Ans – 1

INTRODUCTION:
Predominantly in today’s energetic world, every single business involves certain risks and
uncertainties. If these risks are not solved on time, it may lead to tremendous losses for an
organization. To protect against those risks and losses, organizations have to be aware of them
in advance. And as a part of that, organizations work on the future demand and also for sales
prospects for their products and services. Demand forecasting is helpful for both new as well
as existing organizations in the market. For instance, a new organization needs to preempt
demand to expand its scale of production. On the other hand, an existing organization requires
demand forecasts to avoid problems, such as overproduction and underproduction.

There are two types of demand forecasting in an organization. The first one is short-term and
the other one is long-term demand forecasting. It depends on the organization’s requirements.
short-term forecast is generally used for routine activities and on the contrary, Long-term
forecasting is performed for new projects, expansion, and upgradation of the existing
production plant. It also takes many years to complete.

From the introduction mentioned above, we must have understood that the term demand
forecasting is used to make future decisions in any business So, let us know what the terms
demand and forecasting are and what is their definition.

Demand is an economic concept that relates to a consumer’s desire to purchase goods

and services and willingness to pay a specific price for them. It depends upon three things i.e.,
Desire, purchasing power (Money), and willingness to spend.

As per Prof. Hibdon, “Demand means the various quantities of goods or commodities
that would be purchased per period at different prices in a given market”

Forecasting is the process of making predictions based on past and present data, as well
as marketplace trends to predict the organization’s future financial performance.

let us now understand what is “Demand Forecasting” with more focus on the important
question mentioned above.
Demand forecasting is the process of using predictive analysis of historical data to estimate
and predict customers’ future demand for a product or service.

In the other words, we can say that Demand Forecasting is the “Art and Science” of predicting
the probable demand for a product or a service at some future date on basis of certain past
behavior patterns of some related events and the prevailing trends in the present. It’s not simple
to guesswork, it refers to estimating demand scientifically and objectively based on certain
facts and events relevant to forecasting.

The business market is characterized by various risks and uncertainties that affect the demand,
sales, and prices of goods and services in the market. It involves failure of technology, natural
disasters like famines, floods, earthquakes, etc., and also restrictions of government policies,
economic fluctuation like recession, and so on.

There are three bases for performing demand forecasting, which is shown below:

Firm Level

Level of
Industry Level
Forecasting

Economy level
Bases of
Short-Term
Demand Forecasting
Time-Period
Forecasting Involved Long-Term
Forecasting
Consumer Goods
Nature of Forecasting
Products Capital Goods
Forecasting
 There are also many techniques of demand forecasting which we
will understand through the chart shown below:

Demand Forecasting Techniques

Qualitative Qualitative
Techniques Techniques

Survey Opinion
Time Series Smoothing Barometric Econometric
Methods Polls Analysis Techniques Methods Methods

Complete Secular Cyclical

Enumeration Trend Variation
Survey
Sample
Survey
Seasonal Irregular
Variations Variations

Leading
Indicators

Test
Coincident Lagging
Marketing
Indicators Indicators

Sales Force Delphi

Composite Method
Let’s understand the example with one of the above techniques which are quantitative demand
forecasting by the weighted moving average method:

Now calculate 3 Year weighted Average Mean =

(0.3) ∗ (1018) + (0.5) ∗ (968) + (0.8) ∗ (1113)

0.3 + 0.5 + 0.8
305.4+484+890.4 1679.8
1.6
= 1.6
= 1049.875
Forecast for the year 2022 will be equal to 3 years weighted moving
average for the year 2022 = 1049.875

So, from the introduction, definition, and examples mentioned above, we can understand very
well that demand forecasting is used in every factor like in sales, purchase, marketing
strategies, budget allocation, and especially in the manufacturing department, and from that
the business owner buys how much raw materials for production or how much investment on
machinery to prepare the goods, Thus it is proved that it provides reasonable data for the
organizations capital investment and expansion decision.

CONCEPT:
 Collecting
Specifying Determining Selecting Interpreting
and
the time method for the
adjusting
objective perspective forecasting outcomes
data

Let us discuss the steps in detail:

 Specifying the objective: - This is the first and major step of Demand Forecasting.
Whenever we start any task or process, the first important object is why we are doing
that task or process, similarly in demand forecasting. The purpose of demand
forecasting needs to be very specific before starting the process. It can be identified on
three bases:

I. Short-term or Long-term demand for a product

II. Industry demand or demand specific to an organization
III. Whole market demand or demand specific to a market segment

 Determining the time perspective: - After considering the objective. Another thing to
keep in mind is the duration. It can be forecasted for a short period or the long period.
If there is a short period then the forecast can be made up to 1 year, and if it is a long
period then it can be made beyond 10 years. We have to be taken care of constant
changes in the market when forecasting for the long term.
  Collecting and analyzing data: - After selecting the period, Data is to be collected. It
can be collected either from primary sources or secondary sources or both.

