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 examination of the past to predict the future. Forecasting and forward
planning enable organisations to evaluate and mitigate future risks and uncertainties. Without
foresight, forward planning will be ineffective and aimless. The objective of demand
forecasting is to minimise both underproduction and overproduction by attempting to predict
future demand based on historical and current information and data. It is based on projections
of the market's entire demand potential. All marketing control procedures begin with demand
forecasting. It is crucial in the industry of today. Demand forecasting combines the ideas of
"demand" and "forecasting," which are distinct. Demand is the external needs for a
manufactured product or valuable service. Forecasting generally means producing an
estimate of an occurrence that will occur in the future at the present time. Using these
estimates, all firms create their marketing and sales strategy. It contributes significantly to
increasing their profit margins. Here, we will examine demand forecasting, its features, and
its usefulness. It is based on a real-time analysis of the market's previous demand for the
product or service in question. Demand forecasting must be conducted using a scientific
process that takes into consideration pertinent data, statistics, and occurrences. Demand
forecasting is a statistical method that employs scientific principles and excellent judgement
to predict future demand for a product or service. It collects information on a variety of
market aspects, such as prospective changes in selling prices, product designs, differences in
the level of competition, marketing campaigns, consumer purchasing power, employment
opportunities, population, etc.
Source: What is Demand Forecasting? Definition, Factors, Process, Objectives - The
Investors Book

Concept & Application:

Forecasting demand is the process of estimating demand levels for future time intervals. It is
an estimate of future income based on a proposed marketing plan and a collection of
uncontrollable and conflicting factors.

Identification of Objective: The first step comprises identifying the objective of the study
and evaluating the objectives of sales forecasting in depth. The target may be expressed in
terms of long-term or short-term demand, the entire market for a firm's product or just a
section of it, the total demand for a product or demand for that product alone, the firm's
overall market dominance in the sector, etc. Prior to beginning the demand forecasting
process, the demand's objective must be set, since it will serve as the basis for the whole
study. In other words, producers establish objectives that are attainable via analysis and
suitable for their needs.
Determining the Time Perspective: Depending on the objective, the demand estimate might
be for a short duration, such as the next two to three years, or a long duration. In this step, the
creator decides whether the analysis will be undertaken for a brief or extended amount of
time. Since they produce ever-more-reliable data, many forecasts are extremely long-lasting.

Selecting a Demand Forecasting Method:

After determining the forecast's objective and temporal viewpoint, the forecasting technique
is selected. There are several ways for predicting future demand, which may be categorised
into two groups: survey techniques and statistical techniques. Together with analysts, the
manufacturer determines the strategy that will yield the highest results in the subsequent
phase. Included in the survey technique are consumer survey and opinion poll methodologies,
as well as statistical processes such as trend projection, barometer analysis, and economic
analysis. The forecaster must determine which methodology best fulfils his requirements.

Data Collection and Analysis:

After selecting a methodology, the next stage is to collect the relevant data from primary,
secondary, or combined primary and secondary sources. The primary data consists of first-
hand information that has never been collected before. While the primary statistics are the
currently available facts. Collecting, tallying, analysing, and cross-referencing the relevant
information for the forecast. The data are examined using statistical or graphical methods,
and then the pertinent conclusions are drawn. The information is collected in line with the
characteristics that will be employed in the analysis.
Results Estimation and Interpretation:
In the last stage, collected data is processed to draw conclusions for the forecast. This method
assists in demand estimation for the selected time period. Estimates are frequently provided
in the form of equations, and the results are interpreted and presented in a way that is
straightforward and helpful.

Conclusion:

Consequently, we may infer that the capacity to estimate client demand is one of the most
important components in the success of any firm, and consequently demand forecasting is
extremely important. It can only be completed if these steps are done in a methodical
sequence. The forecast of demand is a scientific undertaking. There are several steps
involved. Important concerns must be examined at every level. It aids the organisation in
making better informed decisions regarding sales and income projections for the coming
years. It also aids in acquiring an understanding of their clients' wants through a variety of
forecasting methodologies. Consequently, demand forecasting is vital for corporations.

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 method for calculating the lost chances when selecting one good or activity over
another. Frequent usage of the term "opportunity cost" to characterise this required expense.
The phrase "whole cost" is used to define the overall cost of production, which includes both
fixed and variable expenses. In economics, the whole cost of producing a thing is referred to
as the total cost. The two components of total cost are: Fixed cost: This is a consistent
expense. In other words, these are expenditures that remain constant regardless of the
quantity of units produced. For example, the monthly rent for an apartment or the building
leases. Variable cost is the cost that varies (increases or lowers) dependent on the amount of
items produced by a firm or the service needs of clients. Total cost is an essential indication
of a company's financial performance. This can reveal if a corporation is spending too much
money on particular procedures and whether there is a need to reduce expenditures. The total
cost formula may be expressed mathematically as Total Cost = Total Fixed Cost + Total
Variable Cost. Total Cost may alternatively be expressed in a more sophisticated manner as:
Total Cost = (Average fixed cost plus Average variable cost) x Number of units. The average
total cost is calculated by dividing the sum of all production expenditures by the number of
units produced. The output is considered the most comprehensive costing collection for a
production run since it incorporates all fixed and variable costs connected with producing the
units. This information is typically used to establish the minimum value of a price point. Any
price below the average total cost precludes a business from recovering its costs, resulting in
losses. To demonstrate the fluctuation of this cost over time, it is also useful to plot it on a
trend line. To calculate the average total cost, add together all fixed and variable costs and
divide by the number of units produced. The expression is as follows: Total average cost =
(Total fixed costs + Total variable costs) / units produced. Fixed costs are expenses that are
incurred regardless of the quantity of output. The quantity of manufactured units will have a
direct effect on the amount of variable expenses incurred. For example, the cost of the actual
materials required to manufacture a product is a variable cost, as opposed to the lease on a
manufacturing site. The phrase "marginal cost" refers to the price increase or decrease
associated with producing or delivering goods or services to an extra consumer. It is also
known as incremental cost.

