Business Economics

Question: - 1
Answer: - Price elasticity of demand is described as a measurement of percentage
change in quantity demanded in response to a given percentage change in own price of the
commodity. Elasticity of demand is generally defined as the responsiveness or affectability
of demand to a given change in the price of a commodity.It suggests the constraint of
demand either to go up or go down to a given change in cost. Elasticity of demand shows a
proportion of relative variations in two quantities.ie, price and demand.Price elasticity of
demand is determined as the percentage change in quantity demanded by the percentage
change in price.
Various factors influencing price elasticity of demand some of the important determinants
are as under:
Nature of the Commodity: -An essential commodity like food, oil, salt, milk, sugar, etc. that
has no substitutes will have inelastic demand. Consumers will purchase a fixed amount per
unit of time, irrespective of price change. On the other hand demand for luxuries goods like
TV, refrigerator, AC, etc. will be elastic in nature.
Availability of Substitutes: -Demand for products which have close substitutes like, coke
and Pepsi, being close substitutes of each other is relatively more elastic. Because, when
price of such product rises, the consumers have the option of shifting to its substitute.
Products without close substitutes like cigarettes and liquor, are generally found to be less
elastic in demand.
Income level of the buyer : -Elasticity of demand for a good also relies upon the income
level of its purchaser .If the purchaser of the good are high-end consumer with high level of
income then they will not beconcerned by a rise in its price.For example –Rise in the price of
luxury itemswill not affect the demand for products consumed by multi-millionaire.
Similarly, on the other hand the demand for products consumed by lower or middle class
people with low income,then the elasticity of demand is expected to be high.For: Demand
for small cars by the middle class people.
Price level: -Elasticity of demand also rely on the level of price of the concerned commodity.
Elasticity of demand will be high at higher level of the price of the commodity and low at the
lower level of the price.
Proportion of Total Expenditure: -If the consumer spends large proportion of their income
(Cloth, scooter etc.) will have an inelastic demand. On the other, hand if the consumer
spends a small proportion of their income (Salt, toothpaste, newspaper etc.) tends to have
elastic demand. A small part of the income is purchased after spending.
Possibility of postponement: - This implies that the demand for goods that can be
postponed by purchaser in the near future is elastic. For example, purchasing a vehicle and
fixing a building can be postponeso, their demand would be elastic on the other hand, if the
demand for a particular product cannot be postponed, its demand will be discontinuous. For
example, the demand for drugs is unpredictable.
Time Period:-In short period demand will be inelastic but in long period demand will be
elastic. It is because, in the long run consumer can change his consumption habits more
appropriately than in the short period.
Level of Knowledge: Demand for knowledgeable customer would be elastic and for
uninformed customers, it would be inelastic.

Diversity of Uses: - A commodity that can be placed to several uses have elastic demand.
Forexample: electricity has several uses. It is used for room heating, lighting, cooking, etc. If
the price of electricity rises, its use may be restricted and use only to essential purposes like
lighting .Other uses may be stopped.
Similarly, if a commodity such as paper has only a few uses, its demand is likely to be less
elastic.
Habit of Consumers: Goods to which consumer become habituated will have inelastic
demand like, liquor, cigarette and tobacco. In that case, demand tends to be inelastic .If
people are not habituated for the use of these products, then demand generally tends to be
elastic.

