Business Economics

1. 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 (10 Marks)

Ans 1.

Introduction:

Forecasting is the study of the past in order to forecast the future. Forecasting and forward
planning allow businesses to assess and reduce future risks and uncertainty. Forward
preparation will be worthless and directionless without predicting. Demand forecasting is an
attempt to anticipate future demand based on historical as well as current information and
data, in order to minimize both underproduction and overproduction. It can be founded on
forecasts of the industry's total demand potential. Demand forecasting is the starting point for
all marketing control activities. It is essential in today's industry. Demand forecasting
combines the phrases "demand" and "forecasting," which are two different concepts. Demand
is defined as the external requirements of a produced good or valuable service. In general,
forecasting entails making an estimation of an occurrence that will occur sometime in the
future in the current moment. All businesses construct their marketing and sales strategies
using these projections. It makes a significant contribution to raising their profit margins.
Here, we are advancing to discuss demand forecasting, its characteristics, and its utility. It is
based on a real-time study of historical demand for that specific good or service in the market
at the moment. Demand forecasting needs to be done with a scientific method, taking into
account relevant facts, figures, and events. Demand forecasting is a statistical technique that
uses scientific principles and sound judgment to anticipate future demand for a good or
service. It collects data on a range of market factors, including possible changes in selling
prices, product designs, variations in the degree of competition, marketing campaigns,
consumer spending power, job possibilities, population, etc.
Source: What is Demand Forecasting? Definition, Factors, Process, Objectives - The
Investors Book

Concept & Application:

Demand forecasting is the practice of determining demand levels for future time frames. It is
an estimate of future revenue based on a suggested marketing strategy and a set of specific
uncontrolled and competing variables.

● Identification of Objective:
The first phase entails agreeing on the analysis's goal explicitly and thoroughly
considering the goals of sales forecasting. The objective may be described in terms of
long- or short-term demand, the entire market for a firm's product or just a specific
portion of it, overall demand for a product or just for that product alone, firm's overall
market dominance in the sector, etc. Prior to starting the demand forecasting
procedure, the demand's goal must be established because it will guide the whole
investigation. In other words, the manufacturers set targets that are attainable via
analysis and appropriate for their purposes.
● Determining the Time Perspective:
The demand estimate can either be for a short term, such as the next two to three
years, or a lengthy duration, depending on the aim that has been defined. The maker
chooses whether the analysis will be conducted for a short or lengthy period of time in
this stage. Since they provide more and more reliable data, many projections last for a
very long time.
● Choosing a Demand Forecasting Technique:
The forecasting method is chosen once the forecast's aim and temporal perspective
have been established. There are a number of demand forecasting techniques, which
may be divided into two groups: survey techniques and statistical techniques. The
manufacturer chooses the approach that will produce the greatest outcomes in the
following stage along with the analysts. Consumer survey and opinion poll
methodologies are included in the survey method, and statistical procedures including
trend projection, barometer analysis, and economic analysis are included. The
forecaster must decide which approach best meets his needs.
● Collection and Analysis of Data:
Once a technique has been chosen, the following step is to gather the necessary data,
either through primary, secondary, or both primary and secondary sources. The first-
hand information that has never been gathered before makes up the main data. While
the primary data are the information that is currently in hand. The necessary
information for the prediction is gathered, tallied, examined, and cross-referenced. By
using statistical or graphical approaches, the data are evaluated, and then the relevant
conclusions are drawn from them. The information is gathered in accordance with the
qualities that will be used in the analysis.
 ● Estimation and Interpretation of Results:
The obtained data is analyzed to make inferences for the forecast in the last stage.
This process aids in estimating demand for the specified time period. The estimates
often take the form of equations, and the output is interpreted and presented in a way
that is simple to understand and useful.

Conclusion:

Hence, we can conclude that one of the key factors in every business' success is the ability to
predict customer demand, and therefore demand forecasting is very crucial. Only if these
stages are taken in a methodical order can it be accomplished. Demand projection is a
scientific endeavor. There are several stages it must take. There must be important
considerations considered at every stage. It assists the company in making more
knowledgeable choices that project the overall volume of sales and income over the next
years. Through a number of forecasting techniques, it also assists in gaining insight into what
their customers' demands are. Therefore, demand forecasting is essential in corporate
organizations.

2. From the given hypnotically table Calculate Total Cost, Average Fixed Cost, Average
Variable cost, and Marginal Cost. (10 Marks)

Quantity Total Total Total Average Average Average Marginal

Fixed Variable Cost Fixed Variable Total Cost
Cost Cost Cost Cost Cost
0 100 0
1 100 20
2 100 30
3 100 40
4 100 50
5 100 60

Ans 2.

