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Estimation & Forecasting

Estimation and forecasting refers to the estimation of any variable through econometric techniques. For example, demand estimation attempts to estimate a demand curve using recorded data for quantity demanded, price and other determining factors¹. Based on the demand  curve estimated, a firm can then apply demand & supply economic theory to plan production and investments in a profit maximizing manner. Decisions about entering new markets, inventory and pricing plans are also dependent on demand estimation. Forecasting, as opposed to estimation is used to predict future values.

Forecasting will be used when, for example, a manager wants to know how high demand will be in a certain number of years. If a manager wants to know how a pricing policy can be used to create an increase in demand, he/she will use an estimation technique. The level of demand for a product influences a firm’s decision in forming its competitive strategy. Demand forecasting is estimating the quantity of a good or service that consumers purchase. Demand forecasting includes informal methods and quantitative methods.

Forecasting is used to reduce the uncertainty of a decision regarding resource allocation and predicts economic conditions about the future and determines how they will impact the firm’s operations.

Estimation and forecasting are facilitated by regression analysis and various econometric techniques. Once the parameters are estimated, the strength between the independent variable and dependent variable is measured. There are two types of methods of estimation, which include a simple method of estimation and a statistical method of estimation

References:

1. Negji, Shivraj. (Oct 12, 2010). Demand Estimation and Forecasting. Retrieved from www.slideshare.net/shivrajsinghnegi/demand-estimation-and-forecasting

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