NMIMS Global Access

School for Continuing Education (NGA-SCE)

Course: Business Economics/Dec22

Question :1

Answer:

Introduction:

Any Business is drives through demand, in the market there are always consists of risks
and uncertainties like climatic conditions, Technological advancement etc. that can
affect the price, demand and sales of goods. To overcome this, it is important for
organizations to determine the future prospects of their products and services.

This knowledge of future demand of their products and services is called as demand
forecasting.

There are three Basis for demand forecasting

1. Level forecasting – Firm, Industry, Economy

2. Time period forecasting – Short time (1-2 yrs), med term (2-5 Yrs), Long term (7-
10 yrs)
3. Nature of product forecasting – Consumer goods ,Capital goods.

There are various steps and methods involved in demand forecasting

Concepts & Application:

To get accurate demand results it is important that demand forecasting to be done

systematically and it involves various steps in demand forecasting.
1) Purpose/Objective of demand forecasting:

Before starting demand forecasting purpose of demand forecasting should be specified,

the objective of demand forecasting on basis of

• Short term or long-term demand forecast for a product

• Industry based or specific organization-based demand
• Whole market demand or specific to market segment demand forecast

2) Determining time perspective:

Based on the objective the demand forecast time frame needs to be set either it could
be short term (1-2 years) or long term (7-10 Years), there are numerous determinants,
each determinants has its individual importance. Based on industry, product or
psychological market conditions demand forecasting time may vary.

3) Selecting a Method for demand forecasting:

The purpose of demand forecast is set, and time duration also determined for forecast
next coming to selection of right method for demand forecasting.

There are various methods for demand forecasting each method has its own merits and
de-merits,The demand forecasting methods are mainly categorized into two namely
Qualitative & Quantitative methods.

Qualitative is further classified into Survey methods and opinion pools, Survey methods
are like complete list survey and sample survey, in case of opinion pool like Delphi
method etc.

Quantitative methods are broadly classified into Time series analysis,Smoothing

techniques, Barometric method, Econometric method & Regression analysis.

All methods are not suitable for all business types so based on organization; methods
must be chosen carefully to get accurate results. It requires more experience and
expertise for demand forecasting.
4) Collecting and Analyzing Data:

After carefully selected the method of demand forecasting then data needs to be
collected for further process.

Data can be collected from various sources namely primarily source and secondary
source can be collected from both sources, this collected data will be in the raw form
which is called raw data it doesn’t give any correlation among them.

Here primary data means a first handed data which is not available or not collected
hence before, secondary data is available data, data are adjusted and sometimes even
manipulated these data which are analyzed to get a meaningful output from it.

5) Interpretation of results:

All required data collected, and Demand forecasting method finalized, then the final last
step is to analyze the data to estimate demand for predetermined years. Normally result
will be in the form of equation and this equation interpreted into understandable data
and presented in readable format.

Conclusion:

Hence, we conclude that demand forecasting is one of the key factors in every successful
business, here success is the ability to predict future demand, and therefore demand
forecasting is very essential for any business. Only by adopting these discussed stages
are taken in a methodical order it can be accomplished.

Demand projection is a scientific endeavor. Important considerations must be considered

at every stage of its process.It supports the organization to make more knowledgeable
choices that project the overall volume of sales and income over the subsequent years.
Demand forecasting will give an accurate result to the organization for their intense capital
Investments and future expansions with considering current market scenario.

Thus, we take an example of Tata steels, they are proposed capital expenditure and
expansion plan to double their capacity within time period of 2030, their current capacity
is 20millionTons/Annum of steel production, they proposed to double their capacity to 40
million tons/Annum by 2030. because China decided to reduce their steel production due
to environment conditions, TATA STEELS forecasted that there will be a huge demand
in coming years, to fill the demand gap Tata Steel planned to expand their capacity with
green energy, it is called green steel solutions. This seems a success demand forecast
plan of Tata steel.

Question :2

Answer:

Introduction:

The cost is vital parameter in any of business, it is like the oxygen for human being,
every organization is providing commodity or services to the society, even some of non-
profit organization also providing some sort of services for a social cause, but every
organization work and make decision on basis of cost.

