The law of demand explains only the direction of change of the demand & price of a commodity.

It fails to explain the quantitative relationship between the two changes, i.e., how much quantity will change as a result of a change in the price of the commodity.
Thus, it is clear that different goods respond differently to a change in their prices. For some goods, a small change in the price of a commodity may lead to a considerable change in the quantity demanded, but, sometimes even a considerable change in price may not lead to any change in demand

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It is forward projection of data. It is an essential tool in developing new products, scheduling production, determining necessary inventory levels and creating a distribution system. Forecasting is an attempt to foresee the future by examining the past. Business firms can estimate and minimise the future risk and uncertainty through forecasting and forward planning. Virtually all types of national and international organisationsGovernment, social and business, engage in some type of demand forecasting. The goal, of course, is to better managements ability to plan and control operations. So we can say that demand forecasting is a crucial activity for planning, survival and growth of a corporate unit. As production takes time, business firms would like to know the likely demand for a product at a future date to plan and execute its producting properly.
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Demand Forecasting

Demand forecasting is an attempt to estimate the future level of demand on the basis of past as well as present knowledge and experience to avoid both under production and over production. Demand forecast may be passive or active. Demand forecast methods vary according to whether they apply to a large aggregate as whole economy (macro), or for an industry or a company (micro forecast). Macro forecasts are based on national income, production, general price level, etc. These forecasts help the govt. in implementing price control policy, export-import policy etc. Managers should consider the macro forecasts while taking decisions.

In India, economic liberalisation &rising competition during recent years has increased the importance of demand forecasting. So N.C.A.E.R. prepares macro forecasts for many products. dr. nidhi gupta 3

The objective of demand forecasting is to help in estimating industry demand, company demand and market segment demand.

NEED FOR DEMAND FORECASTING There is no choice between forecasting & non-forecasting, as changes are natural in the present dynamic world. The demand forecasts of particular products provide a guideline for demand forecasts for related industries. Eg. The demand forecast for cotton textiles may provide an idea of the likely sales for the textile machinery industry, dyestuff industry & for readymade garments industry.

The need of forecasting differ according to the times span of forecasting. When the fluctuations in demand are more, relatively shorter period should be chosen.
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Need of Short-Term Forecasting It can cover a period of 3 months, 6 months or an year. It is concerned with forecasting products. It is useful in following ways: (a) Appropriate Production scheduling: We can estimate seasonal variation in demand & avoid over production or less supply. (b) Suitable purchase policy: Reducing cost of raw material & controlling inventory by determining future requirement. (c) Appropriate Price Policy: it depends upon the anticipation of market demand conditions. Expecting weak Mkt. conditions avoid price rise Expecting strong Mkt. conditions avoid price reduction (d) Setting Realistic Sales Targets for Salesmen: Too high targets salesman failed to achieve discourage Too low targets easily achieved meaningless to provide incentives
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(e) Forecasting Financial Requirements: Demand forecast will enable

management to arrange funds for production, advertising etc. Need of Long-Term Forecasting It covers a period of 5,10 or 20 years. It provides information for major strategic decisions. For introduction of new products, researcher has to consider long-term changes in population, tastes & preferences of the buyers, technology etc. Following are some imp. Uses of long-term forecasting. (a) Business Planning: Demand forecasting for products is needed for starting a new unit or expansion of an existing unit. If a co. has better knowledge than its rivals about demand & distribution, its position would be much better. (b) Financial Planning: For assessing long term financial requirements, demand forecasting is needed. Eg. Purchasing of machines, raw materials & research and development programs.
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(c ) Planning Man-power Requirements: According to long-term demand forecasts, we can estimate manpower requirements and can start Training & personnel development programs.

Methods of demand forecasting.

