UNIT – I

Objective:
 To access the demand for a particular product.
 To make optimal business decisions by integrating the concepts of economics,
mathematics and statistics.
 To understand the economic goals of the firms and optimal decision making.
Syllabus:
Unit 1: Introduction to Managerial Economics
Definition, Nature and Scope of Managerial Economics– Relation of Managerial Economics
with other disciplines.
Demand Analysis: Demand Determinants, Law of Demand and its exceptions, Significance &
Types of Elasticity of Demand. Factors governing demand forecasting- Methods of Demand
forecasting.

Learning Outcomes:
 Know the various factors that influence demand of particular product
 Forecast the future demand using various tools & Techniques
 Take the Further Decisions based on demand

Learning Material
Introduction
Managerial Economics as a subject gained popularity in USA after the publication of the book
“Managerial Economics” by Joel Dean in 1951.
Managerial Economics refers to the firm’s decision making process. It could be also interpreted
as “Economics of Management” or “Economics of Management”. Managerial Economics is
also called as “Industrial Economics” or “Business Economics”.
As Joel Dean observes managerial economics shows how economic analysis can be used in
formulating polices.
Meaning & Definition:
In the words of E. F. Brigham and J. L. Pappas Managerial Economics is “the applications of
economics theory and methodology to business administration practice”.
Managerial Economics bridges the gap between traditional economics theory and real business
practices in two days. First it provides a number of tools and techniques to enable the manager to
become more competent to take decisions in real and practical situations. Secondly it serves as
an integrating course to show the interaction between various areas in which the firm operates.
M. H. Spencer and Louis Siegelman explain the “Managerial Economics is the integration of
economic theory with business practice for the purpose of facilitating decision making and
forward planning by management”.
Nature of Managerial Economics
Managerial economics is, perhaps, the youngest of all the social sciences. Since it originates
from Economics, it has the basis features of economics, such as assuming that other things
remaining the same (or the Latin equivalent ceteris paribus). This assumption is made to simplify
the complexity of the managerial phenomenon under study in a dynamic business environment
so many things are changing simultaneously. This set a limitation that we cannot really hold
other things remaining the same. In such a case, the observations made out of such a study will
have a limited purpose or value. Managerial economics also has inherited this problem from
economics.
The other features of managerial economics are explained as below:

(a) Close to microeconomics: Managerial economics is concerned with finding the solutions for
different managerial problems of a particular firm. Thus, it is more close to
microeconomics.
(b) Operates against the backdrop of macroeconomics: The macroeconomics conditions of the
economy are also seen as limiting factors for the firm to operate. In other words, the
managerial economist has to be aware of the limits set by the macroeconomics conditions
such as government industrial policy, inflation and so on.
(c) Normative statements: A normative statement usually includes or implies the words
‘ought’ or ‘should’. They reflect people’s moral attitudes and are expressions of what a
team of people ought to do. For instance, it deals with statements such as ‘Government of
India should open up the economy. Such statement are based on value judgments and
express views of what is ‘good’ or ‘bad’, ‘right’ or ‘ wrong’.
(d) Prescriptive actions: Prescriptive action is goal oriented. Given a problem and the
objectives of the firm, it suggests the course of action from the available alternatives for
optimal solution. If does not merely mention the concept, it also explains whether the
concept can be applied in a given context on not.
(e) Applied in nature: ‘Models’ are built to reflect the real life complex business situations
and these models are of immense help to managers for decision-making. The different areas
where models are extensively used include inventory control, optimization, project
management etc. In managerial economics, we also employ case study methods to
conceptualize the problem, identify that alternative and determine the best course of action.
(f) Offers scope to evaluate each alternative: Managerial economics provides an opportunity
to evaluate each alternative in terms of its costs and revenue. The managerial economist can
decide which is the better alternative to maximize the profits for the firm.
(g) Interdisciplinary: The contents, tools and techniques of managerial economics are drawn
from different subjects such as economics, management, mathematics, statistics,
accountancy, psychology, organizational behavior, sociology and etc.
(h) Assumptions and limitations: Every concept and theory of managerial economics is based
on certain assumption and as such their validity is not universal. Where there is change in
assumptions, the theory may not hold good at all.

