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Theory Of Demand

Demand Forecasting

Demand forecasting is a combination of two words; the first one is Demand and another forecasting. Demand means outside requirements of a product or service. In general, forecasting means making an estimation in the present for a future occurring event. Here we are going to discuss demand forecasting and its usefulness.

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Demand Forecasting

It is a technique for estimation of probable demand for a product or services in the future. It is based on the analysis of past demand for that product or service in the present market condition. Demand forecasting should be done on a scientific basis and facts and events related to forecasting should be considered.

Therefore, in simple words, we can say that after gathering information about various aspect of the market and demand based on the past, an attempt may be made to estimate future demand. This concept is called forecasting of demand.

For example, suppose we sold 200, 250, 300 units of product X in the month of January, February, and March respectively. Now we can say that there will be a demand for 250 units approx. of product X in the month of April, if the market condition remains the same.

Usefulness of Demand Forecasting

Demand plays a vital role in the decision making of a business. In competitive market conditions, there is a need to take correct decision and make planning for future events related to business like a sale, production, etc. The effectiveness of a decision taken by business managers depends upon the accuracy of the decision taken by them.

Demand is the most important aspect for business for achieving its objectives. Many decisions of business depend on demand like production, sales, staff requirement, etc. Forecasting is the necessity of business at an international level as well as domestic level.

Demand forecasting reduces risk related to business activities and helps it to take efficient decisions. For firms having production at the mass level, the importance of forecasting had increased more. A good forecasting helps a firm in better planning related to business goals.

There is a huge role of forecasting in functional areas of accounting. Good forecast helps in appropriate production planning, process selection, capacity planning, facility layout planning, and inventory management, etc.

Demand forecasting provides reasonable data for the organization’s capital investment and expansion decision. It also provides a way for the formulation of suitable pricing and advertisement strategies.

Following is the significance of Demand Forecasting:

  • Fulfilling objectives of the business
  • Preparing the budget
  • Taking management decision
  • Evaluating performance etc.

Moreover, forecasting is not completely full of proof and correct. It thus helps in evaluating various factors which affect demand and enables management staff to know about various forces relevant to the study of demand behavior.

Demand Forecasting

Source: Alamy

The Scope of Demand Forecasting

The scope of demand forecasting depends upon the operated area of the firm, present as well as what is proposed in the future. Forecasting can be at an international level if the area of operation is international. If the firm supplies its products and services in the local market then forecasting will be at local level.

The scope should be decided considering the time and cost involved in relation to the benefit of the information acquired through the study of demand. Cost of forecasting and benefit flows from such forecasting should be in a balanced manner.

Types of Forecasting

There are two types of forecasting:

  • Based on Economy
  • Based on the time period

1. Based on Economy

There are three types of forecasting based on the economy:

  1. Macro-level forecasting: It deals with the general economic environment relating to the economy as measured by the Index of Industrial Production(IIP), national income and general level of employment, etc.
  2. Industry level forecasting: Industry level forecasting deals with the demand for the industry’s products as a whole. For example demand for cement in India, demand for clothes in India, etc.
  3. Firm-level forecasting: It means forecasting the demand for a particular firm’s product. For example, demand for Birla cement, demand for Raymond clothes, etc.

2. Based on the Time Period

Forecasting based on time may be short-term forecasting and long-term forecasting

  1. Short-term forecasting:  It covers a short period of time, depending upon the nature of the industry. It is done generally for six months or less than one year. Short-term forecasting is generally useful in tactical decisions.
  2. Long-term forecasting casting: Long-term forecasts are for a longer period of time say, two to five years or more. It gives information for major strategic decisions of the firm. For example, expansion of plant capacity, opening a new unit of business, etc.

Solved Example on Demand Forecasting

Q. Which of the following is not correct about demand forecasting?

  1. Predicts future demand for a product or service.
  2. Based on the past demand for the product or service.
  3. It is not based on scientific methods.
  4. Helps in the managerial decision making.

Ans: The correct option is C. Demand Forecasting is based on scientific methods and proper judgment in order to correctly predict the future demand for a product or service. It gathers information about various aspects of the market like future changes in the selling price, product designs, changes in competition, advertisement campaigns, the purchasing power of the consumers, employment opportunities, population, etc.  All the information gathered is scientifically analyzed so as to forecast the future demand for the product.

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