Introduction:

Cost is a way to calculate the opportunities lost when choosing one good or activities over
another. The term "opportunity cost" is frequently used to describe this essential expenditure.
Whole cost is the term used to describe the total cost of manufacturing, that encompasses
both fixed and variable costs. The cost necessary to manufacture a good is referred to as the
whole cost in economics. The two parts that make up total cost are: Fixed cost: This is a cost
that never changes. In other words, they are the expenses that are constant regardless of the
volume of units produced. For instance, the monthly lease for an apartment or the leases for a
building.Variable cost: Variable cost is the cost that changes (increases or decreases) based
on the number of goods produced by a company or the service requirements of
customers.Total cost is an important indicator of the financial performance of a company.
This can show if a company is spending too much money on certain processes and if there is
a need to cut down the costs. Mathematically, the total cost formula can be represented
as,Total Cost = Total Fixed Cost + Total Variable Cost. It can also be represented in a more
advanced way as, Total Cost = (Average fixed cost + Average variable cost) x Number of
units. Average total cost is the sum of all production expenses divided by the quantity of units
produced. The result is regarded the most thorough costing collection for a manufacturing run
since it combines all fixed expenses and variable expenditure associated to generate the units.
Setting a pricing point's minimum value is frequently done using this information. Any price
underneath the average total cost prevents a company from recouping its expenses, which
results in losses. To show how this cost is fluctuating over time, it is also helpful to chart it on
a trend line.To determine average total cost, sum total fixed and variable expenses and
dividing it by the number of units manufactured. The equation reads as follows: Average total
cost = (Total fixed costs + Total variable costs) / Number of units produced. Fixed costs are
expenses that will be sustained regardless of the amount of production. The number of units
manufactured will directly affect the number of variable expenditures spent. For instance, the
expense of the direct materials used to make a product is categorised as a variable cost as
opposed to the lease on a manufacturing plant. The term "marginal cost" describes the rise or
fall in price associated with producing or providing services to an additional consumer. It also
goes by the name incremental cost.

Source: 10 Types Of Costs | Production | Economics (geektonight.com)

Concept & Application:

Actual direct expenses (accounting costs) and opportunity costs are both included in the
financial cost. Total cost is an economics metric that includes both the initial cash outlay and
the opportunity cost of the decision-makers' options when calculating the costs incurred to
create a good, buy an asset, or obtain a piece of machinery. The cost per unit of the entire
number of manufactured items is the average total cost. For any pricing-related choices, this
information is essential. For the business to be successful, the product must be priced higher
 than the typical total cost. Both fixed and variable expenses are included in the average total
costs.

Average
Average Total
Total Total Total Fixed Average Cost=
Fixed Variable Cost=TF Cost= Variable AFC+AV Marginal
Quantity Cost Cost C+ TVC TFC/Q Cost=TVC/Q C Cost
0 100 0 100 0 0 0 20
1 100 20 120 100 20 120 10
2 100 30 130 50 15 65 10
3 100 40 140 33.33 13.33 46.66 10
4 100 50 150 25 12.5 37.5 10
5 100 60 160 20 12 32 10

Conclusion:

Therefore, we can conclude that costs play a crucial role in the discipline of economics since
they examine decisions. Balancing our limitless wants against our finite resources allows us
to make decisions that will help us get the things we desire.Hence, we can say that cost is a
way to calculate the opportunities lost when choosing one product or activity over another.
Cost is the price paid, which is often calculated based on the resources given up to
accomplish a specific goal. It is a price paid in exchange for certain commodities or services.
Cost also helps in planning upcoming actions as well as attribute expenses incurred to
services or products.

3. a. 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. (5 Marks)

Ans 3 A.

Introduction:

Demand is the number of customers who are capable and willing to purchase goods at a range
of prices throughout a specific time period. Demand for any thing or service indicates that
people want it and are ready and able to pay for it. It is the fundamental driver behind
financial growth and expansion. No company would ever bother making anything if there
was no demand. Demand in economics refers to the quantity of a commodity or service that
customers are willing to purchase at a specific price. It is possible for demand to be inelastic,
which means that demand changes very little regardless of price change, or elastic, which
means that demand changes by approximately the same amount as price fluctuations. The
idea of elasticity in economics refers to the impact of changing one economic variable on
another. On the other hand, demand elasticity precisely assesses the impact of variation in an
economic variable on the amount of a product that is wanted. The quantity requested for a
product is influenced by a number of variables, including consumer income levels, the
product's price, the price of competing items in the market, and a number of others. The term
"income elasticity of demand" describes how responsive a given good's quantity demand is to
changes in the real income of the customers who purchase it. The percent change in quantity
requested divided by the percent change in income is the formula for determining the income
elasticity of demand.

