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Business Economics New
Introduction:
Evan J. Douglas writes that " Demand estimating (forecasting) may be characterized as a
method of determining values for demand in future periods." Estimating future demand for a
company's goods or services is known as demand forecasting. Since it involves projecting an
organization's upcoming sales figures, it is known as sales forecasting. A corporation may
plan its manufacturing process, acquire raw materials, manage its cash flow, and set the price
of its products with the aid of demand forecasting. Companies can predict demand either
internally by estimating bids or externally by working with specialised experts or market
research firms.
By using demand forecasting, a company may plan for the required inputs based on the
anticipated demand, avoiding material and time waste. Both currently offered services and
new ones entering the market gain from it. Demand forecasting is necessary for a new
company to expand its manufacturing scope. On the other side, a reputable company needs
demand predictions to avoid issues like overproduction and underproduction.
The following are the steps involved in demand forecasting:
a) Identification of goal: The purpose of Demand forecasting has to be established prior
to the process starting. The criteria mentioned below can be used to define the
objective:
Demand for a product might be long-term or short-term,
Sectoral or company-specific demand
Demand for the entire market or just a certain market segment.
b) Determination of time horizon: Demand projections may be made for a short period
of time (2–3 years) or for a lengthy period of time (depending on the goal) (beyond 10
years). An organisation must account for the economy and regular market fluctuations
while anticipating long-term demand.
a. To choose Forecasting Method: There are numerous ways to undertake
demand forecasting. But not all techniques are suitable for all kinds of demand
forecasting. Based on the goal, time frame, and data accessibility, the
company must choose the optimal forecasting technique. The expertise and
skills of the demand forecaster also have an impact on the demand forecasting
methodology.
b. Data collection and analysis: After selecting a demand forecasting method,
data collection is required. Since data is gathered in its unprocessed form,
analysis is required to provide useful information. Data can be gathered from
either supplementary or important sources, or perhaps from both.
c) Interpretation of results: The analysis of the data is then utilised to forecast demand
for the given years. Unsurprisingly, the gathered results typically remain in the type of
equations that must be presented.
Demand forecasting can be done at the corporate, societal, or market levels. An
organization's services and goods are expected to be in high demand in the future,
according to business projections. At the market level, the demand for the combined
services and goods of all businesses in a certain industry is anticipated. On the other
hand, forecasts are made for the economy's total aggregate demand for products and
services. Depending on their nature, products are categorised as either capital or
consumer goods.
d) Consumer goods: These goods remain in great demand. Demand forecasting for
these items is typically conducted whenever a new product is released or an existing
product is upgraded significantly.
e) Capital goods: These include things like raw resources that are necessary to make
consumer items. These commodities have derived demand as a result. Demand for
durable goods has an impact on anticipating capital goods demand. Anticipating more
demand for capital goods would include forecasting higher demand for consumer
goods.
Based on duration, which is described below, demand is expected over the short- and
long-terms:
Short-term projections: It necessitates predicting demand for about a year. It
emphasises the quick decisions made by an organisation (for example, arranging
finance, developing production plans, establishing marketing plans, and so on).
Long-term projections: It involves predicting demand over a period of five to seven
years, with a potential inclusion of a period of ten to twenty years. It is concerned
with a company's long-term choices (for example, picking manufacturing capability,
changing machinery, and so forth).
Conclusion:
Demand forecasting has many advantages inside an organisation, but it does have some
restrictions also, as demand forecasting can decide the optimal course of action for the future
based on an analysis of recent and past events. Past events or happenings might not always be
dependable or sufficient as a basis for future predictions. The technique used to predict
demand determines how well demand forecasting performs. Flexibility, accuracy, price, ease
of evaluation, timeliness, ease of usage, and application are some of the factors to be
considered while choosing a technique for demand forecasting.
Introduction:
Organizations spend money on different activities related to producing services and goods,
such as buying raw materials, paying wages to workers, and buying or renting equipment and
facilities. These expenses are what it costs the business to produce its services and goods. The
cost is the total amount of resources needed to manufacture goods and provide services. The
cost of production is calculated as the cash values of all the inputs added together, multiplied
by each one's unique cost.
Expenses incurred by a business that remain constant despite changes in output level are
known as fixed costs. Even if a company doesn't produce anything, its dealt costs will still
exist. For instance, even though a company's output increases and decreases, devaluation,
administrative costs, land and building rent, tax requirements, and several other expenditures
still exist. The level of the company's outcome is directly correlated with its variable costs.
Simply said, variable costs change when production quantity or level changes.
TVC (Total Variable Cost): These costs directly affect a company's performance. This
means that when results improve, TVC improves as well and vice versa.
The sum of the fixed and variable costs yields the SRTC.
A company's SRAC has a U-shape. It first begins to decline, then reaches a minimum and
then begins to improve. The variable expenses, such as the costs of primary materials and
labour, are the only ones that change initially while the taken care of costs remain constant.
Later, as the cost of repairs is divided among the manufacturing, the average cost starts to
drop. When a business utilises all of its resources, the average cost is kept to a minimal. The
short-run average cost of producing a specific quantity of outcomes is represented by the
SRAC curve. The downward slope of the SRAC curve implies that average costs increase as
output increases. The SRAC contour starts to slope upward, indicating that average costs rise
at output levels higher than Q1.
