Q:

Why is forecasting demand important?

A:

Quick Answer

Forecasting demand is important because it enables a firm to accurately and efficiently allocate resources to a level of production that meets anticipated demand. Incorrect forecasts, either too high or too low, are both economically inefficient and unprofitable. Demand forecasting is performed at both the micro and macro levels.

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Full Answer

When forecasting demand, a firm must consider the number of potential customers, the price those customers are willing to pay, the cost of goods used to produce a given product and the availability of those goods used in production. All of these factors are subject to the economic laws of supply and demand.

Firms use numerous methods, both qualitative and quantitative, to forecast demand. Qualitative methods rely on expert opinion to reach a result. A popular qualitative forecasting method is the Delphi method. The Delphi method uses several rounds of questionnaires in which a panel of experts revise and narrow their prior assessments until a consensus is reached. Critics of the Delphi method say that it is ineffective for making complex decisions and that it is limited by the knowledge of the experts.

Quantitative methods rely on statistical and data analysis to examine historical sales data and data from market testing. They include extrapolation and data mining.

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