 Interpreting outcomes: - After the data is analyzed, it is used to estimate demand for the
predetermined years. Mostly, the results obtained are in the form of equations, which
need to be presented in a penetrable.

CONCLUSION

From all the important definitions, details, techniques, and steps mentioned above, we have
come to understand that demand forecasting plays an important role for any small or giant
business and organization to sustain itself in the market for a long time. But it also has some
limitations, Demand Forecasting involves estimating the future event by taking past and present
data, so it may not always be hundred percent accurate. There are so many limitations like Lack
of historical sales data, Unrealistic assumptions, Cost factors, Change in fashion, lack of
expertise, and psychological factors.

The accumulation of excess stock or, the reverse issues with product availability is the main
reason for inaccurate demand forecasting. Poor Forecasting hits in a less supply or
oversupply of inventory, and both are negative for the company.
 Ans – 2

Before continuing the sum from the details mentioned above, we have to understand what is
Total cost, Average Fixed Cost, Average Variable Cost, and Marginal Cost, and after that
how to use the formula to find above mentioned details.

UNDERSTANDING & USAGE OF FORMULA:

In a simple sentence, we can say that Fixed Costs are the costs that do not change when sales
or a production volume increase or decrease. The costs do not vary with output.

Head of Fixed Cost: - Fixed staff salaries, Shop/office/building/factory rent, property taxes,
interest expenses, depreciation, insurance payments, etc.

Example in detail: - From 2016, We have leased a factory from a third party to make sarees
manufacturing business. And fixed monthly rent of 1,00,000 rupees. From January 2016 to
December 2016 sarees production quantity and income from production are as follows:

MONTH Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16

PRODUCED
QTY OF 450 500 550 500 600 450 500 600 700 750 450 550
SAREES
INCOME
FROM
90,000 1,00,000 1,10,000 1,00,000 1,20,000 90,000 1,00,000 1,20,000 1,40,000 1,50,000 90,000 1,10,000
PRODUCTION

RENT (FIXED
COST) 1,00,000 1,00,000 1,00,000 1,00,000 1,00,000 1,00,000 1,00,000 1,00,000 1,00,000 1,00,000 1,00,000 1,00,000

Fixed Cost
INCOME FROM PRODUCTION RENT (FIXED COST) VARIABLE EXPENSES

1,60,000

1,40,000

1,20,000

1,00,000

80,000

60,000

40,000

20,000

-
Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16
 We can see that yellow line in the above chart, which represent the fixed cost, and we can also
see that whatever the production and other variable expenses, the yellow line of fixed is
constant same.

The average fixed cost is the fixed cost that does not change in the number of goods or sales
and services generated by a company.

The Formula of Average Fixed Cost: -

Total Fixed Cost

Average Fixed Cost =
Output

Variable costs are a cost that changes as the quantity of the goods or services that a business
produces changes.

In simple language, we can say that the cost increases as sales or services increase and
decreases as sales or services decrease.

Head of Variable Cost: - Sales commission, cost of raw materials used in production, utility
cost, etc.

With 2nd example let us understand what the variable cost is:
The company is named “Interwood Furniture” and manufactures different furniture products
like chairs, tables, beds, sofas, etc.

Let us see about the production of bed, The month wise data of its production is as follows:

MONTH Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20

UNITS 600 800 700 900 1100 1300 1000 800 900 1000 1200 1400

VARIABLE
COST 1,20,000 1,60,000 1,40,000 1,80,000 2,20,000 2,60,000 2,00,000 1,60,000 1,80,000 2,00,000 2,40,000 2,80,000

FIXED
COST OF
RENT PER 1,20,000 1,20,000 1,20,000 1,20,000 1,20,000 1,20,000 1,20,000 1,20,000 1,20,000 1,20,000 1,20,000 1,20,000
MONTH
 In the above data, we can see that when 600 chairs were produced in April 2019, a variable
cost of 1,20,000 was incurred. And when the production of 800 chairs was done in May 2019,
the variable cost was 1,60,000, so as the production of 200 chairs increased in May 2019 as
compared to April 2019, the variable cost also increased by 40,000 rupees.

In the above data, as the unit changes, the variable cost also changes, and we understand it
better through the graph shown below.

Variable Cost
UNITS VARIABLE COST FIXED COST OF RENT PER MONTH

300000

250000

200000

150000

100000

50000

0
600 800 700 900 1100 1300 1000 800 900 1000 1200 1400

The formula of Average Variable Cost: -

Variable cost
Average Variable Cost =
Output

Also, Average variable Cost = Average Total Cost – Average Fixed Cost

The sum of all costs incurred by a firm in producing a certain level of output.
The Formula of Total Cost: -

Total Cost = Total Variable Cost + Total Fixed Cost

So now let us discuss the marginal cost:

The marginal cost refers to the increase in production cost generated by the production of
additional product units.

