1.

Demand forecasting refers to the process of making estimations about the demands
of customer in the future over a defined period of time, with the use of historical data
and other information. Following are some of the limitations of demand forecasting:

1. Just Estimates: The future is always going to be uncertain. Even if the organization
uses best of forecasting techniques and accounts for every aspect imaginable. It is not
possible to predict future events with total success.

2. Based on Assumptions: Any forecast is done on the basis of assumptions,

approximations and normal conditions, etc. These lead to forecasts which are often
unreliable. So, even the plans which are best-laid may not be of any use. This would
always be one of the biggest challenges of forecasting. So, it is not a good idea to over-
rely on forecasting.

3. Time and Cost: The data and information needed to make formal forecasts are
usually too many. Collecting and tabulating such data involve too much of time and
money. Converting qualitative data into quantitative data is another factor. A person
must be careful that the time and the money spent on forecasting should not out-weight
the benefits received from this forecast.

Steps of Demand Forecasting:

1. Identifying and understanding the structure: There are many factors shaping the
future of a company. It isn’t feasible and desirable to define each and every factor. The
executives must also define the variables that need to be concentrated in order to
ensure an effective forecast.

Forecasting the future: The next step here is to make a reliable and scientific
prediction after the foundation is laid. This involves both, research instruments and
methods and professional judgment and observations as well. The forecast isn’t a
foolproof strategy, just a potential guidance map.

Analysis of Deviation: No prediction is entirely exact. It is necessary to evaluate and

study the variations or deviations from the forecasts. In the future, this will enable to
build more detailed predictions.

Adapting the forecasts procedure: The skills and the professional judgment needed
in forecasting are acquired through experience and practice. With each cycle, the
procedure of forecast is well-tuned.

Although demand forecasting has several limitations:

1. Helps in scheduling: One of the greatest advantages of forecasting is that it enables
the manager to prepare for the future of the organization. In the current scenario,
planning and forecasting go hand in hand.

2. Changes to the Climate: Demand forecasting must be able to point out the potential
environmental changes when done correctly. This will enable the organization to benefit
from such environmental changes. It can develop and grow its business if the changes
are advantageous to the company. And, it may intend to prepare to defend itself in
scenarios that are adverse.

3. Detection of weak spots: Another advantage of forecasting is that it enables the

manager to find any weak points that the organization may have or overlooked areas.
When the attention is in these areas, successful controls and preparation strategies to
rectify them can be easily put into practice by the manager.

4. Enhances coordination and control: Information and data from various internal and
external sources are required for forecasting. This knowledge can be obtained from
various internal sources by the different managers and employees.

Conclusion: Hence, we can conclude that there are various limitations of demand
forecasting which need to be overcome by ensuring that the cost as well as time of
conducting the forecast.
2nd Answer

The following are the different costs

Total Cost is the expenditure or the cost incurred by an organization to manufacture a

given quantity of output. It is denoted by the formula:

TFC = TC - TVC

Average fixed cost is the fixed cost per unit of output of a product. When TFC is divided
by total units of production, we get AFC.

Average variable cost refers to the variable cost per unit of production.

AVC = TVC / Q

= Total variable cost / Q

Average total cost refers to cost per unit of output

AC = Total cost / Quantity

= Average fixed cost + Average variable cost.

Marginal Cost is the cost incurred on the production of another or one more unit. It
implies the extra cost incurred in order to produce an extra unit of output.

Quantity Total Total Total Average Average Marginal

Fixed Variable Cost Fixed Average Total Cost
Cost Cost = Total Cost Variable Cost
fixed = Total Cost =
cost + fixed Total
Total cost / variable
variable Quantity cost /
cost Quantity

0 100 0 100 0 0 0 0
1 100 25 125 100.00 25.00 125.00 25
2 100 40 140 50.00 20.00 70.00 15
3 100 50 150 33.33 16.67 50.00 10
4 100 60 160 25.00 15.00 40.00 10
5 100 80 180 20.00 16.00 36.00 20
6 100 110 210 16.67 18.33 35.00 30
3rd Answer

3a.

Price of product per Unit = Rs. 4500

Total supply of units = 450

Consequently, the number of units supplied becomes 600. So, the supply increased
by 150 units. Also, the price was increased to Rs. 5500. So, the price increased by Rs.
1000.

Elasticity of Supply is

Es = Percentage change in the supply of quantity / Percentage change in price of the

product

Percentage change in quantity supplied = Change in the supply of quantity ( ∆S) /

Original quantity supplied (S)

Percentage change in price = Change in the price ((∆P) / Original Price

Elasticity of supply

Es = (150 / 450) / (4500 / 1000)

= (1/3) / (4.5)

= 1.5

3b.

Price of Air Ticket Quantity Demanded per month

1,00,000 5000
1,20,000 3500

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

Percentage change in price

Percentage change in quantity demanded= Change in the supply of quantity ( ∆S) /

Original quantity demanded (S)

Percentage change in price = Change in the price (( ∆P) / Original Price

EP = ∆Q (Change in quantity demanded) /∆P (Change in Price) * Original price/Original

quantity
EP = (∆Q /Q) / (∆P /P)

= (1500 / 5000) / (20,000 / 1, 00,000)

= 0.3 / 0.2 = 1.5