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Managerial Economics and Financial Analysis (MEFA)

Managerial Economics have2 disciplines. Such as!

1). Economics 2).Management

Meaning:-

Economics is a social science concerned with the production, distribution, and

consumption of goods and services. ...

Economics can generally be broken down into 2 types such as.

1. Microeconomics: Study of an individual Consumer or a firm is called

microeconomics. Microeconomics deals with behaviour and problems of
single individual and micro organisation.

2. Macroeconomics: The study of aggregate or total level of economic

activities in a country is called Macroeconomics. It deals with total
aggregates, for instance, total national income, total employment and output
and total investment. Etc.,

Definition:

Economics: According to Adam Smith (Father of Economics) define Economics as

“The study of nature and use of National Wealth. Economics is study actives
both individual and national wealth.

(National Wealth:-the total value of all of

the money, investments, goods, and property held in a country at
a particular time)

Every individual try to earn money and spend the money to satisfy our needs
and wants, such as, food, shelter, clothing and others. Such activities of earnings and
spending money are called economic activities.
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Managerial Economics is branch of economics that is derived from the

subject matter of both Microeconomics and Macroeconomics; Managerial economics
helps managers make the right decisions in the allocation of scarce resources such
as land, labour, capital to achieve the highest profitability while minimizing costs.

Managerial economics bringing their knowledge from different areas such as

psychology, sociology, anthropology, mathematics, statistics, management theories,
economic data and modelling techniques in order to help business managers to carry
out their operations with maximum efficiency.

Managerial economics also helps managers decide which products to produce,

how much to produce, prices to be set, and channels to use in the sales and
distribution.

Management:

Management is science and art of getting things done through the people in
organization.

Definitions of Managerial Economics:

1. Spencer and Siegel men:- he were defined , the Managerial economics as

“ the integration of economic theory with business practice for the purpose
of facilitating decision making and forward planning by Management.
2. Brigham and Pappas:- “ the both persons was defined, the Managerial
Economics is “ the Application of Economics theory and Methodology
to business administration practices.”
3. Salvatore observes that “managerial Economics refers to the
application of economics theory and tools of analysis of decision
science to examine how an organisation can achieve its aims and
objectives most efficiently.”

From the above all the definitions, we can observes the Managerial
Economics!
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• Refers to the applications of principles of economics to solve the

managerial problems such as minimising cost or maximising
production and productivity.
• Directs the utilisation of scarce resources in a goal oriented
manner.
• Seeks to understand and to analyse the problems of business decision
making.
• Facilities forward planning.
• Examines how an organisation can achieve its aims and objectives most
efficiently.

The manager at all levels have to find optimum solution to such economic
issues day in and day out.

Nature of Managerial Economics;

Features or Nature of Managerial Economics:

1. Close to Microeconomics: Managerial Economics is concerned with

find the solutions for different Managerial Problems of a particular firm

and it more close to microeconomics.

2. Operates against the backdrop of macroeconomics; the

macroeconomics conditions of the economy are also seen as limiting

factors the firm to operate. In other wards the managerial economics

has to be aware of the limits set by the macroeconomics conditions such

as government industries policies, inflation and so on.

3. Normative Statement: A Normative Statement usually includes or

implies the words ‘ought’ or ‘should’. They reflect people’s moral

attitudes and expressions of what a team of people ought to do.

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Ex. It deals with statements such as ‘Government of India should open

up the economy’. Such statement are based on value judgements and

express views of what is ‘good’ or ‘bad’, ‘right’ or ‘wrong’. One problem

with normative statement is that they cannot be verified by looking

at the facts, because they mostly deal with the future.

4. Prescriptive Action: Prescriptive action is goal oriented. Given a

problem and the objectives of the firm, it suggests the course of action

from the available alternative for optimal solution.

5. Applied in Nature: Modals are building to reflect the real life complex

business situations and these models are huge help to managers for

decision making. The different areas where models are extensively

used including , Inventory control , optimisation, project management

Etc.,

6. Offers scope to evaluate each alternative: Managerial Economics

provides an opportunity to evaluate each alternative in terms of its costs

and revenues. The managerial economist can decide which is the

better alternative to maximise the profits for the firm.

