Managerial Economics and Strategy, 2/e

3.5 Forecasting

Predictions about the future are often referred to as forecasts. Managers frequently seek forecasts of important variables related to demand such as sales or revenues. Large banks and other financial institutions commonly make forecasts regarding macroeconomic variables such as interest rates, gross domestic product, unemployment, and inflation. Governments make forecasts of revenues, expenditures, and budget balances, among other things, and we are all familiar with weather forecasts.

Managers use many different methods to forecast. We concentrate on two commonly used regression-based methods of forecasting: extrapolation and theory-based econometric forecasting.19

19An alternative approach is to rely on subjective judgments. ...