NMIMS Global Access

School for Continuing Education (NGA-SCE)

Course: Business Economics
Internal Assignment Applicable for December 2022 Examination

Q1. Demand forecasting in an organisations plays a vital role in business organisations.

It provides reasonable data for the organization's capital investment and expansion decision.
Keeping the above statement in consideration. Discuss the various steps involved in demand
Forecasting.
Ans.
Introduction to demand forecasting:

Demand forecasting is the mechanism which help an organization to predict the demand of goods or
services among consumers based on analysing the historical data or past trend.

It helps the business to take vital decision on supply and manufacturing of product [like production
process, purchase raw material, cash flow, transport arrangement etc. ] of products or goods, so that
business can focus to increase their sales and revenue for current as well as future period.

In today’s era, businesses are exploring the technique of JIT [JUST-IN-TIME] to minimise their cost by
producing products as and when needed. IT helps to reduce the excess storage of raw material,
extra labour and provide customer satisfaction, storage of end product. To implement JIT,
Organization need to proper site of demand among the customers in future so that they can make
sync between customer needs with their production. And can take crucial decision well in advance
like to make sync between already produced product, work-in-progress product and future
requirement of producing product, which ultimately impact the sales and revenues.

Demand forecasting can be done at Economy level, Industrial level, Organization level. It may be
short, medium and long term prediction.

Concepts:

It is and essential process to any organization, as it helps them to predict the demand [No Demand
No Business]. Without having the understanding, the demand, firms cannot take appropriate
decision about market behaviour, labour, cash flow, purchase raw material etc.

Organizations can take better decision by using the concept of demand forecasting. Some of them
are describe below.

1. Production of desire output: Organization can perform demand forecasting to identify the
pre -calculated or pre-determined output which help them to ready to face the factors
effecting the production in future [Physical cash, land, transportation, labour,staff etc. ]
advance.
2. Probable demand: Organization apply demand forecasting to predict the demand of their
products and services so that they can plan their production accordingly in the given period
of time.
3. Better control: Organization use this tool to take better control on their businesses to
understand the budgeting, cash flow, profit analysis etc.
4. Inventory controlling: Demand forecasting helps organisation to understand the inventory
management like raw material inventory, partial build or fully build product [ready for
 consume]. It helps them to take decision on time so that inventory should not have
exceeded or deficit based on demand in market.
5. Manpower Requirement: Help to identity how much requirement of employees would be
required based on demand analysis. It also gives site to organization that what skill
employee set would be required.

The following steps are included while implementing the demand forecasting process in an
organization:

1. Specifying the objectives: The purpose of demand forecasting should be specified

before starting the process to achieve desired result. Purpose can be as follow.
a. Short term or long term demand analysis of product.
b. Industry Demand or particular Organization demand.
c. Market demand analysis [Whole sale or retail].

2. Determining the time perspective: Timing for demand forecasting can be short term [2-
3 years] or it could be long term [10 and above]. Organisation have to consider multiple
factors [Economy condition, Government rule, climate changes etc.] while they chose
period for demand forecast.

3. Selecting the method for demand forecasting: There are multiple methods available to
drive the demand forecasting. organization should choose these methods vary carefully
because not all methods suitable for all type of demand forecast.

4. Collecting and analysing the data: Data is required for analysing the demand. selected
method applied on the collected data to extract meaningful data out because data was
collected in raw form and required cleaning before representation purpose.

5. Interpreting Outcome: After data is analysed, it is used to take estimate demand based
on the previous year’s behaviour of the business. Final report gets ready and submit to
take further business decision.

For Example: Case study of Reliance digital

Reliance digital has understood the requirement of data is going to increase exponential
in coming years because IOT [Internet-of-things], cloud computing concept is
implementing very fast these days like OTT platform implementation, accessing multiple
thing through internet data, better resolution, high speed data.
Also they have analysed the goods and services are provided by competitors on what
price. Are competitors full fill the requirement which will come in coming years?

They gather all this important information by use of demand forecasting technique and
prepare the market strategy accordingly.

Jio said while revenue will shift from voice to data over the next couple of years, the
overall industry revenue will grow to Rs 3 lakh crore by 2021 of which it will capture 50
per cent.

As per JIO, leading global consultants have forecast demand for data at 500-600 crore
GB per month. At a yield of Rs 50 per GB, it translates into Rs 3-3.6 lakh crore per year.
 Jio said after its entry, the domestic data market has expanded six times in less than six
months and the data tariff rate has also come down. It also feels that customers have
the ability to pay for data services and are willing to spend Rs 500 and above on digital
services per month.

Above numbers [or demand] enable JIO digital to take decision to invest in market which
will give them better output in terms of revenue in future, due to this they spent lot on
infrastructure cross all over India and give tough competition to their competitors leads
to grow exponential.

