Course: Business Economics

Answer 1:
Demand Forecasting:
Demand Forecasting is a combination of two words Demand & Forecasting. Demand
stands for the requirement of organizational product or a useful service. Forecasting
stands for the prediction in the present that will occur in future i.e. , Demand Forecasting
is a technique of estimating the demand of product or a service provided by Organization
in the specified time period in the future.
Demand Forecasting is very helpful for the new organizations ae well as the existing
organizations because it helps the organizations to predict the required inputs based on the
estimated demands, which directly leads to the process of production without any wastage
of material and time. When it comes to estimation organizations requires the correct data.
Without accurate data organizations cannot predict the exact demand of their products and
services.
Steps in Demand Forecasting:
Basically in Large – scale production firms may often face difficulties in predicting the
fairly accurate estimation of future demand. So, to overcome the difficulties firms uses the
following steps to clear the path for a systematic demand forecasting. The following steps
are involved:

Making a Estimation
Collection of
Specifying Determining Choice of and
Data and
the the Time method for interpretation
Data
Objective Perspective Demand
Adjustment of result
Forecasting

1. Specifying the objective: For the demand forecasting objective must be specified
before the start of the process as it will give direction to whole research. The objective
may be defined in terms of:
 Short-term or long-term demand
 Whole or only the segment of a market for a firm’s product
 Overall demand for a product or only for a firm’s own product

2. Determining the Time Perspective: Based on the objectives defined. Demand

Forecasting can either be for short period (for 2-3 years) or long period. If forecasting
demand for a short period, it’s possible that many determinants will remain constant or
do not change significantly. But for long period forecasting, it’s possible many
determinants of demand may change significantly. That’s why it is essential to define
the time perspective.
 3. Making a choice of method for demand forecasting: Since the objective is set and
time period has been specified for performing the forecasting. Based on the objective,
organization need to select the most suitable method of demand forecasting. Not all the
methods are suitable for all types of demand forecasting. The selection of forecasting
method depends on the experience and expertise of demand forecaster.

4. Collection of data and data adjustment: After selecting the demand forecasting
method, next step is to gather the data. Data can be gathered either from primary source
or secondary source or both. Primary data is the data which has never collected before
Secondary data are the data which are already available. Most of them data required is
not available, so to obtain the necessary data, needs to be adjusted, sometimes
manipulated to build the consistent data which is required.

5. Estimation and interpretation of result: After the required data collection and
demand forecasting method finalization, the final step is to estimate the demand for the
predefined years of period. Usually the estimated data are obtained in the form of
equations, which needs to present in the easy and usable form.

Thus, the objective of demand forecasting can be achieved only if the steps followed
systematically.
Example: An existing organization currently selling a 10,000 units per month. Now the
organization wants to increase their sell to 30,000 units per month in the following year. Since
the objective defined for short-period, the economic environment is currently stable & order
volume will fluctuate a bit sized. The organization is able to stock the 30,000 units in their
present warehouse space. Since, all the steps are followed current objective achieved easily.
For long- period, organization wants to sell the 1,00,000 units in the distant future. To achieve
the goal organization has to purchase or lease the land for the warehouses, inventory fullfiment
based on the projected demand. Organization have to follow the steps:
Step 1: Objective: Organization wants to sell the 1,00,000 units in the distant future
Step 2: Time perspective defined: Long-period
Step 3: Selection of suitable method for the demand forecasting
Step 4: Gather the necessary data related to lands (for warehouse), Workforce (for production
based on the projected demand)
Step 5: Once all the necessary steps are fulfilled, now adjust the data to check the result.

Conclusion:
Demand forecasting helps organizations to make smart business decisions. Based on
the business requirements, sales data, market research, and economic factors different
demand forecasting techniques can be used. It is often an iterative, highly detailed, and
expertise-driven process. By using Demand Forecasting organizations can take the
following steps to strengthen the business:
  Budget Preparation
 Performance evaluation
 Planning and scheduling of production
 Making key management decisions

Answer 2:
Representation:
TFC Total Fixed Cost
TVC Total Variable Cost
TC Total Cost
AVC Average Variable Cost
AFC Average Fixed Cost
AC Average Cost
MC Marginal Cost
Q Quantity

