Business Economics

December 2022 Examination

Q1. 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

Ans 1.
Introduction:
"Demand estimating (forecasting) may be characterized as a way of figuring out values for
demand in future intervals," creates Evan J. Douglas. Demand forecasting is estimating future
demand for a firm's services or products. It is called sales forecasting because it includes
looking ahead to a company's future income figures. Demand forecasting allows a
corporation make enterprise alternatives including proceeding the manufacturing method,
obtaining raw substances, coping with cash, and figuring out the pricing of its products.
Organizations can anticipate demand either internally by way of guessing fees or at the
surface with specialized experts or marketplace studies businesses.

Steps involved in demand forecasting

To obtain the desired outcomes, demand forecasting should be done methodically. Allow us
to go over these steps in deepness.

 Identifying the goal: Before beginning the process, the function of demand
forecasting has to be determined. The adhering to criteria can be made use of to define
the goal:
 Lasting or short-term product demand
 Sector demand or demand unique to a business
 Demand for the entire market or demand for a specific market segment
 Determining the time horizon: Depending upon the goal, demand might be
projected for a quick (2-three years) or extended duration (past ten years). Long-time
period demand forecasting requires an enterprise to make up for frequent market
adjustments and the economic system.
  Choosing a Forecasting Method: Demand forecasting may be finished in various
methods. Not all strategies, however, are suitable for all varieties of call for
forecasting. The enterprise has to choose the excellent forecasting method primarily
based at the goal, time array, and facts accessibility. The call for forecasting method is
also influenced by the demand forecaster's revel in and functionality.
 Data series and evaluation: Data should be gathered after picking a demand
forecasting approach. Because information is amassed in its uncooked kind, it must be
analyzed to supply pertinent data. Data may be obtained from either additional or
crucial sources or both.
 Interpretation consequences: After the information has been analyzed, it is used to
expect call for the specified years. In fashionable, the received consequences continue
to be within the sort of equations that must be supplied, now not particularly.

Products are classified as consumer or capital items based on their nature.

 Consumer items: These objects continue to be in high call for. Generally, call for
forecasting for those merchandise is accomplished while a brand-new product is
delivered, or an existing product is changed with a much higher one.
 Capital goods: These are merchandise which can be crucial to supply customer
goods, along with uncooked substances. Therefore, these commodities have derived
demand. Capital objects call for forecasting is prompted by means of durable items
call for. Forecasting more call for patron products could suggest forecasting greater
demand for capital merchandise.
Demand is projected in the short and lengthy run based upon duration, which is detailed
below:
 Short-time period projections: It requires forecasting call for about a year. It makes
a specialty of a company's short selections (for instance, arranging finance,
developing manufacturing plans, setting up advertising plans, and so forth).
 Long-term projections: It involves forecasting call for a period of five-7 years,
which might be covered length of 10 to twenty years. It is concerned with an
enterprise's lasting choices (as an example, choosing manufacturing functionality,
converting machinery, and so forth).
Conclusion:
Although call for forecasting has a considerable array of packages in a corporation, it does
have some limits. This is because demand forecasting is primarily based upon an evaluation
of modern and previous events to determine the first-rate route of action for the future. Past
events or incidents may not always be dependable and adequate for destiny base forecasts.
The overall performance of call for forecasting is determined by the method utilized to
anticipate demand. The standards for selecting a demand forecasting method consist of
precision, timeliness, affordability, ease of interpretation, flexibility, simplicity of use, and
alertness, amongst others.

Q2. From the given hypnotically table Calculate Total Cost, Average Fixed Cost,
Average Variable cost, and Marginal Cost.

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:

Organizations incur miscellaneous charges on various activities for production products and
services, which includes obtaining basic materials, paying salaries/wages, and buying or
leasing machines and homes. These costs represent the agency's fee of producing its products
and services. The quantity of resources required for production objects and services is called
the fee. The sum of the coins values of the inputs elevated by their specific expenses is
referred to as the cost of production.

Calculation of various costs

The total cost is the actual cost incurred by a company to create a particular degree of the
outcome. An organization's Short-Run Total Cost (SRTC) is comprised of two significant
elements:

TFC (Total Fixed Cost): These costs do not regulate due to changes. Even when the result is
zero, TFC stays steady. TFC is represented as a horizontal line parallel to the x-axis (end
result).

