Business Economics

Ans 1.

Introduction:

Forecasting is a method used to determine the demand that will be in the near future for services
or products. It is based on real-time analysis and analysis of demand that existed before for that
particular product or service in the current market. Forecasting demand must be conducted by a
scientific approach and all facts, and events that are related to the forecasting should be taken
into consideration. If someone inquires about demand forecasting, they will find that it involves
gathering details on the various aspects of the market and the demand that is dependent upon the
past. This data can be utilized in predicting the future demand. Forecasts of the total demand for
goods and services can make it possible. A demand forecast is an essential element of any
control of marketing. Demand forecasting is a combination of "demand" (which are two distinct
concepts) and "forecasting". A demand from outside for a product or service is defined as
demand. Forecasting is typically a method of estimating the occurrences that could take place in
the near future. Forecasts are often used by companies to devise sales and marketing strategies. It
improves profit margins. It is based on the real-time demand for the good or service. Here are its
characteristics and advantages.

Concept and application

Forecasting demand requires a scientific approach that takes into account relevant facts, figures,
and occasions. Forecasting the demand for future goods or services is achieved by applying
scientific principles and sound judgment. It collects data on a variety of market factors like
changes in the selling price and product designs as well as the level of competition advertising
campaigns, and consumer spending capacity.
Forecasting for the future is what demand forecasting does. Forecasting future revenue is based
on marketing strategies and inexplicably varying variables.

Forecasting steps

Demand forecasting must be done carefully in order to get the desired results. Five steps are
involved in forecasting demand.

Identification of the Goal

The first step involves clearly selecting the objective of the study. This is how companies set
their goals and make sure they're attainable. This goal can be defined as a longer-term or short-
term demand as well as the entire market or just a small portion of it and the general demand for
a specific product , or for the particular specific product, the dominance in the market of the firm
in the particular sector or area, and further. The aim should be clear before you can estimate
demand. Manufacturers set achievable and acceptable goals based on analysis. These are the
criteria that can be used for goal definition:

 Lasting or short-term product demand

 The demand from a specific industry or a particular business
 Demand for the whole market or a certain market segment
The Determination of Time Perspective

This process allows the company to determine if the analysis is to be conducted for a brief period
or for a more extended period. The company can decide if the demand estimate will be carried
out for a brief period in the next two-three years, or for a longer time dependent on the objective.
In this stage the creator decides to conduct an analysis on the short-term or longer time. They
provide reliable data that lasts longer than many projections.

Selecting the Demand Forecasting Method for Selection

The next step is when the manufacturer chooses together with analysts what method is most
effective. There are a variety of methods of forecasting demand that can be utilized. These
methods can be divided into survey and statistical techniques. The analysts and the maker decide
the most effective next-stage strategy. Surveys of opinion, consumer surveys as well as statistical
methods comprise trend prediction and barometer analysis. Forecasters must select the best
method.

The collection and analysis of Data

The final step is to collect the data according to preconceived attributes for analysis. The next
step is to gather the required data from secondary, primary or mixed sources. The most important
data is the firsthand, uncollected information. The primary data is the latest information. To
collect the data, you must count, analyse, cross-reference, and cross-reference the forecast data.
Data is analysed statistically , or graphically. The criteria of analysis guides data collection.

Estimation and Interpretation

The last step is to review the data to draw conclusions regarding the future. In this phase, the
inferences are drawn regarding the forecast. This allows you to predict the amount of demand
over the time period. These estimates are usually in the form of equations and the result is then
displayed in a manner which is easy to comprehend and helpful.

Countries, markets as well as companies can forecast the future demand. Businesses forecast the
demand that will be forthcoming for a company's products and services. Markets predict the
demands for all companies in a specific sector. Combining demand forecasting is the opposite.
Short- and long-term demand projections are based on duration:

 The short-term projection: It requires a year-long forecast. It emphasises swift judgments

(for example, arranging finance, developing production plans, setting up marketing plans,
etc.).

 Long-term projections: Include anticipating demand forecasts for 7-10 years, with 10-20
years added. It's about a company's longer-term strategies (for example, selecting
manufacturing capacity, moving machinery, and so forth).

Conclusion

It is evident that forecasting demand from customers is an essential element in every business's
success. Only when these steps are carried out in a systematic order , can they be completed.
Demand projection is a scientific endeavor. It must go through several stages. It is essential to
look at all aspects of each stage. It assists the company in making better informed choices that
can predict the overall amount of revenue and sales over the next few years. Additionally, the
business can gain knowledge of their clients need by using various forecasting strategies. When
selecting a method of predicting future demand It is vital to consider factors such as precision,
timeliness, costs-effectiveness, interpretability and adaptability, user-friendliness, and
complexity of application, amongst other elements. Corporate companies must forecast future
demand.

Ans 2.

