Demand Forecasting And Demand Analysis

Differences between demand estimation and demand forecasting

It can be noted that the business world is characterised by a lot of risk and uncertainty. Therefore, most business decisions are made under the conditions of risk and uncertainty. Thus businesses try to reduce the adverse effects of risk and uncertainty by acquiring knowledge of about the future demand prospects of its products (Dwivedi, 2009). Demand estimation attempts to quantify the links between the level of demand for a product and the variables which determine it while demand forecasting attempts to predict the level of sales at some future date (Davies and Lam, 2001). Demand estimates have to keep In view a time frame. Thus demand estimation becomes a short-tern demand forecast

It is quite important for a business enterprise to know the demand for its product. An existing unit must know current demand for its product in order to avoid underproduction or over production. The current demand should be known for determining pricing and promotion policies so that it is able to secure optimum sales or maximum profit. Management can also plan production capacity, and investment in fixed assets as these should be based on a precise estimate of demand for the firm’s product. Other managerial decisions such as the need to tap into new markets, inventorying of raw materials and investment strategies are all dependent on demand estimation. It has to be noted that for the purpose of estimating demand, a firm has to rely on past experiences to check on the reliability of the current demand estimates.

In practice the demand function of a firm or entity has to be estimated from empirical data. According to Wilkinson (2005:122) there are basically seven stages involved in estimation:

1. Statement of a theory or hypothesis.

This usually comes from a mixture of economic theory and previous empirical studies. For example the quantity demanded of a product by consumers depend more on the past price than current price. This tends to have effects on perfect knowledge, information costs, habit formation

Forecasting.

This is the ultimate focus of most econometric analysis. In this context there is an attempt to forecast sales, and may be producing many forecasts in the light of various possible scenarios.

Methods of demand estimation include market or consumer surveys, market experiments, sales force opinion, expert opinion and statistical methods. Several statistical methods are also used in demand estimation but the most common and useful method is regression analysis. According to Samuelson and Marks (2012), there are two main types of regression analysis: Ordinary Least-Squares Regression and Multiple Regression.

Another point of variation between Demand estimation and demand forecasting lie in the data sources. In demand estimation the firm’s records, Commercial and private agencies, government departments and agencies, and international agencies like the EU, OECD, WTO and the various UN agencies can be used as sources of data.

Demand