In simple language, we can say that an addition is made to the total cost by producing 1 extra
unit of output.

Formula: - ΔC/ΔQ
For example: - produced 5 units in 200 total costs, and then 6 units in 250 total costs. Now,
let’s find out the marginal cost of the 6th unit:

MC 6th = 250-200 = 50

PROCEDURE:

TOTAL TOTAL AVERAGE AVERAGE

TOTAL MARGINAL
QUANTITY FIXED VARIABLE FIXED VARIABLE
COST COST
COST COST COST COST

0 100 0 100   0
1 100 20 120 100 20 20
2 100 30 130 50 15 10
3 100 40 140 33.33 13.33 10
4 100 50 150 25 12.5 10
5 100 60 160 20 12 10
TC = TFC + TVC AFC = TFC/QTY
FOR QTY = 0 → 100+0 = 100 FOR QTY = 0 → 100/0 = 
FOR QTY = 1 → 100+20 = 120 FOR QTY = 1 → 100/1 = 100
FOR QTY = 2 → 100+30 = 130 FOR QTY = 2 → 100/2 = 50
FOR QTY = 3 → 100+40 = 140 FOR QTY = 3 → 100/3 = 33.33
FOR QTY = 4 → 100+50 = 150 FOR QTY = 4 → 100/4 = 25
FOR QTY = 5 → 100+60 = 160 FOR QTY = 5 → 100/5 = 20

AVC = TVC/QTY MC = ΔC/ΔQ

FOR QTY = 0 → 0/0 =  FOR QTY = 0 → 100- =
FOR QTY = 1 → 20/1= 20 FOR QTY = 1 → 120-100 = 20
FOR QTY = 2 → 30/2= 15 FOR QTY = 2 → 130-120 = 10
FOR QTY = 3 → 40/3= 13.33 FOR QTY = 3 → 140-130 = 10
FOR QTY = 4 → 50/4= 12.5 FOR QTY = 4 → 150-140 = 10
FOR QTY = 5 → 60/5= 12 FOR QTY = 5 → 160-150 = 10

Note: - here, TC = Total Cost, TFC = Total Fix Cost, TVC = Total Variable
Cost, AFC = Average Fix Cost, AVC = Average Variable Cost, and MC =
Marginal Cost.

Interpretation for all the cost cures in one chart: -

ATC

AVC

AFC
INTERPRETATION:

✓ When output increases AFC always decreases.

✓ When the output is zero AFC is µ.
✓ TFC is never a Zero, that’s why AFC also never be a Zero.
✓ AVC curve is a “U” shape curve.
✓ ATC curve is also a “U” shape curve.
✓ AVC and ATC both curves are the same because of the operation of the law of variable
proportions.
✓ level of output at which ATC is minimum is known as “Optimum Output”
✓ ATC’s behavior is dependent on the both AVC and AFC.
✓ The fall in AFC is large in comparison to the rise in AVC, and that’s why ATC falls.
✓ The rise in the AVC is more than the fall in AFC, and because of that ATC is rising.
✓ The vertical distance between the ATC curve and AVC curve goes on diminishing
because of falling AFC.
✓ The change in MC is totally due to changes in VC, as FC remains Constant.
✓ MC curve is also a “U” shape curve, because of the operation of the law of variable
proportions.

ATC AVC AFC

  
  
  

Note: -  = Downward and  = Upward

ATC = Average Total Cost

AVC = Average Variable Cost

AFC = Average Fix Cost

Ans – 3 (A)

Before calculating the income elasticity of demand, we have to understand what is “Elasticity
of demand” and then discuss the Income elasticity of demand and its types:

UNDERSTANDING:

The Elasticity of demand explains the relationship between a change in price and the
consequent change in the amount demanded. It refers to the degree to which demand responds
to a change in an economic factor. And the price is the most common economic factor used
when determining elasticity. There are also other factors which include income level and
substitute availability. Elasticity measures how demand shifts when economic factors change.

In the other words of “Marshall”, The elasticity of demand in a market is great or small
according to the amount demanded increases much or little for a given fall in the price, and
diminishes much or little for a given rise in price”.

There are four types of Elasticity of Demand:

 Income Elasticity
 Price Elasticity
 Demand Elasticity
 Cross Elasticity

So, as per the details mentioned above, we have understood what is called elasticity of demand,
now let us discuss “Income Elasticity of Demand”:

In simple words, we can say that Income Elasticity of Demand is a measure of a change in the
quantity demanded of a product due to a change in the income of the customer.

