Answer No (1)

INTRODUCTION
Elasticity of Demand:-
Demand extends or contracts respectively with a fall or rise in price. This quality of
demand by virtue of which it changes (increases or decreases) when price changes
(decreases or increases) is called Elasticity of Demand. In other words, it is the percentage
change in quantity demanded divided by the percentage in one of the variables on which demand
depends.”

The variables on which demand can depend on are:

 Price of the commodity

 Prices of related commodities

 Consumer’s income, etc.

Types of Elasticity of Demand

Based on the variable that affects the demand, the elasticity of demand is of
the following types:-

1)Price Elasticity
The price elasticity of demand is the response of the quantity demanded to change in the
price of a commodity. It is assumed that the consumer’s income, tastes, and prices of all
other goods are constant. It is measured as a percentage change in the quantity
demanded divided by the percentage change in price.

Symbolically,

% change∈quantity demanded
EP = % change∈ price
2) Income Elasticity
The income elasticity of demand is the degree of responsiveness of the quantity
demanded to a change in the consumer’s income.

Symbolically,

% change∈quantity demanded
EI =% change∈income

3) Cross Elasticity
The cross elasticity of demand of a commodity X for another commodity Y, is the change
in demand of commodity X due to a change in the price of commodity Y.

Symbolically,

Ec=ΔqxΔpy×pyqx
Where,

Ec   is the cross elasticity,

Δqx is the original demand of commodity X,

Δqx is the change in demand of X,

Δpy  is the original price of commodity Y, and

Δpy is the change in price of Y.

CONCEPTS & APPLICATION:-

Elasticity of demand measures the degree of responsiveness of quantity demanded of a
commodity to a change in one of the variables affecting demand (i.e., to a change in
any one of the demand determinants).

The responses to change in each influencing variable is measured by a separate

elasticity concept. We may start with the most commonly encountered of all elasticity,
viz., and price elasticity of demand.

PRICE ELASTICITY OF DEMAND

The Law of Demand states that if the price of a commodity falls, the quantity demanded
of the commodity will increase. But will it be a large or a small increase? The degree to
which the quantity demanded of a commodity responds to a change in its own price is
known as ‘price elasticity of demand’.

If a change in price leads to a relatively large change in quantity demand, then demand
for the commodity is said to be ‘elastic’. If the change in quantity demanded is relatively
small, demand is said to be ‘inelastic’. 

FACTORS AFFECTING PRICE ELASTICITY OF

DEMAND
The following points highlight the six main factors affecting the
price elasticity of demand:-

1)Nature of the Good:-The elasticity of demand for a good depends upon the
nature of the good. In economics goods are classified into three categories, namely,
necessities (or essential goods), comforts, and luxuries.
Generally, the demand essential goods, such as salt, sugar is relatively inelastic (less
than unity) or perfectly inelastic. On the other hand, price elasticity of demand for luxury
goods, such as car, air conditioners, and expensive jewellery, is highly elastic.

2. Availability of Substitute Goods:-If close substitutes for a particular

good are available in the market, then the demand for the good would be relatively more
elastic. For example, since tea, a close substitute for coffee, is available in the market, a
rise in the price of coffee would result in a considerable fall in its demand and a
consequent rise in the demand for tea.Therefore, demand for coffee would be relatively
more elastic because of the availability of tea.

3.Number and Variety of Uses of the Product:-The more the

number and variety of uses of a good, the more would be its elasticity of demand. One
such good is electricity that is used in a number of ways.
That is why when the price of electricity diminishes (increases), its demand will increase
(decrease) in all these uses, and so, in totality, its demand will increase (decrease)
considerably, giving us a high value of the (numerical) coefficient of price-elasticity of
demand.

4. Proportion of Income Spent on the Good:-The price-elasticity of

demand for a good also depends on the proportion of their income the buyers spend on
the good. If the buyers spend a small proportion of their income, then they would not
considerably decrease their purchase of the good as its price increases.

On the other hand, since the buyers spend a small proportion of their income on the
good, they buy the good more or less according to their requirement at any particular
price. Therefore, when the price of the good decreases, they do not considerably
increase their purchase

5. Role of Habits:-The habits of people also play an important role in

determining the extent of the elasticity of demand for a good. Sometimes some people
completely surrender to the consumption of articles of addiction like drugs, alcohol and
tobacco products. Consequently, if the prices of these goods increase, demand for them
do not decreases considerably and so their elasticity of demand will be relatively small.

6. Price of the Good:-The elasticity of demand for a good also depends on its
own price. As price changes, quantity demanded of the good changes, owing to the law
of demand.

Generally, the smaller the price of a good, the less is the elasticity of its demand. For,
when the price is very small, a change in price would have no considerable effect on
demand.