7. Interdisciplinary : The contents, tools and techniques of managerial

economics are drawn from different subjects such as economics,

management, mathematics, statistics, accounts, psychology,

organisational behaviour, sociology, etc.,

Scope of Managerial Economics

The main focus in managerial economics is to find an optimal solution to

a given problem. The problem may be related to production, reduction or control

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of costs, determination of price of a given product or services make or buy

decision or human resource management.

While all the are the problems, the managerial economist makes use of

the concepts, tools and techniques of economics and other related disciplines to

find an optimal solution to given managerial problem. The concept is explained

in!.

Concept, decision Areas and Optimal Solutions in Managerial

Economics

MANAGERIAL DECISION AREAS:

Concept and • Production.
Applied For For
techniques • Reduction or control of
of To Optimum
costs.
managerial solutions.
• Determination of price
economics. of a given product or
service.
• Make or buy decisions
• Inventory decisions.
• Capital management
• Profit planning and
management.

The Main Areas of Managerial Economics

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1. Demand Decision: The analysis and forecasting of demand for a given

product and service is the first task of the managerial economics. The

behavioural implications such as needs of the customers, responses to

given changes in the price or supply are analysed in a scientific manner.

2. Input – Output Decision: Here, the costs of inputs in relation to output

are studied to optimise the profits. Production function and cost functions

are estimated given certain parameters. The behaviour of costs at different

levels of production is assessed here. Some cost is fixed, some are semi-

variable and other is perfectly variable.

3. Price output Decision: here, the production is ready and the task is to be

determined price these in different market situation such as perfect

marketing, and imperfect market, and so on.

4. Profit Related Decisions: Here, we employ the techniques such as

break even analysis; cost reduction and cost control and ration analysis to

ascertain the level of profits.

5. Investment Decisions: Investment Decisions are also called Capital

Budgeting Decisions. These involve commitment of large funds, which

determine the fate of the firm.

6. Economic Forecasting and Forward Planning: Economic forecasting

leads to forward planning. The firm operates in an environment which is

dominated by the external and internal factors.

The External Factors including: Government Policies, Competition,

Employment, labour, price and income levels and so on.
Internal Factors including: policies and procedures, human resources,
finance and market and products.
Linkages with other Disciplines
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1. Economics: Managerial Economics are basically economics concepts. If

economics deal with theoretical concepts, managerial economics is the

application of these in the real life.

2. Operations Research: Decision making is the main focus in operations

research and managerial economics. If managerial economics focuses of

“problems of decision making”, operation research focused on solving the

managerial problems. Or operation research is the tool for finding the

solution for many managerial problems.

3. Mathematics: Managerial economics is concerned with estimating and

predicting the relevant economic factors for decision making and forward

planning. In this situation using mathematic tools and techniques such as

algebra, calculus, exponentials, vectors, input-output tables and so on.

4. Statistics: Statistics deals with different techniques useful to analyse the

cause and effect relationship in a given variable or phenomenon. It also

empowers the manager to deal with the situation of risk and uncertainty

through its techniques such as probability.

5. Accountancy: The accountancy provides accounting information relating

to costs, revenues, receivables, payable, profit and loses etc.,

6. Psychology: Consumer psychology is basis on which managerial

economist acts upon. How the customer reacts to a given change in price

or supply and its consequential effect on demand/profits is the main focus

of study in managerial economics.

7. Organisational Behaviour: Organisational Behaviour enables the

managerial economist to study and develop behavioural models of the firm

integrating the manager behaviour with that of the owner.

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Demand Analysis
What is Demand?
Demand is an economic principle referring to a consumer's desire to
purchase goods and services and willingness to pay a price for a specific
good or service. Holding all other factors constant, an increase in the price
of a good or service will decrease the quantity demanded, and vice versa.
(Or)

Every want supported by the willingness and ability to buy constitutes demand

for a particular product or service.

EX:- If I want a car and I cannot pay for it, there is no demand for the car from my

side.

A product or service is said to have demand when three conditions are satisfied:

1. Desire on the part of the buyer to buy

2. Willingness to pay for it

3. Ability to pay for it

Unless all these conditions are fulfilled, the product is not said to have any demand.

Nature and Types of Demand

Demand always implies at a given price. How much is the quantity demand at

a given level of price? This is the volume of demand. The use and characteristics of

different products affect their demand.

