Answer 1

Understanding and usage of the formula

Price elasticity of demand is defined as the change in quantity demanded of a good or

commodity as a result of a change in the market price of the good or commodity.
It is represented as-
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
Price elasticity of demand =
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒

The formula used for calculating price elasticity of demand is given below –
∆𝑄 𝑃
𝑒𝑝 = X
∆𝑃 𝑄
Where,

𝑒𝑝 = Price elasticity of demand

P = Initial price
∆P = Change in price
Q = Initial quantity demanded
∆Q = Change in quantity demanded

Price elasticity grouped into five main categories; those are as follows-
• Perfectly elastic demand- Elasticity of Demand = ∞
• Perfectly inelastic demand- Elasticity of demand = 0

• Relatively elastic demand- Elasticity of demand is greater than 1 and is

represented as 𝑒𝑝 > 1.
 • Relatively inelastic demand- Price elasticity is less than 1 and represented as
𝑒𝑝 < 1.

• Unitary elastic demand- Price elasticity is equal to 1 and is represented as 𝑒𝑝

=1.

To summarize the categories, below is the table:

Procedure / Steps
Here percentage method is used to calculate the price elasticity.

𝑄2 − 𝑄1 𝑃2 − 𝑃1
𝑒𝑝 = ÷
𝑄1 𝑃1

Solution:

Price elasticity:
Price is 6 and Quantity is 0

𝑒𝑝 = -

Price is 5 and Quantity is 100

100 − 0 5 −6
𝑒𝑝 = ÷
0 6

= -∞

Price is 4 and Quantity is 200

200 − 100 4 −5
𝑒𝑝 = ÷
100 5
=-5

Price is 3 and Quantity is 300

300 − 200 3 −4
𝑒𝑝 = ÷
200 4
=-2

Price is 2 and Quantity is 400

400 − 300 2 −3
𝑒𝑝 = ÷
300 3
=-1

Price is 1 and Quantity is 500

500 − 400 1 −2
𝑒𝑝 = ÷
400 2
= - 0.5

Price is 0 and Quantity is 600

 600 − 500 0 −1
𝑒𝑝 = ÷
500 1
= - 0.2

Total revenue

Price is 6 and Quantity is 0

𝑇𝑅0 = 𝑃0 x 𝑄0
=6x0
=0

Price is 5 and Quantity is 100

𝑇𝑅1 = 𝑃1 x 𝑄1
= 5 x 100
= 500

Price is 4 and Quantity is 200

𝑇𝑅2 = 𝑃2 x 𝑄2
= 4 x 200
= 800

Price is 3 and Quantity is 300

𝑇𝑅3 = 𝑃3 x 𝑄3
= 3 x 300
= 900

Price is 2 and Quantity is 400

𝑇𝑅4 = 𝑃4 x 𝑄4
= 2 x 400
= 800

Price is 1 and Quantity is 500

𝑇𝑅5 = 𝑃5 x 𝑄5
= 1 x 500
= 500

Price is 0 and Quantity is 600

𝑇𝑅6 = 𝑃6 x 𝑄6
= 0 x 600
=0

Marginal Revenue

Price is 6 and Quantity is 0

𝑀𝑅0 = 0

Price is 5 and Quantity is 100

𝑀𝑅1 = 𝑇𝑅1 - 𝑇𝑅0 ÷ 𝑄1 - 𝑄0

= 500 - 0 ÷ 100 - 0
=5

Price is 4 and Quantity is 200

𝑀𝑅2 = 𝑇𝑅2 - 𝑇𝑅1 ÷ 𝑄2 - 𝑄1

= 800 – 500 ÷ 200 - 100
=3

Price is 3 and Quantity is 300

𝑀𝑅3 = 𝑇𝑅3 - 𝑇𝑅2 ÷ 𝑄3 - 𝑄2

= 900 – 800 ÷ 300 - 200
=1

Price is 2 and Quantity is 400

𝑀𝑅4 = 𝑇𝑅4 - 𝑇𝑅3 ÷ 𝑄4 - 𝑄3

= 800 – 900 ÷ 400 - 300
=-1

Price is 1 and Quantity is 500

𝑀𝑅5 = 𝑇𝑅5 - 𝑇𝑅4 ÷ 𝑄5 - 𝑄4

= 500 – 800 ÷ 500 - 400
=-3

Price is 0 and Quantity is 600

𝑀𝑅6 = 𝑇𝑅6 - 𝑇𝑅5 ÷ 𝑄6 - 𝑄5

= 0 – 500 ÷ 600 - 500
=-5

We get the following table after calculating the Price elasticity, Total revenue and
Marginal revenue:
 Total Marginal Price
Price Quantity
Revenue Revenue Elasticity
6 0 0 - -
5 100 500 5 -∞
4 200 800 3 -5
3 300 900 1 -2
2 400 800 -1 -1
1 500 500 -3 -0.5
0 600 0 -5 -0.2

