Business Economics

1.
INTRODUCTION :

One of the various approaches that management economics offers to companies of all sizes is
demand forecasting. Companies can use it to solve practical issues and increase the economic
impact of both short- and long-term planning decisions. Demand forecasting is also based on the
suggested marketing strategy and a specific set of inescapable and competitive forces; demand
forecasting is an estimation of sales for a given future term. There are different steps involved in
demand forecasting, to accomplish an objective, demand forecasting, survey and statistical must
be done methodically.

CONCEPT AND APPLICATION :

Prevailing economic conditions: The shifting pricing levels, nationwide and per capita income,
consumer spending patterns, saving and investing habits, high unemployment rates, etc. of an
economy can all have an impact on demand forecasting. To match demand forecasts with present
economic trends, it is crucial to evaluate the present economic situation.

Existing conditions of the industry: The overall state of the sector in which an organization
operates has an impact on how much demand there is for its goods and services. For instance,
industrial concentration raises the amount of competition, which directly impacts the demand for
the goods and services provided by various businesses in the sector. Demand projections made
by organizations may fail in such a situation.

The existing condition of an organization: Aside from business conditions, the internal state of
an organization has an impact on demand forecasting. Numerous factors within the organization
influence demand forecasting, such as production volume, quality of products, price of the
product, branding and production policies, financial policies, and so on.

Prevailing Market Conditions: Changes in market scenarios, such as modifications in the

prices of commodities; changes in consumers' expectations, tastes, and preferences; adjustments
in the prices of goods produced; and variations in consumers' income level, all influence demand
for an organization's products and services. Sociological factors such as population size and
density, age group, family size, family status, educational status, household income, social
awareness, and soon have a large impact on an organization's demand forecasts. For example,
markets with a large population of young people would have a higher demand for luxury items,
electronic devices, and so on.

Psychological Conditions: Psychological factors such as changes in consumer attitudes,

behavioral patterns, styling, personality, perspective, and cultural and religious beliefs, and soon
have a massive effect on an organization's demand forecast.

Competitive Conditions: A market is made up of several organizations that sell similar products.
This increases market competition, which has an impact on demand forecasting by organizations.
For example, lowering trade barriers tends to increase the number of new entrants into a market,
which influences demand for existing organizations' goods and services.

Import – Export policies: Changes in factors such as import and export control, both import and
export terms and conditions, import/export policies, shipping conditions, and soon have a direct
impact on demand for export-import goods.

Specifying the objective: Before beginning the process, the objective of demand forecasting
must be specified. The following criteria can be used to define the goal:
1. Short-term or long-term product demand
2. Sector demand or demand specific to a company
3. Demand for the entire market or demand for a specific market segment

Determining the time perspective: Depending on the goal, demand can be forecasted for a
short less than 3 years or prolonged period (beyond 10 years). Long-term demand forecasting
requires an organization to account for constant changes in the marketplace as well as the
economy.

Selecting the method for forecasting: Demand forecasting can be done in a variety of ways, not
all methods. However, are suitable for all kinds of demand forecasting. He organization must
choose the best forecasting method based on objective, time frame, and availability. The choice
of demand forecasting method is also influenced by the demand forecaster's experience and
expertise.

Collecting and analyzing data: After deciding on a demand forecasting method, data must be
gathered. Data can be collected from either primary or secondary data sources or both. Because
data is collected in its raw form, it must be reviewed to yield meaningful information.

Interpreting outcomes: After the evaluation is complete, it is used to forecast demand for the
specified years. In general, the obtained results are in the form of solutions, which must be
presented in an understandable format.

Market Research: Consumer-specific survey questionnaires are delivered in tabular design in

the market research approach to obtain information that a firm cannot obtain through internal
sales. It provides more information on the types of clients as well as demographic data that may
be used to target developing markets. Market research assists emerging businesses in better
understanding their client base.

Sale Force Opinion: The Sales Force Opinion approach forecasts demand using data from sales
groups. Because salespeople are nearest to their client base, they may provide useful information
about consumer wants, behavior, and feedback, as well as knowledge about market competitors.

Delphi Method: A group of external consultants is hired by a company using the Delphi Method.
Based on their industry knowledge, each Expert makes a prognosis. Projections are anonymously
communicated among experts following this approach, thus experts are impacted by one other's
forecasts. The experts are then asked to make another projection, and the process is repeated
again until all analysts reach a near consensus forecast. The procedure is designed to allow
professionals to build on one another's knowledge and evaluations.

Trend Projection: This is the most basic and often utilized demand forecasting approach in
businesses. Trend Projection forecasts future sales based on prior sales data. Organizations with
a large enough amount of historical sales data can use this technique. The data is grouped in
sequential order to produce a time series, which represents historical market patterns and may be
used to forecast future market trends.

