Business economics

Q1. Demand forecasting in an organization plays a vital role in business

organizations. It provides reasonable data for the organization's capital
investment and expansion decisions. Keeping the above statement into
consideration. Discuss the various steps involved in demand forecasting.

Answer:

Introduction:

Demand forecasting is a technique that is used for the estimation of what can be the
demand for the upcoming product or services in the future. It is based upon the
real-time analysis of demand which was there in the past for that particular product or
service in the market present today. Demand forecasting must be done by a scientific
approach and facts, events which are related to the forecasting must be
considered.Hence, in simple words, if someone asks what demand forecasting is, we
can answer that after fetching information about different aspects of the market and
demand which is dependent on the past, an attempt might be made to analyze the
future demand. This whole concept of analyzing and approximations are collectively
called demand forecasting. In order to understand it more clearly, we can consider the
following equation so that we can understand the concept of demand forecasting more
easily.

Application and concept applied

Steps involved in demand forecasting

To reap the favored outcomes, call for forecasting have to be performed methodically.
Allow us to move over those steps in deepness.
• Knowing your goal : Before starting the process, the characteristic of call for
forecasting needs to be decided. The adhering to standards may be made use of to
outline the goal:
- Lasting or quick-time period product call for
- Sector call for or call for particular to a enterprise
-Demand for the whole marketplace or call for for a particular marketplace segment
• Determining the time horizon: Depending upon the objective, call for is probably
projected for a brief (2-three years) or extended length (past ten years). Long-time
period call for forecasting calls for an business enterprise to make up for common
marketplace modifications and the financial system.

• Choosing a Forecasting Method: Demand forecasting may be finished in numerous

methods. Not all methods, however, are suitable for all forms of call for forecasting. The
business enterprise have to pick the satisfactory forecasting approach primarily based
totally at the objective, time array, and information accessibility. The call for forecasting
approach is also inspired through the call for forecasters' enjoyment and capability.
• Data series and analysis: Data has to be accumulated after choosing a call for
forecasting approach. Because information is collected in its uncooked kind, it needs to
be analyzed to supply pertinent information. Data may be received from both extra or
important sources or both.
• Interpretation effects: After the information has been analyzed, it's miles used to count
on call for for the required years. In general, the received effects stay inside the type of
equations that have to be presented, now no longer surprisingly.

Forecasting calls may be made on the company, financial system, or marketplace

levels. The destiny call for a selected business enterprise's products and services is
projected at a enterprise degree. The collective call for the products and services of all
companies in an information quarter is ready for on the marketplace level. On the
alternative hand, the amassed call for items and offerings within the financial system all
of sudden is forecasted.

Products are labeled as patron or capital objects primarily based totally on their nature.

• Consumer items: These objects stay in excessive call for. Generally, call for
forecasting for those merchandise is performed whilst a brand new product is
introduced, or an current product is changed with a far higher one.
• Capital items: These are merchandise which are crucial to supply patron items,
consisting of uncooked materials. Therefore, those commodities have derived call for.
Capital objects call for forecasting is inspired through long lasting items call for.
Forecasting extra call for for patron merchandise could mean forecasting extra call for
for capital merchandise.
Demand is projected withinside the quick and prolonged run primarily based totally upon
length, that is exact below:

• Short-time period projections: It calls for forecasting for about a year. It makes a
speciality of a business enterprise's brief decisions (for example, arranging finance,
growing manufacturing plans, setting up advertising and marketing plans, and so on).
• Long-time period projections: It includes forecasting call for for a length of 5-7 years,
which is probably a blanketed length of 10 to twenty years. It is involved with an
business enterprise's lasting decisions (for example, choosing production capability,
converting machinery, and so forth).
Closing statement:
Although call for forecasting has a full-size array of programs in a business enterprise, it
does have a few limits. This is due to the fact that the call for forecasting is primarily
based totally upon an evaluation of present day and former activities to decide the
satisfactory route of movement for the destiny. Past events or incidents won't constantly
be reliable and ok for destiny base forecasts. The overall performance of call for
forecasting is decided through the approach applied to count on call for. The standards
for choosing a call for forecasting approach consist of precision, timeliness, affordability,
ease of interpretation, flexibility, simplicity of use, and application, amongst others.
Q2. From the given hypnotical table Calculate Total Cost, Average Fixed Cost,
Average Variable cost and Marginal Cost.

