Thus, for example, food items, ready made clothes, books, television sets,
video cassets and video games etc. are consumer goods. Demand for consumer goods is also
known as direct demand, for these goods are used directly for final consumption. The income
of the consumer is an important determinant of the demand for consumers' goods.

Consumer goods may be of two types: (a) perishable (b) durable

(a) Perishable consumer goods are those goods which can be used only once; for
example sweets, bread and milk, soft drinks, etc. The utility of the perishable consumer
goods gets exhausted in one use.

(b) Durable consumer goods are those goods which can be used more than once; for
example, furniture, refrigerator, car, umbrella, etc.

Producers' goods are those goods which are used for the production of other goods. These are
man-made means of production and are also called as investment goods or capital goods.
Demand for producers' goods is also known as derived demand, because these goods are not
demanded for final consumption but for further production of other goods.

Producers' goods can also be perishable and durable. Thus, for xample, coal, oil, raw materials,
etc. are perishable producers' goods hile machinery, equipment, plant, tools and implements
are urable producers' goods.

It should be noted here, that the distinction between consumer's and producers' goods is
somewhat arbitrary, because whether a good is a consumers' good or producers' good depends
upon its ise. Thus, for example, sugar when used in home to prepare tea is consumer good, but
when used in a factory to prepare confectiona ries is a producer good. However, this distinction
is useful because, among other factors, demand for consumer goods depend on the income of
the consumers, while that of producers' goods depends on the output of the industries using this
product as an input.
 2. Demand for Perishable Goods and Demand for Durable Goods:

Perishable goods or non-durable goods are those which can be consumed only once, that is,
their utility gets exhausted in one single use. Thus, as said earlier, food items, soft drinks,
sweets, etc. are examples of non-durable consumer goods, while coal, oil, raw materials,
packing items, etc. are instances of non-durable producers' goods.

Durable goods are those goods which can be used more than once over a period of time, that
is, these can be repeatedly or continuously used over a period of time. Thus, for example,
furniture, scooters, television sets, fountain pen, etc. are durable consumers' goods, while
machinery, plant, factory building, tools and implements, etc. are durable producers' goods.

This distinction between non-durable and durable goods is important, because demand for
durable goods presents more complicated problems than the demand for non-durable goods.
Thus, for example, demand for non-durable goods largely depends on current prices,
consumers' income, fashion etc. and is subject to frequent changes, while on the other hand
demand for durable goods depends upon the requirement to replace old durable goods and the
new demand coming from buyers whose incomes have gone up to enable them to buy such
goods. Besides, these factors, demand for durable goods also depends upon the maintenance
or operating costs; likewise, such a demand is substantially affected by changes in technology,
introduction of new and sophisticated designs etc. The demand for durable goods changes over
a relatively longer period.

Again, sale of non-durable goods are made largely to meet the current demand to meet the
current conditions, while sale of durable goods add to the stock of existing goods whose
services are consumed over a period of time. Thus, durable goods have two kinds of demand:
(a) replacement of old stock or replacement demand (b) expansion of total stock or expansion
demand. Their demand fluctuates with changes in business conditions. In short, durable goods
create demand for replacement as well as for expansion.

3. Autonomous Demand and Derived Demand :

Autonomous demand or direct demand for the product is that which arises independently of
the demand for any other product. These commodities are products demanded for satisfying
human wants directly, that is, they directly, satisfy human wants. Thus, for example, demand
for food, house, furniture, soap, tooth paste, television set, radio etc. may be taken as
autonomous demand. An autonomous demand may also arise as a result of 'demonstration
effect', rise in consumers' income, due to advertisements, etc. Autonomous demand generally
is demand for consumer goods or final goods and is also known as direct demand.

On the other hand, demand for a product that arises out of the demand for some other products
is known as derived demand; this demand depends upon the demand for other products. Thus,
when the demand for a product is tied to the demand for some 'patent product', it is known as
derived demand. For example, the demand for cement is a derived demand, because it is not
needed for its own sake, but for satisfying the demand for buildings. Likewise, the demand for
iron and steel, machinery, industrial raw materials, etc. is derived demand because these
products do not serve any direct need, but they help in the production of gocds, having direct
demand. Broadly, therefore, it can be said that demand for consumers' goods is a direct or
autonomous demand, while the demand for producers' goods or capital goods is derived
demand.

