ASSIGNMENT-1

BUSINESS ECONOMICS

Demand Forecasting is the process by which managers can predict the future demand of
their organisation's product or services in which they deal in on the basis of past trends their
organisation.

With the help demand forecasting, businesses can anticipate future demand on the basis of
which they can maintain sufficient inventory so that they can match future demand of their
Goods to avoid under stocking and so that they can meet customer orders.

Demand forecasting is useful for business organisation in many ways such as deciding no. of
units to be produced according to which they can purchase their inputs, in management of
funds due to which business’s can be saved from over-production or involved in excess
investment.

STEPS INVOLVED IN DEMAND FORECASTING

If business organisation want to achieve organisation's goal and to get desired results, they
have to pursue demand forecasting systematically.

1- Determining the Business Objectives - In this beginning, we should know the aim or the
purpose of demand forecasting. In other word, what we went to know or achieve from
forecasting. The objective must be cleared before we made ahead towards demand
forecasting. The objective may be the period of demand whether long term form or short
term, it may be a overall demand of the product or demand of only’s firm product, etc.
2- Determining the Time Perspective- On the basis of desired objective, the forecasting of
demand can be for a short period or for a long period. Short period mean a period of one
year. In the short period, determinants of demand cannot change significantly. While long
period is the period of ten years or beyond that. In the long period determinants of demand
change very frequently and it is very important for the organisation to forecast these
changes frequently.
3- Selection Among Various Methods of Forecasting- For forecasting the demand there are
various methods, and we have to select the method best suited to our requirement by
keeping in mind organisational's objective. Each method is different from other one in term
of aim of forecast, period of time available .So who is forecasting have to select the
economist best according to his requirement.
4- Collection And Interpretation of Data - Once the organisation choose the method of
forecasting. The next step is to collect data. Data can be primary or secondary or both.
Primary data are the data which is collected by economist himself for the first time while
secondary data is the data which is already collected and taken from somewhere. As data is
collected in raw form , economist has to analise it to achieve a meaningful result.
5. Interpretation of Outcomes- After the data is collected and analysed by the economist in
classified manner, the organisation or economist can predict the future of its product or
services.
Conclusion-
Demand forecasting helps the businesses to plan future production of their Goods according
to predicted demand in near future. So that the firm can make efficient utilisation of inputs
and resources to avoid over production or under production. The business which can predict
the demand accurately can easily win over its competitor efficiently.
Hence, it is true that without demand forecasting , no business can run efficiently and
smoothly . in other words, it is important for all the businesses.

Ques 2

Introduction –
In the production of Goods, the firms requires raw materials, inputs, labour, machinery &
equipments . Sum total of all the value of inputs is the total cost of output. Without the
determination of Cost, no business can survive & compete over its competition.
Determination of cost help businesses to -

a) Estimating the cost of organisation product.

b) Knowing the profit margin left after meeting all the expenses.

c) Determining the minimum units must be produced in order to cover total cost.
VARIOUS TYPES OF COSTS-
Business organisation must undertaken different types of cost such as -

a) Opportunity Costs - It is also known as hidden cost. Opportunity cost is cost of losing
potential benefit while choosing the other most suitable alternatives.
For Example- Business Man uses its 1/3rd portion of building as its residence, if he let
out its portion which he is using as it residence he can get Rs 1 Lakh as a rent. So, Rs 100000
is the opportunity cost of using his building as a residence.

b) Explicit Casts - Explicit costs are those costs which are actually incurred by business
organisation. These cost include expenditure incurred by organisation in purchase of
raw material, wages and salaries paid to labourers and staff, rent and interest
expenses.

c) Implicit Cost - Implicit cost are also known as implied cost or notional cost. It is
opportunity cost that arises when a company uses its own resources rather than
giving them on rent. These cost are not recorded in accounts as there is no cash
flow. For example - Mr Aaditya singh, a teacher teaches his own son without any
fees. In this case, average fees will be considered as implicit cost.

d) Accounting cost - These cost is the sum total of expenditure incurred by the firm in
obtaining various inputs like raw material, labour, machinery building.These costs
are properly recorded in firm accounts .

e) Economic Cost – Economic cost is the sum total of opportunity cost and accounting
cost. It is the potential value of alternative what an organisation for goes in selection
of best suited alternative.

f) Total Cost - Total cost is the sum total of fixed cost and variable cost incurred in
producing a commodity. TC = FC + VC

g) Fixed Cost- Fixed cost is the cost which does not varies with the output level. It is the
cost which remain same whether firm is taking out production function or not. For
example - Rent of land, deprisiation.

h) Variable Cost. Variable cast is the cost which changes with the change in the level of
output. It is the cost which increase with the increase in the level of output and vice
versa. For example -if we have to produce more units more manpower is required if
we have to produce few units less manpower is required.
i) Marginal costs - Marginal cost is the change in total cost as the production increases.
It as the addition cost of producing another addition unit.
 Marginal cost=change in total cost /change in quantity

Quantity Total Total Total Average Average Average Marginal

fixed variable cost fixed variable total cost cost
cost cost cost cost
0 100 0 100 20
1 100 20 120 100 20 120 10
2 100 30 130 50 15 65 10
3 100 40 140 33.33 13.33 46.66 10
4 100 50 150 25 12.50 37.50 10
5 100 60 160 20 12 32 10

Conclusion-
In order to carry out the production activity firm has to undertaken various expenses such as
acquiring raw material machinery land labour sum of all the expenses represent total cost it
is significant for the form to compute it's cost of output both explicit and implicit cost in
order to a choice scale price if firm cannot compute its cost efficiently it is difficult to survive
in the error of cut short competition.