No forecasting method is suitable for all circumstances. The choice is complicated, because each situation might require a different method. Selection of a forecast has to be appropriate to the situation, i.e., objective urgency, data availability, nature of the product, time horizon, cost and accuracy level required. Various forecasts have to be linked properly for correct decision making. It is always prudent to use more than one forecast for cross-checking and for improving the credence of forecast. There are several methods of demand forecasting. These methods can be used to derive macro as well as micro forecasts.
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FORECASTING METHODS

Survey Methods

Statistical Methods

Consumer Survey method

Collective Opinion method

Reasoned Opinion method

Market

Time series analysis

Regression Analysis

Experiments
method

Graphical method

Semi averages method

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Moving averages method

Least squares method

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Survey Methods Under this approach, surveys are conducted about

the intentions of consumers (individuals, firms or industries), opinion of experts or of markets. Census survey: all consumers/experts/markets are surveyed. Sample Survey: a selected subset of them are surveyed. This is suitable for short-term forecasts due to volatile nature of consumers intentions. Used for new product demand forecasting.
Consumer Survey Method: It is a simple method,as it is not based on past historical record. In this we can assess information from primary sources. Like, a firm can ask consumers, what & how much they are planning to buy at various prices for forthcoming period. 2. Census method is time consuming & tedious for a product having vast market. It does not introduce any bias judgement becoz data is simply recorded & aggregated. These methods only give information about demand for a product of the industry but not useful for estimating demand for a particular firm.
1.
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2. Collective Opinion Method: Under this method, salesman or experts are required to estimate expected future demand of the product in their territories & sections. The estimates of individual salesmen are averaged to find out the total estimated sales, and then reviewed by the top executives to eliminate the bias of optimism & pessimism on the part of salesmen. These revised estimates are further examined in the light of factors like proposed changes in selling prices, product designs & advertisement programs, changes in competition, changes in income, tastes & preferences, purchasing power, employment etc.This method takes opinion from salesman to departmental heads & top executives. 3. Reasoned opinion (delphi) method: It consists of questioning a group of experts repeatedly until the logical conclusion regarding future demand come. This method facilitates the maintenance of anonymity of respondents identity throughout the discussion. The experts can revise their responses.
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4. Market experiment method: Under this method, the main determinants of a product like prices, advertising, product design, packaging, quality etc. are identified. These factors are then varied separately over different markets holding other factors constant. Then the effect of experiment is studied under actual or controlled market conditions & will be used for overall forecasting purpose. In this method market division should be homogenous with regard to income, age, tastes & population. In this any company can give token money to buyer & asked to shop around a simulated market.
But in this method potential buyers may treat these experiments

as a game & may not behave in a natural way. This is risky & can give wrong signals to the consumer as well as competitors. This method can be used to check the results of demand forecasting obtained from other methods.
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Statistical methods: These are useful for long-term forecasting & based on scientific ways of estimation which are logical & unbiased. Time series Analysis: It is an important technique of forecasting demand which is widely used by business world. Time series analysis contains more than one technique of forecasting future value of a variable if it shows a recognisable particular pattern over time. Only past or historical values of variables are used to predict future values. this analysis can be used for forecasting by evaluating its 4 components so as to make it understandable & explainable.
Trends These are long term increase or decrease in time series of

a variable. Increasing population or changing consumer tastes may result in long term increase or decrease of a demand for a product over time.
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Seasonal Variation: These are the changes in demand series over time due to changes in seasons during a year. Seasonal effects are generally consistent from year to year. Season can have different meanings. (weather, holidays, festival, fashions) Cyclical variation: These are substantial expansion or contraction in an economic variable (demand or sales in the present analysis) that are usually more than a years duration. Prediction of cycles is difficult for industries, as they do not always repeat at constant intervals of time.

Random or Residual variation: These include other factors not explained by above 3. These are disturbance due to unforeseen future events like, weather, strikes, lockouts, riots, fires, war, transport breakdowns and so on. Caused by random factors, random fluctuations are not predictable.
There are various models that can be used to describe time series data.
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Nave Model: (no change model)

It states that the forecast value of demand for a product for the next period will be the same as the demand for the present period. Dt+1 = Dt Dt (Demand or sale of a product in a quarter) Dt+1 (for next quarter) It is simple & cheapest but useful for a short period of time where no drastic changes occurs & demand of a product changes very slowly.

Problems: Data is not avaliable immediately for forecast, for this firm has to speed up the collection of data. We cannot incorporate the effect of present sales promotion efforts. Proportional change Model:- When time series of demand or sales of a product show a slight upward trend than previous year, or demand is seasonal i.e. rise during some months of year then we use this model.
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There are some methods under time series analysis: Useful for long term demand. Scientific way of estimation. Logical & unbiased. Through these methods, we can identify & estimate the trend.
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