Business Economics Assignment

Answer :1

S. No. Price Qty TR MR AR Price Elasticity

a. 6 0 0 0 ∞ =∞ Perfectly Elastic

b. 5 100 500 5 5 5 >1 Relatively Elastic

c. 4 200 800 3 4 2 >1 Relatively Elastic

d. 3 300 900 1 3 1 1 Unitary Elastic
Relatively
e. 2 400 800 -1 2 0.5 <1
Inelastic
Relatively
f. 1 500 500 -3 1 0.2 <1
Inelastic
g. 0 600 0 -5 0 0 0 Perfectly Inelastic

1.1 Elasticity of Price (e P )

Price elasticity can be defined as the ratio of the percentage change in quantity
demanded to the percentage change in price . It can be expressed as

Price elasticity of demand= Percentage change in quantity demanded /

Percentage change in price

Formula:
Price elasticity = (Change in Quantity) (Initial Price)
(Change in Price) × (Initial Quantity)

e P = (∆ Q /∆ P ) × ( P/Q )

(100-0) x 6
eP = = ∞ Perfectly Elastic
(5-6) 0
(200-100) x 5
eP = = 5 Relatively Elastic
(4-5) 100
(300-200) x 4
eP = = 2 Relatively Elastic
(3-4) 200
 (400-300) x 3
eP = = 1 Unitary Elastic
(2-3) 300
(500-400) x 2
eP = = 0.5
(1-2) 400 Relatively Inelastic
(600-500) x 1
eP = = 0.2 Relatively Inelastic
(0-1) 500
(0-600) x 0
eP = = 0.0 Perfectly Inelastic
(0-0) 600

 When a small change(rise or fall ) in the price results in a large change in the
quantity demanded it is known as perfectly elastic demand.
 When a change in the price of a product does not bring any change in the
quantity demanded is called perfectly inelastic demand.
 When a proportionate or percentage change in price results in greater than the
proportionate or percentage change in quantity demanded is called as relatively
elastic demand.
 When a percentage or proportionate change in price results in less than the
percentage or proportionate change in demand, the demand is called to be
relatively inelastic demand.

1.2 Total Revenue

Formula: Total Revenue = Quantity Sold x Price
TR = Q × P

a. TR = 0 X 6 = 0
b. TR = 100 X 5 = 500
c. TR = 200 X 4 = 800
d. TR = 300 X 3 = 900
e. TR = 400 X 2 = 800
f. TR = 500 X 1 = 500
g. TR = 600 X 0 = 0

1.3 Marginal Revenue

 Formula:
Marginal Revenue = Change in Total Revenue/ Change in Quantity
MR = ∆ TR /∆ Q
MR = (0-0)/ (0-0) = 0
a.
b. MR = (500-0)/ (100-0) = 5
MR = (800-500)/ (200-
= 3
c. 100)
MR = (900-800)/ (300-
= 1
d. 200)
MR = (800-900)/ (400-
= -1
e. 300)
MR = (500-800)/ (500-
= -3
f. 400)
g. MR = (0-500)/ (600-500) = -5

1.4 Average Revenue

Formula: Average revenue = Total revenue / Quantity sold.
AR = TR/Q
a. AR=0/0 = 0
b
AR=500/100 = 5
.
c. AR=800/200 = 4
d
=
. AR=900/300 3
e. AR=800/400 = 2
f. AR=500/500 = 1
g
=
. AR=0/600 0

1.5 Relationship between AR and MR

Average Revenue (AR) : This is the revenue earned per unit of output sold. It is
calculated by dividing the total revenue of the firm by the total number of units sold.

Mathematically AR = TR/Q.