1. Consumer Goods Vs Producer Goods: Consumer Goods refer to such

products and services which are capable of satisfying human needs. Consumer

goods are those which are available for ultimate consumption. These are given

direct and immediate satisfaction.

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Ex:- Bread, Apple, Rice, and so on..

Producer Goods are those good which are used for future processing or

production of goods and services to earn income.

Ex: Machinery or Tractor and such others.

2. Autonomous Demand Vs Derived Demand: Autonomous demand refers to

the demand for products and services directly. The demand for services of a

super speciality hospital can be considered as autonomous whereas the

demand for the hotels around that hospital is called a derived demand.

3. Durable Vs Perishable Goods:- Here the demand for goods is classified

based on their durability. Durable goods are those goods which give service

relatively for a long period. Ex:- Rice, Wheat, Sugar, TV, Washing machine.

Perishable goods is very less, may be in hours or days. Ex:- Milk, Vegetables,

Fish and so on.

4. Firm Demand Vs Industry Demand: The firm is a single business unit

whereas industry refers to the group of firms carrying activity. The quantity of

goods demanded by a single firm is called firm demand and the quantity

demanded by the industry as a whole is called industry demand.

Ex;- One construction company may use 100 tonnes of cement during a given

month. This is firm demand. Whereas the construction industry in a particular

state may used 10 Million tonnes. This is industry demand.

5. Short-run Demand Vs Long-run Demand:- Short-run demand as the demand

with its immediate reaction to price changes, income fluctuation and so on.
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Long-run demand as that demand which will ultimately exist as a result of the

changes in pricing, promotion or product improvement, after enough time is

allowed to let the market adjust itself to the given situation.

6. New Demand Vs Replacement Demand:- New demand refers to the demand

for the new product. And replacement demand, the item is purchased to

maintain the asset in good condition. Ex- Purchasing Car Cover for better

maintains.

What is the Factors Determining Demand?

The demand for a particular product depends on several factors. The following
factors determine the demand for a given product:

1. Price of the product (P).

2. Income level of the consumer (I).

3. Tastes and preferences of the consumer (T).

4. Price of related goods which may be substitutes/complementary (PR).

5. Expectations about the prices in future (EP).

6. Expectations about the Income in future (EI).

7. Size of the population (S P).

8. Distribution of consumers over different regions (Dc).

9. Advertising efforts (A).

10. Any other factor capable of affecting the demand (O).

Demand Function
Demand function is a function which describes a relationship between one

variable and its determinants. It described how much quantity of goods is bought at
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alternative price of goods and related goods, alternative income levels, and

alternative value of other variable affecting demand.

Qd = f (P, I, T, PR, Ep, EI, Sp, Dc, A, O)

Law of Demand

The law of Demand states: Other things remaining the same, the quantity demanded
rises with every fall in the price and vice versa. (Or)
When the price of the product decreases, the quantity of product increased
and when the price of product increased, the quantity of product demand decreased.

Ex: when the price of product increased Quantity of product demand Decreased

When the price of the product decreased Quantity of product demand increased

According to above table, At OP price, the quantity demand is OQ. If the price falls

from P to P1, then the higher quantity OQ1 is bought. DD is the demand curve. This

shows that there is an inverse relationship between demand and the price. It can see

that demand curve is sloping downwards from left to right.

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Assumptions of Law of Demand

The phrase ‘other things remaining the same’ is the assumption under the law of
demand. Here, other things include!
• Income level of consumers,
• Testes and preferences of the consumers,
• Price of related goods,
• Expectations about the price or income in the future,
• Size of population,
• Advertising efforts,
• And any other factor capable of affecting the demand.

Exceptions of Law of Demand

1. Where there is a shortage of necessities feared: if the customer fear that
there could be shortage of necessities, then this law does not hold goods. They
may tend to buy more then what they required immediately, even price of the
product increases.
2. Where the product is such that it confers distinction: products such as
Jewels, gold and Diamonds and so on, confer distinction on the part of the user.
In such a case , the consumers tends to buy (to maintain their prestige) even
though there is increase in its price, such products are called ‘Veblen’ goods.
3. Giffens’ paradox: People whose incomes are low purchases more of a
commodities such as broken rice, bread etc.(which is their staple food) when
its price rises. Conversely when its price falls, instead of buying more, they buy
less of this commodity and use the saving for the purchase of better goods such
as meat.
4. In case of ignorance of price changes: At times, the customer may not keep
track of changes in price. In such a case, he tends to buy even if there is
increase in price.
In case of these exceptions, the demand curve slope upwards.
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Extension and Contraction in Demand

An extension is the downward movement along a demand curve, when

indicates that a higher quantity is demanded for a given fall in the price of the good. A
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contraction is the upward movement along a demand curve, which indicates that a

lower quantity is demanded for a given increase in the price of the good.