Conclusion:
Generally, organization use demand forecasting to find answer of multiple questions keeping
one goal in mind which is better and improved sales and revenue.
Organization is surrounded by multiple questions like how many units can they sell at
current prices in the next few years? Are prices likely to go up or down in the future? Are
they profitable? If next year they think you can sell 5% more product, how much more (or
less) will it cost them? Will they production costs increase or decrease? Can their existing
equipment handle the additional production? Will they need more labour? Will they need to
pay overtime? Will they need extra storage and/or production space? Will they arrange
extra transportation to transport product? How much physical cash they have so that they
can take decision of expansion or you are producing with full capacity?

And the tool which is available to identify the answer of above questions is DEMAND
FORCASTNG.

Q2. From the given hypnotical table Calculate Total Cost, Average Fixed Cost, Average
Variable cost and Marginal Cost.
Ans:
Introduction
The marginal cost is the change in total production cost that comes from making or producing
one additional unit. To calculate marginal cost, divide the change in production costs by the
change in quantity.
The purpose of analysing marginal cost is to determine at what point an organization can
achieve scale optimize production and overall operations. If the marginal cost of producing
one additional unit is lower than the per-unit price, the producer has the potential to gain a
profit.

Average cost or unit cost is equal to total cost divided by the number of units of a good
produced: Average cost help firms how they will choose to price their commodities.

Concept and Calculation

 Average Fixed cost refers to the fixed cost per unit of goods or services.
 Average variable cost refers to the variable cost per unit of goods or services.
 the marginal cost is the change in total production cost that comes from making one
additional unit.
 Total Total Average Average Average
Quantit Total Margina
Fixed Variabl Fixed Varibal Total
y Cost l Cost
Cost e Cost Cost e Cost Cost
0 100 0 100 0 0 0 0
1 100 20 120 100 20 120 20
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

Formula applied for calculating different costs:

1. Total cost = Total fixed cost + total variable cost

2. Average Fixed cost = Total fixed cost / total quantity
3. Average variable cost = Total variable cost / total quantity
4. Average total cost = (Average fixed cost + Average variable cost)
or (Total cost / total quantity)
5. Marginal cost = Change in cost / change in quantity

Below is the graphical representation of the above example:

Conclusion

The average cost vs. marginal cost is used for better decision-making by efficiently using
resources and identifying optimum production levels.

Q3 a. Suppose the monthly income of an individual increases from Rs 20,000 to Rs 25,000

which increases his demand for clothes from 40 units to 60 units. Calculate the income
elasticity of demand.

Ans.

Introduction

Income elasticity of demand is the ratio of the percentage change in quantity demanded of a
product to the percentage change in income.

Concept and numerical

Below is the formula for calculating income elasticity of demand.

Income Elasticity of Demand = Percentage change in quantity of demand

Percentage change in the income

Let’s first calculate the percentage change in demand of product.

Old demand for the product = 40 units

New demand for the product = 60 units
Percentage change in demand = (60 – 40) *100/ (40) = 50%

Now calculate percentage change in income.

Old price of product = 20,000

New price of product = 25,000
Percentage change in income = (25000 – 20000)*100/20000 = 25%
Now as per income elasticity of demand formula = Percentage change in quantity of
demand / Percentage change in income
= 50/25 = 2

So, Income elasticity of demand is 2 as per the given statistic.

Conclusion
It measures how the quantity demanded changes as the consumer income changes.
For normal goods, demand of normal goods moves in the same direction of income. If
income increases people will buy more goods like food, clothes etc.
For Inferior goods, demand moves opposite with respect to income increase. Inferior goods
like ride with buses, instant noodles, frozen food etc. If individual income will increase,
he/she will travel with taxi rather than with bus.

Q3 b. Assume that a business firm sells a product at the price of Rs 500. The firm has
decided to reduce the price of the product to Rs 400. Consequently, the demand for the
product is raised from 20,000 units to 25,000 units. Calculate the price elasticity of demand.

Ans.
Introduction
Price elasticity of demand is the ratio of the percentage change in quantity demanded of a
product to the percentage change in price.

Concept and numerical

Below is the formula for calculating price elasticity of demand.

Price Elasticity Of Demand = Percentage change in quantity of demand

Percentage change in the price

Let’s first calculate the percentage change in demand of product.

Old demand for the product = 20,000 units

New demand for the product = 25,000 units
Percentage change in demand = (25,000 – 20,000) *100/ (20,000) = 25%

Now calculate percentage change in price of product.

Old price of product = 500

New price of product = 400
Percentage change in price = (400 – 500)*100/500 = 20% [Ignoring negative sign as per rule
of elasticity in demand]

Now as per elasticity of demand formula = Percentage change in quantity of demand /

Percentage change in price
= 25/20 = 1.25

So, Price elasticity of demand is 1.25 as per the given statistic.

Conclusion

When demand is elastic [elasticity>1], then small drop in price will lead to bigger rise in
demand and accordingly revenue will grow. On other hand, small rise in pride will lead to big
drop in demand and revenue will go down.