Discussing about the cost there are various types of costs are there in an organizations
like Actual cost, fixed cost, variable cost, social cost,Alternative cost,accounting cost,
Implicit cost,Marginal cost, Explicit cost,Economic cost,Business cost, Incremental cost,
Real cost, Direct and Indirect cost.

In our case it is discussed about Total cost, Average fixed cost, Average variable cost
and Marginal cost.
Concepts & Application:

Fixed cost:

The costs which don’t vary with changing in output, it includes the cost of building,
insurance, property taxes, land rental charges, etc. If firms output changes or even don’t
produce anything, fixed costs remain the same.

Variable cost:

The cost, which is directly related to output, if production increased in a firm, it required
larger quantity of raw materials, more energy to process it, extra machinery for
production, maintenance charge changes, higher manpower requirement etc. and all
above mentioned things incurred some extra cost, it is not necessary that change in
cost will be in same proportion to change in output.

Marginal cost:

Marginal cost is a cost to produce an extra unit, If the total cost of 3 unit is Rs.1500 and
total cost of 4 units is Rs.1900, then marginal cost of 4th unit is Rs.400/-

Formula:

Total cost = Fixed cost +Variable cost

Average fixed cost = Total fixed cost / Quantity

Average variable cost =Total variable cost/ Quantity

Average Total cost = Average fixed cost + Average variable cost

Marginal cost = Change in Total cost / Change in Quantity.

 Total Total Average Average
Total Average Marginal
Quantity Fixed Variable fixed variable
cost total cost cost
Cost cost cost cost

0 100 0 100 0 0 0 -

1 100 20 120 100 20 120 20

2 100 30 130 50 15 65 10

3 100 40 140 33.3 13.3 46.6 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 cost play a vital role in the discipline of economics.
Every organization works for profit and every people works for their own needs that could
be a basic survival needs or luxuries needs.

This cost analysis makes business decisions successful; any action is taken on based of
cost, even a normal person decide on basis of cost of product or service and against their
value it offers to him.
In an industry arena fixed and variable costs are monitored on daily basis to track their
efficiency by production people, it is one of the efficiency trackers for an industry.

In cement industry following trackers are used to track their efficiency to record their
benchmarks.

variable cost / MT of clinker produced & fixed cost / cement bag etc.

One must consider the cost as a primary vital parameter and based on cost only even a
basic business decisions should be made to keep their organization on right track.

Question :3 (a)

Answer:

Introduction:

Elasticity the word means flexibility,

As we know demand drives the market, and demand of commodity is directly

proportional to price of commodity or service. If demand increases price also increases
likewise vice versa.

Few days back crude oil price fallen less than $85/Barrel in the global market to
increase the crude oil price, Saudi Arabian oil companies stopped crude production and
increased the demand of crude oil in the global market, now it is more than $95/barrel it
is nice example for price demand, like this income also a determinant that decides
buying capacity of consumer, consumer will buy more commodity or services if
consumer’s income level is increased.
Concepts & Application:

Income elasticityof Demand:

In considering any business model, income level of consumer is as important as price.

Income level of consumers will decide the buying capacity of any commodity or service.

Positive income elasticity of demand: Buying capacity increases with increase in

consumer’s income. e.g., Cloths

Negative income elasticity of demands: Demand of commodity goes down if

consumer’s income increases. E.g., Inferior goods

Zero income elasticity demand: No change in demand even consumers income

increases, e.g., Salt, Milk

Formula:

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 increases from Rs 20,000 to Rs 25,000. So, I0= 20,000;
I1= 25,000, 𝛥𝐼 = 5000
Which increases his demand for clothes from 40 units to 60 units, D0=40, D1= 60,
𝛥𝐷 = 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
income. 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. it is
considered as Positive income elasticity.

Question :3 (b)

Answer:

Introduction:

Demand is based on needs and wants. The buying capacity to also influence 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 behavior 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.

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 goods or service is used to
determine that goods demand. if all other variables remain constant. This straightforward
idea maintains market stability.

The change in commodity quantity with respect to commodity price is known as price
elasticity of demand. The consumer's income, preferences, taste, fashion, and pricing for
all other commodities are remains as constant. It is calculated by dividing the % change
in the amount by the % variation in the commodity 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
𝛥Q= 5000, 𝛥𝑃 = 100

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

= %𝛥𝑄/%𝛥𝑃
= 𝛥𝑄/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 Highly elastic / Relatively elastic.