Extension and Contraction

Elasticity of Demand
The term ‘Elasticity’ is defined as the rate of responsive in the demand of a
commodity for a given change in price or any other determinants of demand.
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(Due to changes in price of product either increase or decrease how much

percentage to influence product quantity demand).

Measurement of Elasticity of demand

1. Perfectly Elasticity Demand
2. Perfectly Inelasticity Demand
3. Relatively Elasticity Demand
4. Relatively Inelasticity Demand
5. Unity Elasticity

1. Perfectly Elasticity Demand:- when any quantity can be sold at a given price,
and when there is no need to reduce price, the demand is said to be Perfect
elasticity. In such case, even a small increase in price will lead to complete fall
in demand.

According to the above Diagram, the quantity demand increases from OQ to

OQ1from OQ1 to OQ2 even though there is no change in price. Price is fixed
at OP.
2. Perfectly Inelasticity Demand:- when a significant degree of change in price
leads to little or no change in the quantity demanded, then the elasticity is said
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to be perfect inelastic. Or there is no change in the quantity demanded even

though there is a big change (increase or decrease) in price.

According to above Diagram, Increase in price from OP to OP1, the quantity

demanded has no fallen down. Similarly, though there is a fall in the price from OP1
to OP2, the quantity demanded remains unchanged.
3. Relatively Elasticity Demand: Relatively Elasticity Demand means when the
change in quantity demand is more than the change in the price.

Note: Change of Product Quantity Demand > then Change in Price of Product.
From the above Diagram, OQ1 to OQ2 because of a decrease in price from OP1 to
OP2. The extent of increase in the quantity demanded is greater the extent of fall in
the price.
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4. Relatively Inelasticity Demand: The demand is said to be relatively inelasticity

when the change in demand is less than the price.

Note: Change of Product Quantity Demand < then Change in Price of Product.

From above Diagram, OQ1 to OQ2 because of th a decrease in price OP1 to Op2.
The extent o increase in quantity demanded is lesser than the extent of fall in the price.

5. Unity Elasticity Demand: The elasticity in demand is said to be Unity when

the change in demand is equal to the change in price.
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Note: Change of Product Quantity Demand Equal to Change in Price of Product.

(Price Change = Product Quantity Change).

From the above diagram,OQ1 to OQ2 because of a decrease in price from OP1 to
OP2. The extent of increase in the quantity demand is equal to the extent of fall in the
price.

Types of Elasticity of Demand

The following are the 4 types of Elasticity of Demand:
1. Price elasticity of demand
2. Income elasticity of demand
3. Cross elasticity of demand
4. Advertising elasticity of demand

1. Price elasticity of demand:- Its refers to the quantity demanded of commodity

in response to a given change in price. The price elasticity is always negative
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which indicates that the customer tends to buy more with every fall in the price.
The relationship between the price and the demand in inverse.
Proportionate change in quantity demanded
For product X
Price Elasticity of Demand = --------------------------------------------
Proportionate change in the price of X

(Or)

(Q2 – Q1)/Q1
Edi = ----------------------
(P2 - P1)/p1

Q1= Quantity Demand before price change,

Q2= Quantity Demand after price change,
P1= Price before change,
P2= Price after change
Note: Which implies that the elasticity is more than one (E>1) or inelasticity (E<1)

2. Income Elasticity of Demand:- Income Elasticity of demand refers to the

quantity demanded of a commodity in response to a given change in income
of the consumer.
Proportionate change in quantity demanded
For product X
Income Elasticity of Demand = --------------------------------------------------------------
Proportionate change in Income
(Or)

(Q2 – Q1)/Q1
Edi = ----------------------
(I 2 - I 1)/ I 1
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Q1= Quantity Demand before change,

Q2= Quantity Demand after change,
I1= Income before change,
I2= Income after change
Note: Which implies that the elasticity (E>1) or Inelastic (E<1).

