NMIMS Global Access School

for Continuing Education (NGA-SCE)

Course: Business Economics

Internal Assignment Applicable for June 2020 Examination

Question 1. The concept of elasticity for demand is

importance for determining the prices of various factors of
production. Discuss the various factors that influences the
price elasticity of demand.

Price elasticity of demand: - Price elasticity of demand

is economic measure used to study the change in
quantity demanded for a product in relation to change
in price of that product.
Price elastic of demand = % change in demand
% change in price
The price elasticity are of five types.
Perfectly elastic demand: - Greater change in demand
in response to percentage or smaller change in the
price.
Elasticity of demand= ∞
Perfectly Inelastic demand:- No change in demand in
response to percentage or smaller change in price.

Elasticity of demand= 0
Relatively elastic demand:- Change in demand is
greater than change in price.
Elasticity of demand>1

Relatively inelastic demand:- Change in demand is

less than change in price.

Elasticity of demand<1
Unitary elastic demand:- Change in demand is equal
to change in price.
Elasticity of demand=1

Elasticity of demand: - It is a principle which study

how demand and supply react to variation in its
determinants. Demand in elastic if it reacts to change
in its determinants while inelastic if it does not react
and remain constant and due to change in its
determinants.
Income: - The level of income also influences the price
elasticity of demand. Elasticity of demand for high
income groups will be less elastic because rich people
are not bothered by small change in price but poor
people gets highly affected by increase and decrease
in price as a result demand for low income group is
highly elastic.

Availability of substitute good: - Demand for

commodity having large number of substitute will be
more elastic because small change in price will leads
people to shift to substitute goods.
For e.g. 1) if the price of chocolate of one brand rises
people will shift to other brand chocolate making
demand highly elastic.
2) Rise in price of Pepsi encourages buyer to go for a
coke and vice-versa.
Time period under consideration: - In short period of
time demand is more inelastic as demand of product
cannot be postponed however in longer run other
factor such as income availability etc makes demand
more elastic.
For e.g. 1) Demand for life saving drugs and medicine
is inelastic as consumer cannot postpone their usage.
2) Demand for a particular vehicle will more elastic as
its purchase can be postponed and in long run their
will be a lot of and technology change will be there.

Nature of good: - Good can be divided in three types

of categories.

Necessity or (essential good):- Generally the demand

for essential good is inelastic as there consumption
cannot be stopped.
For e.g. Demand for salt and sugar, match boxes are
inelastic as due to increase and decrease in price does
not affect their consumption more.

Normal of goods: - The demand for normal good is

elastic in nature as change in price result in change in
demand for product.
For e.g. Increase in price of milk and butter will lead to
decrease in their demand.

Luxury good: - The demand for luxury goods is more

elastic in nature however elasticity of luxury goods
also demands on level of income of consumer.
For e.g. If the price of branded shoe falls there will be
more people demanding the branded shoe and vice
versa.

Perishability of product: - Demand for perishable

good is inelastic as their consumption cannot be
postponed and they are of single use only.
For e.g. Vegetable, fruit required on regular basic
(single use) and their use cannot be postpone.
While demand of durable goods is more elastic,
durable good can be used many number of times. If
price of durable good increases people will not think of
replacing old good or they will start using cautiously.
For e.g. Price of sofa set increase the people will not
think to replace their old sofa.

Habitual goods: - Demand for habitual good are

inelastic in nature people will even buy extra for these
goods for e.g. demand of cigarette, alcohol, tobacco
will not affect much by change in its price.

Use of a commodity: - If a commodity has a single use

demand of that commodity will be less elastic but if a
commodity have different use demand for that
commodity will be highly elastic.
For e.g. if the price of milk falls people will start
consuming(demand) more as it has multiple uses
making butter, cheese etc.

Relative need of product: - The need of every

individual is not same for every product. Someone’s
demand for product can be elastic while for others it
can be inelastic for someone what is luxury can be
necessity for other. So price elasticity also differ on the
basis of needs.
For e.g. AC is luxury for normal people but it is
necessary for cold storage business.

