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FORECASTING & PREDICTION

• Forecasting is a process of estimating a future event by using
past data. The past data are systematically analyzed in a
predetermined way to obtain estimate of the future.
• Forecasts can only be made when past data exist

• Prediction is a process of estimating a future event based on

subjective considerations other than just past data. The
subjective considerations need not be combined in a
predetermined way.
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FORECASTING & PREDICTION

• An established TV manufacturer, for example, can use past
data to forecast the number of sets required for next week’s
TV manufacturing. Similarly, a fast-food restaurant can use
past data to forecast the number of burger buns required for
this weekend’s operations. But suppose the manufacturer
offers a new TV model or the restaurant decides to offer a
new food service. Since no past data exist to estimate first
year sales of the new products, prediction, not forecasting, is
required.
• For predicting, good subjective estimates can be based on the
manager’s skill, experience, and judgment; but forecasting
requires statistical and management science techniques.
• In business in general, when people speak of forecasts, they
usually mean some combination of both forecasting and
prediction. Commonly, forecasting is substituted freely for
“economic forecasting” which implies some combination of
objective calculations and subjective judgments.

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FORECASTING TECHNIQUES
1 - Simple Average

• In Table (next slide), the usage of photocopier paper by the

reproduction department of UMT is presented.
• Suppose it is necessary to predict the requirement for paper in order
to manage its procurement more effectively.
• The best estimate of the requirement for week 2 is simply the usage
in week 1, i.e. 132.
• At the end of week 2, it is possible to estimate the requirement for
week 3 as the average of the first two weeks’ actual requirement, i.e.
147.5.
• The estimate for week 4, at the end of week 3, would then become
155.3, until the end of week 24, when the estimate for the
requirement for week 25 is the average of all the requirements to
date.

WEEK REAM USED WEEK REAM USED

1 132 13 152
2 163 14 170
3 171 15 131
4 148 16 153
5 135 17 137
6 162 18 172
7 107 19 122
8 144 20 142
9 127 21 189
10 193 22 138
11 142 23 161
12 163 24 133

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FORECASTING TECHNIQUES
2 - Moving Average
• In simple averages method, it is the disadvantage that as the process continues,
there is more and more data to store, and all are given equal weights in
estimating the demand in the next period.
• It is possible to get round this, by introducing the idea of a moving average, only
including a fixed number of the most recent values.
• Considering a 5-point moving average, the forecast for week 6 is simply, 132 + 163
+ 171 + 148 + 135 = 749/5 = 149.8.
• When the requirement for week 6 is known, it is possible to forecast the
requirement for week 7 as the average of the 5 most recent values: 163 + 171 +
148 + 135 + 162 = 779/5 = 155.8. Alternatively, note that 132 was dropped and
162 was added.
• The remainder of the values, together with the forecasts based on an 11-point
moving average, are presented in last column of the Table.

WEEK REAM USED FORECAST REAMS FORECAST REAMS

(USED 5-POINT MOVING (USED 11-POINT MOVING
AVERAGE) AVERAGE)
1 132
2 163
3 171
4 148
5 135
6 162 149.8
7 107 155.8
8 144 146.6
9 127 139.2
10 193 135.0
11 142 146.6
12 163 142.6 147.6
13 152 153.8 150.4
14 170 155.4 149.4
15 131 164.0 149.3
16 153 151.6 147.8
17 137 153.8 149.4
18 172 148.6 147.2
19 122 152.6 153.1
20 142 143.0 151.1
21 189 145.2 152.5
22 138 152.4 152.1
23 161 152.6 151.7
24 133 150.4 151.6
25 ? 152.6 149.8

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FORECASTING TECHNIQUES

3- Weighted Moving Average

• A minor modification to the above approach is to avoid giving equal
weight to all values in the moving average.
• Suppose, it was considered desirable to give more emphasis to more
recent values. For the 5-point moving average example, it is possible to
choose weights of: 0.4, 0.3, 0.2, 0.07 and 0.03 (note the weights sum to
one, and contrast with 0.2, 0.2, 0.2, 0.2, 0.2 with regular 5-point moving
average).
• These weights give: 0.4 (135) + 0.3 (148) +0.2 (171) +0.07 (163) +0.03
(132) = 147.97 as the forecast for week 6, and 0.4 (162) 0.3 (135) + 0.2
(148) + 0.07 (171) + 0.03 (163) = 151.76 as the forecast for week 7, and so
on.
• With weighted moving averages, the user has to decide upon both the
number of points in the average and the weights to apply.

FORECASTING TECHNIQUES
4- Exponentially Weighted Moving Averages
• The previous approaches either gave each of a fixed number of most recent values, equal
weight or differential weights, in arriving at an average.
• This approach uses all available historical data, with the weights applied to each getting
smaller as the data gets older.
• The formula for this approach is:

Forecast for next period = Forecast for last period + α (actual for last period –
forecast for last period)

where α is the smoothing constant which must lie between 0 and 1.