Answer:
Introduction:
Organizations incur miscellaneous prices on numerous sports for production offerings
and products, inclusive of obtaining primary materials, paying hard work salaries/wages,
and shopping or leasing machines and buildings. These fees constitute the
organization's fee of producing its offerings and products. The amount of assets
required for production gadgets and offerings is known as the fee. The sum of the coins
values of the inputs accelerated with the aid of using their precise prices is known as
the fee of manufacturing.
Fixed prices are prices persisted with the aid of using an organization that doesn't
extradite in reaction to versions in output degree. Even if the commercial enterprise
does now no longer create anything, its dealt prices will remain non-stop. As an
example, devaluation, administrative prices, land and constructing rent, tax obligations,
and numerous different prices of an organization remain non-stop even if the
organization's output rises and falls. Variable prices are immediately related to the
organization's final results stage. To place it simply, variable prices range with
manufacturing amount or stage adjustments.
Application and concept applied:

Calculation of various costs

The overall price is the real price incurred through a agency to create a selected degree
of the final results. An organization's Short-Run Total Cost (SRTC) is comprised of
tremendous elements:
TFc (Total Fixed Cost): These costs do now no longer alter because of changes. Even
while the end result is zero, TFC remains constant. TFC is represented as a horizontal
line parallel to the x-axis (result).
TVc (Total Variable Cost): These costs are instantly associated with a firm's end result.
This shows that once final results boosts, TVC boosts as well, and while output
decreases, TVC reduces.
SRTC is decided through including the whole constant and variable prices.
TFC + TVC = SRTC
The average price is calculated through splitting the whole price through the range of
structures a commercial enterprise generates. A firm's short-run common price (SRAC)
describes the price of effects at one of a kind ranges of production.
SRAC is calculated through dividing the short-run basic price through the end result.
A firm's SRAC is U-shaped. It starts to drop, and after that receives to a minimal and
starts to enhance. The sorted prices stays constant initially, at the same time as most
effective the variable prices, which includes number one cloth and paintings prices,
modify. Later, because the repaired prices are unfold out for the duration of the
manufacturing, the everyday price starts to reduce. When a agency makes use of all to
be had resources, the everyday price is maintained to a minimal. The SRAC curve
illustrates the short-run common price of making a selected amount of outcomes. The
SRAC curve's downward slope indicates that as output expands, so do common prices.
The SRAC contour begins to slope higher, revealing that ordinary prices growth at
output levels above Q1.
The change in a firm's basic price divided through the adjustment withinside the overall
end result is called marginal price (MC). The adjustment in short-run overall price as a
result of an adjustment withinside the agency's end result is defined as minimum
short-run price. On a chart, the minimum short-run price is the slope of short-run overall
price and represents the price of change in basic price as output modifications. Due to
elevating returns at the start complied with through lessening returns, the short-run
restrained price (SRMC), the short-run common price (SRAC), and ordinary variable
price (AVC) are U-shaped. The SRMC curve intersects the SRAC contour and the AVC
curve on their floors.
Conclusion:
When a commercial enterprise determines to supply an asset, it has to pay the charge
for the several inputs required within the process. The corporation calls for labor,
uncooked materials, gas, and power, at the side of the condo rate for the manufacturing
center. Business selections are made via means of comparing the financial cost of
inputs in reference to the output. The coin's cost of inputs is computed via means of
multiplying inputs via means of their corresponding prices (price of manufacturing). Cost
evaluation is vital in commercial enterprise decision-making for the reason that the time
period price has specific significance in specific occasions and is probably interpreted
differently. A business enterprise has to have a sturdy reputation of the numerous price
principles to make green aid appropriation choices.
Q3a. Suppose the monthly income of individual increases from Rs 20,000 to Rs
25,000 which increase his demand for clothes from 40 units to 60 units. Calculate
the income elasticity of demand.
Answer:
Introduction:
Elasticity of demand is an important variation on the concept of demand. Demand can
be classified as elastic, inelastic or unitary. An elastic demand is one in which the
change in quantity demanded due to a change in price is large. An inelastic demand is
one in which the change in quantity demanded due to a change in price is small. The
formula used here for computing elasticity of demand is:
(Q1 – Q2) / (Q1 + Q2) (P1 – P2) / (P1 + P2)
If the formula creates an absolute value greater than 1, the demand is elastic. In other
words, quantity changes faster than price. If the value is less than 1, demand is
inelastic. In other words, quantity changes slower than price. If the number is equal to 1,
elasticity of demand is unitary. In other words, quantity changes at the same rate as
price.
Application and concept applied
Income elasticity of Demand
Ey = Percentage change in quantity demanded/ Percentage change in income
Where Percentage change in quantity demanded = New quantity demanded – Original
quantity demanded (∆Q)/ Original quantity demanded (Q)
Percentage change in Income = New income – Original income (∆Y)/ Original income
(Y)
Ey = ∆Q/∆Y × Y/Q
Applying the formula in the present case,
∆Q = 50 – 40 = 10
∆Y = 35,000 – 20,000 = 15,000
Q = 40
Y= 20,000
Ey = 1/3
Demand's income elasticity modifications rely on the product and the circumstances.
The revenue flexibility of demand is divided into three groups based upon a numerical
value, with the following descriptions.
• Revenue flexibility of demand is considered favorable when a consumer's demand
increases in reaction to a proportionate change in revenue and the other way around.
There are three different sorts of positive revenue elasticity of demand: unitary, less
than unitary, and higher than income elasticity.
• Unitary revenue elasticity of demand: When a proportionate adjustment in a
customer's earnings translates into a relative change in the demand (increase) for a
great, the revenue elasticity of demand is said to be unitary.
• Less than unitary revenue flexibility of demand: When a proportionate adjustment in a
customer's revenue leads to a minor increase in demand for an excellent, this is when
the income flexibility of demand is smaller than 1.
• Greater than unitary income flexibility of demand: When a proportionate adjustment in
a customer's revenue leads to an equally significant increase famous for a good, this is
when the earnings flexibility of demand is higher than 1.
• When a consumer's demand for a product decreases in reaction to a proportionate
modification in their income and vice versa, this is referred to as having an adverse
income elasticity of demand. When the items are subpar, it usually happens.
Closing statement:
Demand's revenue flexibility helps sellers select where to put their cash. In general,
sellers favor purchasing markets where product demand is a lot more sensitive to
adjustments in earnings as a percentage or where the income elasticity of demand is
more significant than no (> 1).
Q3b. Assume that a business firm sells a product at the price of Rs 500. The firm
has decided to reduce the price of the product to Rs 400. Consequently, the
demand for the product is raised from 20,000 units to 25,000 units. Calculate the
price elasticity of demand.
Answer:
Introduction:
The price elasticity of demand is an economic indicator of the increase in the quantity of
commodity demands or consumed in relation to its change in price.