We have discussed few factors influencing the price

elasticity of demand there are many other factor
influencing price elastic of demand which changes as
per time and situation.
These factor help to study the elasticity of demand
they gives us idea whether the demand will be elastic
or inelastic for a product. The concept of elasticity
helps in process of framing the policy and making
decisions. The price elastic of demands play an
important role in determining the price under various
market situations. It helps government to formulate
taxation policy setting parameters of international
trade, farming of agriculture policy for farmer etc.
 So here we can conclude that price elasticity of
demand is very important and play and significant role
in determining prices of factors of production.

Question 2)
Complete the hypothetical table below and explain in brief, the behavior of each type of
cost.
Quanti Total Total Total Average Average Average Marginal
ty Fixed Variable Cost Fixed Cost Variable Total Cost
Cost Cost Cost Cost
0 0
1 25
2 40
3 50
4 60
5 100 80
6 110
7 150
8 300
9 500
10 900

Types of cost: -

Total fixed cost [TFC]: - Cost of production that does

not change with change in quantity of output
produced by a firm. Total fixed cost is constant in
nature and remains same even when there is no
production. The fixed cost does not change in short
run however it can vary in long run. Total fixed cost
curve is straight line horizontal to x axis.
Example- Factory, rent, office expense etc.
Total variable cost [TVC]: - Cost of production that
vary with change in quantity of production. It increase
with increase in output and decrease with decrease in
output if the output is zero variable cost also becomes
zero.
Total variable cost curve start from the origin and its
inverted shaped.
For e.g. direct material, direct labour etc.

Total cost [TC]: - Total cost is overall cost incurred by

the firm in production process. Total cost is a
summation of both total fixed cost and total variable
cost as the total fixed cost remain constant any change
in total cost would be result of change in total variable
cost.
Total cost = Total fixed cost + Total variable cost

Average fixed cost [AFC]: - Average fixed cost is

calculated by total fixed cost divided by number of
quantity produced. Average fixed cost is fixed cost per
unit of output since total fixed cost is constant average
fixed cost decrease with increase in output and
increase with decreasing output. Average fixed cost
cannot be zero.
Average Fixed Cost = Average Total Cost - Average
Variable Cost
Average Fixed Cost = Total Fixed Cost
Quantity
 Average variable cost [AVC]: - Average variable cost is
calculated by total variable cost divided by number of
quantity produced. Average variable cost is variable
cost per unit of output average variable cost fall as
output goes from zero to normal capacity it reaches to
minimum beyond normal capacity average variable
cost rise due to diminishing return.
Average Variable Cost = Total Variable Cost
Quantity
Average Variable Cost = Average Total Cost -Average Fixed
Cost
Average total cost [ATC]: - Average total cost is
calculated by total cost divided by number of unit
produced. It is summation of average fixed cost and
average variable cost. It is U shaped curve. It declines
in beginning reaches to minimum and then start to rise
due to increasing return earlier followed by
diminishing returns.
Average total cost = Average Fixed Cost + Average
Variable Cost
Average total cost = TOTAL COST
QUANTITY

Marginal cost [MC]: - The change in total cost due to

additional output produce by a firm is known as
marginal cost. It is independent of fixed cost because
fixed cost does not change with the output only
variable cost changes with level of output. Hence
marginal cost change due to variable cost only.
Marginal cost = Total cost
 Quantity

Or Mcn = Tcn – Tc(n – 1)

Or Mc = Change in TVC
Change in Quantity

Table showing calculation of various costs

Quantity Total Total Total Average Average AVERAGE Marginal
Fixed Variable Cost Fixed Cost Variable Total Cost
Cost Cost (TFC+ ( TFC Cost Cost (MC=
TVC) Q ) ( TVC (AFC+AVC) TCN-TCN-1)
Q )
0
1 100 25 125 100 25 125
2 100 40 140 50 20 70 15
3 100 50 150 33.33 16.67 50 10
4 100 60 160 25 15 40 10
5 100 80 180 20 16 36 20
6 100 110 210 16.67 18.33 35 30
7 100 150 250 14.29 21.42 35.71 40
8 100 300 400 12.5 37.5 50 150
9 100 500 600 11.11 55.56 66.67 200
10 100 900 1000 10 90 100 400

