Tag Archive for: demand forecasting

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Missing Price Targets

Businesses frequently set price goals. What does it mean not to hit them?

In A, we predict 1, the price of a barrel of oil. When the forecast date arises, the actual price, 2, varies, resulting in a one-dimension Error Line. We know by how much we missed, but nothing else.

B shows us what it means to be off-target in archery. If we aim at 1 and land on 2, we create an Error Triangle. That’s a two-dimensional error, in elevation (up and down) and azimuth (left to right).

In C, where every blue diamond stands for a business jet, we propose a new one. We set our target quantity and price, as 1, on the Demand Frontier, the line through the market’s outermost quantity-price points, in yellow. If we can’t put in enough features to support that price, we’d make a plane fetching less money, as 2. Moving from 1 to 2, we make a Demand Error Triangle.

But, in D, we find as prices fall, we might be able to sell more models. Analysts should find the Demand Frontier Slope to ascertain the amount of revenue available at market limits. That will be the areas under the curves, the green rectangle for 1, the orange one for 2.

What does it mean to miss price targets in Value Space? Find out in my next post.

#prices #demand #demandplanning #demandforecasting

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Real Demand Curves In Action

The rock star Meatloaf tells us that “Two out of three ain’t bad.”

But, when it comes to, say, selling your new supersonic jet, it can be.

One can adequately estimate a product’s Cost and Value (as a sustainable price for the first business jet to go over 1,000 miles per hour) only run afoul of its market’s Demand Frontier.

Below, we find Aerion offers a credible development Cost target for its supersonic AS2 (see A), and offline there is evidence its $120 million Price works for the market. Their problem lies with Demand. They forecast a market of 500 models, with 300 in a decade. But in the ten years studied in B, their forecast exceeded the limit of the Upper Demand Frontier (P-Value 4.91E-04). Five years later, in C, the Demand Frontier (P-Value 5.39E-05) shifted only slightly. As of January 2020, the company still only has the 20 orders they received in 2015. Currently, its chances of selling 300 units at $120 million in a decade are less than 25%.

COVID-19 or other forces may increase business jet demand, moving the Demand Frontier where Aerion would like it to be.

Failing that, the company likely got Cost and Price right, but missed Demand.

In business, two out of three is bad.

#demand #demandforecasting #marketanalysis #prices

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The Demand For Money: Crypto vs. Fiat Currencies

Earlier, we examined Demand for fiat currencies and found they had an Upper and Outer Demand Frontier.  Those types of monies have existed for millennia.  A new form of exchange began to take off over a decade ago.

Cryptocurrencies began to become popular with the advent of Bitcoin.  How does the Demand for cryptocurrencies behave relative to the one for fiat currencies?  As it happens, when it comes to Demand, both payment forms have something important in common.

Below, using a fiat currency study from July and one on crypto 20 days later, note the slopes of their Demand Frontiers are nearly identical.  At left in yellow, the crypto Demand Frontier slope is -1.47 (P-Value 1.28E-04), while that for fiat currencies is -1.42 (P-Value 7.88E-05).  At that time, at the Demand Frontier, cryptocurrencies had reached about 1/1000th of the fiat currency extent. Observe with the steep cryptocurrency Demand Frontier, at its limit, there is more money at the upper end of this curve.  Bitcoin’s market capitalization was nearly twice that of the rest of its market combined.

We need to see how each currency form reacts to the coronavirus. Look for my next post on that.

#currency #demandforecasting #cryptocurrencies #currencytrading

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Measuring Demand

Two useful measures of Demand are the Demand Frontier and Aggregate Market Demand.

The Demand Frontier describes a market’s outer boundary.  For the S&P 500, the dark green dots show the outermost quantities (stock volumes) and prices (split-adjusted stock prices).  The Demand Frontier is the green line of best fit through them.  It shows the market’s price limits and its reaction to price changes.

Another way to portray buyers’ price sensitivity is with Aggregate Market Demand.  Here, an algorithm splits the stocks into price bins, distributed 1) equally concerning price, or unequally distributed to price following 2) a Fibonacci or 3) Geometric series for the number of observations per bin.  In this case, a 6 bin split (divided by red lines) provides 5 red points (bin 5 is empty).  Each red point is the total stock quantity in each bin and the average weighted price of those stocks.  The red line through them is Aggregate Market Demand.