However, the distinction between autonomous demand and derived demand is not very strict
and clear, because in modern times, most demands are inter-related and it is difficult to come
across a product whose demand is wholly independent of all other demands. However, the
degree of this dependence varies widely from product to product. Thus, for example, demand
for a car will be direct demand when it is used as a private car, but it will be a derived demand
when it is used as a private taxi. Similarly, demand for food grains will be considered as a direct
demand when food grains are demanded and used by the consumers; but it will be derived
demand when it is needed by their employers to pay their workers.

Besides, it should also be noted that this distinction between autonomous demand and derived
demand is important in taking managerial decisions, because autonomous demand serves as an
indicator of derived demand. Thus, for example, rise in demand for food grains leads to an
increase in the demand for seeds, fertilisers, agricultural equipments, etc. whose demand is
derived. Likewise, an increase in the demand for housing facilities will lead to an increase in
the demand for steel, cement, bricks and other building materials whose demand again is a
derived one.

4. Company Demand and Industry Demand :

Company demand means the demand for the products of a particular firm, while industry
demand refers to the total demand for the product of a particular industry. Thus, for example,
the demand for toothpaste produced by colgate company is known as company demand, while
the demand for toothpaste produced by all companies taken together is known as industry
demand. Likewise, demand for steel produced by Tata Iron and Steel Company is called
company demand, while the demand for steel produced by all companies is known as industry
demand.

An industry comprises of all the firms or companies producing similar products which are close
substitutes to each other irrespective of differences in their brand names. Thus, for example,
producers of maruti car, ambassador car or premier padmini car or santro car or matiz car etc.
constitute the car industry in India, but various scooter companies are not part of this industry.
This is because, while the five types of cars mentioned above are close substitutes to each other,
scooters are only remote substitutes for cars.

A clear-cut understanding of the relationship between company demand and industry demand
can had by a study of the different market structures. Market structure is generally classified
on the basis of :

(a) number of sellers.

(b) degree of product differentiation. We can divide the market into the following broad
categories:

• Monopoly Market: Under monopoly since there is only one seller or one firm, the firm
itself is industry. Hence, under monopoly company demand is the same as industry
demand.
• Oligopoly Market: Here there are a few firms producing either standardised or
identical products or differentiated products. The former is known as homogeneous
oligopoly and the latter as differentiated oligopoly.
In the case of homogeneous oligopoly where products are identical, demand is highly
transferable among rivals. The company's demand, therefore, is influenced by the
actions of its rivals. Steel, aluminium, cement firms generally fall under this category.
In differentiated oligopoly, because of consumers' preferences for particular brands, the
demand for an individual company product is less closely related to the industry
demand. Here, price competition gives way to non-price competition like advertising,
 sales promotion, brand names etc., markets for cars, scooters, television sets, air-
conditioners etc. fall in this category.
• Perfect Competition: In perfect competition, company demand is totally divorced
from industry demand. Here, an individual firm can sell as much as it wishes at the
prevailing price, but can sell nothing at price even slightly higher than the ruling price.
In perfect competition, the output of an individual firm is a very small part of the total
output of the industry.
• Monopolistic Competition: In monopolistic competition, there are fairly a large
number of firms with differentiated products, the industry demand has little meaning.
The products of the rival firms are advertised like different products and so we have
only company demand for each brand of a product as in monopoly. Markets for
toothpastes, toilet soaps, textiles, etc. fall in this category.

5. Demand by Total Market & Demand by Market Segments:

Demand by total market refers to total demand for a product, where as demand by market
segments refers to demand in different segments of the market. Demand for product is to be
studied not only in its totality, but also by dividing it into different segments. It should be noted
here that a firm or an industry is not only interested in the total demand for its product but also
in the demand for its product in the different segments of the market, for example, in different
regions of the country, different uses for its product, different distribution channels etc. Each
of these segments may differ significantly from each other in respect to delivered prices, profit
margin, extent of competition, seasonal patterns, etc.