Question: - 2
Answer: - TotalFixed Cost -Fixed cost refers tothe money expenses incurred on fixed
assets like plants, equipment, machine and gear in the short run.Total fixed costs do not
change with the change in output. It remains constant even when output is zero. Graphically
TFC will be represented as a straight line parallel to the horizontal axis.
Fixed cost is related to the cost of fixed assets. It does not change with level of production
(thus, fixed). Fixed assets include buildings, machinery costs or rent constitutes fixed costs.
Also called as overhead costs, supplementary cost and indirect cost, these costs remains
constant and do not change regardless of the level of production.
TFC = TC- TVC

Total variable Cost –Total variable cost refers to add up to cash costs caused on variable
factor inputs like crude materials, power, fuel, water, transportand correspondence, etc.in
the short run. These costs are directly proportional to the output of a firm. This suggest that
when the output rises TVC also rises and when the output falls, TVS also falls as well. It is
derived by adding the manufacturing of quantities of variable inputs increased by their
costs.
TVC = TC – FC

Total Cost –Total cost is the total monetary cost of production. It refersto the total cash
consumption brought about by a firm to deliver a given amount of yield. The total cost is
valued corresponding to the production function by multiplying the factor costs with their
prices. TC = f (Q) which implies that the T.C. shifts with the yield. TC includes all kinds of
money costs, both explicit and implicit expense. It is equal to fixed plus variable costs.

TC = TFC +TVC.

Average Fixed Cost – Average fixed cost is the fixed cost per unit of yield divided by the
amount of production produced. Fixed costs are those costs that must be incurred in a fixed
quantity, regardless of the level of output produced. Average fixed cost is the fixed cost per
unit of production. The explanation is easy to comprehend. Since AFC = TFC/Q it is an pure
numerical outcome that the numerator staying unchanged, the expanding denominator
causes lessening cost. As the total number of units of goods rises, the average fixed cost falls
because the spread of the same amount of fixed cost over a large number production is
done in units.
Average Fixed Cost = Total Fixed Cost /Quantity

Average Variable Cost – When a firm increases its product, its initial variable cost decrease
slightly and then increases. Here the question can be asked as to why the AVC fallsslightly at
the beginning and then it rises. The answer to this question is very simple. When a firm is
not initially producing to its full potential, many of the factors of production used to
manufacture a particular commodity are partially absorbed. As the output of the firm
increases, they are used to their fullest extent. When the plant operates at its full capacity,
the AVC is at its minimum. If the expansion in the average variable cost is greater than the
fall in the average fixed cost, the average total cost will increase.

Average Variable Cost = Total Variable Cost /Quantity

Average Total Cost –As the firm’s productivityrises, the average total cost, such as the
average variable cost initially falls, then rises. The reason forthe initial falls in ATC is the sum
of AFC and AVC. As production increases, the average fixed cost and the average variable
cost also fall. AC is also called as the unit cost since it is the cost per unit of output
produced. Average total cost or average cost is acquired by dividing the total cost by all out
yield manufactured.

Average Cost = Total Cost /Quantity

Average Cost = Average Fixed Cost + Average Variable Cost
Marginal Cost –Marginal cost refers to the addition or one more unit to the total cost as a
result of a unit increase in the production volume. That is the cost of the production of a
good unit.It infers extra expense brought about to deliver an extra unit of yield. Marginal
cost will tends to fall at first, however quickly rise as marginal returns to the variable factor
inputs will start to reduce, which makes the marginal factors more expensive .This is
referred to as the ‘law of diminishing marginal returns’. It has nothing to do with fixed
expense and is always connected with variable expense. It is calculated by measuring
change in total cost resulting from a unit increase in output.

MCn = TCn –TC n-1

Quantity Total Total Total Average Average Average Marginal

Fixed Variable Cost Fixed Variable Total Cost
Cost Cost Cost Cost Cost
0 100 0 0 0 0 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 21.43 35.71 40
8 100 300 400 12.5 37.5 50 150
9 100 500 600 11.11 55.56 66.67 200
10 100 900 1000 10 90 100 400