Marginal Revenue (MR) : This is the revenue earned by selling an additional unit of
the commodity. I.e. The change in total revenue resulting from the sale of an additional
unit is called as marginal revenue.
 Mathematically MRn = TRn – TRn-1,

 The general relationship between AR and MR can be explained as under:

 Marginal revenue is less than average revenue :MR<AR
 Marginal revenue is equal to average revenue: MR=AR
The relation between average revenue and marginal revenue can be discussed under
pure competition, monopoly or monopolistic competition or imperfect competition.

a. Under Imperfect Competition (Monopoly)

MR < AR occurs for a firm selling an output in a monopoly market, where a single
firm sells to several customers. A monopoly market faces market control and has a
negatively sloped demand curve. In order to sell more units, a firm in the
monopoly market must charge a lower price.
b. Under Perfect Competition
MR = AR occurs for a firm selling an output in a perfectly competitive market,
where there are several several and several buyers of a given product. In such a
scenario, to sustain in the market firms sells products at the prevailing market
price. Since the firms in a perfectly competitive market receive the same price for
each unit(an additional units), the marginal revenue is equal to per unit price,
which is equal to AR.

Answer 2:
Introduction
A forecast is an estimation or prediction about situations which are most likely to
occur in near to distant future. The firm must plan for the future. Planning involves
forecasting .The firm must forecast the future of demand for its products under different
possible circumstance, such as price, competition, promotional activities and general
economic activities.
Forecasting plays an important role in managerial decisions. The objective of demand
forecasting is to minimize risk and the margin of uncertainty.
Concept
The Demand forecasting is being performed on three bases i.e.,
a. Level of Forecasting
b. Time Period of Forecasts
c. Nature of Forecasts

Techniques & Methods of Demand Forecasting:

Techniques of demand forecasting are categorized into qualitative and quantitative
technique.
 Qualitative
o Survey method
o Complete enumeration
o Sample Survey
o Opinion polls
o Expert Opinion Method
o Delphi Method
o Test Marketing
 Quantitative
o Time Series Analysis
 Secular trend
 Cyclical component
 Seasonal component
 Irregular component
o Moving Average
o Exponential Smoothing
o Index numbers
o Regression analysis
o Econometric models
o Input-Output analysis
 Expert Opinion Method
The Firm obtains the opinion of experts from experience members. It is also known as
forecasting through panel consensus. Another approach called Delphi is used in which
questionnaire pertaining to forecasting problem is presented to the panel members.
Responses are analysed by panel members and re-circulated until consensus is reached.
This method involves extensive statistical calculations.
 Consumer’s Survey Method
 This is used for short term projections. Buyers’ intentions are surveyed by directly taking
their opinions. These can be done in three ways: complete enumeration survey, sample
survey, end-use method
Joel Dean criticized survey method by stating that consumers are often inconsistent and
there are formidable barriers to learning the buying intentions of the household
consumers.
 Time Series
Historical data is used in this method for forecasting the demand. Time Series data
indicates different types of fluctuations which can be classified as secular trends, cyclical
variations, seasonal variations, and random fluctuations. The trend projections is used for
long term forecasting
 Moving average
The method of moving average is useful when the market demand is assumed to remain
fairly steady over certain period. It is calculated as Moving average = Demand in the
previous n months / n
 Exponential smoothing:
In this technique more recent data is given weightage
 Index numbers:
The index number offers a device to measure changes in a group of related variables over
a number of years. We select a base year which is given value of 100 and then express all
subsequent changes as movement of this number.
 Regression Analysis:
The statistical method measures the relation between two variables where co-relation
exists. For e.g.: Demand for annual repairs of air conditioners can be established based on
age of machines under servicing.
There are two methods for regression analysis
o Simple Linear regression: This method explains the relationship between an
independent variable with one or multiple variables. For eg.the relation between
the quantity demanded and the price of commodity.
o Multiple linear regression: This method is used to determine the relationship of
two or more independent variables with one dependent variable. For e.g. The
relation between the production of crops and rainfall, irrigation facility,
 availability of fertilisers, credit availability for farmers, availability of agricultural
labour.