6. Short-Run Demand and Long - Run Demand:

Short-run demand refers to the current demand for the product and is immediately influenced
by factors like price changes, income changes etc. Long - run demand on the other hand is the
demand that exists over a period and is influenced by factors like change in technology, arrival
of new substitutes, improvement in the quality of the existing products, changes in the size and
composition of population etc. As Joel Dean has very aptly put it, "Short run demand refers to
demand with its immediate reaction to price. changes, income flucutations, etc., where as long
run demand is that which will ultimately exist as a result of the changes in pricing, promotion
or product improvement, after enough time is allowed to let the market adjust itself to the new
situation".

Thus, for example, if price reduction is made in the case of a particular product, then in the
short run its demand will increase due to the larger use of this product by the existing
consumers, while in the long run, its demand will increase even more when new consumers
also start using this relatively cheaper product and old consumers find new uses of this product.
Again, in the short run the firm will try to meet the increased demand for the product by
increasing the quantum of variable factors and by a more and better utilisation of the existing
productive capacity of the firm, while in the long run the demand will be met by increasing the
size of the firm, entry of new firms, invention of substitutes, by importing the product etc.

The Law of Demand :

The law of demand states functional relationship between the price of the product and its
demand, and this relationship is inverse in nature. The law states that, "other things being equal,
at any given time, the amount demanded increases with a fall in price and diminishes with a
rise in price". In other words, according to the law of demand, a rise in the price of a product
leads to a fall in its demand and a fall in price leads to a rise in its demand.

The law can be illustrated with the help of a demand schedule and a demand curve.

Demand Schedule

Price of Product x (Rs.) Demand of Product x

5 10
4 15
3 20
2 25
1 30

Demand Curve:

A demand curve is a locus of points showing various alternative price-quantity combinations.

It shows the quantities of a product which the consumers would buy at different prices per unit
of time. We draw below an individual demand curve:
In this diagram, along OX we have measured the quantity demanded and along OY the price
of the product.

With every fall in the price of the product, the quantity demanded increases; DD is the demand
curve.

The price-quantity relation can also be expressed algebrically in the form of the following
equation :

Dx = f (p)

Here, Dx = is the demand for product X

F = is function and

P = is the price of the product

Source: Demand Curves: What Are They, Types, and Example ([Link])

Reasons for the Downward Slope of the Demand Curve:

If we study the slope of the demand curve, we shall find that it is a downward sloping curve
from left to right except in the case of inferior goods and certain other exceptions. This is
because of the following reasons:

(1) Negative Substitution Effect: We know that when the price of a commodity falls, it
becomes relatively cheaper than other commodities and therefore the consumer substitutes it
for other commodities and accordingly its demand goes up. Thus, substitution effect is always
negative. Now this negative relationship between the price of the commodity and its demand
can be expressed only by a curve which is convex to the origin, that is, which slopes downwards
to the right.

(2) Negative Income Effect in case of Superior Goods: Likewise, a fall in the price of the
commodity leads to an increase in the real income of the consumer and therefore he buys more
of this commodity or any other commodity. The income effect is negative for superior goods
which explains the downward slope of the demand curve. However, in case of inferior goods,
the income effect is positive and hence we get an exceptional demand curve sloping upwards.

(3) Marginal consumers who were not upto this time in a position to buy that commodity
because of its high price, now start buying it due to a fall in its price. This increases the demand
for that commodity.

(4) When a commodity has a number of uses, its demand rises due to a fall in its price and
vice-versa. For example, electricity is used only for lighting purposes when it is expensive, but
when it becomes cheap it is used for heating, cooking, etc; other examples are milk, potatoes,
etc.

(5) Unequal distribution of income is yet another cause. Those with high incomes buy a
commodity even though the price is high. But when the price falls, those with low incomes
also buy that commodity

Elasticity of Demand

The elasticity of demand measures the relative change in the total amount of goods
or services that are demanded by the market or by an individual. The quantity
demanded depends on several factors. Some of the most important factors are the price
of the good or service, the price of other goods and services, the income of the
population or person and the preferences of the consumers.
So, we have several types of elasticity of demand according to the source of the
change in the demand. For example, if the price is the source of the change, we have
the “price elasticity of demand”.

