Demand Analysis and Optimal Pricing, and Estimating and Forecasting Deman
1. Why is knowing (or estimating) the product demand so crucial for a firm? What are the differences between estimating and forecasting demand? In your response, include an example of a business that has suffered from poorly forecasting the demand of its products. Evaluate how or why the business made such a mistake. To keep our discussion more interesting, please use examples that are not from our textbook.
2. Respond to CM with no more than 200 words
Accurately predicting demand is essential for any business, as it directly influences production schedules, inventory control, pricing decisions, and overall profitability. If a company overestimates demand, it can lead to overproduction, excess stock, and wasted resources. On the flip side, underestimating demand may result in stockouts, lost sales, and frustrated customers. There’s a key difference between estimating and forecasting demand. Estimating tends to be more of a quick, rough judgment based on available data or past experiences, typically used for short-term needs. In contrast, forecasting is a more structured approach that uses historical data, trends, and statistical models to predict future demand, often on a longer-term basis. A real-world example of poor demand forecasting is Target’s ill-fated expansion into Canada. The company assumed that demand levels from the U.S. would directly translate to the Canadian market, which led to mismatches in inventory. As a result, some items were overstocked while others were in short supply. Target also underestimated regional differences and consumer preferences, relying on inaccurate data and moving too fast without adjusting their forecasts. This resulted in empty shelves, customer dissatisfaction, and ultimately the closure of Target’s Canadian operations just two years after opening. This example underscores how crucial it is for businesses to make well-informed, data-driven demand forecasts, rather than relying on assumptions or simplistic estimates. Accurate demand forecasting helps companies avoid these costly mistakes and make smarter, more strategic decisions.
3. Respond to RW with no more than 200 words
Understanding how much demand there is for a product is important for any business. It helps them figure out how much to produce so they do not end up with too much or too little. This also plays a big role in setting prices. If many people want the product, the company might charge more, but if demand is low, they might lower the price to attract buyers. Knowing demand also helps businesses decide how to use their resources, like labor and materials, more effectively. It is also crucial for planning budgets and predicting future growth. Marketing strategies also benefit from this knowledge, as it helps target the right audience. When we talk about estimating demand, we look at current data and trends to understand how much of a product people want right now. This is important in making short-term decisions. On the other hand, forecasting demand is about looking ahead and predicting future trends. This helps businesses prepare for changes in the market and plan long-term strategies. While estimating gives a snapshot of the present, forecasting helps anticipate the future, and both are key to making smart business decisions.
Week 3: Demand Analysis and Optimal Pricing, and Estimating and Forecasting Demand
Overview:
Welcome to Week 3.
The demand function is one of the key managerial decision–making tools for determining the magnitude of the demand for their products. An accurate estimation of the demand for a product or a service is based on defining the underlying variables that impact it. Theoretically, determinates of demand include
1. Own price: Remember the law of demand.
2. Income: A product is a normal good if an increase in income results in an increase in the quantity demanded for that product and vice–a–versa. A product is an inferior good where an increase in income lowers its sales and vice–a–versa.
3. Substitute goods: These are direct or indirect competitive goods or services, and therefore, an increase in demand for such a good results in a decreased demand for its substitutes.
4. Complementary goods: These are the types of products or/and services that are jointly purchased and consumed with a given item, and therefore, an increase in demand for such a good results in an increase in demand for its complements.
5. Population: Changes in population affect the number of consumers and also in the quantity of purchases.
6. Demographics: Characteristics of a population, such as racial and ethical compositions and age distribution, also have a significant impact on demand for a product.
7. Tastes and preferences: These preferences refer to those of a large group of consumers, not an individual. These change over time for music, food, fashion, health consciousness, recreation, travel, drugs, etc., resulting in changes in the quantity of demand.
8. Price elasticity of demand: price elasticity is a measure of consumers’ price sensitivity, or a measure of how responsive consumers are to price changes.
From the Law of Demand, we understand that an increase or a decrease in the price of a product always causes in a decrease or an increase in the quantity demanded. Price elasticity provides managers with an insight to the magnitude of change in quantity demanded due to change in price.
Scientific research investigates relationships among variables. These relationships may be causal, meaning that the changes in one variable (dependent variable) depend on the changes in another variable (independent variable). The regression method is used to quantify these models. However, such scientific processes demand data. The required data can be collected through secondary methods (published data) or/and primary methods including (a) observations, (b) interviews, (c) focus groups, (d) pilot studies, and (e) surveying and sampling. From such data sources, firms are in the position of the necessary information to construct a demand equation for their product.
A purpose of demand estimation is for forecasting future sales and prices. Estimation of demand functions is most often accomplished using the technique of regression analysis. Typically, in the demand estimation, quantity demanded for a product or a service is stated in relation to its price, the level of income, price substitute(s), price of complement(s), population, and tastes and preferences.
The method of estimating the parameters of an empirical demand function depends on whether the price of the product is market–determined (perfect competition) or company–determined (monopolistic competition, oligopoly, and monopoly). Managers of price–taking firms do not set the price of the product they sell; rather, prices are endogenous or “market–determined” by the intersection of demand and supply. Managers of price–setting firms set the price of the product they sell by producing the quantity associated with the chosen price on the downward–sloping demand curve facing the firm. Since price is manager–determined rather than market–determined, price is exogenous for price–setting firms.
Weekly Objective(s):
LO1: Explain the relationship between price elasticity of demand and revenue
LO2: Discuss how a firm can maximize its profit by using optimal markup pricing and price discrimination
LO3: Explain how empirical analysis is both “art and science”
LO4: Explain the statistics that are generated by regression analysis
Collepals.com Plagiarism Free Papers
Are you looking for custom essay writing service or even dissertation writing services? Just request for our write my paper service, and we'll match you with the best essay writer in your subject! With an exceptional team of professional academic experts in a wide range of subjects, we can guarantee you an unrivaled quality of custom-written papers.
Get ZERO PLAGIARISM, HUMAN WRITTEN ESSAYS
Why Hire Collepals.com writers to do your paper?
Quality- We are experienced and have access to ample research materials.
We write plagiarism Free Content
Confidential- We never share or sell your personal information to third parties.
Support-Chat with us today! We are always waiting to answer all your questions.
