1) Demand Forecasting

Demand forecasting can be defined as a process of predicting the future

demand for an organization’s goods or services. It can also be termed as
sales forecasting.

Need for Demand Forecasting

Demand forecasting is a vital process to the
management of every organization. It enables an
organization to mitigate business risks and make
effective business decisions.
There is a need to demand forecasting due to the
following reasons:
 Assessing the probable demand and
producing the desired output:
Demand forecasting enables an
organization to assess the possible
demand for its products and
services in a given period and plan
production accordingly. Demand forecasting enables an organization
to produce pre-determined output. It also helps the organization to
arrange the various factors of production beforehand to meet the
upcoming ascertained demand.
 Sales Forecasting:
Sales Forecasting refers to the estimation of sales figures for an
organization for a given period of time. Demand forecasting helps in
predicting the sales figures by considering the historical sales data
and current trends in the market, hence aligning the objectives of
the organization likewise.
 Ensuring Stability:
Demand Forecasting helps an organization to stabilize their
operations by initiating the development of suitable business policies
to meet cyclical and seasonal fluctuations of an economy.

Steps in Demand Forecasting

The steps involved in Demand Forecasting is illustrated and explained
as below.
  Specifying the objective:
The purpose of demand forecasting needs to be specified before
starting the process. The objectives can be specified on the following
basis:
 Short-term or long-term demand for a product
 Industry demand or demand specific to an organization
 Whole market demand or demand specific to a market segment.
 Determining the time perspective:
Depending on the goal of the organization, the demand should be
forecasted for a short period or long period. If an organization
performs long term demand forecasting it needs to take into
consideration constant changes in the market as well as the economy.
 Selecting the method of forecasting:
There are various methods of demand forecasting. Depending on the
objective, time period, and availability of data, the organization
needs to select the most suitable forecasting method.
 Collecting and analyzing data:
After selecting the demand forecasting method, the data needs to be
collected. Data can be gathered either from primary sources or
secondary sources. As data is collected in its raw form, it needs to be
analyzed in order to derive meaningful information out of it.
 Interpreting outcomes:
After the data is analyzed, it is used to estimate demand for the
predetermined years. Generally, the results obtained are in the form
of equations, which need to be presented in a comprehensible
format.

2) Total Revenue(TR)
Total Revenue of a firm refers to total receipts from the sale of a given
quantity of a commodity. Total Revenue is the total income of a firm.TR is
calculated by multiplying the quantity of the commodity sold with the price
of the commodity.

Total Revenue=Quantity*Price

Average Revenue (AR)

Average Revenue of a firm refers to the revenue earned per unity of the
output sold.
It is calculated by dividing the total revenue of the firm by the total number
of units sold.
Average Revenue=Total Revenue/ Total Number of units sold

Important:-AR and Price of the commodity are equal in value.

Marginal Revenue (MR)

Marginal Revenue of a firm refers to the revenue earned by selling an
additional unit of the commodity. In other words, the change in total
revenue resulting from the sale of an additional unit is called marginal
revenue.

MRn=TRn-TRn-1

Where MRn=marginal revenue of nth unit (additional unit), TRn=total

revenue from n units, TRn-1=Total Revenue from (n-1) units and n=number
of units sold

MR is the change in TR when an additional unit is sold. However, when

change in units sold is more than one, MR can also be computed using the
following Method:

MR=Change in Total Revenue/Change in number of units

Relationship between TR and MR

 If MR is greater than zero, the sale of an additional unit increases the
TR.
 If MR is below zero, then the sale of an additional unit decreases the TR.
 If MR is zero, then the sale of an additional unit results in no change in
the TR.

These relationships between TR and MR exist as marginal revenue measures

the slope of the total revenue.

MR=Change in
Quantity Price TR=Q*P AR=TR/Q TR/Change in
Q
50 200 10000 200 0
60 150 9000 150 100
70 100 7000 100 200
80 50 4000 50 300
90 10 900 10 310

In this case, increase in quantity sold in market TR decreases, in such a

situation MR increases, it is the situation where “Monopolistic
competition” exists in the market.
 3) A) Y=5000
Y1=15000
Q=30
Q1=60

Y=Y1-Y
=15000-5000
=10000

Q=Q1-Q
=60-30
=30

Income Elasticity of Demand

= Q * Y
Q Y

=30 * 5000
30 10000

= 0.5

Interpretation: In such a situation income elasticity will be less than 1 which

represents that such a good is compulsory for the public and there is no
substitute for it in the market.

4) B)
P=100
P1=60
P=P1-P
=60-100
=-40
Q=1.75
Q1=7
 Q=Q1-Q
=7-1.75
=5.25

Elasticity of Demand
Q * P
Q P
=5.25 * 100
1.75 -40
=7.5

Interpretation: In such a situation income elasticity will be more than 1 which

represents that such a good is considered in the normal good category.