NMIMS Global Access

School for Continuing Education (NGA-SCE)

Course: Buisness Economics

Internal Assignment Applicable for December 2022 Examination

Assignment Marks: 30
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Answer 1

Introduction:
Demand Forecasting can be defined as process of predicting the future demand for an origination
goods or service. Demand forecasting helps an organisation to take various business decisions such
as raw material procurement, cash flow management, planning of production process, pricing
decision. The knowledge of future product demand in the market is studied through the process of
Demand forecasting. Same way demand forecasting is also help to analyses the organisation need a
capital investment or any expansion decision. There are number of techniques of demand
forecasting such as survey method or statically method. Forecasting to be done in short term way it
involves a period not more than 1 year or long term for a period of 5 to 7 years it is all depending
on the requirement. Short term forecasting is done for coordinating routine activity and long term
forecasting helps in for planning a new project, expansion and up gradation of production plant.

Concepts & Application:

By accurately anticipating future demand, a business can save time and money by utilising accurate
forecasting. Both start up and established business can take the benefit of forecasting technique
There are the various steps involved in demand forecasting.
 Specifying the objective
 Determining the time perspective
 Selecting the Method of Forecasting
 Collecting and Adjusting Data
 Interpreting the outcome
The first step in this process is the identification of the objective. This ensures how the forecast has
to be conducted to ensure the objective can be achieved.

The forecasting objective may be long term or short term product whether this for industry demand
or for organisation demand. Depending on the objective decided the forecasting to be long term
period (beyond 10 years) or for the short term period (not more than 1 year). In our case we have to
perform a long term forecasting, capital investment is to be done for long term planning its help for
deciding the production capacity, replacing machinery and capital investment.

There are various effective strategy of forecasting demand is the one that works for you. Not all
methods are suitable for all type of demand forecasting. The ideal forecasting approach can be
chosen by considering the organization's objectives, the forecasting time frame, and the available
data. The approach employed to forecast client demand will also be influenced by the forecaster's
knowledge and experience.

After selecting a demand forecasting technique, the relevant data are gathered and analysed. Since
unprocessed data cannot be used practically until they have been processed, data processing occurs
after data collection. Further complicating variables include the potential that the content was
derived from highly credible or critically significant sources.

After analysing data and drawing conclusions from the findings, demand predictions are created.
Generally the result obtained are in the form of equations which need to be presented in
comprehensible format.

Demand plays a vital role in the decision making  of a business. In competitive market conditions, there
is a need to take correct decision and make planning for future events related to business like a sale,
production, etc. The effectiveness of a decision taken by business managers depends upon the accuracy
of the decision taken by them. Demand is the most important aspect for business for achieving its
objectives. Many decisions of business depend on demand like production, sales, staff requirement, etc. 

Conclusion:
To accurately estimate future demand, it is essential to examine the history and conduct appropriate
research. This will help you make the best possible choice. On the basis of past performance, it is
not always possible to anticipate the future significance of an event. For the effectiveness of the
strategy, it is essential that demand estimations are accurate. Before selecting on a strategy for
predicting future demand, it is essential to analyse all pertinent variables, such as precision,
timeliness, and cost. They must be simple to deploy, simple to implement, simple to use, adaptable,
affordable, and user-friendly, among other qualities.

Answer 2.

Introduction:
If any organisation decided to produce a product, it means it has to pay the price of various input
that are used in production. The cost includes raw material, labour wages, factory building, fuel and
power and so on. This are the cost incurred by the business in order to provide the products to the
customer. Cost refer as the total amount of expenses that carried out by the origination in the
process of production. From Manufacturer point overall cost can be categorised into two sub
category name as Fixed Cost & Variable Cost.
Fixed cost means the portion of total cost which remains same with the variable quantity of
production. Such as Executive Salary, Factory Rent, depreciation, tax liabilities, office expenses.
Variable cost means the portion of total cost which differ with the quantity of production. Such as
raw material prices, labour wages.

Concepts & Application:

While computing the total cost of production, there are different types of cost which organisation
need to consider apart from the capital, labour wages and raw material prices. Different
circumstances gives different types of cost such as incremental cost, accounting cost, opportunity
cost, explicit and implicit cost, fixed cost & variable Cost etc.
Let’s discuss about the total cost which is actual cost that is incurred by an organisation to produce a
given level of output. The short term total cost consist of two elements one is Total fixed cost and
another is Total Variable Cost.
Total Fixed Cost (TFC) refer to expenditures that are not impacted by external variables. TFC
remains constant even when the output is zero. TFC appears as horizontal line parallel to the X
Axis.
Total Variable Cost (TVC) is directly proportional to the output of firm, this means that when the
output of the firm increases TVC also increases & when the output is decreases TVC also decreases.

SRTC is calculated by Adding Total fixed cost and Total variable Cost.
SRTC = TFC + TVC
As the TFC remains constant, there is change in SRTC due to variation in TVC.

