Chapter four (8).pptx; Demand and supply Analysis
- 1. 08/02/2025 MUBARIK ABDULAHI 1 FACULTY OF BUSINESS AND ECONOMICS LECTURES ON INDUSTRIAL ECONOMICS Lecturer: Khalid Ahmed ADMAS UNIVERSITY
- 2. 08/02/2025 MUBARIK ABDULAHI 2 UNIT FOUR DEMAND ANALYSIS
- 3. 08/02/2025 MUBARIK ABDULAHI 3 DEMAND FORECASTING A forecast is a prediction or estimation of a future event. Nearer a forecast is to its true value, higher will be its acceptability or accuracy. An industrialist therefore aims at getting as accurate as possible forecast for future sales of its products. A Demand forecasting may be active or passive Passive forecasting( static) assumes a static business in the future, this means whatever are the current time external and internal dimensions of the demand, will continue in the future with out change. On the other hand the active forecasting (dynamic) assumes a change in the future business environment through likely future actions of the firm or its competitors or government. Therefore, a demand forecasting is a crucial requirement in business. It reduces the uncertainty about the future so that more effective decisions can be taken right now.
- 4. 08/02/2025 MUBARIK ABDULAHI 4 TYPES OF DEMAND FORECASTING Short-run forecasting: short-run forecasting is concerned with the short-run time period usually less than one year. Short-run forecasting requires information about the current: production scheduling, purchases of raw materials and inventory of stocks, seasonality of sales and its effects on production planning, stocks, distribution of products in the market etc. Long-run forecasting is concerned with the long-run time period usually more than one year Also long-run forecasting requires information about population, technology, government policies, competition in the market, etc.
- 5. 08/02/2025 MUBARIK ABDULAHI 5 EXAMPLE ONE Price( P) Quantity (Q) 100 10 70 20 50 30 30 40 The Economic data below shows quantity demand and its own price of particular industry A. Find the values of the parameters? B. Estimate the demand function C. Estimate the price elasticity of demand function at the point of average price?
- 6. 08/02/2025 MUBARIK ABDULAHI 6 THE REQUIREMENTS FOR DEMAND FORECASTING (A) Elements related to consumers: Total number of consumers. Distribution of consumers/products. Total purchasing power and per capita/household income . Income elasticity. Consumer tastes, social customs, etc. Consumers' marketing details: where they do buy and when, etc. Effect of design, color, etc., on consumers preferences.
- 7. 08/02/2025 MUBARIK ABDULAHI 7 CONT… (B) Elements concerning the suppliers: Current levels of sales Current stocks of goods Trends in sales and stocks Market share Patterns of seasonal fluctuations Research and development trends Company strength and weaknesses Product life cycle (age) New product possibilities
- 8. 08/02/2025 MUBARIK ABDULAHI 8 CONT… (C)The elements concerning the market (i.e. industry): The effect of prices; price elasticity Product characteristics Identification of competitive and complementary products. Number and nature of competitors. Forms of market competition (price, advertisement, brand policy etc.) General price levels. Prices of similar goods.
- 9. 08/02/2025 MUBARIK ABDULAHI 9 CONT… D) Other exogenous elements: Economic environment in the country showing levels of economic activities, employment, trends in income, national income, population, education, etc. Government policies Taxation International economic climate TheTechniques of Demand Forecasting: Subjective Methods: we use this method when there is no past available data(absence of appropriate quantitative data), so in a subjective method, conclusions are drawn about the demand forecasting using intuition which makes its base on experience, intelligence and judgment.
- 10. 08/02/2025 MUBARIK ABDULAHI 10 CONT… Types of Subjective methods: (A) Survey methods: These methods are designed to know the intentions of the buyers to buy a product given its price, quality standards and other properties (complete enumeration or sample). There are two ways to do this: i. One may ask the buyers directly through a set of well- defined questions to find their willingness to buy the product at different prices(complete enumeration or sample). This may be done either through interviewing them individually or via mail questionnaire method.
- 11. 08/02/2025 MUBARIK ABDULAHI 11 CONT… Defects of interrogating buyers: Vague responses. Biased or random responses. Ambiguous responses “do not know” to analyze. Inflated magnitude for the purchases just to please the interviewer. Buyers’ purchase plan may change. False records of responses by the interviewer. Biased sample selection.