Typical values for α lie between 0.1 and 0.2

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FORECASTING TECHNIQUES
• Illustrating this method with the data from the previous example, it is
necessary to obtain the first forecast before the formula can be applied.
• Initially, this is normally taken to be the straightforward arithmetic mean.
• Let the value of α used is 0.1. So forecast for week 11 = average
requirements for first 10 weeks = (132 +163 + 171 +148 + 135 + 162 + 107 +
144 + 127 + 193) / 10 = 148.2. So forecast for week 12 = 148.2 + 0.1 (142 –
148.2) = 147.6 forecast for week 13 = 147.6 + 0.1 (163 – 147.6) = 149.0 and
so on.
• The calculations are summarized for both α = 0.1 and α = 0.2 in Table .

WEEK REAM USED FORECAST FORECAST

(α = 0.1) (α = 0.2)
12 163 147.6 147.0
13 152 149.1 150.2
14 170 149.4 150.5
15 131 151.5 154.4
16 153 149.4 149.7
17 137 149.8 150.4
18 172 148.5 147.7
19 122 150.9 152.6
20 142 148.0 146.5
21 189 147.4 145.6
22 138 151.5 154.3
23 161 150.2 151.0
24 133 151.3 153.0
25 ? 149.4 149.0

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LAW OF SUPPLY AND DEMAND

THE DEMAND SCHEDULE

• It is commonly observed that the quantity of good that people will buy at
any time depends on its price; the higher the price charged for an article,
the less the quantity of it people will be willing to buy and other things
being equal, the lower its market price the more units of it will be
demanded.
• Thus there exists at any one time a definite relation between the market
price of a good (such as wheat) and the quantity demanded of that good.
• This relationship between price and quantity bought is called the
“demand schedule”.
• Fig (on next slide) shows the graphical relationship between price and
quantity demanded of a good:

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SUPPLY AND DEMAND

• The curve drawn in last figure is called ‘Demand Curve’.

• Note that quantity and price are inversely related, When demand
increases, price decreases and vice verse.

• The curve slopes downward. This important property is given a

name; the law of demand, and is explained as:

“when the price of a good is raised (at the same time that all other
things are held constant), less of it is demanded. Or in other words: if
a greater quantity of a good is put on the market, then other things
remain equal, its price decreases or it can be sold only at a lower
price.”

LAW OF SUPPLY AND DEMAND

THE SUPPLY SCHEDULE

• By supply schedule, or supply curve, is
meant the relation between market prices
and the amounts of the good that
producers are willing to supply.
• The table & Fig on next slide illustrates the
supply schedule for wheat, and the
diagram plots it as a supply curve.

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LAW OF SUPPLY AND DEMAND

• Unlike the falling demand curve, the “supply” curve normally

rises upwards.
• At higher prices of wheat, farmers may decrease planted area
say ‘corn’ and increase wheat acreage.
• In addition, each farmer can now afford the cost of more
fertilizer, more labor, more machinery, and can now even
afford to grow extra wheat on poorer lands.
• All tends to increase output at the higher prices offered.

LAW OF SUPPLY AND DEMAND

Equilibrium of Supply and Demand

• Let us now combine our analysis of supply and demand to see

how competitive market price is determined.
• This has been shown in Fig. on next slide.
• To which level, the price will actually go, and how much will
then be produced and consumed? Neither the supply
schedule nor the demand schedule can individually answer
these questions.

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EQUILIBRIUM OF
SUPPLY AND DEMAND
• Let us look at the two curves together as given in last Fig .
Can the situation ‘A’ as given in the table prevail for long?
The answer is clear, No.
• At Rs:500/00, the producers will be supplying 18 million
bags to the market every month. But the amount
demanded by the consumers is only 9 million bags per
month. As stocks of wheat pile up, the competitive sellers
will cut the price a little.
• Thus as column (4) shows price will tend to fall downwards.
But it will not fall indefinitely to zero.

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EQUILIBRIUM OF
SUPPLY AND DEMAND

• Now let us try situation E of Table.

• Can that price persist? A comparison of
columns 2 and 3 shows that consumption will
exceed than production at that price.
• Storehouses will begin to empty; disappointed
demanders who cannot get wheat will tend to
bid up the too low price.
• Thus, there will be an upward pressure on P as
shown in column 4.

EQUILIBRIUM OF
SUPPLY AND DEMAND

• The obvious conclusion of the two examples is

the Equilibrium Price, the price that can only
last, is that at which amount willingly supplied
and amount willingly demanded are equal.
• Competitive equilibrium must be at the
intersection point of supply and demand
curves.
• This occurs only at point ‘C’ of the last Fig.

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THANKS

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MARKETS
• In the ordinary language the term “market” is used to denote
a specified place or area where buyers and sellers come
together for purchase and sale of goods.
• In economics, this term is used to a wider sense.
• According to the French economist Cournet’:
• “Economists understand by the term market not any
particular market place in which things are bought and sold,
but the whole of any region in which buyers and sellers are in
such a free interaction with one another that the prices of
the same goods tend to equality easily and quickly.”

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MARKETS (-CTD-)
• From this definition the essentials of a market can be
deduced as:

(1) Some ‘Commodity’ which is dealt in.