Scope of Managerial Economics:

THE MAIN AREAS OF MANAGERIAL ECONOMICS:

1. Demand decisions.
2. Input-output decision
3. Price-output decision
4. Price-related decision
5. Investment decision
6. Economic forecasting and forward planning.

Managerial economics relationship with other disciplines:

Many new subjects have evolved in recent years due to the interaction among basic disciplines.
While there are many such new subjects in natural and social sciences, managerial economics
can be taken as the best example of such a phenomenon among social sciences. Hence it is
necessary to trace its roots and relationship with other disciplines.
1. Relationship with economics
2. Management theory and accounting
3. Managerial Economics and mathematics
4. Managerial Economics and Statistics
5. Managerial Economics and Operations Research
6. Managerial Economics and the theory of Decision- making
7. Managerial Economics and Computer Science
DEMAND ANALYSIS
Introduction & Meaning:
Demand in common parlance means the desire for an object. But in economics demand is
something more than this. According to Stonier and Hague, “Demand in economics means
demand backed up by enough money to pay for the goods demanded”. This means that the
demand becomes effective only it if is backed by the purchasing power in addition to this there
must be willingness to buy a commodity.
Law of Demand:
Law of demand shows the relation between price and quantity demanded of a commodity in the
market. In the words of Marshall, “the amount demand increases with a fall in price and
diminishes with a rise in price”.
A rise in the price of a commodity is followed by a reduction in demand and a fall in price is
followed by an increase in demand, if a condition of demand remains constant.
The law of demand may be explained with the help of the following demand schedule.
Demand Schedule.

Price of Apple (In. Rs.) Quantity Demanded

10 1

8 2

6 3

4 4

2 5

When the price falls from Rs. 10 to 8 quantity demand

increases from 1 to 2. In the same way as price falls,
quantity demand increases on the basis of the demand
schedule we can draw the demand curve.
The demand curve DD shows the inverse relation
between price and quantity demand of apple. It is downward sloping.
Assumptions:
Law is demand is based on certain assumptions:
1. This is no change in consumers taste and preferences.
2. Income should remain constant.
3. Prices of other goods should not change.
4. There should be no substitute for the commodity
 5. The commodity should not confer at any distinction
6. The demand for the commodity should be continuous
7. People should not expect any change in the price of the commodity

Exceptional demand curve:

Sometimes the demand curve slopes upwards from left to right. In this case the demand curve
has a positive slope.

Price

When price increases from OP to Op1 quantity demanded also increases from to OQ1 and vice
versa. The reasons for exceptional demand curve are as follows.
1. Giffen paradox
2. Veblen or Demonstration effect
3. Ignorance
4. Speculative effect
5. Fear of shortage
6. Necessaries
Factors Affecting Demand:
There are factors on which the demand for a commodity depends. These factors are economic,
social as well as political factors. The effect of all the factors on the amount demanded for the
commodity is called Demand Function.
These factors are as follows:
1. Price of the Commodity
2. Income of the Consumer
3. Prices of related goods
4. Tastes of the Consumers
5. Wealth
6. Population
7. Government Policy
8. Expectations regarding the future:
9. Climate and weather
 10. State of business
ELASTICITY OF DEMAND
Elasticity of demand explains the relationship between a change in price and consequent change
in amount demanded. “Marshall” introduced the concept of elasticity of demand. Elasticity of
demand shows the extent of change in quantity demanded to a change in price.
Elastic demand: A small change in price may lead to a great change in quantity demanded. In
this case, demand is elastic.
In-elastic demand: If a big change in price is followed by a small change in demanded then the
demand in “inelastic”.
Types of Elasticity of Demand:
There are three types of elasticity of demand:
1. Price elasticity of demand
2. Income elasticity of demand
3. Cross elasticity of demand