According to the source of the change, the following types of elasticity of demand can
be mentioned:
 1. Price Elasticity of Demand
2. Cross Elasticity of Demand (the elasticity in relation to the change of the price of other
goods and services)
3. Income Elasticity of Demand
4. Advertisement Elasticity of Demand (the elasticity in relation to the
advertisement expenditure)

1. Price Elasticity of Demand

The change in the quantity demanded of a product due to a change in its price is known as price
elasticity of demand. Thus, the sensitiveness or responsiveness of demand to a change in price
is as called elasticity of demand. It measures the degree of responsiveness of the quantity
demanded of a product due to a change in its price. In short, price elasticity of demand is a
device to measure the rate of change in the quantity of a product demanded in response to a
change in its price.

The price elasticity of demand is the proportional change in the quantity demanded, relative to
the proportional change in the price of the good.
 Percentage change in quantity demanded
Price elasticity of demand =
Percentage change in price
Example: If the price of an ice cream cone increases from $2.00 to $2.20 and the amount
you buy falls from 10 to 8 cones, then your elasticity of demand would be calculated as:

(10 − 8)
 100 20%
10 = =2
(2.20 − 2.00) 10%
 100
2.00

Types of price elasticity of demand:

1. Perfectly Elastic Demand:( Ed → -∞ ):

When the demand for a product changes - increases or decreases even when there is no
change in price, it is known as perfectly elastic demand. The demand curve here is a
straight line parallel to X-axis, which indicates that demand changes even though the
price remains unchanged. This is shown in below Figure-1 where DD is the demand
curve which is parallel to X - axis.

2. Relatively Elastic Demand (Ed > 1):

When the proportionate d change in demand is more than the proportionate change in
price, it is known as relatively elastic demand. Thus, for example, if the price of the
product changes by 5 percent and demand changes by say 8 percent, it is a case of
relatively elastic demand.
3. Elasticity of Demand Equal to Unity (Ed=1):
When the proportionate change in demand is equal to proportionate change in price, it
is known as unitary elastic demand. Thus, for example, if a 5 percent change in price
brings about a 5 percent change in demand, we shall say that the elasticity of demand
is unity.

4. Relatively Inelastic Demand (Ed < 1):

When the proportionate change in demand is less than proportionate change in price, it
is known as relatively inelastic demand. Thus, for example, if the price of the product
changes by 5 percent but demand changes say, only by 3 percent, it is case of relatively
inelastic demand.
5. Perfectly Inelastic Demand (Ed = 0):
When a change in price, howsoever large, causes no change in the quantity demand, it
is known as perfectly inelastic demand. The shape of this demand curve is vertical
parallel to Y-axis which indicates that there is no change in demand even though there
is change in price.

2. Income Elasticity of Demand:

Income elasticity of demand refers to the sensitivity of the quantity demanded for a
certain good to a change in the real income of consumers who buy this good.
The formula for calculating income elasticity of demand is the percent change in
quantity demanded divided by the percent change in income.

Percentage change
in quantity demanded
Income elasticity of demand =
Percentage change
in income

With income elasticity of demand, you can tell if a particular good represents a necessity
or a luxury.
Inferior Goods vs. Normal Goods
Depending on the values of the income elasticity of demand, goods can be broadly
categorized as inferior and normal goods. Normal goods have a positive income
elasticity of demand; as incomes rise, more goods are demanded at each price level.
Normal goods whose income elasticity of demand is between zero and one are typically
referred to as necessity goods, which are products and services that consumers will buy
regardless of changes in their income levels. Examples of necessity goods and services
include tobacco products, haircuts, water, and electricity.

As income rises, the proportion of total consumer expenditures on necessity goods

typically declines. Inferior goods have a negative income elasticity of demand; as
consumers' income rises, they buy fewer inferior goods. A typical example of such a
type of product is margarine, which is much cheaper than butter.

Furthermore, luxury goods are a type of normal good associated with income elasticities
of demand greater than one. Consumers will buy proportionately more of a particular
good compared to a percentage change in their income. Consumer discretionary
products such as premium cars, boats, and jewellery represent luxury products that tend
to be very sensitive to changes in consumer income. When a business cycle turns
downward, demand for consumer discretionary goods tends to drop as workers become
unemployed.