In the words of Watson, “Income elasticity of demand means the ratio of the percentage change
in the quantity demanded to the percentage change in income.”
USAGE OF THE FORMULA:

Percentage change in quantity demanded

Income elasticity of demand =
Percentage change in income

Percentage change in quantity demanded =

New quantity demanded − original quantity demanded(Q)

=
Original quantity demanded(Q)

Percentage change in income =

New income − Original income(Y)

=
Original income(Y)

Q y
Thus, ey= × Where, Q = Q1 − Q , and 𝑌 = 𝑌1 − 𝑌2
Y Q

PROCEDURE:

The old income is 20,000 & the new income is 25,000

The old demand for clothes is 40 units & the new demand for clothes is 60 units.

 Change in income (25,000-20,000) = 5000

 Change in Quantity (60-40) = 20

Q y 20 20,000
Ey = Y
×
Q
=
5000
×
40

= 0.004 × 500
=2
 INTERPRETATION:
Here, we are easily proved that the used clothes are normal goods. Because our answer shows
a positive numeric value.

Here, we are easily proved that the used clothes are Normal goods. Because our answer shows
a positive numeric value.

So, for normal goods, we can say that “quantity of demand increases with increase in income.
“And for the inferior goods, we can say that “Quantity of demand decreases with increase in
income”

If the answer to the above sum comes in a negative value, then it is called inferior goods. And
when the answer is in zero elasticity that is unrelated goods.

I I
N N
C C
O O
M M
E E
D E M A N D D E M A N D

FOR POSITIVE INCOME ELASTICITY OF DEMAND FOR NEGATIVE INCOME ELASTICITY OF DEMAND

I
N
C
O
M
E

D E M A N D

FOR ZERO INCOME ELASTICITY OF DEMAND

Income elasticity can be classified with their respective goods as follows:

Income
Goods
elasticity
The elasticity equal to one Normal Goods

The elasticity of more than Luxurious & Semi-Luxurious

one Goods

The elasticity of less than

Necessity Goods
one

Negative Elasticity Inferior / Giffen Goods

Zero Elasticity Matchbox, Salt, Thread-needle

Ans – 3 (B)

Before calculating the sum, let us understand about Price Elasticity of Demand.

UNDERSTANDING:
Price elasticity of demand is a measure of the relationship between a change in the quantity
demanded of particular goods and a change in its price. Price elasticity of demand is a term in
economics often used when discussing price sensitivity.

USAGE OF THE FORMULA:

Percentage change in quantity demanded

Price elasticity of demand =
Percentage change in income
Q P
Thus, ep= ×
P Q
Where, ep = Price elasticity of demand.
P = Initial price
P = Change in price
Q = Initial quantity demanded
Q = Change in quantity demanded

The extent of responsiveness of demand with change in the price does not remain the same
under every situation. The demand for a product can be elastic or inelastic, depending on the
rate of change in the demand concerning change in the price of a product. Based on the rate of
change, the price elasticity of demand is grouped into five categories, which are shown in the
below chart:
Numerical Types of Price elasticity Condition
Value of Demand
Greater change in demand in response to a
=¥ Perfectly elastic demand
percentage or smaller change in the price

No change in demand in response to a

=0 Perfectly inelastic demand
percentage or smaller change in the price

A change in demand is greater than a change

>1 Relatively elastic demand
in price

A change in demand is less than a change in

<1 Relatively inelastic demand
price

A change in demand is equivalent to a change

=1 Unitary elastic demand
in price

In general, it is not sufficient to determine whether the demand is elastic or inelastic. An

organization needs to estimate the numerical value of change in demand concerning change in
the given price for making various business decisions. And it’s estimated by only measurement.
There are various methods for measuring the price elasticity of demand. Below mention chart
shows some commonly used methods of measuring price elasticity of demand.
Now let us discuss one of the above methods and do the sum with the Percentage Method.

PROCEDURE:
The percentage method is also known as the ratio method. Using this method, a ratio of
proportionate change in quantity demanded to the price of the product is calculated to
determine the price elasticity.

Now we calculate the sum based on the Percentage method formula:

Q2−Q1 (P2−P1)
ep= /
Q P

Where, Q1 = Original Quantity demanded

Q2 = New quantity demanded
P1 = Original Price
P2 = New Price

25,000−20,000 (400−500)
So, ep = ÷
20,000 500
5000 500
=
20,000
 −100
= 0.25  (−0.2) = 0.05

INTERPRETATION:

In this sum, the value of the denominator is negative. However, price and demand are inversely
related and move in opposing directions. Therefore, the negative sign is ignored. Thus, the
elasticity is less than one. (ep < 1).