Source: Income elasticity of demand (slideshare.net)

Concept & Application:

Demand Elasticity, also known as Elasticity of Demand, is a measurement of how much a

company's quantity demand changes in reaction to changes in any of the market factors, such
as cost, revenue, etc. It tracks changes in demand brought on by alterations in those other
financial indicators. The percentage change in the amount required measures the percentage
change in another economic indicator is known as the elasticity of demand. The term "income
elasticity of demand," often known as "YED," describes how sensitive the amount requested
for a given commodity is to changes in the real incomes of the people who buy it, holding all
other factors constant. Real income is the income generated by an individual after adjusted
for inflation.

Income Elasticity of Demand = Percentage Change in Quantity

Demanded (∆D/D) / Percentage Change in Income (∆I/I)

Income Elasticity of Demand = (D1 – D0) / (D1 + D0) / (I1 – I0) / (I1 + I0)
where,

D0 = Initial Quantity Demanded

D1 = Final Quantity Demanded
I0 = Initial Real Income
I1 = Final Real Income

Given:
The monthly income of an individual increases from Rs 20,000 to Rs 25,000. So, I0=
20,000; I1= 25,000, Δ I =5000
which increases his demand for clothes from 40 units to 60 units, D0=40 , D1= 60,
Δ D=20

Income elasticity of demand= (∆D/D) / (∆I/I)

= (20/40)/ (5000/20000)
= 0.5/ 0.25
= 2units

The income elasticity of demand is 2 units

Conclusion:

Therefore, we can conclude that the higher the income elasticity of demand for a certain
commodity, more the demand for that commodity is linked to changes in consumer revenue.
The income elasticity of demand is 2 units that means individuals are particularly sensitive to
changes in their income when it comes to buying clothes.

3. b. 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. (5 Marks)

Ans 3 B.

Introduction:

The quantity of an item or service that customers are prepared and capable to acquire at each
cost is referred to as demand by economists. A customer may be able to distinguish between
a need and a want, but from the standpoint of an economist, they are exactly the same thing.
Demand is based on needs and wants. The capacity to pay also affects demand. Elasticity
measures how sensitive one variable is to changes in another variable, most frequently the
change in amount requested in relation to changes in other parameters, such cost. Demand's
responsiveness to a change in the cost is quantified economically as price elasticity of
demand. Elasticity describes the extent to which people, consumers, producers, and suppliers
modify demand and supply in response to changes in factors like income. When the elasticity
number exceeds 1.0, it signifies that the price has an impact on the demand for that item or
service. The demand for the products or services is unchanged by a price change however,
when the elasticity score is less than 1.0. It is also known as inelastic. Inelastic indicates that,
regardless of changes in pricing, consumer purchasing behaviour mostly remains unchanged.
Another hypothetical case, known as "completely inelastic," exists. Another hypothetical
case, known as "completely inelastic," exists. This occurs when elasticity is equal to zero.
This would imply that even if prices were dramatically altered, demand for the fully inelastic
commodity would still exist. Price elasticity of demand is the measurement of the change in
quantity required as a consequence of an increase in the price of a particular product or
service.

Source: Price elasticity of demand (slideshare.net)

Concept & Application:

The economics concept of demand describes the consumer's desire to purchase the good or
service. The price that consumers are willing to pay for the good or service is used to
determine demand. Demand should increase as prices decrease and decrease as prices rise, if
all other variables remain constant. This straightforward idea maintains market stability. To
comprehend the demand for products and services, market and aggregate demand are
employed. Elasticity of demand refers to how quickly the amount of a good is requested in
response to changes in a factor that affects demand. The quantity required in response to a
fluctuation in a commodity's price is known as price elasticity of demand. The consumer's
income, preferences, and pricing for all other commodities are regarded as constant. It is
calculated by dividing the percent change in the amount sought by the percent variation in the
price. The greater the income elasticity of demand for a certain commodity, more the demand
for that commodity is linked to changes in consumer revenue.

Given:
P1= 400 , P0= 500 , Q1= 25,000 , Q0= 20,000
Δ Q= 5000, Δ P=100

Price Elasticity of Demand = Percentage change in quantity / Percentage change in

price

= % ΔQ /%ΔP
= Δ Q / ΔP × P/Q
= 5000/100 ×500 /20000
= 50 × 0.025
= 1.25units

Conclusion:

Therefore, we can conclude that the price elasticity of demand is 1.25 units. The demand is
said to be elastic because the answer we procured is greater than 1. The demand for the
product is therefore susceptible to price increases.