The Average cost is calculated by dividing the total cost by the number of units company has
produced, The short run average cost of company refer to per unit cost of output at different level
of production.
To Calculate SRAC, short run total cost is divided by the output

SRAC = SRTC /Q = TFC +TVC/Q

Where TFC /Q is Average Fixed Cost & TVC/Q is Average Variable Cost

The SRAC of an organisation is U Shaped that means it lower down in the beginning and reaches to
minimum and start to rise. In the beginning fixed cost remains the same and variable cost such as
labour and raw material varies. However when the fixed cost get distributed over the output the
average cost begins to fall. When organisation uses its full capacity, the average cost reaches to
minimum, it is this point that the firm operate at its optimum capacity.

Marginal Cost (MC):

Another concept to learn in short run average cost is Marginal Cost. Marginal cost in addition made
to the cost of production by producing an additional unit of the output. In simpler words, it is the
total cost of producing T units instead of T-1 unit.
A note about marginal cost, it is independent of fixed cost, this is because fixed cost do not change
with the output. On the other hand, in the short run the variable cost change with the output. Hence
marginal cost are due to change in variable cost. Therefore
MC =∆TC/∆Q

Where ∆TC is the change in the total cost & ∆Q is the change in the output.
This equation can also be written as
MCn =TCn – Tcn-1

The diagram below shows the AFC, AVC, ATC, and Marginal Costs (MC) curves: It is important to
note that the behaviour of the ATC curve depends upon that of the AVC and AFC curves
In the beginning, both AVC and AFC curves fall. Hence, the ATC curve falls as well.
Next, the AVC curve starts rising, but the AFC curve is still falling. Hence, the ATC curve continues
to fall. This is because, during this phase, the fall in the AFC curve is greater than the rise in the
AVC curve.
As the output rises further, the AVC curve rises sharply. This offsets the fall in the AFC curve.
Hence, the ATC curve falls initially and then rises.
 Qty Total Total TotalCost Average AverageVariable Average Marginal
Fixed Variabl SRTC= Fixed Cost Total Cost
Cost e TFC+TV Cost AVC= TVC/Q Cost MC=∆TC
(TFC) Cost C AFC=TFC/Q ATC /∆Q
(TVC) =AFC+AVC
0 100 0 100 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

Conclusions:
The average cost falls due to an increase in the output, the marginal cost is less than the average
cost.

Answer 3a.

Understanding and usage of the Formula:

Income elasticity of demand refers to the quantity demanded of a good increases to a change in the
real income of consumers who buy this good. Income elasticity of demand refers to how the
demand for goods relates to changes in consumer income. This formula can also be used to
determine whether a particular product is a necessity or a luxury.
The formula for calculating income elasticity of demand is the percentage change in quantity
demanded divided by the percentage change in income.
Where,
Percentage Change in quantity demanded =
New Qty demanded – original Qty demanded (∆ Q) / original qty demanded (Q)

Also, Percentage change in Income =

New Income – Original Income (∆Y) / original income (Y)
Thus the formula income elasticity of demand is as
Ey = ∆Q/∆Y x Y/Q
Where
Q is the original quantity demanded
Q1 is new quantity demanded
∆Q = Q1-Q
Y is original income
Y1 is new Income
∆Y= Y1-Y

Procedure & Steps:

Given Data
Original Monthly Income (Y) - 20000/-
New Income (Y1) – 25000/-
∆Y= 25000-20000 = 5000
Q = 40 units
Q1 = 60 units
∆Q = 60 – 40 = 20
The formula for calculating the income elasticity of Demand is:
Ey = ∆Q/∆Y x Y/Q
Substituting the Values,
Ey = 20/5000 x 20000/40
Income Elasticity of Demand Ey = 2

Interpretation:
Income elasticity of demand describe the rate of change in consumer spending in response to
income fluctuations. Also If the income elasticity of demand of a product is less than 1 then it is
Necessity Good & If it is more than 1 then it is a luxury Good.

Answer 3b.

Understanding and usage of the Formula:

The formula for calculating price elasticity of demand is percentage of change in quantity
demanded of the product or commodity divided by the percentage change in price. Economics
Expert use this concept of price elasticity of demand to find out how changes in price affect a
product's supply and demand.
Procudre & Steps:

Given Data

Initial Price P = Rs 500

Change in Price ∆ P = 100 (a fall in price Rs500 – Rs 400 = 100)

Initial Quantity demanded Q = 20000

Change in Quantity Demanded ∆ Q = (25000-20000) = 5000

Formula for calculating the price of Elasticity of demand is as

Ep = ∆ Q / ∆ P x P / Q

Where,
Ep = Price Elasticity of demand

P = Initial Price

∆ P = Change in price

Q = Initial Quantity Demanded

∆ Q = Change in Quantity Demanded

By substituting these values in the formula, we get

Price Elasticity of demand Ep = 5000/100 x 500/20000

= 2500000 / 200000

Price Elasticity of demand = 1.25

This is the value of Price Elasticity of demand is greater than 1

Interpretation:
How much product change is alter in respective to price changes it is measured by elasticity of
demand. If the price Elasticity of demand is greater than 1 then it is a relative elastic in demand that
means a change in demand is greater than the change in price. If the Price elasticity of demand is
less than 1 then it relatively inelastic in demand that means a change in demand is less than the
change in price. If the price elasticity is exactly 1, it is referred to as unitary elasticity