Types of Income Elasticity of Demand:

1. Positive income elasticity of demand :

If there is direct relationship between income of the consumer and demand for the
commodity, then income elasticity will be positive. That is, if the quantity demanded
for a commodity increases with the rise in income of the consumer and vice versa, it is
said to be positive income elasticity of demand. For example: as the income of
consumer increases, they consume more of superior (luxurious) goods. On the contrary,
as the income of consumer decreases, they consume less of luxurious goods.

In the below figure, the slope of the curve is upward from left to right, which indicates
that the increase in income causes increase in demand and vice versa. Therefore, in such
a case, the elasticity of demand is positive.
 Positive income elasticity can be further classified into three types:

• Income elasticity greater than unity (EY > 1)

If the percentage change in quantity demanded for a commodity is greater than percentage
change in income of the consumer, it is said to be income greater than unity. For example:
When the consumer’s income rises by 3% and the demand rises by 7%, it is the case of
income elasticity greater than unity.

• Income elasticity equal to unity (EY = 1)

If the percentage change in quantity demanded for a commodity is equal to percentage

change in income of the consumer, it is said to be income elasticity equal to unity. For
example: When the consumer’s income rises by 5% and the demand rises by 5%, it is the
case of income elasticity equal to unity.

• Income elasticity less than unity (EY < 1)

If the percentage change in quantity demanded for a commodity is less than percentage
change in income of the consumer, it is said to be income greater than unity. For example:
When the consumer’s income rises by 5% and the demand rises by 3%, it is the case of
income elasticity less than unity.
 2. Negative income elasticity of demand ( EY<0)
If there is inverse relationship between income of the consumer and demand for the
commodity, then income elasticity will be negative. That is, if the quantity demanded
for a commodity decreases with the rise in income of the consumer and vice versa, it is
said to be negative income elasticity of demand. For example:
As the income of consumer increases, they either stop or consume less of inferior goods.

3. Zero income elasticity of demand ( EY=0):

If the quantity demanded for a commodity remains constant with any rise or fall in
income of the consumer and, it is said to be zero income elasticity of demand. For
example: In case of basic necessary goods such as salt, kerosene, electricity, etc. there
is zero income elasticity of demand.
Figure shows that when income increases from, then also the demand for goods is
remain same. In Figure, the slope of the curve is parallel to Y-axis (income side), which
indicates that the increase in income causes no effect in demand. Therefore, in such a
case, the elasticity of demand is zero.
3. Cross Elasticity of Demand:

The cross elasticity of demand is an economic concept that measures the responsiveness in
the quantity demanded of one good when the price for another good changes. It's also
referred to as cross price elasticity of demand.

This measurement is calculated by taking the percentage change in the quantity demanded
of one good and dividing it by the percentage change in the price of the other good.

Types of Cross Elasticity of Demand:

Cross price elasticity of demand can be negative, positive, or zero.
Negative Cross Price Elasticity of Demand:
The cross price elasticity of demand will be negative when two goods are complements.
Complementary products are goods that are consumed together. If the price of one good
goes down, demand for its complement will increase and vice versa. The quantity change
in one good and the price change in the second good will always move in opposite
directions for complements. This is what makes the cross price elasticity negative.
As an example, think of peanut butter and jelly. Because these goods are frequently
consumed together, if the price of jelly falls, consumer demand for peanut butter will
increase. If the price of jelly goes up, consumer demand for peanut butter will decrease.

Positive Cross Price Elasticity of Demand

Cross price elasticity of demand will be positive when two goods are substitutes.
Substitute goods are goods used to satisfy the same demand. If the price of a good goes
down, demand for its substitute will decrease and vice versa. In this way, the quantity
change and the price change will always move in the same direction for substitutes. This is
what makes the cross price elasticity positive.
As an example, think of Pepsi and Coca-cola. If you assume the two brands of soda are
substitutes, if the price of Coke falls, consumer demand for Pepsi will fall because more
consumers will choose to buy Coke over Pepsi. If the price of Coke increases, demand for
Pepsi will increase as consumers shift away from Coke and start buying more Pepsi.