On the other hand, the larger the price, the more would be the elasticity of demand. For,
when the price is relatively large, a further rise in price would have a considerable
dampening effect on demand and a fall in price would have an encouraging effect on
demand.
CONCLUSION
Price elasticity measures the responsiveness of the quantity demandedof a good to a
change in its price. It is computed as the percentage change in quantity demanded
divided by the percentage change in price. Elasticity can be described as elastic (or
very responsive), unit elastic, or inelastic (not very responsive). Elastic demand curve
indicate that quantity demanded respond to price changes in a greater than
proportional manner. An inelastic demand curve is one where a given percentage
change in price will cause a smaller percentage change in quantity demanded. A
unitary elasticity means that a given percentage change in price leads to an equal
percentage change in quantity demanded or supplied.

Answer No (2)

INTRODUCTION
COST:-  
In general terms,cost refers to an amount to be paid or given up for acquiring any
resource or service. In economics, cost can be defined as a monetary valuation of
efforts, material, resources, time and utilities consumed, risks incurred, and opportunity
forgone in the production of a good or service. Cost is also defined as by the expenditure
incurred to produce a given good or service. The cost will be the expenditure that is
attributable to something.

Value is measured in terms of the usefulness of the product, the cost is measured strictly
in monetary terms.While cost is a very generic term, it can be classified further. All costs
can be qualified as prime cost, sunk cost, factory cost, direct cost, indirect cost, etc. It is
advisable to classify costs as it gives more information about it.

Costs are very important in business decision-making. Cost of production provides the
floor to pricing. It helps managers to take correct decisions, such as what price to quote,
 whether to place a particular order for inputs or not whether to abandon or add a
product to the existing product line and so on.
There are various concepts of cost that a firm considers relevant under various
circumstances. To make a better business decision, it is essential to know the
fundamental differences and uses of the main concepts of cost.

CONCEPTS & APPLICATION

Quantity Total Total Total Average Average Average Marginal

Fixed Variable Cost Fixed Variable Total Cost
Cost Cost Cost Cost Cost
0 100 0 100 - 0 0 -
1 100 25 125 100 25 125 25
2 100 40 140 50 20 70 15

3 100 50 150 33.33 16.67 50 10

4 100 60 160 25 15 40 10
5 100 80 180 20 16 36 20

6 100 110 210 16.67 18.33 35 30

7 100 150 250 14.29 21.42 35.71 40
8 100 300 400 12.5 37.5 50 150

9 100 500 600 11.11 55.55 66.66 200

10 100 900 1000 10 90 100 400
TYPES OF COST

Fixed Costs
Fixed costs (FC) are costs that don't change from month to month and don't vary based
on activities or number of goods produced. They stay exactly the same.

For example, rent, property taxes, interest on loans, etc. However, note that fixed costs
can vary with the size of the plant and are usually a function of capacity. Therefore, we can
conclude that fixed costs do not vary with the output volume within a capacity level.

Variable Cost

Variable costs are cost concepts which are a function of the output in the production
period. Variable costs vary directly with the output. Some examples of variable costs are
the cost of raw materials, wages, etc. Sometimes, they vary proportionally with the output
too. However, these variations depend on the utilization of fixed facilities and resources
during the production process.
Total Cost

Total cost (TC) in the simplest terms is all the costs incurred in producing something or
engaging in an activity. In economics ,total costs refer to the sum of fixed costs and
variable costs. If there are any semi-variable costs, these would have to be added as
well to arrive at the figure of total costs.

TC=Total Fixed Cost(TFC)+ Total Variable Cost(TVC)

Average Variable Cost

Average variable cost(AVC) refers to the total variable cost divided by the number of
units that are produced. Variable costs rise with the level of output. The average
variable cost of a production batch tells you the per unit variable cost .

AVC = Total Variable Cost / Output (Q)

Average Fixed Cost

The Average Fixed Cost (AFC) is the fixed cost which doesn’t change with the change
in some number of goods and services produced by a company. To put it in a nutshell,
AFC is the fixed cost per unit and is calculated by dividing the total fixed cost by the
output level.

AFC = Total Fixed Cost / Output (Q)

Average Cost

Average Cost is also known as cost per unit. If total cost of production is divided by the
total number of units produced, we get the average cost.In other words, Average Cost
at any output = Total Cost/ Units of Output Average cost is the sum of average variable
cost and average fixed cost. It is also called average total cost.
Marginal Cost
Marginal cost is the change in the total cost of production upon a change in output that
is the change in the quantity of production. Mathematically, it is expressed as a
derivative of the total cost with respect to quantity.

where,

 Change in Total Cost = Total Cost of Production including additional

unit – Total Cost of Production of normal unit

 Change in Quantity = Total quantity product including additional unit –

Total quantity product of normal unit

CONCLUSION
In today’s competitive scenario, the main aim of every organization is to earn maximum
profit. The organization’s decision of maximizing profit depends on the behavior of its
costs and revenues. Cost analysis involves the study of total costs incurred by an
organization to acquire various resources, such as labor, raw materials, machines, land,
and technology. It helps an organization to make various managerial decisions,
including determination of price and level of current production.

