RIZAL TECHNOLOGICAL UNIVERSITY

Boni Ave., Mandaluyong City

MANAGERIAL ECONOMICS
Kathryn D. Tria, DBA

MIDTERM EXAMINATION

1. What are the methods of Demand Estimation/Forecasting.

How can we use these methods to improve the level of

economic performance of one country? Discuss it.

-The methods of Demand Estimation/Forecasting are the survey method and statistical method.
In the survey method, these have the consumer survey method where the potential customers are
being interviewed, the customer being asked directly what are their preferences on the products
they want. This survey can be done by Complete Enumeration Method where the potential
customers were being asked about their future purchase plan or by the Sample Survey Method
where buyers are being chosen and they will be the only ones being interviewed. Under the
survey method, there is also the Collective Opinion method where the firm company's sales team
will aggregate data on customer demand. They will report the sales performance of their
respective regions which allows them to take a look at the overall demand and be able to know
the trends by doing that. They will be able to know the estimated future sales. There is also the
Expert Opinion Method or Delphi method wherein the company will seek advice from the
expert. They will hire an outside contractor that will help them forecast demand, it helps to make
a conclusion and what they will expect in the future. Another one is the Market Experiment
Method where the demand is being predicted by conducting market studies and experiments on
consumer behavior which are being carried out under controlled conditions. In the Statistical
Method, it is scientific, reliable and free from biases and also a cost effective method of Demand
Forecasting. Under it are the Trend Projection Method and Regression Analysis where in the
Trend Projection Method, where the company looks for the past to be able to predict the future. It
is assumed that the past trend will still be continued in future thus helping to forecast the demand
of products and services. While in Regression Analysis, it involves a dependent variable and
independent variables where we will identify and analyze the relationship between the two.
There is also the Barometric Method where the past demands of the product helps project the
past into the future. It has three indicators which are the Leading Indicators, Lagging Indicators
and Coincidental Indicators.
We can use these methods to improve the level of economic performance of a country by
allocating the resources efficiently, predicting the demand helps the businesses to allocate their
resources efficiently which helps for economic growth of a country. The businesses can also be
able to manage their inventories and supply chains that causes them to reduce their waste and
cost and that will result in saving their cost and improving the economic performance. Predicting
demand can also attract domestic and foreign investors to the business as it provides them the
confidence of its stability and they are able to see through the potential of the business to the
market. The firms also make the right decisions that lead them to be successful and improved the
economic performance of the country.

2. Discuss Opportunity Cost and use illustration.

Opportunity Cost is a fundamental economic concept wherein the potential benefits are being
missed out by deciding to choose one alternative to another one. Since the opportunity cost is
unseen then they are easily being overlooked. In here, the business will understand what they
will be missing when it chooses one option over another that allows them to be more profitable
decision-making. It considers the costs and benefits of every option they have to make and be
able to weigh them to each other, which one is more profitable than others. Simply, it is the cost
of what they have to give up when making decisions.

FORMULA
Opportunity Cost= FO- CO
Where FO is the return on best forgone option and CO is return on chosen option

For example:
A company has an excess capital and they are deciding how to invest it.

Option A: Invest it in the stock market

Option B: Invest it back in the business for new equipment.

Assuming that the expected return of investment in the stock market is 15% for the next year
while the company expects the equipment to generate for 12% return over the same period.

If you choose Option A, you will expect a 15% return on the investment over the year while
choosing Option B, the company will expect a 12% return over the same period. The opportunity
of choosing the equipment over the stock market is 3%.(15%-12%). If you choose to invest in
the stock market, you will earn more than the other option B because if you choose to take option
B, you are forgoing an additional 3% return on investment.

Understanding opportunity cost is essential in decision-making. One must consider and weigh
options which helps the businesses know the best alternative they could choose which helps them
allocate resources efficiently and effectively.

3. Enumerate and Discuss the different approaches in

Estimating Demand for New Products.

Different approaches in Estimating Demand for New Products

1. Evolutionary Approach- In this approach, the new product is the improvement of an old
product. The sales of the old product will be analyzed and then the business will make an effort
to be able to predict the sales of the new product. It is also assumed that the new product will
follow a life cycle based on the old product.

2. Substitute Approach- this approach is based on the assumption that a new product will be
analyzed as a substitute for an existing product. In this method, the business analyzes the demand
of the substitute product and then based on its analysis, forecasts will be made for the new
product to be introduced to the market.

3. Buyers or consumers view- In this approach, the potential buyers of the product are being
asked for their opinions and preferences regarding the product. Efforts are also made to predict
the quantity of the product they will launch by the consumers. The first reviews of the consumers
will set the sales forecast of the product.