Barometric Forecasting Technique: Demand is projected using the Barometric Technique

based on historical occurrences or events happening in the present. It is accomplished by the
examination of statistical and economic variables such as savings, investment, and income. This
strategy can be used even in the lack of previous data. For example, if the government plans a
huge housing project, this implies that building materials will be in high demand in the future.

Econometric Forecasting Technique: This approach combines previous sales data with
demand-influencing elements to produce a mathematical formula for forecasting future demand.
It determines the relationship between the dependent and independent variables. A single factor
that demands function or simple regression is used when only one factor influences demand.
When numerous factors influence demand, it is referred to as a multivariable demand function or
multiple linear regressions. Regression Equation: Y = a + bX , Y is the forecasted demand.

CONCLUSION:

Therefore, your fulfillment firm is a critical partner in demand forecasting. It can collect a large
number of data points required to provide reliable projections. Forecasting demand assists firms
in making sound business decisions. Different demand forecasting approaches may be utilized
depending on the company standards, sales statistics, market analysis, and economic
considerations. It is frequently an iterative, thorough, expert-driven process and economic
variables will aid your company's survival.

2.

INTRODUCTION:

Short run period refers to a certain period of time where at least one input is fixed while others
are variable. An organization cannot change the fixed factors of production such as capital,
factory buildings, plant and equipment etc. Variable cost such as raw material, employee wages
etc., change with level of output.
CONCEPT AND APPLICATION:

Total Fixed Cost (TFC) remains constant throughout the change in output. TFC remains constant
even when output is zero and it indicates straight horizon line to x-axis which is known as output.

Total Variable Cost (TVC) is directly proportional to the output of firm, when output increases
or decreases TVC also increases or decreases depending on the change in output.
SHORT RUN TOTAL COST (SRTC) = TFC + TVC
TFC remains constant, changes in SRTC are entirely due to variations in TVC

Short Run Average Cost (SRAC) = SRTC/Q = TFC - TVC / Q

= TFC / Q + TVC / Q
TFC / Q = Average Fixed Cost (AFC)
TVC / Q = Average Variable Cost (AVC)

Therefore, SRAC = AFC + AVC

SRAC declines in the beginning, reaches to minimum and starts to rise.

Quantity Total Total Total Average Average Average Marginal

Fixed Variable Cost Fixed Variable Total Cost
Cost Cost Cost Cost Cost
0 100 0 100 0 0 0 0
1 100 20 120 100 20 120 20
2 100 30 130 50 15 65 10
3 100 40 140 33.3 13.3 46.6 10
4 100 50 150 25 12.5 37.5 10
5 100 60 160 20 12 32 10

SHORT RUN MARGINAL COST (SRMC) = ∆SRTC/∆Q

Whereas ∆Q = 1, because it is total fixed cost does not change with the change in quantity.

SRMC = ∆SRTC/1

CONCULSION:
Therefore, SRMC = ∆ in SRTC = ∆ in TVC
3. A)
INTRODUCTION:

We are going to calculate the monthly individual income of elasticity of demand.

Y= Original Income
Y1= New Income
Q = Original Quantity Demanded
Q1= New Original Quantity Demanded
ey = Percentage change in quantity demanded / Percentage change in income
∆Q = New Quantity Demanded - Original Quantity Demanded
∆Y = New Income - Original Income

Given that,
Y = 20,000, Q = 40 UNITS
Y1= 25,000, Q1= 60 UNITS

CONCEPT AND APPLICATION:

Solution:

STEP 1: Change in income,

∆Y= Y1 - Y
∆Y=25,000 - 20,000
∆Y=5,000

STEP 2: Change in quantity demanded,

∆Q = Q1 - Q
∆Q = 60 - 40
∆Q = 20

STEP 3: The formula for calculating the income elasticity of demand is:

ey = (∆Q / ∆Y) x (Y / Q)

Substituting the values in the above equation,

ey = ( 20/5000) x (20000/40)
ey = 0.004 x 500
ey = 2
CONCLUSION:

INCOME ELASTICITY OF DEMAND = 2

3. B)
INTRODUCTION:

We are going to calculate the price elasticity of demand.

ep = Price Elasticity of Demand

P= Initial Price
∆P = Change in Quantity
Q = Initial Quantity Demanded
∆Q = Change in Quantity Demanded

Given that,
P = 500, Q = 20,000,
P1 = 400, Q1 = 25,000,

CONCEPT AND APPLICATION :

Solution:
STEP 1: FINDING ∆P

∆P = P1 - P
∆P = 500 - 400
∆P = 100 (fall in price)

STEP 2: FINDING ∆Q

∆Q = Q1 - Q
∆Q = 25,000-20,000
∆Q = 5,000 (Increase in quantity)

ep = (∆Q / ∆P) x (P / Q)

By substituting these values in the above formula, we get:

ep = (5000/100) x (500/20000)
ep = 50 x 0.025
ep = 1.25

CONCLUSION:

Thus, the absolute value of elasticity of demand is greater than 1.