- 12. 08/02/2025 MUBARIK ABDULAHI 12 CONT….. ii. Another way for finding the consumers' intention to buy a commodity is to take the opinion of persons other than buyers. Such persons may be the salesmen, distributors and retailers who deal with consumers and so are able to assess their needs indirectly. Relying on Sales Stuff: This may be convenience and cost saving. Defects of Relying on Sales Stuff: Subjectivity and optimism may be because of nature or to please their bosses. Pessimism by nature or preferring to give lower estimates for saving their burden of selling more. This can only be convenient when sales persons have full knowledge of the market situation and get incentive.
- 13. 08/02/2025 MUBARIK ABDULAHI 13 CONT… Relying on Wholesalers and Retailers: because of their experience and judgment, they may able to give a better a better feeling of the future demand for the products they deal with. However, there is no guarantee from personal biases and subjectivity. Expert’s Opinion Method. In this method, panel of experts from the relevant field is set up first. The members of the panel are approached in a number of rounds for interrogation, response and feedback by providing the necessary information for forecasting. The process goes on till a complete reconciliation is reached.
- 14. 08/02/2025 MUBARIK ABDULAHI 14 CONT… Defects of Expert’s Opinion Method. Time consuming for bringing experts in place for several rounds. It is not scientific method, but just brainstorming method of forecasting. To conclude the survey methods discussed above, they are useful in demand forecasting for existing and new products. They are simple in use but less reliable and less accurate because of the subjectivity attached with them. However, for quick estimates and cost saving in forecasting, one has to use them in practice in spite of their limitations
- 15. 08/02/2025 MUBARIK ABDULAHI 15 CONT… (B) Historical Analogy Method(HAM): This method is applicable in demand forecasting for a new product or some existing product in a new area. Since there will be no past data on consumption of that product in the new area, its consumption pattern elsewhere may be taken as a basis for demand forecasting. If the product has not been in use anywhere, then past consumption pattern of some other similar product may be taken as a basis for forecasting the demand for the product. Difficulties to Apply HAM There could be differences between areas that cause subjective bias: o Standard of living o Income o National characteristics o Technology.
- 16. 08/02/2025 MUBARIK ABDULAHI 16 CONT… Objective Methods: We use this method when there is past available data(present of appropriate quantitative data), so objective method gives us the prediction and projection of demand using a statistical or mathematical approach. Types of Objective Methods: (A) TheTrend Method: This method is used to forecast the demand of a product whose past sales records are available for a number of years. The time series of sales of the product may show some variation over time because of some systematic forces. The most important of these may be the ‘trend’ which shows effect of certain basic developments in population, capital formation or technology, etc, over time affecting the demand for the commodity.
- 17. 08/02/2025 MUBARIK ABDULAHI 17 CONT… A trend is long term increase or decrease in a variable being measured over time. So a Trend model is very useful tool for long-term demand forecasting for the commodity, specially when the data does not include cyclical, seasonal, and random movements. To use the trend method as a tool for demand forecasting, we assume explicitly that there is stable relationship between dependent variable(output) and independent variable(time) If the data includes cyclical, seasonal, and random movements; You can adjust this movements by using smoothing models (e.g. moving average method).
- 18. 08/02/2025 MUBARIK ABDULAHI 18 CONT… (B) Leading indicators method The trend method discussed above cannot be used directly to forecast the demand if there are frequent turning points (movements), so we can use leading indicators method as an alternative method , such as: Gross national product. Personal income. Gross investment Construction activities index. Bank rate. Wholesale commodity price index. Employment rate and inflation rate. Industrial production, and so on.
- 19. 08/02/2025 MUBARIK ABDULAHI 19 CONT… For example the planned investment rate in this year may have effect on the demand machines in a next year, or construction activities today may lead to increase the demand for electricity tomorrow. The main difficult of this method is to finding the appreciate indicator. Once such indicator is identified, one may use the least squares method to fit the sales trend with that for forecasting purpose. (C) Regression Method: In this method, both economic theory and statistical methods of estimation are used together to estimate the demand for a commodity. The economic theory is used to identify the demand factors for the commodity and the expected shape of its demand function.
