Question 1.

Introduction:- Demand Forecasting

Demand forecasting is a combination of two words, Demand and Forecasting.

Demand means requirements of product or services. Forecasting means predicting in
present for future occurring events. So demand forecasting is process of predicting the
demand of product or services of any organisation in specific time period in future.
Demand forecasting is based on the analysis of past demand of product or services in
present market condition.

For example, suppose we sold 500, 600, 700 units of product X in the month of January,
February, and March respectively. Now we can say that there will be a demand for 600
units approx. of product X in the month of April, if the market condition remains the same.

Concepts and Application:-

Now a days there are various risks in the market which affects demands, prices of
goods and services ans sales performance. These risks involve natural calamities like
earthquakes, floods, technology failure, bad economic conditions like recession. so to
overcome out of these situations it is very important for any organisations to
determine future plan of their products or services. And the knowledge of future
demand for organisations product and services in market is solved through the process
of Demand Forecasting.

To achieve accurate results, it is important to organisation that demand forecasting is

done in a systematic way, demand forecasting involves some steps which are shown
as follows:-

1) Specifying the Objective:

First step of demand forecasting is specifying the objective of that. the economist
must know that what is the purpose of demand forecasting. here the objective may be
defined in terms of: (i) long term or short term demand, (ii) the objective can be
specified on the basis of the whole industry demand or only demand for a specific
firm. The objective of demand must be specified before the process of demand
forecasting which will give direction to whole research.

2) Determining the time perspective:

On the basis of objective set, the demand forecast can be long term or short term
demand. Long term demand forecasting involves predicting demand for 5-10 years or
more and its focus on long term activities like long term decisions, expansion of
plants, etc.of the organisations. Short term demand forecasting involves predicting
 demand for short term like a period not more than 1 year and it is focuses on short
term decisions like arrangement of finance, production related decision, making
strategies etc thus it is very important to define the time perspective that is the time
duration for which the demand is forecasted.

3) Selecting the method for forecasting:

After the objective is set and the time perspective has been specified the methods for
demand forecasting is selected. There are two types of demand forecasting Survey
methods and statistical methods.
Survey method include consumer survey, suppliers survey, opinion poll method etc,
and statistical method involve past years trends projection. Each methods are different
from each other. Depending on the objective, time period and type of data required,
availability of data the organisation need to select most accurate forecasting method.
Selection of demand forecasting method depends on the experience and expertise of
economistor forecaster.

4) Collecting and analysing data:

Once the demand forecasting method is selected then next step is to collecting
required data. Data should be primary or secondary or both. Primary data are the data
which has been never collected before and secondary data are already collected. As
data is collected as raw form, its needs to analysed and convert it in a meaningful
information.

5) Interpretation of results:
Interpretation of results is a final step of demand forecasting after collecting required
data and finalization of demand forecasting method. This final step is to estimate the
demand for predefined years of period. Usually these estimates are in form of
equations and results are presented in easy way.

Conclusion:-
Looking after all the step by step demand forecasting analysis it enables better
planning and utilization of resources of business to be competitive.Forecasting is an
integral part of demand management since it provides an estimate of the future
demand and the basis for planning and making sound business decisions. It helps the
firm to decide how many in-hand material will be needed, how many quantity will be
manufactured and how many employee will be hire for fulfill demand.
 Question 2.
Quantity Total Total Total Average Average Average Marginal Cost
Fixed Variable Cost Fixed Variable Total Cost
Cost Cost Cost Cost (MC)
(Q) (TFC) (TVC) (SRTC) (AFC) (AVC) (SRAC)
0 100 0 100 - - - -

1 100 20 120 100 20 120 (120-100)/1=20

2 100 30 130 50 15 65 (130-120)/1=10

3 100 40 140 33.33 13.33 46.67 (140-130)/1=10

4 100 50 150 25 12.50 37.50 (150-140)/1=10

5 100 60 160 20 12 32 (160-150)/1=10

In above given hypnotical table to calculate Total Cost, Average Fixed Cost, Average
Variable cost and Marginal Cost lets see explanation and formulas are as follows:-

 Total Cost:-
Total cost means the actual cost incurred by the organisation to produce final output
or product. There are 2 mail elements of total short run total cost (SRTC) is total fixed
cost (TFC) and total variable cost (TVC).

Short run total cost is calculated by adding total fixed cost and total variable cost.
SRTC=TFC+TVC

 Average Fixed Cost:-

Average fixed cost (AFC) is calculated by dividing total fixed cost (TFC) by the
number of quantity (Q) produced.
AFC= TFC/Q

 Average Variable Cost:-

Average variable cost (AVC) is calculated by dividing total variable cost (TVC) by
the number of quantity (Q) produced.
AVC= TVC/Q

 Marginal Cost:-
Marginal cost (MC) can be defined as change in total cost of the organisation divided
by change in total output.
MC= change in SRTC/ change in Q
Question 3A:-

Income Elasticity of Demand:-

‘Income’ it is a very important component of demand for a product. If any changes in
income of the consumer then the demand also change even if the price of the product
remains constant.for example if increase in income of consumer increase in demand
for product also and if decrease in income of consumer then decrease in demand for
the product also even if price of product remains constant in both cases.

Mathematically, income elasticity of demand can be calculated as:-

Income Elasticity of Demand (ey)= % Δ Quantity Demanded (ΔQ/Q)

% Δ Income (ΔY/Y)

Here,
Q is original quantity demanded
Q1 is new quantity demanded
ΔQ=Q1-Q
Y is original income
Y1 is new income
ΔY=Y1-Y

Now as per Question no. 3A:-

the monthly income of an individual increases from Rs 20,000 to Rs 25,000
which increases his demand for clothes from 40 units to 60 units.

Given that,

Y=20,000 Rs

Y1=25000 Rs

ΔY=25000-20000=5000 Rs

Q=40 units

Q1=60 units

ΔQ=60-40 = 20 units
The formula for calculating income elasticity of demand is:

ey = ΔQ/Q
ΔY/Y

Substituting the values,

ey = 20/40
5000/20000

= 0.5
0.25

ey = 2 (>1)

Income Elasticity of Demand is 2.

Question 3B:-

Price Elasticity of Demand:-

Price is a very important component of demand for a product. If any changes in price
of the product then the demand also change for example if increase in price of product
decrease in demand for product take place if decrease in price of product then increase
in demand for the product also. This is called price elasticity of demand.

Mathematically, price elasticity of demand can be calculated as:-

Price Elasticity of Demand (ep)= % Δ Quantity Demanded (ΔQ/Q)

% Δ Price (ΔP/P)

Here,
Q is original quantity demanded
Q1 is new quantity demanded
ΔQ=Q1-Q
P is original price
P1 is new price
ΔP=P1-P
Now as per Question no. 3B:-
a business firm sells a product at the price of Rs 500. The firm has decided to reduce
the price of the product to Rs 400. Consequently, the demand for the product is raised
from 20,000 units to 25,000 units.

Given that,

P=500 Rs

P1=400 Rs

ΔP=400-500= -100 Rs

Q=20,000 units

Q1=25,000 units

ΔQ=25,000-20,000 = 5000 units

The formula for calculating price elasticity of demand is:

ep = ΔQ/Q
ΔP/P

Substituting the values,

ep = 5000/20,000
-100/500

= 0.25
-0.2

ep = 1.25 (>1)

Price Elasticity of Demand is 1.25