3. Cross Elasticity of Demand:- Cross Elasticity of demand refers to the quantity

demanded of a commodity in response to a change in the price of a related
goods, which may be substitute or complement.

Its measures as follows:

Proportionate change in quantity demanded

For product X
Cross Elasticity of Demand = -------------------------------------------------------
Proportionate change in price of product Y
(Or)

(Q2 – Q1)/Q1
Edi = ----------------------
(P2Y - P1Y)/P1Y
Q1= Quantity Demand before change,
Q2= Quantity Demand after change,
P1y= Price before change in the product Y
P2y= Price after change in the product Y

Note: Which implies that the Cross elasticity (E>1) or inelastic (E<1).
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4. Advertising Elasticity of Demand:- It refers to increase in the sales revenue

because of change in the advertising expenditure. It is direct relationship

between the amount of money spent on advertising and its impact on sales.

Its measures as follows:

Proportionate change in quantity demanded

For product X
Advertising Elasticity of Demand = ---------------------------------------------------------
Proportionate change in Advertising Costs
(Or)

(Q2 – Q1)/Q1
Edi = ----------------------
(A2 - A1)/A1
Q1= Quantity Demand before change,
Q2= Quantity Demand after change,
A1= Amount spent on advertisement before change
A2= Amount spent on advertisement After change

Note: Advertising elasticity is always positive. Advertising for a particular

product may be Elasticity (E>1) or inelasticity (E<1).
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Point Elasticity and Arc Elasticity

There are certain limitations of elasticity of demand. A demand curve does not have
the same elasticity throughout its entire length. In general, elasticity differs at
different points on a given demand curve. However, this does not hold good in the
following three cases:
1. Perfectly elastic
2. Perfectly inelasticity
3. Unity elasticity

The demand curve in the each of these cases possesses a single elasticity
throughout its entire length. From the below diagram shows the changing elasticity at
different points of demand curve.
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It can be seen that elasticity at Point ‘C’ where the demanded curve meets the
quantity axis is equal to zero, and elasticity at point ‘D’ where the demand curve
meets the price axis is equal to infinity.
If P1 is the mid-point of DC, elasticity at P1 is equal to 1.
At all the points between P1 and C elasticity the elasticity is greater than Zero
but less than unity and at the points between P1 and D elasticity is greater than unity
but less than infinity.

At point D, elasticity is equal to ∞. Thus the range of value of elasticity is

between Zero and infinity which means: 0 ≥ e ≤∞.

Point Elasticity: it is useful to compute elasticity at a single point on the demand curve
for an infinite small change.
Arc Elasticity: it is refers to the elasticity between two separate point of demand
curve.
Point Elasticity

It can see that at any point to the right of point P1, elasticity is less (E<1), and any
point to its left (E>1): where the demand curve touches the vertical axis E p ∞.
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And where the demand curve touches the horizontal axis Ep = 0. Thus the range of
values of elasticity are demand is said to be elastic (i.e 0<Ep<1) and to the left of P1,

the demand is said to be elastic (i.e., 1<Ep<∞).

Where Ep= 0, the demand is perfectly inelastic

Where Ep=1, the demand is unity elasticity

Where Ep=∞, the demand is perfectly elastic

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Arc Elasticity

Are elasticity measures the average responsiveness to price change over a

finite stretch on the demand curve.

Where MN refers to the stretch on the demand curve D1D2, it is not clear
whether Point ‘M’ or Point ‘N’ should be considered to determine elasticity. It makes
a difference from which point we start. Moving from point ‘M’ to ’N’ is different from
‘N’ to ‘M’. It is because he percentage change in quantity and price is different,
depending upon the price and quantity from which it is taken. The difference in the
starting point reveals the different values of elasticity coefficients.

Which means it is the price demand is inelastic.

The Arc elasticity is defined as below:

∆Q P (P1+P2)/2 ∆Q (P1 + P2)

Arc Ep = ––– ––––––––– = ––––––––––
∆P P (Q1+Q2)/2 ∆P (Q1+Q2)

Where!

P1 and P2 = Price before and after changes,

Q1 and Q2 = Quantity demand before and after change.