Ques 3-
Introduction-
a) Income elasticity of demand refers to corresponding the change in the quantity
demanded in response to the change in income of the consumers.
when there is rise in income the consumer will increase its purchasing while when
there is fall in income of the consumer, he will buy lesser quantity.

Ey= percentage change in quantity demanded/percentage change in income

Percentage change in quantity demanded = (New quantity demanded-original quantity
demanded)/(percentage change in income)
Percentage change in income= new income-original income/original income
If percentage is not mentioned in the question we calculate income elasticity by following
formulae-
Ey= ΔQ/ ΔY X Y/Q
Where,
Y= original income
Q=original quantity demanded
Y1= new income
Q1=new quantity demanded

ΔY=Y1-Y

ΔQ=Q1-Q

In the given question following things are as follows-

Y=20000
Y1=25000
So, Δy=25000-20000 =5000
Q=40
Q1=60
So, ΔQ=60-40=20
Ey= ΔQ/ ΔY X Y/Q
= 20/5000 X 20000/40

=2

TYPES OF INCOME ELASTICITY OF DEMAND-

1) Positive income elasticity of demand- When there is a direct or positive relationship
between demand and income it means increase in income of consumer increases
demand and vice versa.
 Graph-DyDy is upward sloping curve from left to right which represent increase in
demand from OQ to OQ1 due to rise in income from OA to OB.
a) Unitary income elasticity of demand= when a change in income of consumer results
in same change in quantity demanded
b) More than unitary income elasticity of demand- when a proportionate change in
income of consumer leads to a bigger change in quantity demanded
c) Less the unitary income elasticity of demand- When a proportionate change in
income of consumer leads to lesser change in quantity demanded

2) Negative income elasticity of demand- when a proportionate change in income of

consumer leads to fall in quantity demanded and vice versa.

Graph-DyDy is downward sloping curve from right to left which represents decrease
in demand from 2 to 1 due to rise in income from 10 to 15.
3) Zero income elasticity of demand -When a proportionate change in income of
consumer leads to zero changes or no change in quantity demanded.

Graph-Dy curve is a straight line parallel to y axis shows zero change in quantity
demanded as a result of rise in income.

Conclusion-

Income elasticity of demand is very helpful for the business concern in business
research and production planning.once the income increases,standard of living also
increases.so the business concerns start producing superior goods rather than
inferior goods i.e. study of income elasticity of demand is of great importance.
3(b) Price elasticity of demand measures the change in quantity demanded of a
product due to change in price of commodity in the market .

Ep = ΔQ/ ΔP X P/Q
Where, ep = price elasticity of demand
ΔQ= change of quantity demanded
ΔP= change in price
P= original price
Q= original quantity

Price elasticity of demand= percentage change in quantity demand/percentage

change in price
In the given question, following things are as follows-
Q = 20000
Q1=25000

So, ΔQ=Q1-Q
=25000-20000
=5000

P=500
P1=400

So, ΔP=500-400
=100

Ep = ΔQ/ΔP X P/Q
= 5000/100 X 500/20000
=1.25

TYPES OF PRICE ELASTICITY OF DEMAND-

PRICE
ELASTICITY
OF DEMAND

PERFECTLY PERFECTLY UNITARY RELATIVELY RELATIVELY

ELASTIC INELASTIC ELASTIC ELASTIC INELASTIC
DEMAND DEMAND DEMAND DEMAND DEMAND
a) Perfectly elastic demand- when a slight change in price leads to large change in
demand of a product known as perfectly elastic demand.In perfectly elastic
demand fall in price of product leads to increase in demand whereas rise in
prices leads to fall in demand to zero. In perfectly elastic demand business
concern and price takers not price makers .They have to sell their product
according to market price. if they increase their prices then demand of their
product turns zero.

b) Perfectly inelastic demand- In perfectly inelastic demand there is no change in

quantity demanded of commodity due to change in its price. It means in
perfectly inelastic demand forms are price makers they can charge whatever
they want to charge as high prices not effect the sale of the commodity.

c) Unitary elastic demand - in Unitary elastic demand the demand change in same
proportion in which there is change in price.
 It is curve sloping from to right.when price increases from OP1 to Op2 to
demands falls from OQ1 to OQ2.

d) Relatively elastic demand- In relatively elastic demand proportionate change in

prices leads to large change in price leads to larger change in quantity
demanded.

This graph shows that when price fall from OP to OP1 demand rises from OQ to
OQ1 .Rise in demand is greater than fall in price.

e) Relatively inelastic demand- In relatively inelastic demand proportionate change

in price leads to lesser change in quantity demanded.

This graph shows that when price falls from OP to OP1 demand rises from OQ to
OQ1. Rise in demand is lesser than fall in price.

Conclusion-

Price elasticity of demand helps the firm to know about price sensitivity of the
consumer. It helps the firm to apply effective pricing strategy in order to
increase sales and to face competition.It also helps the business concern to plan
their production.Firms must focus on price elasticity in order to remain in
competitive market.