Formula used:
TC TFC + TVC
AVC TVC/Q
AFC TFC/Q
AC AFC + AVC
MC ΔTC / ΔQ
Where,
ΔTC = Change in Total Cost
ΔQ = Change in Quantity

Total Fixed Cost: Total fixed cost doesn’t change with the change in Output (Quantity).
Quantity= 0
TFC= 100
TVC= 0
TC = TFC + TVC 100 Output produced is zero.
Hence, TVC is also zero.
TC = TFC
AFC = TFC / Q ∞
AVC = TVC / Q Nil
MC = ΔTC / ΔQ Nil
AC = TC / Q Nil
Answers
Quantity= 1
TFC= 100
TVC= 20
TC = TFC + TVC = 100 + 20
= 120
AFC = TFC / Q = 100 / 1
= 100
AVC = TVC / Q = 20 / 1
= 20
MC = ΔTC / ΔQ 20
AC = TC / Q = 120 / 1
= 120

Answers
Quantity= 2
TFC= 100
TVC= 30
TC = TFC + TVC = 100 + 30
= 130
AFC = TFC / Q = 100 / 2
= 50
AVC = TVC / Q = 30 /2
= 15
MC = ΔTC / ΔQ 10
AC = TC / Q = 130 / 2
= 65

Answers
Quantity= 3
TFC= 100
TVC= 40
TC = TFC + TVC = 100 + 40
= 140
AFC = TFC / Q = 100 / 3
= 33.33
AVC = TVC / Q = 40 / 3
= 13.33
MC = ΔTC / ΔQ 10
AC = TC / Q = 140 / 3
= 46.66

Answers
Quantity= 4
TFC= 100
TVC= 50
TC = TFC + TVC = 100 + 50
= 150
AFC = TFC / Q = 100 / 4
= 25
AVC = TVC / Q = 50 / 4
= 12.5
MC = ΔTC / ΔQ 10
AC = TC / Q = 150 / 4
= 37.5
 Answers
Quantity= 5
TFC= 100
TVC= 60
TC = TFC + TVC = 100 + 60
= 160
AFC = TFC / Q = 100 / 5
= 20
AVC = TVC / Q = 60 / 5
= 12
MC = ΔTC / ΔQ 10
AC = TC / Q = 160 / 5
= 32

Quantity Total Total Total Average Average Average Marginal

Fixed Variable Cost Fixed Variable Total Cost
Cost Cost Cost Cost Cost
0 100 0 100 ∞ - - -
1 100 20 120 100 20 120 20
2 100 30 130 50 15 65 10
3 100 40 140 33.33 13.33 46.66 10
4 100 50 150 25 12.5 37.5 10
5 100 60 160 20 12 32 10

Answer 3(a):
Particulars Amount
Original Income (Y) 20,000
New Income (Y1) 25,000
Change in income (ΔY) = = 25,000 – 20,000
New income (Y1) – Original income (Y) = 5,000
Percentage change is income = = 5,000 / 20,000
ΔY / Y = 0.25
Original quantity demanded (Q) 40
New quantity demanded (Q1) 60
Change in Quantity (ΔQ) = = 60 - 40
New quantity demanded (Q1) – original = 20
quantity demanded (Q)
Percentage change in demanded quantity = = 20 / 40
ΔQ / Q = 0.5
Income elasticity of demand (ey) = = (ΔQ / ΔY) * (Y / Q)
Percentage change is quantity demanded / = ( 20 / 5000 ) * ( 20000 / 40 )
Percentage change in income =2
Answer 3(b):
Particulars Amount
Original Price (P) 500
New Price (P1) 400
Change in Price (ΔP) = = 500 – 400
original price (P1) – new price (P) = 100
Percentage change is price = =100 / 500
ΔP / P = 0.2
Original quantity demanded (Q) 20,000
New quantity demanded (Q1) 25,000
Change in Quantity (ΔQ) = = 25,000 – 20,000
New quantity demanded (Q1) – original = 5,000
quantity demanded (Q)
Percentage change in demanded quantity = = 5,000 / 20,000
ΔQ / Q = 0.25
Income elasticity of demand (ep) = (ΔQ / ΔP) * (P / Q) =
Percentage change is quantity demanded / ( 5,000 / 100 ) * ( 500 / 20,000 ) = 1.25
Percentage change in price