Introduction

Companies incur miscellaneous costs on different aspects of manufacturing services and

products, such as buying basic materials such as labor and wages and leasing or purchasing
machinery and buildings. These expenses are the company's cost to produce its products and
services. The cost is the quantity of resources required for the production of items or services.
The cost of production is made up of the cash value of all inputs , divided by the specific cost of
each input.

Businesses have what is known as fixed costs, which are costs that remain identical regardless of
the quantity of product produced. Even in the event that the business doesn't generate any
income, the expenses that are associated with its activities will remain constant. Even if the
revenue of a firm decreases or rises, devaluation land and administration costs, taxes liabilities
and numerous other expenses remain the same. The phrase "As an example" is a great example
of this. The level of the business's results is directly related to the magnitude of its variable costs.
In other words, variable costs shift depending on changes in the amount or amount of production.

Concept and Application

Calculation for various costs

Total cost is the total cost the company has to pay to attain an optimum level of performance. A
company's Short-Run Cost (SRTC) is made up of two major components:

AFC (Average Fixed Prices): Average fixed cost refers to the per unit fixed cost of production.
It is calculated by multiplying TFC by total production, i.e.

AFC = TFC/Q

where,

AFC = Average Fixed cost

TFC is the acronym for Total Fixed Price

Q = Quantity

AVC (Average Variable Price): Average variable cost refers to the per unit variable cost of
production.

It is calculated simply by subtracting TVC from the output total.

AVC = TVC/Q
Where is the place?

AVC = Average Variable Price

TVC = Total Variable Cost

Q = Quantity

TFC (Total Fixed Price): The cost of these services does not change because of changes. Even
when the result is zero, TFC stays consistent. TFC is shown as a horizontal line parallel to the x-
axis (result).

TVC Total Variable Cost: The costs are directly linked to the results of the business. TVC
directly relates to a firm's outcome. TVC rises when output drops, but TVC drops when output
rises.

SRTC is calculated by adding up total fixed costs and variable costs.

TVC + TFC = SRTC

The average cost of a firm's system is calculated by divising the total cost by the quantity of
systems that it creates. The cost of different stages of production, based on a company's short-run
average costs (SRAC), is the expense of the outputs.

SRAC can be calculated by dividing short-run global costs by the final result.

SRAC in a business is a U-shaped. It falls, and then it goes to a minimal level before it begins to
increase. While the fixed costs remain constant at first, only the variable costs like primary and
work costs vary. As the repair cost is spread across the production process, the standard cost
starts to reduce. When a company makes use of all available resources, the typical cost is
reduced to a minimum. The SRAC curve is a representation of the cost of a short-term average to
achieve a specified amount of results. The SRAC curve's downward slope suggests that output
grows with higher costs. The SRAC contour begins to slope higher and indicates that the average
cost increases when output exceeds Q1.
Marginal cost refers to the percentage increase in an organization's total expenses that results
from an alteration in its overall revenue (MC). The term "minimal short-run cost" refers to a
reduction in total costs for short-run periods that result from changes in the outcome of the
company. The slope of the short run total cost is a graph that shows how much overall cost
changes as output increases. The slope of the short run total cost is what is called the minimum
short-run cost. To determine if it is required to manufacture more of a product, a company will
look at the marginal cost. Imagine that a company can sell the additional unit for an amount that
is over the expense of manufacturing the new unit (limited cost). In this case the company could
make the decision to manufacture an additional unit.

The U-shaped contour of short-run minimal cost (SRMC) and short-run average costs (SRAC)
and typical variable cost is due growing returns in the beginning which are followed by
decreasing returns. On their floor, the SRMC curve is abutting the SRAC contour.

Quantit Total Total Total Average Average Average Margin

y Fixed Variable Cost=T Fixed Variable Total al Cost
Cost Cost FC+ Cost= Cost=TVC/ Cost=
TVC TFC/Q Q AFC+AV
C
0 100 0 100 0 0 0 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 12.5 37.5 10
5 100 60 160 20 12 32 10

Conclusion:

We can see that economics studies the influence of costs on the decisions. In balancing our
unlimited desires against our finite resources allows us to make choices that enable us to attain
what we desire. Hence, we can say that costs are a way to assess the chances lost by choosing
one item or service over another. Cost is the cost that is paid. This is typically determined by the
quantity of resources needed to reach the purpose. Cost is the amount paid in exchange for
certain products or services. Cost can be used to plan the future of actions as well as identify the
costs incurred by products or services. Since cost is used in a variety of contexts and can be
understood differently the analysis of cost is vital in making business decisions. A company must
have solid understanding of the different cost concepts to make efficient resource appropriation
choices.

Ans 3a.

Introduction

The number of people willing and able to buy items at various prices over a given time period is
known as demand. If there is a need for a particular product or service, it means that people are
willing to pay for it. It is the driving force behind financial growth and expansion. There is no
point in producing anything if there were no demand. The term "demand" in economics refers
the quantity of a product or service that customers are willing to purchase at a particular price.
Demand may be either inelastic or elastic. This means that demand does not alter with price
changes. The concept of elasticity in economics refers to the impact of changing one economic
factor on another.