When Cross Price Elasticity of Demand Is Zero:

Cross price elasticity of demand will be zero when two goods are unrelated.
When two goods are unrelated, the price of one good should have no effect on demand for
the other. This is why the cross price elasticity of two unrelated goods will be zero.
4. Advertisement Elasticity of Demand:

The advertisement elasticity of demand is a degree of responsiveness of a change in the

sales of a product with respect to a proportionate change in advertisement expenditure.

Every organisation spends a certain amount on advertisement and other promotional

activities with an aim to create awareness among customers and boost sales. The
effectiveness of elasticity of demand decides the sales of an organisation. Thus, is it
important for the organisation to determine how advertisements affect its sales.

By measuring the advertisement elasticity of demand, an organisation can determine

optimum level of advertisement expenditure under various situations, such as
government’s restrictions on the cost of advertisement and high competition.

Percentage Change in quantity demanded

eA = —————————————————————–
Percentage Change in advertisement cost
Demand Forecasting:
Central Theme of Study:
Risk and uncertainties are always associates with a business. These risk and
uncertainties can minimize the planning and forecasting. The success of a business firm
digs any upon its ability to forecast future events. Future is uncertain. The is great deal
of uncertainty with regard to demand. Since the demand is uncertain, production, cost,
revenue, profit etc. are also uncertain Through forecasting it is possible to minimize the
uncertainties.
Meaning Of Demand Forecasting:
Demand forecasting is an estimate of future demand. It cannot be hundred percent
precise. But it gives a reliable approximation regarding the possible outcome, with a
reasonable accuracy. It is based on the mathematical laws of probability. Forecasting
simply refers to estimating or anticipating future events. It is an attempt to foresee the
future by examining the past. Thus, demand forecasting mean estimating or anticipating
future demand on the basis of past data.
According to American marketing association demand forecasting means 'An estimate
of sales in dollars or physical units for a specified future period under a proposed
marketing plan."
Demand forecasting is the scientific and analytical estimation demand for a product on
a particular period of time. It is the process of determining how much of what products
are needed when and where.
Forecasting is like trying to drive a car blind-folded and following action given by
person who is looking out of the back-window."

Types of Demand Forecasting:

From the time span and planning requirements point of view, demand forecasting can
be classified under two headings:
• Short-term demand forecasting
• Long-term demand forecasting

Short-term Demand Forecasting:

Short-term forecasting is limited to short periods, usually not exceeding a year. It relates
to policies regarding sales, purchasing. and finances. Knowledge of immediate future
conditions is important in pricing. If prices of are expected to go up or shortage is
expected, businessman may take advantage of the rise by earlier buying. Proper price
forecasting may, thus help the firm in reducing the cost of operation. Demand
forecasting is also useful to the businessman in determining his price policy. An
increase of prices is avoided when future market conditions are not expected to be good
and the lowering of prices is avoided when costs or sales levels are likely to rise
considerably.

Long-term Demand Forecasting:

In short-term forecasting a company is concerned only about the use of its existing
production capacity. But when questions of long-term planning are involved, the
businessman must know something about the long term demand for this product. Thus,
the planning of a new production, unit or the expansion of an existing unit must start
with an analysis long-term demand potential of the products. the longer the term
covered by the prediction, the more likely it is that unanticipated events such as
international conflicts including wars, periods of major depression and prosperity and
inventions technological advances will upset the calculation. It is the function of the
top management in each firm to make it ow decision regarding the span of time to be
covered by demand forecast. It is safer to forecast for longer periods, when the volume
of demand.

Criteria of Good Forecasting Method:

A good forecast should satisfy the following criteria:
1. Time Frame
The first factor that can influence the choice of forecasting is the time frame of the
forecasting situation. Forecasts are generally for points in time that may be a number
of days, weeks, months, quarters, or years in the future. This length of time is called the
time frame or time horizon. The length of the time frame is usually categorized as
Immediate, Short term, medium or long term. In general, the length of the time frame
will influence the choice of the forecasting technique. Typically, a longer time frame
makes accurate forecasting more difficult with qualitative forecasting techniques
becoming more useful as the time frame lengthens.
2. Pattern of the Data
The pattern of the data must also be considered when choosing a forecasting model.
The components present i.e., trend, cycle, season or some combination of these will
help the model that will be used. Thus, it is extremely important to identify the existing
data pattern.