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

Concept & Application:

The financial cost comprises both actual direct spending (accounting charges) and
opportunity costs. Total cost is an economics term that combines both the initial cash
expenditure and the opportunity cost of the decision-makers' alternatives when assessing the
cost to produce an item, acquire an asset, or acquire a piece of equipment. The average total
cost is the cost per unit of the full number of manufactured goods. This information is crucial
for any decisions on price. For the firm to be profitable, the product's price must exceed the
average total cost. The average total expenses include both fixed and variable expenses.
 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:

Since a result, we may infer that costs play an important part in the field of economics, as
they are used to evaluate actions. By weighing our boundless desires against our limited
means, we are able to make judgments that will assist us in acquiring the things we desire.
Therefore, we might argue that cost is a method for calculating the opportunities missed
when selecting one product or activity over another. Cost is the price paid, which is
frequently determined based on the resources sacrificed to achieve a certain objective. It is
the sum of money exchanged for certain goods or services. In addition to aiding in the
planning of prospective activities, cost enables the attribution of expenditures to services or
goods.

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 amount of buyers that are able and willing to acquire items at a range of prices
during a particular time frame. The demand for a product or service suggests that consumers
are willing and able to pay for it. It is the driving force behind economic growth and
expansion. If there was no demand for a product, no company would ever produce it. In
economics, demand is the quantity of a good or service that consumers are willing to
purchase at a given price. It is possible for demand to be inelastic, in which case demand
changes very little regardless of price change, or elastic, in which case demand fluctuates
roughly in proportion to price changes. In economics, elasticity refers to the effect of altering
one economic variable on another. In contrast, demand elasticity precisely measures the
effect of variation in an economic variable on the quantity of a product desired. Several
variables, including consumer income levels, the product's price, and the prices of rival
products on the market, impact the amount demanded for a product. The term "income
elasticity of demand" describes the responsiveness of the quantity demanded of a given good
to changes in the real income of its purchasers. The formula for calculating the income
elasticity of demand is the proportional change in quantity demanded divided by the
proportional change in income.

Source: Income elasticity of demand (slideshare.net)

Concept & Application:

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

company's quantity demand varies in response to changes in market factors such as price,
revenue, etc. It monitors changes in demand precipitated by these other financial indicators.
Elasticity of demand is the ratio of the percentage change in the amount demanded to the
percentage change in another economic indicator. The term "income elasticity of demand,"
often abbreviated as "YED," describes the sensitivity of the quantity demanded for a given
commodity to changes in the real incomes of its purchasers, all other factors being held
constant. Real income is the income a person generates after adjusting 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 may deduce that the greater the income elasticity of demand for a certain
product, the greater the correlation between changes in consumer income and demand for that
commodity. The income elasticity of demand for clothing is 2 units, which indicates that
consumers are very sensitive to changes in their income.

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:

Economists refer to the quantity of a product or service that consumers are willing and able to
purchase at each price as demand. A customer may be able to differentiate between a need
and a want, but from an economist's perspective, they are identical. Demand is driven by
needs and desires. The capacity to pay influences demand as well. Elasticity measures the
sensitivity of one variable to changes in another variable, most commonly the change in
requested amount in relation to changes in other parameters, such as cost. The economic term
for the responsiveness of demand to a change in price is price elasticity of demand. Elasticity
is the degree to which individuals, consumers, producers, and suppliers modify demand and
supply in response to changes in variables such as income. When the elasticity number is
greater than 1, it indicates that the price affects the demand for the product or service. When
the elasticity score is less than 1, however, the demand for the product or service is
unaffected by a change in price. It is sometimes referred to as inelastic. Inelastic denotes that
regardless of price changes, consumers' purchasing behaviour stays mostly constant. There
exists a second hypothetical scenario called as "totally inelastic." There exists a second
hypothetical scenario called as "totally inelastic." When elasticity is equal to zero, something
occurs. This would imply that demand for a completely inelastic commodity would still exist
even if prices were drastically altered. Price elasticity of demand measures the change in
quantity demanded in response to an increase in the price of a specific good or service.

Source: Price elasticity of demand (slideshare.net)

Concept & Application:

The demand notion in economics explains the consumer's desire to acquire the product or
service. Demand is determined by the price that buyers are willing to pay for the product or
service. If all other variables stay constant, the demand should climb as prices fall and fall as
they rise. This simple concept supports market stability. To appreciate product and service
demand, market and aggregate demand are utilised. Elasticity of demand refers to the rate at
which the quantity of an item is sought in response to changes in an influencing factor. The
amount demanded in response to a change in the price of a commodity is known as the price
elasticity of demand. It is assumed that the consumer's income, tastes, and pricing for all
other goods remain unchanged. It is determined by dividing the percentage change in the
amount desired by the percentage change in the price. The greater the income elasticity of
demand for a certain item, the greater its dependence on changes in consumer income.

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

Conclusion:

We can therefore conclude that the demand price elasticity is 1.25 units. We say that the
demand is elastic because the answer we obtained was greater than 1. Consequently, the
product's demand is susceptible to price increases.