Correct Answer & Interpretation

At all points, price elasticity is less than 1 (𝑒𝑝 < 1) which means it is relatively inelastic
demand.
There are three types of revenue- Total revenue, Marginal Revenue and Average
Revenue.
Total revenue- The total receipts from the selling of a given quantity of a product are
referred to as a company's total revenue (TR).
Formula:
Total Revenue = Quantity x Price

Marginal Revenue- The revenue generated by selling an additional unit of a product is

referred to as a firm's marginal revenue (MR).
Formula-
MRn = TRn-TRn-1

Where MRn = marginal revenue of nth unit (additional unit)

TRn = total revenue from n units
TRn-1 = Total revenue from (n – 1) units
n = number of units sold.

Average revenue- The revenue earned per unit of output sold is known as a firm's
average revenue (AR).
Formula:
Average Revenue= Total revenue/Total number of units sold

Relationship between AR and MR

Since marginal revenue (MR) can be positive, zero, or negative, we can say that it can
be less than average revenue (AR). AR also represents the price of a product that is
always positive.
The relationship between average revenue and marginal revenue can be explained
under pure competition, monopoly or monopolistic competition or imperfect competition.
Monopoly market: MR < AR
A firm selling an output in a monopoly market, where a single firm sells to many
customers, experiences MR < AR. The demand curve is negatively sloped in this case.

11

10

1 2 3 4 5 6 7 8 9 10

Pure competition (Perfectly competitive market): MR=AR

MR=AR happens when there are several sellers and buyers of a commodity. In such a
case, firms sell their goods at the current market price in order to stay in business.
The same is shown graphically below where MR=AR.
 11

10

1 2 3 4 5 6 7 8 9 10

Answer 2

Introduction
Any company, particularly in today's fast-paced world, entails some level of risk and
uncertainty. If these risks are not mitigated in a timely manner, organizations will suffer
significant losses. Organizations may mitigate these threats by forecasting potential
demand or revenue for their goods or services. Market forecasting is the method of
projecting the demand for an organization's goods or services in the future over a given
time span.
Demand forecasting is the method of estimating an expected prediction of consumer
demand based on historical sales data. Demand Forecasting provides companies with
an estimation of the number of products and services that their consumers will purchase
in the near future. Demand Forecasting influences critical market expectations such as
turnover, profit margins, cash flow, capital spending, risk assessment and risk
mitigation, capacity planning, and so on.

There are certain factors which influence demand forecasting:

• Prevailing economic conditions - Demand forecasting can be influenced by an
economy's shifting price levels, national and per capita income, consumer
spending patterns, saving and investment habits, job level, and so on.
• Existing conditions of the industry - The general conditions of the market in which
the organization operates also have an effect on the estimation of demand for its
goods and services.
• Existing conditions of the organization - The internal state of an organization has
an effect on demand forecasting as well. Various factors within the organization
influence demand forecasting, including plant size, product quality, product price,
advertisement, and so on.
• Prevailing market conditions - Changes in market factors, such as changes in the
prices of commodities, changes in customer perceptions, tastes, and
preferences, and changes in the prices of related goods, all have an effect on the
demand for an organization's products and services.
• Sociological conditions- Sociological variables such as population size and
density, age group, education level, family income, social knowledge, and so on
have a significant effect on an organization's demand forecasts.
 • Psychological conditions- Psychological factors, such as changes in customer
behaviour, habit, perception, cultural and religious values, and so on, have a
significant impact on an organization's demand forecast.
• Competitive conditions- A market is made up of many organisations that sell
similar goods. This increases market competitiveness, which has an effect on
demand forecasted by organisations.

Concept and Application

Demand forecasting is the method of anticipating future demand for an organization's

products or services. It is also known as sales forecasting because it includes predicting
an organization's potential sales figures.
Demand forecasting assists a company in making various business decisions, such as
coordinating the manufacturing process, buying raw materials, handling assets, and
determining the price of its goods. Organizations can forecast demand either internally
by guess estimates or externally through specialized consultants or market research
agencies.