Question – 3 A
Answer –Demand forecasting can be defined as acourse of predicting the upcoming
demand for an organization’s goods or services. It is also stated to as sales forecasting as it
involves anticipating the future sales figures of an organisation. In general, assessing the
potential demand for a product in the future is called demand forecasting. Demand
forecasting helps an organisation to take various business decisions, such as purchasing
materials, planning the production process, managing funds and deciding the cost of its
products. Demand can be anticipated by organisations either internally by making estimates
called guessestimate or externally through market research agencies or specialized experts.
Steps involved in demand forecasting
1 – Specifying the objective: - The objective for which the demand forecast is to be made
must be clearly defined. Objective can be defined in terms of long-term or short-term
demand for a product, or wholemarket demand or demand specific to a market section, or
industry demand or demand specific to an organisation.The goal of demand should be set
before the demand forecasting process beings as it well provides direction to the whole
research.
2 – Determining the time perspective: - Depending on the goal set, demand can be
estimates either short-term, for example, for the following 2-3 years or longer periods i.e
(beyond 10 years). There are various determinants of demand when forecasting demand for
short periods It may be considered to be constant or do not change significantly. But for
long term demand forecasting needs into consideration as there is a constant changes in the
market. So, it is important to define the perspective of time that is the time period for which
demand is to be forecasted.
3 – Selecting the Method for Demand Forecasting: - Once the goal is set and the method of
executive forecasts in a time perspective is selected. There are various methods of
forecasting demand dropping in two categories, survey methods and statistical method. The
survey methods includes consumer surveys and opinion poll and statistical methods include
trend projection, barometric and econometric methods. Each method, forecast, type of
expected data, availability of data and time period under which the suitable forecasting
method selected. The forecast is different from each other in terms of what is to be done.

4 – Collecting and analysing data: -After method is determined, the next step is to collect
primary or secondary or both required data. Primary data is first hand data that has never
been collected before whereas secondary data are already available data often expected
data is not available and so the data is adjusted, even changing it, for the purpose of
building the data according to the expected data it gives.
5 –Interpreting Outcomes: - Once the data is analysed and the demand forecasting method
is finalized. Thelast step is to estimate the demand for the predetermined years of the
period. Usually the estimation is in the form of an equation and the result is simplified and
interpreted is presented in a comprehensible format.

Question -3- b
Answer –Demand forecasting plays asignificant role in the management of every
business. It helps an organisation to lower the risk involved in business activities and make
important business decisions. Also, demand forecasting provides insight into the
organisation’s capital investment and developmentdecisions.
Needs for demand forecasting in business organisations
In the short run: It involves forecasting demand for a period not exceeding one year. It
made on the assumption that thecompany has a given production capacity and the period is
too short to change the existing production capacity.
 Production planning: It helps in choosing the degree of yield at different periods and
also help is avoiding under or over production of goods.

 Formulation correct purchase policy: It provides better material management, of

purchasing inputs and control its stock level which cuts down expense of activity.

 Sales forecasting: It encourages the organization to set practical sales targets for
every individual sales representative and for the organization all in all.

 Framing realistic pricing policy: An objective valuing tactics can be planned to suit
short run and seasonal change in demand.

 Reducing the dependence on chances: The business unit would have the option to
strategies its production properly and face the difficulties of rivalry productively.

In the long run:It involves forecasting demand for period of 5-7 and may extend for a period
of 10-20 years. It mainly focused on the long-term decisions.

 Business planning: It supports with arranging extension of the current unit or

another new manufactured unit. Capital planning of a firm depends on long run
demand forecasting.
 Financial planning: It helps with arranging since quite a while ago run budgetary
prerequisites and venture programs by floating shares and debentures in the open
market.

 Business control: Effective administration over totalcosts and incomeof a

corporation helps to see the worth and volume of business. This in its flip helps to
estimate the entire profits of the firm. therefore it's attainable to manage business
effectively to satisfy the challenges of the market

 Manpower planning: It helps in preparing long run coming up with for impartation
training to the current employee’s adept recruit and economical labour force for its
long haul growth

 Establishment of stability in the working of the firm:Fluctuations in production

cause ups and downs in business that retards smooth functioning of the firm.
Demand forecasting decreases production unpredictability and facilitate in managing
the activities of the organization.