Marginal cost is the change in a firm's overall costs divided by the adjustment in the entire
result (MC). Minimal short-run cost is defined as the change in short-run total cost resulting
from a change in the company's results. The minimal short-run cost, which shows the rate of
change in overall cost when output changes on a chart, is the slope of the short-run total cost.
A company decides if it needs to produce more devices based on its marginal cost. Let's say a
business can sell the additional unit for a price higher than what it would cost to produce the
additional unit (limited cost). In that instance, the business may decide to create the extra
unit.
The short-run limited cost (SRMC), short-run average cost (SRAC), and typical variable cost
(AVC) are U-shaped due to rising returns at first followed by decreasing returns. On their
respective floors, the SRMC curve crosses the SRAC contour and the AVC curve.
Conclusion:
When a company decides to create an asset, it must pay the rate for the many inputs needed
in the production process. Along with paying the leasing cost for the production facility, the
corporation also needs workers, raw materials, gas, and electricity. By comparing the cost of
inputs to the cost of the product, business decisions are formed. When determining the cash
value of inputs, they are multiplied by the appropriate prices (cost of production). Given that
the term "cost" can be understood differently and has different meanings in different contexts,
cost analysis is crucial in business decision-making. To effectively allocate resources, a
company has to have a solid understanding of the various cost concepts.
Introduction:
Even if a product's price remains unchanged, demand for it will rise as consumer incomes
rise. The degree to which a demand is responsive to consumer income is known as "earnings
elasticity of demand." Richard G. Lipsey asserts that "earnings elasticity of demand" refers to
how responsively demand adjusts with changes in revenue, while Watson refers to "revenue
flexibility of demand" as the ratio of the percentage adjustment in the amount required to the
percentage adjustment in income.
where,
( New quantity demanded – Original quantity demanded )( ∆Q )
% Change in quantity demanded =
(Original quantity demanded)(Q)
( New income – Original income)( ∆ Y )
% Change in Income =
Original income(Y )
Ey = (∆Q/∆Y) × (Y/Q)
∆Y = 25,000 – 20,000 = 5,000
∆Q = 60 – 40 = 20
Y= 20,000
Q = 40
Therefore, Ey = (20/5000) x (20000/40)
Ey = 2
Changes in demand's income elasticity depend on the product and the environment. Based on
a numerical value, the revenue flexibility of demand is separated into three groups, each of
which is described below.
• When a consumer's demand rises in response to a proportionate shift in revenue and vice
versa, revenue flexibility of demand is seen beneficial.
Positive revenue elasticity of demand comes in three flavours: unitary, less than unitary, and
higher than income elasticity.
• Unitary revenue elasticity of demand: This elasticity is considered to be unitary when a
proportionate rise in a customer's income results in a relative change in the demand (increase)
for a good.
• Less than unitary revenue flexibility of demand: This occurs when a customer's revenue is
proportionately adjusted and results in a slight increase in the demand for an excellent.
• Greater than unitary earnings flexibility of demand: This condition exists when a
proportionate change in a customer's income results in a similarly large increase in the fame
of a good.
• A consumer is said to have an unfavourable income elasticity of demand when their desire
for a product declines in response to a proportionate change in their income and vice versa.
When the products are poor quality, it usually occurs.
Conclusion:
The demand's revenue flexibility aids sellers in making investment decisions. In general,
sellers prefer investing in markets where the income elasticity of demand is greater than zero
(> 2) or where the product demand is far more responsive to changes in earnings as a
percentage.
Introduction:
Price elasticity of demand is a measure of the change in the quantity requested of a product
due to a modification in the product's market value. In other words, it is the percentage
modification in the required amount divided by the price modification. It can be specified
numerically as:
Percentage change∈the quantity demanded
Price elasticity of demand =
Percentage change ∈the price
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
In every situation, the degree to which demand responds to value changes is not constant.
Depending on the amount of change sought after in conjunction with a product's price
modification, a product's demand may be inelastic or elastic. Based on the rate of adjustment,
the price elasticity of demand is divided into five significant groups:
Perfectly elastic demand: Perfectly elastic demand occurs when a little change in price (an
increase or fall) results in a significant change in quantity requested (a surge or fall). A slight
price rise causes demand to decrease to zero, while a slight price decrease causes demand to
increase indefinitely. Demand is flexible in this situation, or ep= ∞
Perfectly inelastic demand: Demand is said to be completely inelastic when a change in a
product's price does not cause a change in the amount needed. The demand elasticity in this
situation is zero, shown by ep = 0.
Relatively elastic demand: Demand is said to be more flexible when a proportionate or %
change in price causes a larger proportionate or % change (increase or decrease) in the
amount needed. However, a popular change overrides a price change. As a result, e p > 1
indicates that the elasticity of demand in this situation is more than one.
Relatively inelastic demand: Demand is said to be reasonably inelastic when a percentage or
proportionate change in price results in less of a percentage or proportionate change in
demand. Demand elasticity is less than 1. A popular adjustment is, to put it simply, less
significant than a price change.
Unitary elastic demand: When a change in price (an increase or fall) is accompanied by an
equivalent change in demand (a rise or fall), this is known as unitary elastic demand. Unitary
elastic demand has a mathematical value of 1.
Conclusion:
Determining the price elasticity of demand is so crucial. Due to its considerable impact on
industry, trade, and commerce, the idea of price elasticity of demand is essential to the
efficient operation of economics. Additionally, it aids firms in understanding economic issues
and coming to wise business judgments.