Demand Frontier and Aggregate Market Demand slopes converge with many observations.  Here, the slope of the Demand Frontier is -0.244; the Aggregate Market Demand is -0.236. Good agreement between the slopes provides good evidence about market workings.

How does Value relate to Demand?  Read the next post.

#demandforecasting

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The Demand For Money

Well, that’s an odd title, I’ll grant you that.

Really, what we’re addressing here is the demand for fiat currency.

Recall in previous posts we found Demand Frontiers for multiple markets. Sometimes these curves have breaks. Such is the case for fiat currencies. As shown in the diagram, this market has an Upper Demand Frontier and an Outer Demand Frontier.

Upper Demand Frontiers emphasize the price-limiting boundary for a market, while Outer Demand Frontiers focus on the quantity-limiting ability of a market to absorb the product. These boundaries help countries’ central banks to figure out how many currency units to issue.

What maintains the price of any currency? Please look at the next post for the first of two answers.

#demand #prices #currency #demandforecasting

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A Change Of Perspective

Modern economics gets inspiration from thermodynamics, constantly looking for the equilibriums such systems demonstrate.

Multidimensional Economics has a different point of origin.

Consider the maps below and the three questions that follow.

Which two countries are these?

Where do they touch?

Why does it matter?

Look to the next post for the answers.

#demandforecasting #prices

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Why Find Demand Frontiers?

In the last few posts, we’ve been examining Demand Frontiers. You might ask, “What is the point of doing that?”

Well, let’s look.

Recall in the last post, we found the Demand Frontier moved little in 20 years.  In 2016, the Demand Frontier had an equation describing the line running from the upper left to the lower right in the diagram below.  Because the programs forming this line clustered closely about it, the standard deviation of the line is relatively low: $25.5 million.

The United States Air Force proposes to build 100 B-21 bombers at a “projected average procurement unit cost of $550 million per plane in FY2010 (https://lnkd.in/g4Rkx2R or $610M per plane in 2016 dollars.  What are their chances of making that number of planes at that price, given the standard deviation of the Demand Frontier?

As shown below, the B-21 Target is nine standard deviations over the predicted limiting price ($380M) for the B-21.  Examined by another metric, the historical maximum percentage deviation over the Demand Frontier was 17.8%.  The B-21 program proposes to exceed it by 60.5%.

What was the procurement history of other programs that tried to exceed the Demand Frontier? We will find out next time.

#demand #demandforecasting

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Demand Frontiers Change – But Some Not By Much

Markets change.  Demand Frontiers depict the limits of markets to absorb products based on their prices to the quantities purchased.  While some markets change rapidly (cell phones, flatscreen televisions, computers, etc.), others, especially at their limits, are slow to respond.

The market for fighters and bombers is such a market.

At its Demand Frontier, this market has changed little in 20 years.  The constant over that period changed less than 2.5%, and the slope less than 1.0%.  (Note: The F-35A, shown in a previous post, once corrected for its revised 2016 values, fell off of the Frontier).

If a market’s Demand Frontier is stable over decades, what are the chances of vastly exceeding it?  Tune in to the next post for the answer.

#demand #demandforecasting #prices

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Demand Frontiers

The circles in the last post represent the outermost quantity-price points for the bomber market. We call the line of best fit through them the Demand Frontier.

Demand Frontiers form for all mature markets.  They move as the products that form them change their quantities sold or prices.

What does this Demand Frontier reveal about the upcoming B-21 Bomber? (Answer in next post)

#demand #demandforecasting #demandfrontier

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Demand Is Not Hypothetical

Virtually all economics textbooks treat Demand hypothetically.  They strike a line to show how prices would theoretically fall as quantities increase.

In the real world, market Demand manifests itself as a series of points, with quantities (here, of bomber models) on the horizontal axis, and prices (as bomber prices) on the vertical axis, as shown below.  Note the limiting values for this market, shown in open circles.  Collectively, what do these circles represent? (Answer in next post)

#demand #demandplanning #demandforecasting