Other Ways to Foretell Our Riches (and Improve Our Foresight)

(Notwithstanding the grammar issues, this video provides a good quick overview of the tools we can use to forecast demand.)

Econometric analysis and forecasting of demand CANNOT solve all of management's pricing problems.

Here are some of the the potential problems we may encounter in using econometric analysis and other non-qualitative techniques:

1. Defining and collecting data requires careful consideration of numerous factors - this can also be true for qualitative techniques as will be shown later.

2. Incorrect functional form of the equation to be estimated results in biased estimates of the parameters of the equation, as with time-series models that fail to account for seasonal or cyclical variations or empirical demand specifications with confidence intervals issues (see "Some Final Warnings" below).

3. Choosing the functional form to use is, to a large degree, a matter of [experienced] judgment and [trained] experience.

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Just to discuss a bit about qualitative or direct forecasting method.

Consumer interview is an example of a qualitative or direct forecasting method.​ We ask potential buyers how much of the commodity they would buy at different prices, with alternative values for the determinants of demand. The most common issues in using this technique are the ones we would usually encounter in typical surveys, such as:

1. Selection of a representative sample

A representative sample is a sample, usually drawn randomly, that has the same characteristics as the population as a whole.

Example:

Population is 50% female and 35% have annual incomes over USD65,000. A representative sample has the same proportions of females and income earners.

2. Response bias

Response bias is the difference between the response given by an individual to a hypothetical question and the action the individual takes when the situation actually occurs.

Responses may be biased by the manner the interview or survey questions are asked.

3. Inability to answer accurately the question posed