Apart from this, it enables an organization to decide whether to opt for the available
alternative or not. On the other hand, revenue analysis is a process of estimating the
total income earned by an organization from different’ sources. An organization is said
to be profitable if its total revenue is more than costs incurred by it.
Answer No (3)

INTRODUCTION
Demand Forecasting:-
Demand forecasting refers to a scientific and creative approach for anticipating
the demand of a particular commodity in the market based on past behaviour,
experience, data and pattern of related events. It is not based on mere guessing or
prediction but is backed up by evidence and past trends.

Accurate demand forecasting is essential for a firm to enable it to produce the required
quantities at the right time and arrange well in advance for the various factors of
production e.g., raw materials, equipment, machine accessories etc. Forecasting helps
a firm to access the probable demand for its products and plan its production
accordingly. Forecasting is an important aid in effective and efficient planning.

It reduces the uncertainty and making the organization more confident of coping with
the external environment. The increasing availability of economic data, the continuous
improvement of technique and the expanded computational ability provided by the
computer made it possible for firms to forecast their demand/sales with considerable
accuracy.

CONCEPTS & APPLICATION

3(a) Steps Involved In Demand Forecasting
Demand forecasting is not based on assumptions but is a systematic and scientific
process of estimating future sales and performance as well as directing the resources
accordingly.
The steps involved in a standard demand forecasting process are as
follows:-

1) Setting the Objectives:- The purpose for which the demand forecasting is
being done must be clear. Whether it is for short-term or long-term, the market share of
the product, the market share of the organisation, competitors share, etc. By all these
aspects, the objectives for forecasting are framed .
2) Determining the Time Perspective:-The defined objectives are
supported by the period for which the forecasting is being done. The demand for a
commodity varies with the change in its determinants over the period.

There is a negligible change in price, income or other factors in the short run. But, the
organisation may notice a considerable difference in these determinants over a long-
term, affecting the demand of a commodity.

3) Selecting a Suitable Demand Forecasting Method:-Demand

forecasting is based on specific evidence and is determined using a particular
technique or method. The method of prediction must be selected wisely. It is
depended on the information available, the purpose of predicting and the period
it is done for.

4) Collecting the Data:- Forecasting is based on past experiences and data.

This data or information can be primary or secondary. Primary data comprises of the
information directly collected by the analysts and researchers; whereas secondary data
includes the physical evidence of the past performance, sales trend in the past years,
financial reports, etc.

5)Estimating the Results:- The data so collected is arranged in a systematic

and meaningful manner. The past performance of a product in the market is analysed
on this basis. Accordingly, future sales prediction and demand estimation are done. The
results soo drew must be in a format which is easy to understand and apply by the
management.

3(b) The significance of demand forecasting are

explained in the following points:-

i. Fulfilling objectives:-Implies that every business unit starts with certain pre-
decided objectives. Demand forecasting helps in fulfilling these objectives. An
organization estimates the current demand for its products and services in the market
and move forward to achieve the set goals.

ii. Preparing the budget:-Demand forecasting helps reduce risks and make
efficient financial decisions that impact profit margins, cash flow, allocation of resources,
opportunities for expansion, inventory accounting, operating costs, staffing, and overall
spend. All strategic and operational plans are formulated around forecasting demand.

iii. Expanding organizations:-Implies that demand forecasting helps in

deciding about the expansion of the business of the organization. If the expected
demand for products is higher, then the organization may plan to expand further. On the
other hand, if the demand for products is expected to fall, the organization may cut
down the investment in the business.

iv. Taking Management Decisions:-Helps in making critical decisions,

such as deciding the plant capacity, determining the requirement of raw material, and
ensuring the availability of labor and capital.
v. Evaluating Performance:-Helps in making corrections. For example, if
the demand for an organization’s products is less, it may take corrective actions and
improve the level of demand by enhancing the quality of its products or spending more
on advertisements.

CONCLUSION
Proper demand forecasting enables better planning and utilization of resources for
business to be competitive. Forecasting is an integral part of demand management
since it provides an estimate of the future demand and the basis for planning and
making sound business decisions. A mismatch in supply and demand could result in
excessive inventory and stock outs and loss of profit and goodwill. Both qualitative and
quantitative methods are available to help companies forecast demand better. Since
forecasts are seldom completely accurate, management must monitor forecast errors
and make the necessary improvement to the forecasting process.

Forecast made in isolation tend to be inaccurate. Collaborative planning, forecasting,

and replenishment are an approach is which companies work together to develop
mutually agreeable plans and take responsibility for their actions. 

Thus we have seen that whether it is fulfilling the objectives, preparing budget, making
managerial decisions forecasting is useful in all these areas. The markets are nothing
but a play of demand and supply. Since demand is such an indispensable part of the
market, demand forecasting is bound to be of great help to the producers.