1. Price elasticity of demand:

Marshall was the first economist to define price elasticity of demand. Price elasticity of demand
measures changes in quantity demand to a change in Price. It is the ratio of percentage change in
quantity demanded to a percentage change in price.
Proportionate change in the quantity demand of commodity
Price elasticity = ------------------------------------------------------------------
Proportionate change in the price of commodity
There are five cases of price elasticity of demand
A. Perfectly elastic demand:
When small change in price leads to an infinitely large change is quantity demand, it is called
perfectly or infinitely elastic demand. In this case E=∞

The demand curve DD1 is horizontal straight

line. It shows the at “OP” price any amount is
demand and if price increases, the consumer
will not purchase the commodity.
B. Perfectly Inelastic Demand
In this case, even a large change in price fails to
bring about a change in quantity demanded.

C. Relatively elastic demand:

Demand changes more than proportionately to a change
in price. i.e. a small change in price loads to a very big
change in the quantity demanded. In this case
E > 1. This demand curve will be flatter.

D. Relatively in-elastic demand.

Quantity demanded changes less than proportional
to a change in price. A large change in price leads to
small change in amount demanded. Here E < 1.
Demanded carve will be steeper.

E. Unit elasticity of demand:

The change in demand is exactly equal to the
change in price. When both are equal E=1 and elasticity if said to be unitary.

When price falls from ‘OP’ to

‘OP1’ quantity demanded increases
from ‘OP’ to ‘OP1’, quantity
demanded increases from ‘OQ’ to
‘OQ1’. Thus a change in price has
resulted in an equal change in quantity
demanded so price elasticity of demand
is equal to unity.

2. Income elasticity of demand:

Income elasticity of demand shows the change in quantity demanded as a result of a change in
income. Income elasticity of demand may be slated in the form of a formula.

Proportionate change in the quantity demand of commodity

Income Elasticity = ------------------------------------------------------------------
Proportionate change in the income of the people

Income elasticity of demand can be classified in to five types.

A. Zero income elasticity:

Quantity demanded remains the same, even though money income increases. Symbolically, it
can be expressed as Ey=0. It can be depicted in the following way:

As income increases from OY to OY1, quantity demanded never changes.

B. Negative Income elasticity:
When income increases, quantity demanded falls. In this case, income elasticity of demand is
negative. i.e., Ey < 0.
When income increases from OY to OY1, demand falls from OQ to OQ1.
c. Unit income elasticity:
When an increase in income brings about a proportionate increase in quantity demanded, and
then income elasticity of demand is equal to one. Ey = 1

When income increases from OY to OY1, Quantity demanded also increases from OQ to OQ1.
d. Income elasticity greater than unity:
In this case, an increase in come brings about a more than proportionate increase in quantity
demanded. Symbolically it can be written as Ey > 1.

E. Income elasticity leas than unity:

When income increases quantity demanded also increases but less than proportionately. In this
case E < 1.
3. Cross elasticity of Demand:
A change in the price of one commodity leads to a change in the quantity demanded of another
commodity. This is called a cross elasticity of demand. The formula for cross elasticity of
demand is:

Proportionate change in the quantity demand of commodity “X”

Cross elasticity = -----------------------------------------------------------------------
Proportionate change in the price of commodity “Y”

a. In case of substitutes, cross elasticity of demand is positive. Eg: Coffee and Tea
When the price of coffee increases, Quantity demanded of tea increases. Both are substitutes.

b. In case of compliments, cross elasticity is negative. If increase in the price of one commodity
leads to a decrease in the quantity demanded of another and vice versa.
c.

In case of unrelated commodities, cross elasticity of demanded is zero. A change in the price of
one commodity will not affect the quantity demanded of another.