 Econometric Models:
Econometric models used in forecasting take the form of equation or system of equation
which best expresses the most probable interrelationship between a set of economic
variables according to the economic theory and statistical analysis.
 Input-Output Analysis
The inputs-output analysis will show how an increase or decrease in demand for cars
affects increase in demand of steel, tyres, or glass.
 Barometric Methods
The barometric method is used to speculate future trends based on current developments
and it is also known as leading indicators approach to demand forecasting. Following
indicators are used
o Leading indicators: When an event has already occurred is considered to predict
the future event, past event would act as a leading indicator. For e.g. Value of
inventory, profit after tax and current investment index.
o Coincident indicators: These indicators move simultaneously with the current
event. For e.g. Level of unemployment, rate of inflation, gross domestic product,
aggregate production in the industry etc act as indicators of the current state of a
nation’s economy
o Lagging indicators: These indicators include events that follow a change. Lagging
indicators are critical to interpret how the economy would shape up in the future.
For e.g. Outstanding loans, rate of interest, cost per unit, demand for loans etc are
the indicators of the performance of a country’s economy.
There is no unique method of forecasting the demand of any product. One or
combinations are used for forecasting.
Each stage of product lifecycle needs an appropriate method.
o For development and introduction stage: Market trial survey, Delphi or in-house
survey or experts are recommended.
o Rapid growth stage: Time Series or regression analysis are best suited method.
o Steady growth stage: In this stage there is slowing down of demand , hence
econometric models are used.
Limitations of demand forecasting
o Even though the opinion surveys are simple and straight forward, there is an element
of subjectivity involved.
o As surveys are expensive and time consuming , there is a tendency to limit the size of
sample consumers. This leads to data being not representative and therefore
misleading.
o When Time series method is used , results are biased as cycles have different
intensities and timings.
o Though scientific methods are adopted, there is difference between field experiments
and laboratory experiments.

Conclusion:
Selection of good forecasting method is done based on accuracy , reliability, and data
availability. The method selected should be economical and flexible, especially when
economists are faced with several uncontrollable variables. The period by which products hit
the market is long , hence the forecasts must stand the test of durability. The process requires
coverage of large correspondents and collected data ; simplicity of the method helps in
obtaining meaningful data in short time.

Answer 3 a:
Elasticity of Supply:
The law of supply states that the quantity supplied of a product increases with a rise in
the prices of the product and vice versa, while keeping all other factors constant. Elasticity of
Supply can be defined as measure of the degree of change in the quantity supplied of a
product in response to a change in its price. Mathematically it is as expressed as below:

e s= Percentage Change in Quantity Supplied of commodity

Percentage Change in Price of commodity

Percentage Change in Quantity Supplied = Change in Quantity ∆S

Original Quantity Supplied (S )

e s= ∆ S/ S = ∆S × P
∆ P /P ∆ P S

e s= Change in Quantity Supplied of commodity x Initial Price

Change in Price of commodity Initial Supply
e s= ∆ S × P
∆P S
here,
es = 2
S1 = 200; S2 = 250
P1 = 8; P2 = x
∆S = S −S
( 2 1 ¿ = 250 - 200 = 50
∆P = ( P2−P1 ¿ = ( x−8 ¿

2= 50 × 8
(x−8) 200

2= 400
(200 x−1600)

2 (200 x -1600) = 400

400x = 400 + 3200
400x = 3600
x = 3600 / 400 = 9; x=9; P2=9

Therefore, the firm supply 250 units at price of Rs 9 per unit.

Answer 3 b:

e s= Change in Quantity Supplied of commodity x Initial Price

Change in Price of commodity Initial Supply

e s= ∆S × P
∆P S

here,
es = 2
S1 = 300; S2 = 345
P1 = x; P2 = 1.15x
∆S = ( S2−S 1 ¿ = 345 - 300 = 45
∆P = (1.15x – x)
[ Considering the initial price as ‘ x ’ and with 15% increase the changed price will be 1.15 x ]
e s= ∆S × P
∆P S

e s= 45 x x
(1.15x – x) 300

e s= 45x = 45 x =1
345x - 300 x 45 x

e s= 1 (The elasticity is 1 therefore it is Unitary Elastic Supply)