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∆Q and ∆P = change in the quantity demanded and change in the price

respectively.

Factors Governing Elasticity of Demand

1. Nature of Product: - Based on their nature, the producers and services

are classified into necessities, comforts refers to TV, refrigerator and so
on. By luxuries, we mean sofa set, Refrigerator, marble flooring in a house
and such other.

2. Time Frame: - The more the time available for the customer, the demand
for a particular product may be elastic (more purchased) and vice versa.
Take the case of vegetables. When you do not have time, you go to a
nearby shop and buy whatever you want at the given price. Had you had
little free time, you would have preferred to get the same from a vegetable
market at lesser price.

3. Degree of postponement:- when the product consumption can be

postponed, the product is said to have elasticity demand and where it
cannot postponed, it is said to have inelasticity. The consumption of
necessaries cannot be postponed and hence they inelastic demand.

4. Number of alternative uses:- if number of alternative uses are more, the

demand is said to be highly inelastic and vice versa.

Ex:- Take power or electricity. It is used for a number of alternative uses

such as running of machines in industries, offices, households, trains, and
so on.

5. Tastes and preference of the consumers:- where the customers is

particular about his taste and preferences, the product is said to be
inelastic.

For the customers who are particular or loyal to certain brand such as
Colgate, Tata Tea, Annapurna Atta, and so on, price increases do not
matter. They tend to buy that brand inspire of the price changes.

6. Availability of close substitutes: Where there are a good number 0f

close substitutes, the demand is said to be elastic and vice versa.
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Ex; If there is an increase in price of coffee, I may tend to switch over to

tea. But this may not hold good when I am particular about coffee only. I
may be prepared to pay higher price for coffee.

7. Government policy: When the government policies are liberal, the

product is likely to have elastic demand and vice versa. Government, in
the interest of the lower income group consumers, closely monitors the
price of certain products (such as, ration goods as sold in fair price shops
are likely to have inelasticity demand).

Significance of Elasticity of Demand

The concept of elasticity is very useful to the products and policy makers
alike. It is very valuable tool to decide the extent of increase or decrease in price for
a desired change in quantity demand for the product and services in the firm or
economy.

1. To fix the price of factors of production

2. To fix the price of goods and services provided rendered

3. To formulate or revise government policies

4. To forecast demand

5. To plan the level of output and price

6. To plan the level of output and price

1. To fix the price of factors of production: the factors of production

are land, labour, capital organization and technology. These have a
cost. We have to pay rent, wages, wages, interest, profits and price for
these factors of production. The elasticity tells how much to pay for
each factor.

2. To fix the price of goods and services provided rendered: the

manufacturer can decide the amount of price that can be fixed for his
product based on the concept of elasticity.
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3. To formulate or revise government policies:

a. Tax policies

b. Raising bank deposits

c. Public utilities

d. Formulate government policies.

4. Forecasting demand: income elasticity is used to forecast demand for

a particular product or service. The demand for the products can be
forecast at a given income level.

5. Planning the levels of output and price: the knowledge of price

elasticity is very useful to produces. The producer cans evaluative
whether a change in price will bring in adequate revenue or not.

Demand Forecasting

It is necessary to measure demand accurately in terms of quantity and its

value for several purpose. Forecasting helps to assess the likely demand for product

and services and to plan production accordingly.

Demand forecasting is helpful not only at the firm level but also at the

national level. There have been instances where the government had to spend

excessively on imports just because the demand for certain goods had not been

forecast in a scientific manner.

In popular countries such as India, in addition to demand forecasting, supply

management is also critical. The result of demand forecasting guides the

entrepreneurs to set up their business/industrial activities accordingly.

The micro policies such as export/import and fiscal policies can be designed

based on the results of demand forecasting.

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Factors Governing Demand Forecasting

There are seven factors such as!

1. Functional Nature of Demand: Market Demand for a particular product

or services is not a single number but it is a functional of a number of

factors.

For Ex: - Higher volume of sales can be realized with high levels of

advertising or promotion efforts. However, there could be some minimum

volume of sales even when there is no advertising on a large scale.

2. Types of Forecasting:-

Short Run Forecasting:-Short Run Forecasting Covers one year period.

The forecasting helps to forecasting the fluctuations in the demand based on

seasonal and cultural factors such as festivals and so on. Its helps facilitate

decisions by which the utilization of resources can be optimized.