Factors influencing the elasticity of demand

1. Nature of commodity
2. Availability of substitutes
3. Variety of uses
4. Postponement of demand
5. Amount of money spent
6. Time
7. Range of Prices
DEMAND FORECASTING

METHODS OF DEMAND FORECASTING:

I.Survey method.
1) Survey of buyer’s intention.
A] Census method
B] Sample method.
2) Sales force opinion method.

II.Statistical methods
1) Trend projection method.
A] Trend line observation.
B] Least square method.
C] Time series analysis.
D] Moving average method.
E] Exponential smoothing.
2) Barometric techniques.
3) Simultaneous equations method.
4) Correlation & regression method.

III. Other methods

1) Expert opinion method
2) Test marketing.
3) Controlled experiments.
4) Judgmental approach.

I. Survey methods:-

Survey of buyer’s intention:-

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 her plans to buy of the given
product at a given point of time under particular conditions.
This is the most effective method because the buyer is the ultimate decision maker and
we are collecting the information directly from him.
The survey of the buyers can be conducted either by covering the whole population or by
selecting a sample group of buyers.

Advantages of the survey methods:-

1. Where the product is new in the market for which no data exists previously.
2. When the buyers are few and they are accessible.
3. When the cost of reaching them is not significant.
4. When consumers stick to their intentions.
5. When they are willing to disclose what they are willing to do.
Disadvantages:-
1. Survey may be expensive.
 2. Sample size and timing of survey.
3. Methods of sampling.
4. In consisted buying behavior.
Sales Force Opinions:-
Another source of getting reliable information about possible level of sales or demand for a
given product or services is the group of people who sell the same. Thus we can control the
limitation of cost and delays in contacting the costumers. The sales people are those who are in
constant touch with the main and large buyers of particular market. The sales force is capable of
assessing the likely reaction of the costumers in their territories quickly; giving the company’s
marketing strategy. It is less costly and can be conducted through telephones, fax, video
conferences and many more.
Here also there is a danger that salesmen may sometimes become biased with their views.
 The sales people are paid based on their results.
 Targets are set for the salesmen.
 The salary of the salesmen depends upon the targets.
 Incentives are paid to the salesmen who achieved the targets.
 Salespersons having more knowledge about the information of sources.
 Salesmen are cooperative.
II. Statistical Methods:-
For forecasting the demand for goods and services in the long-run, statistical and mathematical
methods are used considering the past data.
(a)Trend projection methods:-
This is based on past sales patterns. The necessary information is already available in company
files with different time periods.

There are five main techniques:

1. Trend line by observation.
2. Least square method.
3. Time series analysis.
4. Moving average method.
5. Exponential smoothing.

(1)Trend line by observation:-

It is easy and quick as it involves plotting the actual sales data on a chart and then
estimating just by observation when the trend line lies.

(2) Least square method:-

In this statistical method is used. The trend line is the basis to extrapolate the line for
future demand for the given product or service on graph. Here it is assumed that there is a
proportional exchange in sales over a period of time. In such a case the trend line equation is in
linear form.

The estimated linear trend equation of sales is written as:

S = x + y (T)
x & y have been calculated from past data.
S = sales;
T = year no. for which the forecast is made.

To find x & y values,

 ΣΣ S = N x + yΣΣ T
ΣΣΣ ST = x Σ T + yΣ (T * T )
S = sales;
T = year number
N = no. of years.

Example 1:

Year 1996 1998 2000 2002 2004

Sales (lakhs) 75 84 92 98 88

Estimate the sales for the years 2004 & 2006.