Demand forecasting methods are classified into two types: Qualitative techniques and
Quantitative techniques.
Qualitative techniques- In order to forecast demand, qualitative techniques depend on
collecting data on consumer purchasing behavior from experts or conducting surveys.
These methods are usually used to render short-term demand forecasts.
There are different types of qualitative techniques:
Survey Method- In the short run, survey approaches are the most widely used methods
of forecasting demand. This approach anticipates demand by relying on consumers'
potential buying plans and intentions. An company conducts customer surveys to
assess the need for its current goods and services and forecast potential demand
accordingly. This method further constitutes of a) complete enumeration survey, b)
sample survey.
Opinion polls- Opinion polling strategies include polling those with knowledge of industry
patterns, such as sales managers, marketing experts, and consultants. The following
are the most widely used opinion polling approaches- a) Sales force composite, b)
Delphi method and c) Test marketing.
Quantitative techniques- Statistical methods are commonly used in quantitative
demand forecasting techniques. Demand is forecasted using historical data in these
techniques. These approaches are commonly used to make long-term demand
forecasts.
There are different types of quantitative techniques-
Time series analysis- A time series is a sequential order of values of a variable (called a
trend) at equal time intervals. Using patterns, an organization can forecast demand for
its goods and services for the foreseeable future.
There are four main elements of this analysis:
• Secular trend
• Cyclical variations
• Seasonal variations
• Irregular variations
Smoothing techniques- Smoothing methods are used to exclude spontaneous variations
from historical demand. This aids in the identification of market trends and levels that
can be used to forecast future demand.
The two popular approaches used in demand forecasting smoothing techniques are:
• Simple moving average method
• Weighted moving average method
Barometric method- The barometric method, also known as the leading indicators
approach to demand forecasting, is used to predict on future patterns based on current
developments.
It used the following indicators:
• Leading indicators
• Coincident indicators
• Lagging indicators
Econometric methods- Econometric approaches forecast demand by using statistical
instruments coupled with economic theories to determine different economic variables
(for example, price increases, consumer income levels, changes in economic policies,
and so on).

Conclusion
Demand forecasting is an important component of revenue forecasting and demand
planning efforts. Based on historical sales data, a market forecast is used to estimate
potential consumer demand.
The market research forecasting methodology and the Delphi forecasting approach are
two forms of demand forecasting processes.
Accurate forecasts aid in a variety of activities, ranging from making critical business
decisions to improving inventory management techniques.
Demand forecasting enables companies to make more educated decisions on
everything from inventory planning to supply chain management. Businesses need a
system to reliably predict demand as consumer preferences change faster than ever.

Answer 3
3 a)

Understanding and usage of the formula

Elasticity is a summary indicator of how market fluctuations influence supply or demand

for a particular commodity in economics.
According to the law of supply, there is a clear relationship between the amount
supplied and the price of a good. This is a very qualitative argument, to be sure.
However, commodity markets vary in ways we cannot even imagine. Surprisingly, the
principle of supply elasticity manages all of this with ease.
The elasticity of supply provides a quantitative relationship between a commodity's
supply and its price. In this case, we can make use of the principle of elasticity to
express the numerical change in supply with the change in the price of a product. It
should be noted that elasticity can also be measured in relation to the other supply
determinants.
However, the price of a product is the most important factor regulating its availability. As
a result, we generally refer to price elasticity of supply. The price elasticity of supply is
the ratio of a commodity's percentage change in price to its percentage change in
quantity supplied.
Elasticity of supply is a calculation of how much a product's quantity changes in
response to a change in its price.

We can express the elasticity of supply mathematically as-

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑠𝑢𝑝𝑝𝑙𝑖𝑒𝑑 𝑜𝑓 𝑐𝑜𝑚𝑚𝑜𝑑𝑖𝑡𝑦 𝑋

𝑒𝑠 =
𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑐𝑜𝑚𝑚𝑜𝑑𝑖𝑡𝑦 𝑋

Percentage change in quantity supplied will be calculated as follows-

𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 (∆𝑆)

=
𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑠𝑢𝑝𝑝𝑙𝑖𝑒𝑑 (𝑆)

We can calculate elasticity of supply by using the following formula-

∆𝑆 𝑃
𝑒𝑠 = x
∆𝑃 𝑆
Where, ∆S = S1 – S
∆P= P1 – P

In addition to the approach described above, there are two other methods for calculating
the price elasticity of supply, both of which make use of the supply curve. The elasticity
can be calculated at a particular point on the supply curve, known as point elasticity, or
between two prices, known as arc-elasticity.
Procedure / Steps

In the given question, we will take the new price (P1) as y.