Long-Run forecasting: its covers one to 20 years. It’s provided information

for major strategic decision that result in extension or reduce of limitation

resources. A long run forecasting can be an effective basic to make an application

for necessary long run finance.

3. Forecasting Level:- the forecasting may be at firm level, industry level,

national level or global level. Forecasting estimates all levels about

demand for the goods and services of all.

4. Degree of Orientation: Demand forecasting can be worked out based on

total sales or product/services wise sales for a given time period.

Forecasting in terms of total sales can be viewed as general forecasting

whereas product/service wise or region or customer segment wise

forecasting is referred to as specific forecast.

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5. Established or New Products:- it is relatively easy to forecast demand

for established products which are currently in use. If a firm wants to deal

in detergents, it can find access to the industry demand for the detergents

and market share of each competitor. It is up to this individual new firm to

create its own customer base by pulling customers of the other

competitors through strategy. This type of database is not readily available

in case of new products. Every product, till it is introduced in a given

market, is a new product.

Nature of goods: - the goods are classified into producer goods, consumer

goods, consumer durables and services. The patterns of forecasting in each

of these differ.

Degree of Competition: There may be a single trader or a few traders

depending upon the nature of goods and services.

Methods of Demand Forecastin

There are many methods of forecasting demand. To forecasting

demand, We need to build a certain base of information. To build such an

information base, we need to consider what the customers say, what the

customer do, and how the customers behaved in a given marketing situation.

The different methods of forecasting demand can be grouped under!

1. Survey methods:
A. Survey of Buyer intentions
• Census method
• Sample method

B. Sales force opinion methods.

2. Statistical methods

A. Trend projection method

• Trend line by observation
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• Least square method

• Time series analysis
• Moving averages method

B. Barometric techniques
C. Simultaneous equations method
D. Correlation and regression methods

3. Other methods
A. Expert opinion methods
B. Test marketing
C. Controlled experiments
D. Judgmental approach

1. Survey Methods:

A. Survey of buyers Intentions: To anticipate what buyers are likely to do

under a given set of circumstances, a most useful source of information

would be the buyers themselves. It is better to draw a list of all potential

buyers, approach each buyer to ask how much does he plans to buy of the

given product at a given point of time under particular conditions. This is

most effective method because the buyer is the ultimate decision maker

and we are collecting the information directly from him.

• Census methods: the survey of buyers can be conducted either by

covering the whole population or by selecting a sample group of

buyers. Suppose there are 10,000 buyers for a particular product. If the

company wishes to elicit the opinion of all the buyers, this method is

also called census method.

• Sample method: the firm can select a group of buyers based on

sample basis can be completed faster with relatively lower costs.

B.Sales force opinions method: The sales people are those who are in

constant touch with the main and large buyers of a particular market, and
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hence they constitute another valid source of information about the likely

sales of product. The sales force is capable of assessing the likely reactions

of the customers of their territories quickly, given the company’s marketing

strategy.

2. Statistical Methods:

a. Trend Projection Methods: These are generally based on analysis of past

sales patterns. These methods dispense with the need for costly market

research because the necessary information is often already available in

company files in terms of different time periods, that is, a time series data.

• Trend Line by observation: This method of forecasting trend is

elementary, easy and quick as it involves merely the plotting the actual

sales data on a chart and then estimating just by observation where the

trend line lies.

• Least Squares Method: Certain statistical formulae are used here to

find line which best fits the available data. The trend line is the basis to

extrapolate the line for future demand for the given product or service

on graph. The estimating linear trend equation of sales is written as:

S = x + y (T).

X and Y have been calculated from past data S is sales and T is the

year number for which the forecast is made.

• Time series analysis: Where the surveys or market tests are costly

and time – consuming, statistical and mathematical analysis of past

sales data offers another method to prepare the forecast, that is, time

series analysis. One major requirement to administer this technique is

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that the product should have actively been traded in the market for

quick something in past.

Moving Average Method: this method considers that the average of

past events determines the future events.

B. Barometric Techniques: Under this technique one set of data is used to

predict another set. It’s is forecast demand for a particular product or service,

use some other relevant indicator of future demand.