Economists use price elasticity to explain how supply or demand changes and
understand the workings of the real economy, despite price changes.

For example, certain goods are rather inelastic, that is, their prices don't change much
given the changes in demand or supply, for example, individuals need to buy fuel to get
to work or fly around the world. Even if oil prices increase, people are likely to purchase
exactly the same amount of gas still.

On the other hand, other commodities are very dynamic, causing drastic changes in
their demand or supply due to their price changes.

Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price *

Application and concept applied:

A symbol ∆ denotes a percentage change in demand and price.
As a result, the formula for estimating demand price elasticity is as follows:
Ep = ∆​Q/∆P × P/Q
Where;
Ep = Price elasticity of demand
P = Initial Price
∆P = Change in price
Q = Initial quantity demanded
∆Q = Change in quantity demanded
Applying the formula in the present case,
∆Q = 25000 – 20000 = 5000
∆P = 500 – 400 = 100
P = 500
Q = 20,000
Ep = 1.25

The degree to which demand reacts to value adjustments does not continue to be
continuous in every scenario. A product's demand can be inelastic or elastic, based
upon the price of change sought after in connection with a product's price adjustment.
The price elasticity of demand is categorized right into five significant teams based on
the rate of adjustment:

• Perfectly elastic demandWhen there is a sharp rise or fall due to a change in the price
of the commodity, it is said to be perfectly elastic demand.

In perfectly elastic demand, even a small rise in price can result in a fall in demand of
the good to zero, whereas a small decline in the price can increase the demand to
infinity.

However, perfectly elastic demand is a total theoretical concept and doesn’t find a real
application, unless the market is perfectly competitive and the product is homogenous.

The degree of elasticity of demand helps to define the slope and shape of the demand
curve. Therefore, we can determine the elasticity of demand by looking at the slope of
the demand curve.
. In this circumstance, demand is flexible, or e= ∞.
• Perfectly inelastic demand: A perfectly inelastic demand is the one in which there is no
change measured against a price change.

Like perfectly elastic demand, the concept of perfectly inelastic is also a theoretical
concept and doesn’t find a practical application. However, the demand for necessity
goods can be the closest example of perfectly inelastic demand.
The numerical value obtained from the PED formula comes out as zero for a perfectly
inelastic demand.

. In this circumstance, the demand elasticity is zero, represented by ep = 0.

• Relatively elastic demand: Relatively elastic demand refers to the demand when the
proportionate change in the demand is greater than the proportionate change in the
price of the good. The numerical value of relatively elastic demand ranges between one
to infinity.

In relatively elastic demand, if the price of a good increases by 25% then the demand
for the product will necessarily fall by more than 25%.

Unlike the aforementioned types of demand, relatively elastic demand has a practical
application as many goods respond in the same manner when there is a price change.

The demand curve of relatively elastic demand is gradually sloping.

the elasticity of demand is more than one in this instance, as shown by ep > 1.
• Relatively inelastic demand:In a relatively inelastic demand, the proportionate change
in the quantity demanded for a product is always less than the proportionate change in
the price.

For example, if the price of a good goes down by 10%, the proportionate change in its
demand will not go beyond 9.9..%, if it reaches 10% then it would be called unitary
elastic demand.

The numerical value of relatively inelastic demand always comes out as less than 1 and
the demand curve is rapidly sloping for such type of demand.

• Unitary elastic demand: In a relatively inelastic demand, the proportionate change in

the quantity demanded for a product is always less than the proportionate change in the
price.

For example, if the price of a good goes down by 10%, the proportionate change in its
demand will not go beyond 9.9..%, if it reaches 10% then it would be called unitary
elastic demand.
The numerical value of relatively inelastic demand always comes out as less than 1 and
the demand curve is rapidly sloping for such type of demand.

Closing statement:
We can conclude the blog by stating the fact that the demand for a commodity is
affected by several factors and the three main types of elasticity of demand explains the
effect of those factors.

To explain the extent of the effect of the economic variables on the quantity demanded,
we have 5 other types of elasticity of demand which are perfectly elastic, perfectly
inelastic, relatively elastic, relatively inelastic, and unitary elastic.