NMIMS Global Access

School for Continuing Education (NGA-SCE)

Course: Business Economics
Internal Assignment for September 2021 Examination

1. (a) What is Demand Forecasting?

Demand forecasting is a process of predicting the future demand for an
organisation’s goods/ services. It is also referred to as sales forecasting as it
involves anticipating the future sales figures of an organisation.
Demand forecasting aids an organisation to take various business decisions, such
as purchasing raw materials for production, planning the production process,
managing resources (funds), and deciding the price of its products. Demand can be
forecasted either internally by making estimates called guess estimate or externally
through specialised consultants/ market research agencies.
(b) Need for Demand forecasting – It is vital to the management of every
business as it helps an organisation in mitigating business risks and in making
effective business decisions. Moreover, it also provides insight into the organisation’s
capital investment and expansion decisions. Three needs for demand forecasting are
explained below:
(i) Producing the desired output: Demand forecasting enables an
organisation to produce the pre-determined output without any hindrance by
arranging for the various factors of production (land, labour, capital, and
enterprise) beforehand
(ii) Assessing the probable demand: Demand forecasting enables an
organisation to evaluate the possible demand for its products/ services in a
given period thereby enabling proper planning for production process. Thus, it
helps avoiding dependence on merely making assumptions for demand.
(iii) Forecasting sales figures: Sales forecasting refers to the estimation of
sales figures of an organisation for a given period. Demand forecasting helps
in predicting the sales figures by considering historical sales data and current
trends in the market.

(c) Demand forecasting is done systematically involving a number of steps,

thereby achieving the desired results. The steps involved are shown below: -
Specifying the objective

Determining the time perspective

Selecting the method for forecasting

Collecting and adjusting data

Interpreting the outcomes

 (i) Specifying the objective: The objective can be specified on as follows:
 Short-term/ long-term demand for a product or service
 Industry demand/ demand which is specific to an organisation
 Whole market demand/ demand which is specific to a market
segment
(ii) Determining the time perspective: Depending on the objective, the
demand can be forecasted for a short period of 2-3 years or long period which
is beyond 10 years. If an organisation performs long-term demand forecasting,
then it needs to take into consideration all the constant changes in the market
as well the economy.
(iii) Selecting the method for forecasting: Depending on the objective/
time period/ availability of data, the organisation needs to select the method
most suitable demand forecasting. The selection of method also depends on
the experience and expertise of the de- mand forecaster.
(iv) Collecting and analysing data: Data can be gathered either from
primary sources/ secondary sources or both. As data is collected in the raw
form, it needs to be analysed in order to derive meaningful information out of
it.
(v) Interpreting outcomes: After analysis the data is used to estimate
demand for the predetermined years. Generally, the results obtained are in the
form of equations, which need to be presented in a understandable format.

2. The calculation as sought is tabulated below: -

Quantity Price Total Revenue Average Revenue Marginal Revenue

50 200 10000 200 -

60 150 9000 150 -100

70 100 7000 100 -200

80 50 4000 50 -300

90 10 900 10 -310
 RELATIONSHIP BETWEEN TOTAL REVENUE AND MARGINAL REVENUE
Marginal revenue is the revenue earned by selling an additional unit of the commodity
or
The change in total revenue resulting from the sale of an additional unit.

MRn = TRn – TRn-1 (for sale of an additional one unit)

Or
MR = Change in Total Revenue/ Change in number of units (for
change in units sold is more than one)
Let us consider the table above to understand the relationship between TR and MR.

Case 1
MR60 = (TR60 – TR50) / (60 – 50) = (9000 – 10000) / 10 = -1000/ 10 = -100

Case 2
MR70 = (TR70 – TR60) / (70 – 60) = (7000 – 9000) / 10 = -2000/ 10 = -200

From the above illustrations, the following is evident

If MR is below zero, the sale of an additional unit decreases the TR.

The following relationship conclusions are relevant in this regard: -

• If MR is greater than zero, the sale of an additional unit increases the TR.
• If MR is below zero, then the sale of an additional unit decreases TR.
• If MR is zero, then the sale of an additional unit results in no change in TR.

3 (a). Income Elasticity of Demand – An increase in the income of consumers increases

the demand for the product even if the price remains constant. The responsiveness of
qty. demanded wrt income of consumers is called the income elasticity of demand.
= Percentage change in quantity demanded
Percentage change in income

Mathematically,
𝛥𝛥𝛥𝛥 𝑦𝑦
𝑒𝑒𝑦𝑦 = 𝑥𝑥
𝛥𝛥𝛥𝛥 𝑄𝑄
Where,
Q is original quantity demanded
Q1 is new quantity demanded

∆Q = Q1 – Q
Y is original income
Y1 is new income
∆Y = Y1 – Y

Solution: Given that:

Y = 5,000
Y1 = 15,000
∆Y = 10,000
Q = 30
Q1 = 60
∆Q = 30
Substituting the values,
30 5000
𝑒𝑒𝑦𝑦 = 𝑥𝑥 = 0.5
10000 30

3(b) Price Elasticity of Demand – is the ratio of the percentage change in quantity
demanded to the percentage change in price.
= Percentage change in quantity demanded
Percentage change in price
Mathematically,
𝛥𝛥𝛥𝛥 𝑃𝑃
𝑒𝑒𝑝𝑝 = 𝑥𝑥
𝛥𝛥𝛥𝛥 𝑄𝑄
Where,
Q is original quantity demanded
Q1 is new quantity demanded
∆Q = Q1 – Q
P is Initial price
∆P is change in price
Solution: Given that:
∆P = 40
Q = 1.75
Q1 = 7
∆Q = 5.25
Substituting the values,
5.25 100
𝑒𝑒𝑝𝑝 = 𝑥𝑥 = 7.5
40 1.75