𝑒𝑠 = 2
S= 200
S1= 250
P= 8
P1= y

Putting these values in the formula,

∆𝑆 𝑃
𝑒𝑠 = x
∆𝑃 𝑆
250−200 8
2= x
𝑦−8 200
50
2= x 0.04
𝑦−8

2(y-8) = 50 x 0.04
2y-16 = 2
2y = 2+16
18
y=
2

y=9

Hence, the firm will supply 250 units at Rs. 9/unit.

Correct Answer & Interpretation

If 𝑒𝑠 of a good is 2 and a firm supplies 200 units at price of Rs 8 per unit, then at Rs. 9
per unit the firm will supply 250 units.
3b)
Understanding and usage of the formula

Price elasticity of supply is a measure of the responsiveness of quantity supplied to

price changes. A firm must understand how quickly and effectively it can react to
changing market conditions, especially price changes.
There are five different categories of price elasticity of supply:
• Perfectly inelastic- When the price elasticity of supply formula equals 0, we
have perfect inelastic supply. That is, when the price changes, the amount
supplied does not change. Items with small amounts, such as land or paintings
by deceased artists, are examples.
• Unit elastic- The price elasticity of supply of unit elastic supply is one, which
means that the amount supplied changes by the same percentage as the price
adjustment.
• Perfectly elastic- The price elasticity of supply for perfectly elastic supply is
infinite, which means that the quantity supplied at a given price is limitless, but no
quantity can be supplied at any other price. There are almost no real-world
examples of this, where even a minor price adjustment will dissuade or prevent
product manufacturers from supplying even a single product.
• Relatively inelastic- For relatively inelastic supply, the price elasticity of supply
ranges between 0 and 1. Nuclear power is an example of an inelastic good, with
a long lead time due to the design, technological know-how, and long ramp-up
period for plants.
• Relatively elastic- A price elasticity of supply greater than one indicates that
supply is relatively elastic, with the amount supplied changing by a greater
percentage than the price shift. A fidget spinner is an example of a product that is
simple to produce and distribute. The resources to manufacture additional
spinners are readily available, and the overall cost to scale up or down
production will be negligible.
We can calculate price elasticity of supply in the below-mentioned method-
Percentage change in quantity supplied ÷ Percentage change in price
%∆S
𝑒𝑠 =
%∆P

Where,
𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 (∆𝑆)
%∆S =
𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑠𝑢𝑝𝑙𝑖𝑒𝑑 (𝑆)
𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 (∆𝑃)
%∆P =
𝑂𝑟𝑖𝑔𝑖𝑛𝑎𝑙 𝑝𝑟𝑖𝑐𝑒 (𝑃)

Procedure and steps

From the question we already have, %∆P = 0.15

Now, using the formula-
 %∆S
𝑒𝑠 =
%∆P

∆𝑆= 𝑆1 - S
= 345-300
= 45
45
%∆S =
300

= 0.15
0.15
𝑒𝑠 =
0.15
=1

Correct Answer & Interpretation

If the price of soya bean oil rises by 15%, the supply would increase from 300 to 345
units, resulting in a supply elasticity of one.
The presence of positive market elasticity of supply indicates that there is a direct
relationship between a commodity's, product's, or service's supply and its price.
This implies that the supply is unitary elastic. Supply is unitary elastic when the
proportionate change in quantity supplied equals the proportionate change in price of a
good. Elastic supply is equal to one in this case (𝑒𝑠 =1)
The supply curve is a straight line that starts at the origin and ends at the destination.
Unitary elastic supply is represented graphically as a straight line beginning at the
origin.

Image source-
https://corporatefinanceinstitute.com/resources/knowledge/economics/unit-elastic/
https://www.geektonight.com/types-of-price-elasticity-of-demand/
https://www.veeqo.com/us/blog/demand-forecasting
https://www.geektonight.com/types-of-price-elasticity-of-demand/
http://www.bizzlingo.com/techniques-of-demand-forecasting/
https://www.toppr.com/guides/business-economics/theory-of-supply/elasticity-of-supply/