(2) Existence of buyers and sellers.
(3) Place, area, country or region.
(4) Such free interaction between buyers and sellers that
only one price should prevail for the commodity at the
same time.
• The more nearly perfect a market is, the stronger is the
tendency for the same price to be paid for the same thing
at the same time in all parts at the market (allowing of
course, for the cost of transportation of goods from one
place to another).

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TYPES OF MARKETS (-CTD-)

Markets may be classified in different way:

1. On the basis of Time:

Whether a short period market, or a long period market.

2. On Functional Basis:
A general commodity market, a specialist (commodity) market;
e.g., a market where commodities are marketed by sample or a market
where commodities are marketed by grades.

3. On Geographical Basis:
 Local markets, regional markets: and international markets.
 The area or extent of market will depend upon factors like the character
of the commodity itself, the nature of demand for the commodity means
of communication and transport, peace and security, currency and credit
system, the state policy.

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TYPES OF MARKETS (-CTD-)

Markets can also be classified as:

1 - Perfect Market :
• Perfect market is the one in which buying and selling take
place under conditions of ‘perfect competition’.
• In such a market the same price tends to prevail for the same
commodity in all parts of the market at the same time.
• If there is any difference in prices in different parts of the
market, forces come into operation at once to remove such a
difference, except the difference which is due to the cost of
transporting the commodity from one part of the market to
the other.

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TYPES OF MARKETS (-CTD-)

2 - Imperfect Market:
• In imperfect markets, competition is not perfect because some
of the conditions of perfect competition do not prevail.
• In such markets more than one price can prevail for the same
commodity at the same time.
• The price difference can be more than the cost of transporting
the commodity from the cheaper part of the market to the
dearer one.
• The degree of imperfection of market depends upon the
degree to which price difference can exist over a period of
time between various parts of the market.

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TYPES OF MARKETS (-CTD-)

3- Monopolistic Market
• A monopolistic market is one in which sales take
place under conditions of monopoly.
• In such a market there can either be one price for
the same commodity as decided by monopolist
seller or there may be several prices if the seller is
able to divide the large market into smaller ones
for charging different prices. This is called price
discrimination.

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COMPETITION

• In day to day life, the word competition means a state of affairs in which
a number of persons are in rivalry with each other to achieve the same
objective.
• However, in commercial world, sellers may be in competition with each
other to make the largest amount of sales at the highest price. Similarly,
buyers may be in competition with each other to secure goods they want
at the lowest price.
• Competition amongst the sellers will, then tend to lower the prices.
While competition amongst the buyers will tend to raise the prices.
• Although competition can prevail both on sellers as well as buyers side, it
is the former (sellers), which is more important from the point of view of
price determination.

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CONDITIONS OF PERFECT COMPETITION

When defined scientifically, perfect competition prevails when following
conditions are present:

1. Homogeneity of Product
Every unit of the commodity on sale must be exactly like every other unit
or, in other words, the units must be perfect substitutes of each other.
The buyers will be ready to pay the same price for every unit of the
commodity.

2. Atomism
Atomism is derived from atom which means very small. This condition
implies that the number of sellers in the market should be very large. As a
result each seller supplies such a small proportion of the total supply that
whether he is willing to sell more or less does not have any effect on the
price prevailing in the market.

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COMPETITION
3. Free Entry
The market must be free or open, so that there is no restriction on new
sellers or firms to enter the market or to leave the market, as their interest
may dictate.
4. Perfect Knowledge
Those taking part in the buying and selling must have perfect knowledge of
all the relevant facts of market. For instance, buyers should not pay a
higher price and sellers should not charge a lower price due to ignorance of
the fact that the same commodity could be exchanged in another part of
the market at a different price.
5. Elastic Supply of Factors
All the factors of production which are used in the production of a good
commodity must be available in any amount at current price, or in other
words, the factors of production must be perfectly elastic in supply or
flexible.

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PERFECT COMPETITION
PERFECT COMPETITION
• When the conditions prevail in the market, we
call it pure competition.
• As a result of pure competition conditions, the
demand for the product of a firm would be
perfectly elastic.
• This means that the seller can sell any amount of
the commodity, he likes at the prevailing price.

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IMPERFECT COMPETITION
IMPERFECT COMPETITION

• It is evident from the discussion of perfect competition that it is

extremely difficult to meet all the conditions.
• When one or more of these conditions are totally or partially violated,
the competition no more remains perfect.
• Under such conditions a firm will find that its demand curve slopes
downward as its increased quantity (Q) forces down the price (P), it can
get. Such a firm is classified as an “imperfect competitor”.
• Imperfect competition can thus be defined as:
• “Imperfect competition prevails in an industry or group of industries,
wherever the individual sellers are imperfect competitors and thereby
having some measure of control over price”.

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MONOPOLY

• Like pure competition which is one extreme, there is pure

monopoly on the other extreme.
• A pure monopoly exists when there is only one single seller
selling a commodity, for which there is no substitute, close or
distant. The result is that he can sell any amount he likes of the
commodity at any price he likes.
• In the real world, monopoly means a state of affairs in which a
seller sells a commodity for which there are no close
substitutes, but there are distant substitutes.

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