Interpretation
Total fixed cost: - TFC remain same for all level of
output that is 100.
Total variable cost: - Given in the question itself
 Total cost: - Calculated by adding total fixed cost and
total variable cost.
Average fixed cost: - It will be calculated by dividing
total fixed cost with output.
Average variable cost: - Calculated by dividing total
variable cost by output level.
Average Total Cost: - Calculated by adding average
fixed cost and average variable cost.
Marginal cost: - It is calculated by subtracting total
cost at quantity (N) with total cost at quantity (N-1)
[Tcn - Tcn – 1]
Or
it can also be calculated by given formula.
Marginal cost = Change in Total Cost
Change in Quantity

QUESTION(3)
Demand forecasting in an organisations plays a vital role in
business organisations. It provides reasonable data for the
organization's capital investment and expansion decision.

a. Keeping the above statement in consideration. Discuss the

various steps involved in demand forecasting.

b. Discuss the various needs for demand forecasting in business

organisations?

Answer Part A

Demand Forecasting: - Demand forecasting is technique of

estimation of probable demands for product and services of firm in
future it can also term as sales forecasting.
Demand forecasting plays a vital role in business decision making .It
reduce the business risk and helps in product planning, inventory
management, process selection, assessing workforce requirement etc.

Steps involved in demand forecasting:-

Determining the objective:- First of all objective shall be identified

for what purpose demand forecasting is to be done.

Objective can be set on following basis:-

1) Whether organisation should opt for short term or long term

demand forecasting.
2) Forecast overall demand of the industry or for an organisation
only.
3) Whether to forecast whole market demand or for a particular
segment only.

For organisations capital investment and expansion long term

demand forecasting will be more suitable as capital investment
involve a lot of money and it is done for long run perspective.
Capital investments are done by analysing whole market so
demand forecasting of whole market shall be done.

Defining the time perspective:- Time is defined on the basis of

determined objective that is whether to perform forecasting for short
run or longer period.
For capital investment long term forecasting is advisable.

Method of forecasting:- Selection of method of demand forecasting

depends on purpose of forecasting. For different kind of purpose
different methods are suitable it depends on time period, purpose,
field in which forecasting is done etc.

Collecting and analysing data: - Collection of data is done from

primary and secondary sources or both and that collected data is then
analysed and transformed into understandable and useful form.

Interpretation of outcome:- After analysing data the final outcome

is obtained which is used to predict the demand estimates and the
results obtained from such estimates are presented in the form of
detailed report.

Demand forecasting also provide reasonable data for organisation

capital investment and future expansion plans.
If the expected demand for product is higher than organisation may
plan to invest more capital for expansion purpose or if the demand is
likely to fall then organisation may cut down investment in business.
If the business is planning for capital expansion then the steps
involved in demand forecasting should be followed accordingly to
make desired decision regarding expansion.

Answer Part b

Needs of demand forecasting.

Achieving objective: - Demand forecasting helps in achieving the pre

determined objectives like production of desired output, reaching
sales target, minimising cost etc.

Predicting future: - Forecasting techniques helps in predicting the

future demand so that an organisation can plan and take steps for
resources allocation like raw material, input, finance for the
production purpose.
Inventory management:- Demand forecasting helps to assess the
quantity and time of raw material requirement. So that process of
procuring inventory and warehousing can be done smoothly.

Sales forecasting: - It helps in forecasting the probable sales figure

so that organisation can set up their sales target and do proper
marketing and advertising of product for achievement of sales target.

Manpower requirement:-Demand forecasting predict the future

demand which enables firm to assess how much man power will be
required for meeting the production and sales target. It helps business
in their recruitment process.

Helping government: - It enables government to decide import

export policy. Government can use demand estimates to decide
whether import is required to meet domestic supply or export can be
made in case of output produced in country exceed domestic demand.

Expanding organisational: - If the expected demand of product is

higher in market then firm can think of expansion or if the demand is
expected to fall the decision regarding contraction and shifting
product can be taken.

Better control and stability: - Demand forecasting helps the

organisation to service the seasonal and cyclic fluctuation and
controlling cost budget, profit analysis, inventory management and its
marketing mix effectively.

Demand forecasting is essential part of management

process. It helps management to overcome changes
taken decision effectively. Set objective and goal for
organisation and work for their achievement.
Demand forecasting helps the organisation in
production of output, predicting future estimated
sales, inventory management and stability etc.
Moreover its show way for the capital investment by
organisation for growth and development and
expanding the business.

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