Sol:
Σ S = N x + yΣ T
Σ ST = x Σ T + yΣ (T * T )

Year Year no. (T) Sales (s) ST T*T

1992 1 75 75 1

1994 3 84 252 9

1996 5 92 460 25

1998 7 98 686 49

2000 9 88 792 81

ΣT = 25 ΣS=437 ΣST=2265 Σ(t*t)=165

Substituting the values in the formula,

437 = 5x + 25 y
2265 = 25x + 165 y

By solving these equations

x=77.4 & y=2;
Years 2004 & 2006 take on the year numbers 11 and 13 respectively.
By substituting the values in the trend equations x + y (T)
S 2002 = 77.4 + 2 (11)= 99.4 lakh units
S 20o4 = 77.4 + 2 (13)= 103.4 lakh units.
Thus the forecast sales for year 2004 & 2006 are 99.4 and 103.4 lakh units.

3) 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 forecasts that is
time series analysis.
 The product should have actively been traded in the market for quite sometime in the
past.
Considerable data on the performance of the product or service over significantly large
period should be available for better results under this method.
Time series emerge from a data when arranged chronologically, given significantly large
data.

The following 4 major components analyzed from time series while forecasting the demand.

Trend (T):
It also called as long term trend, is the result f basic developments in the population,
capital formation & technology. These developments relate to over a period of long time say 5 t0
10 years, not definitely over night. The trend is considered statistically significant when it has
reasonable degree of consistency. A significant trend is central and decisive factor considered
while preparing a long range forecast.

Cycle Trend (C):

It is wave like movement of sales inflation, during the period of inflation prices go up and
down.

Seasonal Trend (S):

More goods are sold in festivals seasons, weather factors, holidays.

Eratic Trend (E):

Results from the sporadic occurrence of strikes, riots etc.

4) MOVING AVERAGE METHOD:

This method considers that the average of past events determine the future events.
This method provides consistent results when the past events are consistent and
unaffected by wide changes.
The average keeps on moving depending upon the no. of years selected. Selection of no.
of years is the decisive factor in this method. Moving averages get updated as new information
flow in.
This method is easy to compute. One major advantage with this method is that the old
data can be dispensed with once the averages are calculated. These averages, not original data,
are further used as the forecast for next period. It gives equal weightage to data both in the recent
past and the earlier one.

Example: - Compute 3-day moving average from the following daily sales data.

Date and month Daily sales (lakhs) 3-day moving average

Jan 1 40
Jan 2 44
Jan 3 48
Jan 4 45 44
Jan 5 53 45.7
Sol:-
To calculate 3-days moving avg
S4 = (40 + 44 + 48)/ 3 == 44
S5 = (44 + 48 + 45)/3 == 45.7

5) EXPONENTIAL SMOOTHING:
This is a more popular technique used for short-run forecasts. This method is an
improvement over moving averages method.

All time periods ( ranging from the immediate part to distant part ) here are given varying
weights , that is the value of the given variable in the recent times are given higher weights and
the values of the given variable in the distant past are given relatively lower weights for further
processing.
The formula used for exponential smoothing,
S t + 1 == c S T + (1 -- C) S MT
S t + 1 == exponentially smoothed average for New Year.
S t == actual data in the most recent part.
S Mt == most recent smoothed forecast.
C = smoothing constant.
If the smoothing constant ` c ` is higher, higher weight is given to the most recent
information. The value of `c` varies between `0` and inclusive and the exact values of `c` is
determined by the magnitude of random variation. If the magnitude of random variations is large,
lower values of c are assigned and vice versa. However, it is considered that a value between 0.1
& 0.2 is more appropriate in most of cases.

BAROMETRIC TECHNIQUES:
Where forecasting based on time series analyses or extrapolation may not yield
significant results, barometric techniques can be made use of . Under the barometric technique,
one set of data is use to predict another set.
To forecast demand for a particular product or service, use some other relevant indicator which is
known as a barometer of future demand.
To assess the demand for services in India and abroad. We can see the percentage of
population in each occupation. In the US 78%of the labour force is employed in services 15% of
them in manufacturing. In India, according to 1991 census, 21%of work force is engaged in
services, 13%in manufacturing, and 67% in agriculture. The world over, an increase in
prosperity has been accomplished by an increase in demand for services.