- 20. 08/02/2025 MUBARIK ABDULAHI 20 CONT… For example: We may argue that the quantity demanded depends on price of the commodity and income, etc. In this equation we can specify as follows: Qd = ao - al (price) + a2 (income)+u Qd = 20 - 0.9(price) + 0.7 (income) R 2 = 0.950 The above equation indicates the negative relationship between Qd and price, and positive relationship between Qd and income. If the price level increases one percent the Qd would decrease 90%, Also if the level of income increases one percent the Qd would increase 70%, R square equals 95% means about ninety five percent of variation of Qd is explained by price and income.
- 21. 08/02/2025 MUBARIK ABDULAHI 21 CONT… FinallyThe regression method for demand forecasting essentially has three steps: (i)The specification of the demand equation; (ii)Fitting it to data, i.e. estimation of the regression coefficients and summary statistics like R2 ,T, F, etc., and (iii) Estimation or knowledge of future values for the determinants and through them to compute the demand forecasts using the fitted equation. There are some difficulties of this method specially statistical problems such as autocorrelation, hateroscedasticity, and multicolinearity and estimating future values of explanatory variables. For the detail of regression method, see econometrics text books.
- 22. 08/02/2025 MUBARIK ABDULAHI 22 CONT… (D) Simultaneous Equation Method: Simultaneous equations model is modes that take into account feedback relationship among variables. To conduct the simultaneous equation model, we set several equations instead of single equation such as regression model. This means, there will be variables in such equations which effects each other and determined simultaneously in terms of some other outside or exogenous variables . For example: The determinant of aggregate income of closed economy is aggregate consumption and private investment Also aggregate consumption is a determinant of aggregate income Therefore, to identify the relationship between aggregate income and aggregate consumption, we must set two equations:
- 23. 08/02/2025 MUBARIK ABDULAHI 23 Y=C+I, where Y=Aggregate income C= Aggregate consumption I= Gross private investment C= c(Y-T) c= marginal propensity to consume (MPC) T= Taxes rate. Advantages of simultaneous equations: Simultaneous equation model gives us simultaneously future estimation for some of the determinants of demand, instead of estimating separately such as regression model CONT…
- 24. 08/02/2025 MUBARIK ABDULAHI 24 CONT… Disadvantages of simultaneous equation model: The building of simultaneous equations model needs to set more than one equation and that requires professional skill which is not always readily available. The simultaneous equation model often creates identification problems for the equations, making them doubtful for the economic interpretation. The building of simultaneous equation model generally time consuming and costly, so they cannot be fitted easily without computer. For the details of simultaneous equation models, see econometrics text books.
- 25. 08/02/2025 MUBARIK ABDULAHI 25 (E)Box-Jenkin Method: This method has been suggested by BOX and JINKIN, This method is empirically driven method of systematically identifying, analyzing, and forecasting time- series. This method is also known ARIMA models in a forecasting literature These models are used for short-run forecasting with seasonal fluctuation. ARIMA means auto-regressive integrated moving average (P, d, q). Where P is order of autoregressive, D is order of integration, Q is the order of moving averages. CONT…
- 26. 08/02/2025 MUBARIK ABDULAHI 26 There are three component of the ARIMA process: AR process: in this an autoregressive process of order P, generates the current observation as weighted average of past observation over P periods and this is denoted AR(P): MA process: in moving average process of order q, each observation of Y is generated by weighted average of random disturbance over the past q periods, and Integration process: is combination average process and moving process CONT…
- 28. 08/02/2025 MUBARIK ABDULAHI 28 PROBLEMS In the economic data below shows the sales of particular companyYi and advertisement expenses Xi. Price(P) Quantity supplied(Q) 1 5 2 20 3 35 4 50 5 60 A. Estimate the values of parameters? B. Estimate the sales function C. What is the appropriate interpretations
- 29. 08/02/2025 MUBARIK ABDULAHI 29 PROBLEM TWO The table below shows the production or supply of particular industryYi and its own price Xi. Supply (Yi) Price (Xi) 4 1 5 4 7 5 12 6 A. Estimate the values of parameters? B. Estimate the supply function C. What is the appropriate interpretations