Answer to Question #181055 in Economics for Cally

Question

If each sales outcome has an equal probability of occurring, determine the following for the company: (a) the probabilities of outcomes 1, 2, and 3; (b) its expected sales level; (c) the variance associated with potential sales levels; (d) the expected return of project A; (e) the variance of potential returns for project A; (f) the expected return and variance for project B; (g) standard deviations associated with company sales, returns on project A and returns on project B; 

Answer 1

Any forecasting process, as a rule, is built in the following sequence:

1. Formulation of the problem.

2. Gathering information and choosing a forecasting method.

3. Application of the method and assessment of the resulting forecast.

4. Using the forecast for decision making.

5. Forecast-fact analysis.

It all starts with the correct formulation of the problem. Depending on it, the forecasting problem can be reduced, for example, to an optimization problem. For short-term production planning, it is not so important what the sales volume will be in the coming days. It is more important to distribute production volumes as efficiently as possible according to the available capacities.

The cornerstone limitation when choosing a forecasting method will be the initial information: its type, availability, processing capability, homogeneity, volume.

The choice of a specific forecasting method depends on many factors. Is there enough objective information about the predicted phenomenon (does this product or analogues exist for a long time)? Are qualitative changes in the studied phenomenon expected? Are there dependencies between the studied phenomena and / or within the data sets (sales volumes, as a rule, depend on the volume of investments in advertising)? Is the data a time series (information about the ownership of borrowers is not a time series)? Are there recurring events (seasonal fluctuations)?

Regardless of the industry and the area of ​​economic activity the firm operates in, its management constantly has to make decisions, the consequences of which will manifest themselves in the future. Any decision is based on one way or another. Forecasting is one such method.

Forecasting is the scientific determination of the likely paths and results of the upcoming development of the economic system and the assessment of indicators that characterize this development in a more or less distant future.

Consider forecasting sales volume using a time series analysis method.

Forecasting based on time series analysis assumes that changes in sales volumes that have occurred can be used to determine this indicator in subsequent periods of time.

A time series is a series of observations carried out regularly at regular intervals: a year, a week, a day, or even minutes, depending on the nature of the variable in question.

Usually a time series consists of several components:

1) trend - the general long-term trend of changes in the time series underlying its dynamics;

2) seasonal variation - short-term regularly recurring fluctuations in the values ​​of the time series around the trend;

3) cyclical fluctuations that characterize the so-called business cycle, or economic cycle, consisting of economic recovery, recession, depression and recovery. This cycle repeats regularly.