Simultaneous Equation Method

In this method al variables are simultaneously considered, with the conviction that every
variable influences the other variable in an economic environment. Hence the set of eqns equal
the no. of dependent variable which is also called endogenous variables.
This method is more practical in the sense that it requires to estimate the future values of
only predetermined variables. it is difficult to compute where the no. of eqns is larger.
CORRELATION AND REGRESSION METHODS:
 Correlation and regression methods are statistical techniques. Correlation describes the
degree of association between 2 variables such as sales and advertisement expenditure, when the
2 variables tend to change together then they are said to be correlated. The extent to which they
are correlated can be measured by correlation coefficient.
In regression analysis an equation is estimated which best fits in the sets of observations
of dependent variables and independent variables. The main advantage of this method is that it
provides the values of independent variables from with in the model itself. Thus it frees the
forecaster from the difficulty of estimating them exogenously.
III. OTHER METHODS

EXPERT OPINION:
Well informed persons are called experts. Experts constitute yet another source of
information. These persons are generally the generally the outside experts and they do not have
any vested interests in the results of a particular survey.
Main advantages are:
1. Results of this method would be more reliable as the expert is unbiased, has no direct
commercial involvement in its primary activities.
2. Independent demand forecast can be made relatively quick and cheap.
3. This method constitutes a valid strategy particularly in the case of new products.
The main disadvantage is that an expert can’t be held accountable if his estimates are found
incorrect.
TEST MARKETING:
It is likely that opinions give in by buyers, sales man or other experts may be at times,
misleading. This is the reason why most of the manufacturers favour to test there product or
service in a limited matter as test-run before they launch their products nation wide.
Advantages:
1. Acceptability of the product can be judged in a limited market.
2. Before its too late, the corrections can be made to product design if necessary, thus
major catestrophy, in terms of failure, can be avoided.
3. The customer psychology is more focused in this method and the product and services
are aligned or redesigned accordingly to gain more customer acceptance.
Disadvantages:
1. It reveals the quality of product to the competitors before it is launched in his wider
market. The competitors may bring about a similar product or often misuse the results
of the test marketing against the given company.
2. It is not always easy to select a representative audience or market.
3. It may also be difficult to extrapolate the feedback received from such a test market,
particularly where the chosen market is not fully representative.

CONTROLLED EXPERIMENTS:
Controlled experiments refer to such exercises where some of the major determinants of
demand are manipulated to suit to the customers with different tastes and preferences, income
groups and such others. This method can not provide better results, unless these markets are
homogenous in terms of, tastes and preferences of customers, their income and soon.
This method is in infancy state and not much tried because of following reasons:
It is costly and time consuming. It involves elaborate process of studying different
markets and different permutations and combinations that push the product aggressively. If it
fails in one market, it may affect other markets also.
JUDGEMENT APPROACH:
When none of the above methods are directly related to the given product or service, the
management has no other alternative 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:

1. Historical data for significantly long period is not available.

2. Turning points in terms of policies or procedures or casual factors cannot be precisely
demanded.
3. Sales fluctuations are wide and significant.

Assignment-Cum-Tutorial Questions

A. Questions testing the remembering / understanding level of students

I) Objective Questions (10 to 15)
1. Managerial Economics is close to_micro___ economics.
2. Managerial Economics is more of ____interdisciplinary, pragmatic, and applied_____ in
nature.
3. Any activity aimed at earning or spending money is called ___economic_____activity”.
4. When a great change in price leads small change in the quantity demand, we call it
____inelastic demand____.
5. The theory of firm is also called as___Transaction cost theory,_____property rights approach”
_____.
6. When PE =1 (Price Elasticity of Demand is one), we call it ___unitary elasticity___.
7. Estimation of future possible demand is called ____Demand forecasting__.
8. Demand for a commodity depends on the relative price of its _____commodity itself,
product's price___
9. An upward sloping demand curve is called _____Giffen good,Veblen Goods__ .
10. The degree of responsiveness of quantity demanded to a change in price of the product is
known as______Price elasticity of demand__