TVC (Total Variable Cost): These fees are instantly associated with a company's end result.
This suggests that after final results boosts, TVC boosts as properly, and whilst output
decreases, TVC reduces.

SRTC is determined by adding the total fixed and variable costs.

TFC + TVC = SRTC

The average cost is calculated by splitting the total cost by the number of systems a business
generates. A firm's short-run average cost (SRAC) describes the cost of results at different
stages of production.

SRAC is calculated by dividing the short-run overall cost by the result.

A firm's SRAC is U-shaped. It starts off evolved to drop, and after that gets to a minimal and
starts to beautify. The looked after charges stays steady first of all, whilst simplest the
variable expenses, such as number one material and work prices, modify. Later, as the
repaired costs are spread out all through the producing, the standard cost starts off evolved to
reduce. When a enterprise makes use of all available assets, the standard fee is maintained to
a minimum. The SRAC curve illustrates the fast-run common fee of creating a selected
amount of outcomes. The SRAC curve's downward slope shows that as output expands, so do
common costs. The SRAC contour begins to slope better, revealing that usual expenses
increase at output stages above.

Due to raising returns at the beginning complied with by way of lessening returns, the short-
run constrained value (SRMC), the short-run average cost (SRAC), and usual variable cost
(AVC) are U-shaped. The SRMC curve intersects the SRAC contour and the AVC curve on
their floors.

Quantity Total Total Total Average Average Average Marginal

Fixed Variable Cost Fixed Variable Total Cost
Cost Cost Cost Cost Cost
0 100 0 100 20
1 100 20 120 100 20 120 10
2 100 30 130 50 15 65 10
3 100 40 140 33.33 13.333 46.666 10
4 100 50 150 25 12.5 37.5 10
5 100 60 160 20 12 32 10

Conclusion:

When a commercial enterprise determines to provide an asset, it has to pay the fee for the
several inputs required within the procedure. The company requires hard work, uncooked
substances, gas, and energy, together with the condo price for the production middle.
Business decisions are made via comparing the monetary value of inputs in connection with
the output. The coins fee of inputs is computed by using multiplying inputs through their
corresponding expenses (value of manufacturing). Cost analysis is crucial in business
decision-making given that the time period price has distinctive significances in unique
circumstances and might be interpreted otherwise. An employer needs to have a strong
popularity of the numerous value standards to make efficient useful resource appropriation
selections.
Q3a. 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.

Ans 3a.
Introduction:
Even if the product's price stays the equal, a boom in consumer earnings will increase
demand for it. The term "profits elasticity of demand" refers to the amount of demander's
responsiveness to purchaser earnings. The share of the proportion adjustment in the quantity
demanded to the percentage adjustment in profits is what Watson refers to as "sales flexibility
of demand." Richard G. Lipsey claims that "income elasticity of call for" refers to how
responsively demand adjustments with adjustments in revenue.

Income elasticity of demand:

Ey = Percentage change in quantity demanded/ Percentage change in income

Where Percentage change in quantity demanded = New quantity demanded – Original
quantity demanded (∆Q)/ Original quantity demanded (Q)
Percentage change in Income = New income – Original income (∆Y)/ Original income (Y)
Ey = ∆Q/∆Y × Y/Q
Applying the formula in the present case,
∆Q = 50 – 40 = 10
∆Y = 35,000 – 20,000 = 15,000
Q = 40
Y= 20,000
Ey = 1/3

The degree to which demand reacts to value adjustments does not continue to be continuous
in every scenario. A product's demand can be inelastic or elastic, based upon the price of
change sought after in connection with a product's price adjustment. The price elasticity of
demand is categorized right into five significant teams based on the rate of adjustment:

 Perfectly elastic demand: Perfectly elastic call for happens when a moderate change
(growth or autumn) in fee reasons an extensive adjustment (surge or autumn) in
 amount preferred. A little increase in charge consequences in a decline in sought-after
to no, while a bit reduction in charge results in a growth in call for to infinity. In this
situation, demand is bendy, or e= ∞.
 Perfectly inelastic demand: When an adjustment in the price of a product does not
result in a modification in the quantity required, the demand is stated to be flawlessly
inelastic. In this circumstance, the demand elasticity is zero, represented by ep = 0.

Conclusion:

Thus, it is critical to gauge the price elasticity of demand.