Concept and Application

Demand elasticity measures the impact of an economic variable on the quantity of a product
desired. The cost of the product as well as the income of consumers and other variables affect the
amount of a product ordered. Income elasticity is the measure of how a product's value requested
can be affected by fluctuations in income. The percentage change in the quantity demanded
divided by the percent increase in income is the formula used for measuring the income elasticity
of demand.
Also known as Elasticity or Demand Elasticity, it is a measure of how much the demand of a
business's quantity is affected by shifts in market indicators like cost, revenue, and other factors.
It tracks changes in demand caused through changes in other indicators of financial performance.
The elasticity of demand is the measurement of the percentage change of the economic indicator.
"Income elasticity of Demand" also known as "YED" is the degree to which the value of a
commodity is sensitive to changes in incomes. All other factors are constant. After inflation
adjustment real income is individual's earnings.

%change in quantity
Income elasticity of demand (YED) =
% change in income

Income Elasticity of Demand = (D1 – D0) / (D1 + D0) / (I1 – I0) / (I1 + I0)
where,

D0 = Initial Quantity Needed

D1 = Final Quantity Required

I0 = Initial Real Income

I1 = Final Real Income

Given:

The monthly income of an individual increase from Rs 20,000 to Rs 25,000. So, I0= 20,000; I1=
25,000, ΔI = 5000

which increases his demand for clothes from 40 units to 60 units, D0=40 , D1= 60, ΔD = 20

(Ey)Income elasticity of demand= (∆D/D) / (∆I/I)

= (20/40)/ (5000/20000)
 = 0.5/ 0.25

Ey = 2units

The elasticity of demand's income is 2 units

Conclusion:

Therefore, it is possible to conclusively say that the income elasticity to demand for any
commodity is the measure of how much variations in incomes of consumers are related to
changes in demand. In the case of purchasing clothing, individuals are extremely dependent on
changes in their income, as is evident from the fact that the income elasticity of demand is 2
units.

Ans 3b.

Introduction:

The price elasticity is the measurement of how much demand for a particular product changes as
a result of an economic change. Simply put, it's an amount of change in quantity required divided
by the price adjustment. It could be expressed numerically as:

Proportionate change in the quantity demanded

Price elasticity of demand =
Proportionate change in Price

The extent in which demand reacts value adjustments does not continue to be consistent in every
scenario. Based on the cost of price adjustment, a product's market demand can be either elastic
or inelastic.

Concept and application

The rate of adjustment is what is the determinant of price elasticity. It can be broken down into
five distinct categories.

 Demand that is perfectly elastic: Flexible demand is when the cost of something fluctuates
(increases or falls) and causes a significant change (surge, autumn) in the amount desired. A
modest increase in cost can lead to a decrease of sought-after products to none however a
slight decrease in price can result in an increase of demand that's infinity. In this case the
demand can be flexible or e= ∞ .

 Absolutely inelastic Demand: When a change in price for a product doesn't cause an
increase in the quantity needed The demand will be absolutely elastic. The elasticity of
demand in this instance is zero (ep = 0).

 A relative elastic demand: A decrease or increase in price leads to an increase or decrease

in the quantity of products and services required. This is known as an extra flexible demand.
Any adjustment that is popular will always outweigh a price change. In the case of Ep> 1.
This implies that the elasticity is greater than one.

 Reasonably inelastic Demand: If the percentage or proportional change in price results is

lower than a proportional change in demand that is, then the demand for that product is
reasonable and elastic. The elasticity of demand is lower than 1. An adjustment that is
popular is lower than a price adjustment.

 Unitary Elastic Demand: Any change in demand that occurs due to an increase or fall in
price is called unitary elastic. The mathematical formula for unitary elastic demand is one.

You can determine the price elastic of demand using the formula in this article:

A symbol ∆ signifies the percentage of change in demand and prices.

In this way, the formula to calculate the demand price elasticity follows:

Ep = ∆ Q/∆P × P/Q

Where,
Ep = Price elasticity of demand

P = Initial Price

∆P = Change in price

Q = Initial quantity demanded

∆Q = Change in quantity demanded

Applying the formula in the present case,

Given

P = 500

Q= 20000

∆Q = 25000 – 20000 = 5000

∆P = 500 – 400 = 100

P = 500

Q = 20,000

Ep = ∆ Q/∆P × P/Q

Ep = 5000/100 × 500/20000

Price elasticity of demand Ep = 1.25

Conclusion

We've already talked about how to determine the price elasticity of demand to an amazing
product. In this article, we will look at the six elements of human behavior which could impact
the price elasticity. Also, the price elasticity of demand can vary for different commodities in
relation to the factors that affect their market inside the clients.