3. Cost of Forecasting:
Though the firm is interested in accurate forecasts, the benefits of accurate results must
be weighed against the cost of the method. While choosing a forecasting technique,
several costs are relevant First, the cost of developing the model must be considered.
Second the cost of storing the necessary data must be considered. Some forecasting
methods require the storage of a relatively small amount of data, while other methods
require the storage of large amounts of data. Last, at the cost of the actual operation of
the forecasting technique is obviously very important. Some forecasting methods are
operationally simple, while others are very complex. The degree of complexity can
have a definite influence on the total cost of forecasting

4. Accuracy Desired:
Accuracy in forecasting is very important. The previous method must be checked for
want of accuracy by observing that the predictions made in the past are accurate or not.
The accuracy of past forecasting can be checked against present performance and of
present forecasts against future performance. In some situations, a forecast that is in
error as 20% it may be acceptable. In other situations, a forecast that is in error by 1%
might be disastrous. The accuracy that can be obtained using any particular forecasting
method is always an important consideration.

5. Availability of Data:
Immediate availability of data is an important requirement and the method employed
should be able to produce good results quickly. The technique which takes much time
to produce useful information is of no use. Historical data on the variable of interest are
used when quantitative forecasting methods are employed. The availability of this
information is a factor that may determine the forecasting method to be used. Since
various forecasting methods require different amounts of historical data, the quantity of
data available is important. Beyond the and the timeliness of the data that are available
must be examined, since the use of inaccurate or outdated historical data will obviously
yield inaccurate predictions. If the needed historical data are not available, special data-
collection procedures may be necessary.

6. Simplicity and understanding:

The ease with of forecasting method being operated and understanding is important.
Management must be able to understand and have confidence in the technique used. It
has to understand clearly how the estimate was made. Mathematical and statistical
techniques should be avoided if the management cannot understand what the forecaster
does. Managers are held responsible for the decisions they make and if they are to be
expected to base their decisions on predictions, they must be able to understand the
techniques used to obtain these predictions. A manager simply will not have confidence
in the predictions obtained from a forecasting technique he or she does not understand,
and if the manager does not have confidence in these predictions, they will not be used
in the decision-making process. Thus, the managers understanding of the forecasting
system is of crucial importance.

7. Durability:
The forecast should be durable and should not be changed frequently. The durability
of the forecasts depends on the simplicity and ease of comprehension as well as on
continuous link between the past and the present and between present and the future.

8. Flexibility:
The technique used in forecasting must be able to accommodate and absorb frequent
changes occurring in the economy.

Methods of Demand Forecasting:

There are several methods to predict the future demand. methods can be broadly
classified into two.
• Survey methods,
• Statistical methods

• Survey Methods
Under this method surveys are conducted to collect information about the future
purchase plans of potential consumers. Survey methods help in obtaining information
about the desires, likes and dislikes of consumers through collecting the opinion of
experts or by interviewing the consumers. Survey methods are used for short term
forecasting. Important survey methods are,
(a) Consumers interview method
(b) Collective opinion or sales force opinion method
(c) Experts’ opinion method
(d) Consumers clinic
(e) End use method.

1. Consumers' Interview Method (Consumers survey):

Under this method, consumers are interviewed directly and asked the quantity they
would like to buy. After collecting the data, the total demand for the product is
calculated. This is done by adding up individual demands. Under the consumer
interview method, either all consumers or selected few are interviewed. When all the
consumers are interviewed, the method is known as complete enumeration method.
When only a selected group of consumers are interviewed, it is known as sample survey
method
Advantages
1. It is a simple method because it is not based on past record.
2. It suitable for industrial products.
3. The results are likely to be more accurate.
4. This method can be used for forecasting the demand of a new product.
Disadvantages
1. It is expensive and time consuming.
2. Consumers may not give their secrets or buying plans.
3. This method is not suitable for long term forecasting.
4. It is not suitable when the number of consumers is more.