Ex; To assess the demand for services in India and abroad. We can see the

percentage of population in each occupation. In US, 78% of labor force is

employed in services and 15% in manufacturing. In India, according to 1991

census, 21% of the workforce is engaged in service, 13% in manufacturing

and 67% in agriculture.

C.Simultaneous Equation: In this method, all variables are

simultaneously considered with the convection that every variable

influence the other variables in an economic environment. In other words,

it is a system of ‘n’ equations with ‘n’ unknowns. It can be solved the

movement the model is specified because it covers all the unknown

variables, it is also called complete systems approach to demand

forecasting.

Ex: Like two least sequence, where regression of investment (I) is found on

all the pre-determined variables such as government policies, competition,

leave of technology and so on, which are beyond the control of the

management.
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D.Correlation and Regression Methods: Correlation and Regression both

are Statistical techniques. Correlation describes the degree of association

between two variables such as sales and advertisement expenditure. when

the two variables tend to change together, then they are said to be correlated.

Regression Analysis an equation is estimated which best fits in the sets

of observations of dependent variables and independent variable. The best

estimate of the true underlying relationship between these variables is thus

generated. The dependent (unknown) variable is then forecast based on this

estimated equation, for a given value of the independent (Known) variable.

3. Other Methods:

A. Expert Opinion: Well – Informed persons are called experts. Expert’s constitute

yet another source of information. These persons are generally the outside expert

and they do not have any vested interest in the result of a particular survey.

An expert is good at forecasting and analyzing the future trends in a given

product or service at a given level of technology. The services of an expert could be

advantageously used when a firm uses general economic forecasts or special

industry forecasts prepared outside the firm.

B. Test Marketing: It is likely that opinions given by buyers, salesmen or other

experts may be, at times, misleading. This is the reason why most of the

manufacturers favor to test their product or service in a limited market as test runs

before they launch their products nationwide.

C. Controlled Experiments: Controlled Experiments refer to such exercises where

some of the major determinants of demand are manipulated to suit to the customers
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with different tastes and preferences, income groups, and such others. It is further

assumed that all other factors remain the same.

In this methods, the product is introduced with different packages, different

prices in different markets or same markets to assess which combination appeals to

the customer most.

D Judgmental Approach: When none of the above methods are directly

related to the given product or service, the management has no alternative

other than using its own judgment. Even when the above methods are used, the

forecasting process is supplemented with the factor of judgment for the following

reasons:

Historical data for significantly long period is not available

Turning point in terms in terms of policies or procedures or causal factors

cannot be precisely determined.

Sales fluctuations are wide and significant.

Demand Schedule

The demand schedule shows exactly how many units of a good or service will

be bought at each price. Using this data, economists and industry analysts can

create a demand curve. Both the curve and the schedule describe the relationship

between a good's price and the quantity demanded of that good.

The demand curve is a visual representation of how many units of a good or

service will be bought at each possible price. It plots the relationship between

quantity and price that's been calculated on the demand schedule, which is a table
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that shows exactly how many units of a good or service will be purchased at various

prices in Individual and Market Demand schedule.

Individual Quantity Demand

Price (Rs.) Quantity Demanded

(Kg of Rice)
15 10
14 12
13 15
12 20
11 25
10 30

Market Demand Schedule

Price (Rs.) Quantity Demanded

(Bags of Rice)
15 100
14 120
13 150
12 200
11 250
10 300

As you can see under the chart, the price is on the vertical (y) axis, and the

quantity is on the horizontal (x) axis. This chart plots the conventional relationship

between price and quantity. The lower the price, the higher the quantity demanded.

As the price decreases from p0 to p1, the quantity increases from q0 to q1.
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Definition of 'Law of Supply'

Definition: Law of supply states that other factors remaining constant, price and

quantity supplied of a good are directly related to each other. In other words, when

the price paid by buyers for a good rises, then suppliers increase the supply of that

good in the market.

Description: Law of supply depicts the producer behaviour at the time of changes in

the prices of goods and services. When the price of a good rises, the supplier

increases the supply in order to earn a profit because of higher prices.

The above diagram shows the supply curve that is upward sloping (positive

relation between the price and the quantity supplied). When the price of the good

was at P3, suppliers were supplying Q3 quantity. As the price starts rising, the

quantity supplied also starts rising.

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END OF THE UNIT