Presume it is believed by an analyst that there is a constant rate of change in sales from one quarter to another. This entails that demand or sales enhance by the same volume in each quarter.
This enhances in demand for one quarter can be procured by estimating the parameters of the following deterioration function which is,
Yt = Yo + bt
Yt refers to demand or sales proceeds in one quarter for which forecast is to be calculated. Yo is the parameter depicting sales proceeds in any quarter 0, which means it gauges the cut off of the trend line on the Y axis.
The parameter b is a constant rate of change and depicts the incline of the trend line. With the support of computing devices the deterioration function can be approximated by using normal least square method.
(D) Constant Percentage Rate of Change
Now it is being assumed by an analyst that sales enhances by a constant percentage every quarter. The function articulating such an association is as follows:
Yt = Yo (1+g)^t …..Equation (1)
Where g is a constant rate of growth or variation. The parameters of this function cannot be evaluated by using normal least square method. But if we convert the above function into logarithmic way, we can use normal least squares method to evaluate the parameters.
Therefore, the conversion of the above function is procured as follows:
Log Yt = Log Yo + t Log (1 + g)
Presenting Xt for log Yt, Xo for log Yo and b for log (1+g), we get the following and this is to understand and present in a simple manner.
Xt = Xo + bt
It is to be noted that sales proceeds data Yo and Yt have been converted into logarithmic notations, t has not been converted.
Econometric Method of Demand Forecasting
- A significant method of forecasting technique used by the managerial economist is the econometric structure.
- Econometrics is use of statistical methods and economic theory to evaluate the causal association among economic variables is accomplished.
- Then through the use of statistical methods approximates of parameters are made. With the support of these parameters forecasting of demand is accomplished.
- Econometric technique has a number of significant advantages over time series scrutiny, survey method, skilled persons’ opinion or sales force electing method and finally barometric modes.
- The significant advantage of econometric method is that it is not only enables us to forecast an economic phenomenon but also describes it. That is it inaugurates informal association among economic variables.
- As management is able to influence some of the self-governing variables in a demand function such as price of commodity, advertising outlay, variation in the commodity design, econometric mode also supporting the management the contact of variation in its marketing policies.
· It is therefore, may be a single functioned model or a multiple functioned model.