II) Descriptive Questions(6 to 8)

1. “Managerial Economics is integration of economic theory and with business practice for
the purpose of facilitating decision making and forward planning” explain.
2. Explain in law of demand. What do you mean by shifts in demand curve?
3. What is meant by elasticity of demand? How do you measure it?
4. Discuss the various techniques of demand forecasting?
5. What are the various factors that influence the demand for a mobile hand set?
 6. Explain exceptional demand curve with suitable examples.
7. How do you forecast the demand for washing machines?

B. Question testing the ability of students in applying the concepts.

I) Multiple Choice Questions: (10 to 15)
1. The rise in price of two wheeler leads to fall in demand for fuel and vice-versa. These
goods are_________ ( ) ( )
Substitutes (b) Complimentary goods (c) Giffen goods (d) Veblen goods.
(a) Complimentary goods(c) Giffen goods (d) Veblen goods.
2. When a great change in price leads to small change in the quantity demand, we call it
________.
(a) Elastic Demand (b) Positive Demand
(c) Inelastic Demand (d) None
3. In the short run, firms can adjust their production by changing their
(a) fixed factors (b) variable factors
(b) semi- fixed factors (d) both (a) and (b)
4. In case of Giffen goods the demand curve
(a) Slopes downwards (c) slopes upwards
(b) Intersects supply curve (d) meets cost curve.
5. Demand for a commodity depends on _________ ( )
(a) Price of that commodity (b) Price of related commodity
(c) Income (d) All of the above
6. If the price elasticity of demand for a good is 0.75, the demand for the good can be
described as:
(a) Normal (c) elastic
(b) Inferior (d) inelastic.

7. Economists typically assume that the owners of firms wish to

(a) Produce efficiently. (c) Maximize sales revenues.
(b) Maximize profits. (d) All of these.

8. Isoquants that are downward-sloping straight lines imply that the inputs
(a) are perfect substitutes. (c) are imperfect substitutes.
(b) cannot be used together. (d) must be used together in a certain proportion.

9. Demand forecasting is important for __________ ( )

a. Price Control b. Business Planning c. Competitive Strategy d. All of Above
10. “Coffee and Tea are the ________ goods”. ( )
(a) Relative (b) Complementary
(c) Substitute (d) None
11. Consumers Survey method is one of the Survey Methods to forecast the__. ( )
(a) Sales (b) Revenue
(c) Demand (d) Production
12. When PE =1 (Price Elasticity of Demand is one), we call it ___. ( )
(a) Perfectly Elastic demand (b) Perfectly inelastic demand
(c) Unit elastic demand (d) Relatively Elastic demand
13. When Income Elasticity of demand is Zero (IE = 0), It is termed as ___. ( )
(a) Negative Income Elasticity (b) Unit Income Elasticity
(c) Zero Income Elasticity (d) Infinite Income Elasticity
14. Demand for a commodity refers to___________ ( )
(a) Desire for a Commodity (b) Need for a commodity
(c) Quantity demanded of that commodity
(d) Quantity of the commodity demanded at a certain price during any particular period of time
15. A single point on the Demand curve shows ___________ ( )
(a) Demand & Supply relationship (b) Price & Supply relationship
(c) Price & Quantity Demanded relationship s (d) None of these

II) Problems:
1) If the price of a product is 1000/- and the quantity demand is 10,000 units. When the price
falls to 800/- and the quantity demanded rises to 16,000units, calculate the price elasticity
of demand
2) Determine the Advertising elasticity of demand given that
 The quantity demanded for product M is 10,000 units per day at a monthly advertising
budget of Rs.10,000
 The monthly advertising budget is slashed to Rs.5000; the quantity demanded will fall
down to 30,000 units per day.