2. Collective Opinion Method:

Under this method the salesmen estimate the expected sales in ser respective territories
on the basis of previous experience. Then and is estimated after combining the
individual forecasts (sales amates) of the salesmen. This method is also known as sales
force Tion method.
Advantages
1. This method is simple.
2. It is based on the firsthand knowledge of salesmen.
3. This method is particularly useful for estimating demand of new products.
4. It utilises the specialised knowledge of salesmen who are in close touch with the
prevailing market conditions.
Disadvantages
1. The forecasts may not be reliable if the salespeople are not trained.
2. It is not suitable for long period estimation.
3. It is not flexible.
[Link] may give lower estimates that make possible easy achievement of sales
quotas fixed for each salesman.

3. Experts' Opinion Method:

This method was originally developed at Rand Corporation in 1950 by Olaf Daley and
Gordon. Under this method, demand is estimated on the basis of opinions of experts
and distributors other than salesmen and ordinary consumers. This method is also
known 'Delphi method". Delphi is the ancient Greek temple where people come and
prey for information about their future.
Advantages:
1. Forecast can be made quickly and economically
2. This is a reliable method because estimates are made on the basis of knowledge and
experience of sales experts.
3. The firm need not spare its time on preparing estimates of demand.
4. This method is suitable for new products.
Disadvantages
1. This method is expensive.
2. This method sometimes lacks reliability.

4. Consumer Clinics:
In this method some selected buyers are given certain amounts of money and asked to
buy the products. Then the prices are and the consumers are asked to make fresh
purchases with the given money. In this way the consumers responses to price changes
are observed. Thus, the behaviour of the consumers is studied. On this basis demand is
estimated. This method is an improvement over consumer's interview method.
Advantages:
1. It provides an opportunity to study the behaviour of consumers directly.
2. It provides reliable and realistic picture about future demand.
3. It gives useful information to aid in the decision- making process.
Disadvantages
1. It is a time -consuming method.
2. Selecting the participants is very difficult.
3. It is expensive.
4. Consumers may take it as a game. They may not reveal their preferences.

5. End Use Method:

This method is based on the fact that a product generally has different uses. In the end
use method, first a list of end users (final consumers, individual industries, exporters
etc.) is prepared. Then the future demand for the product is found either directly from
the end users are indirectly by estimating their future growth.

• Statistical methods
Statistical methods use the past data as guide for knowing the vela of future demand.
Statistical methods are generally used for long end forecasting. These methods are used
for products. Statistical methods include:
(a) Trend projection method
(b) Regression and correlation
(c) Extrapolation method
(d) Simultaneous equation method
(e) Barometric method

1. Trend Projection Method:

Future sales are based on the past sales, because future is the grand-child of the past
and child of the present. Under the trend projection method demand is estimated on the
basis of analysis of past data. This method makes use of time series (data over a period
of time). We try to ascertain the trend in the time series. The trend in the time series can
be estimated by using any one of the following four methods:
(a) Least-square method,
(b) Free-hand method,
(c) Moving average method and
(d) semi-average method.

2. Regression and Correlation:

These methods combine economic theory and statistical technique of estimation. Under
these methods the relationship between the sales (dependent variable) and other
variables (independent variables such 5 prices of related goods, income, advertisement
etc.) are ascertained. Such relationship established on the basis of past data may be used
to analyse the future trend. The regression and correlation analysis are also called the
econometric model building.

3. Extrapolation:
Under this statistical method, the future demand can be extrapolated by applying
binomial expansion method'. This method in used on the assumption that the rate of
charge in demand in the past has been uniform.

4. Simultaneous Equation Method:

This involves the development of a complete econometric model which can explain the
behaviour of all the variables which the company can control. This method is not very
popular.

5. Barometric Technique:
This is an improvement over the trend projection method. According to this technique
the events of the present can be used to predict the directions of change m the future.
Here certain economic and statistical indicators from the selected time series are used
to predict variables. Personal income, non-agricultural placements, gross national
income, prices of industrial materials, wholesale commodity prices, industrial
production, bank deposits etc. are some of the most commonly used indicators.
Advantages of Statistical Methods:
(1) The method of estimation is scientific
(2) Estimation is based on the theoretical relationship between sales (dependent and
price, advertising, income etc. (Independent variables)
(3) These are less expensive.
(4) Results are relatively more reliable.

Disadvantages of Statistical Methods

(1) These methods involve complicated calculations.
(2) These do not rely much on personal skill and experience.
(3) These methods require considerable technical skill and experience in order to be
effective. Supply Analysis