4. Vicarious Approach ( Experts' opinion)- This approach is based on the opinion of experts in
the field of marketing which are very informed of the needs,wants and preferences of the
consumers. Their opinions are collected and help the business to forecast demand of the product.

5. Sales Experience Approach ( Market Test Method) - In this approach, the new product is
launched at sale in a sample market for a fixed period. The results of the sales will be the base of
forecasting the demand of this new product. The results will be collected and thoroughly
analyzed.

6. Growth Curve Approach- In this approach, the rate of growth and the ultimate level of
demand for the new product is being estimated by the basis of the pattern growth of an existing
product.

4. Enumerate and discuss the determinants of elasticity of

Demand and cite an example.

Determinants of Elasticity of Demand

1. Availability of Substitutes - It is an important determinant of price elasticity as if there are

many substitutes for a product then potential buyers can easily switch to an alternative product if
there are any changes in the price, especially if it increases that makes the demand more elastic.
For example, if the shampoo (Palmolive) increases its prices, then consumers can easily switch
to another brand like Head and Shoulders, Pantene etc. as there are many substitutes for this
product.

2. Necessity vs. Luxury- Whether the product is a necessity or a luxury will affect its elasticity.
Although necessity tends to be inelastic demand since consumers don't have any choice but to
purchase them because it is a need while luxury is more elastic demand because consumers don't
need to buy them when prices increase. An example of this is rice and jewelry, in this the rice is a
necessity wherein even if the price increases the consumer still needs to buy it while jewelry as a
luxury don't need to buy them if they can't afford it.

3. Proportion to Income- If a product represents an important portion of a customer's income

then demands tend to be more elastic as the price changes have an impact on their budgets. For
example, if the price of gasoline increases, then the consumption of the people will reduce
because it is an important part of their budget.

4. Brand Loyalty- this also has an effect on the elasticity. Loyalty of a consumer to a particular
brand will have an inelastic demand for that product because they are less responsive to the
changes of its price. For example, Samsung users may have inelastic demand for Iphones due to
the loyalty of the consumers.

5. Addiction- For goods that are addictive, like a cigarette or alcohol, demand tends to be
inelastic as consumers still buy them even though the prices increase because of their addiction
to it.

6. Time Horizon- It refers to the time which the consumer must make their purchase. In the
short run, demand for products may be inelastic because consumers have limited time to adjust
but in the long run, consumers may find alternatives, making the demand elastic. For instance,
people relying on public transport to commute, in the short run, will be inelastic as they need to
purchase ticket fare. But in the long run, if the prices rise, they can make other alternatives like
choosing to drive or ride a bike instead.
7. Government Regulations and Taxes- Government policies, such as taxes and regulations
influence elasticity. For example, the demand for coke becomes elastic when taxes are imposed
on them because it will make the price of it increase that leads consumers to quit drinking it or
reduce consuming it.

8. Customer preference- if the consumer likes a particular product then the demand will
increase. It is considered as an elastic demand. For example, if a consumer likes the taste of the
milk tea, then that consumer will still buy that product so the consumer will have a taste of that
beverage.

9. The price of the product- demand of the product changes if the price changes. If the price
increases, the demand decreases while the price decreases, demand increases. For instance, if the
soft drink C2 increases its price, then its demand will definitely reduce.

10. Customer expectation- consumers' expectation of higher prices in the future will make the
demand now increase. For example, an increase of fruits when Christmas is coming, so people
buy as early as possible because they know it will increase. Due to that, the demand for fruits as
of now is increasing.

5. Enumerate and discuss the categories of income elasticity of

demand and cite an example.

Categories of Income Elasticity of Demand

1. Positive Income Elasticity

Normal Goods - goods that as the consumer income rises then quantity of demand
increases. As an individual's income increases, they will buy more goods. For example,
Cellphones are considered normal goods so if the income of people rises then they will
buy cell phones.
2. Negative Income Elasticity
Inferior Goods- goods that if the consumer income rises then quantity of demand
decreases. When people have more money, they will shift to goods that have higher
quality alternatives. For example, a cheap sneaker is considered an inferior good. If the
income of people increases then they will switch to higher quality, brand name sneaker
products.

3. Zero Income Elasticity

Income-Inelastic Goods- these are goods that change in the income of consumers have no
significant impact on the quantity of demand. Demand remains stable regardless of
income rises. For example, goods like salt often have zero income elasticity. People will
still buy them regardless if their income changes as it is consumed on a regular basis.

4. Unitary Income Elasticity

Unitary Elastic Goods- these are goods that percentage change in the quantity demanded
is equal to the percentage change in income.