Forecasting in Managerial Economics

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1. Learning Issues 1.1 What is forecasting? Forecasting is the process of making statements about future happenings based on the previous data collected. Forecasting usually is an estimation of the future data, happenings, trends, values, etc for the specified date. A commonplace example is estimation of the expected value for some variable of interest at some specified future data. The forecasting is similar to the prediction, but more general term. However, as the term implies, forecasting is not necessarily precise, thus it’s a good practice to indicate the degree of uncertainty for each forecast. The term forecasting refers to formal statistical methods employing time series, crosssectional or longitudinal data, or alternatively to less formal judgmental methods. There is no single right forecasting method to use. Forecasting is used in the practice of Customer Demand Planning in everyday business forecasting for manufacturing companies. The discipline of demand planning, also some referred to as supply chain forecasting, embraces both statistical forecasting and a consensus process. An important, often ignored aspect of forecasting. The forecasting is the relationship it hold with planning. The forecasting can be described as predicting what the future will look like, whereas planning predicts what the future should look like. 1.2 What are the techniques in forecasting? There are various techniques which can be used to forecasting the demand or supply in the economics fields. The forecasting techniques can divide into two components; Qualitative forecasting techniques and Quantitative forecasting techniques. The qualitative forecasting techniques are generally more subjective than their quantitative counterparts. Quantitative techniques are more useful in the earlier stages of the product life cycle, when less past data exists for use in quantitative methods. Qualitative method is usually based on expert opinions and expert judgment. Quantitative methods include the Delphi Techniques, Nominal Group Techniques (NGT), Sales Force Opinions, Executive Opinions and Market Research. Explanation on each method is shown as below:  The Delphi Technique The Delphi technique uses a panel of experts to produce a forecasting. Each expert is asked to provide a forecasting specific to the need at hand. After the initial forecasts are made, each expert reads what every other wrote and is, of course, influenced by their views. A subsequent forecast is then made by each expert. Each expert then reads again what every other expert wrote and is again influenced by the perceptions of the others. This process repeats itself until each expert nears agreement on the needed scenario or numbers.

 Nominal Group Technique Nominal Group Technique is similar to the Delphi Technique in that it utilizes a group of participants, usually experts. After the participants respond to forecastrelated questions, they rank their responses in order of perceived relative importance. Then the rankings are collected and aggregated. Eventually, the group should reach a consensus regarding to the priorities of the ranked issues.  Sales Force Opinions The sales staff is often a good source of information regarding future demand. The sales manager may ask for input from each salesperson and aggregate their responses into a sales force composite forecast. Caution should be exercised when using this technique as the members of the sales force may not be able to distinguish between what customers say and what they actually do. Also, if the forecasts will be used to establish sales quotas, the sales force may be tempted to provide lower estimates.  Executive Opinions Sometimes upper-levels managers meet and develop forecasts based on their knowledge of their areas...
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