DEPARTMENT OF BUSINESS

ADMINISTRATION
Semester - I
Managerial Economics
Unit I
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WHAT IS ECONOMICS?

Economics is defned as body of

knowledge that discus how a
society tries to solve human
problems of unlimited wants and
scarce resources.
What is Economics
about?

Man has unlimited wants and

needs;

The means or resources to satisfy

these needs are limited;

These resources are not specifc but

have an alternate uses ; and

Man has, therefore, to choose

between wants.
LIMIE! "E#$%"&E#

Economists use the term scarcity in a

relative and or in absolute terms.
factor of production is scarce or in
abundance depending upon the
demand for it.
ALTERNATIVE USES OF
RESOURCES

!f a particular resource is limited but has to

be used for one purpose, there is no
economic problem.

Economic problem arises when no single

unit of resource can be used for two
purposes at any one given time.

plot of land can be put under cotton

cultivation or for the production of
sugarcane.

wor"er can be employed either in cotton

te#tile factory or sugar factory.
MAN HAS NECESSARILY TO CHOOSE

The choice is between ends and

scarce resources.

The economic problem arises

whenever scarce resources are
related to achievement of one end in
preference to another.

The problem of choice arises because

of scarce resources which have
alternative use.
OPPORTUNITY COST

Measures the cost of any choice in

terms of the ne't best alternative
foregone.

&ost implies something is being

sacrifced or involves having to give
up something.
ECONOMIC RESOURCES
$our Types of Economic Resources

%and

%abour

Capital

Entrepreneur
ECONOMIC RESOURCES

%&'( !ncludes all of the natural physical

resources ) all the materials which nature
gives freely for man*s aid in land, air, light
and heat.

%+,-R( human input into the production

process that is paid for.

C.!T%( refers to that part of wealth which

is used in further production of wealth. !t
consists of all types of tools, machinery;
building etc

E&TRE.RE&E-R( refers to an organiser who

brings land, labour and capital together to
supply goods/services to the mar"et for a
rate of return
M()(*E"I(L
E&$)$MI&#

Managerial Economics can be broadly

defned as the study of economic
theories, logic and tools of economic
analysis that are used in the process of
business decision ma"ing.

Economic theories and techni0ues of

economic analysis are applied to
analy1e business problems, evaluate
business options and opportunities with
a view to arriving at appropriate
business decision.
SCOPE OF MANAGERIAL ECONOMICS

Managerial economics is economics

applied to the analysis of business
problems and decision ma"ing.

+roadly spea"ing, it is
..%!E' EC,&,M!C2.
pplied in business decision ma"ing
SCOPE OF MANAGERIAL ECONOMICS
2ome business decision ma"ing areas
include(

'emand nalysis

.roduction nalysis

.ricing nalysis

Capital +udgeting
MANAGERIAL DECISIONS
Managerial decisions are made under
conditions of

3a4 Certainty,

3b4 Ris" and

3c4 -ncertainty.
CERT!&T5 refers to the situation where
there is only one possible outcome to a
decision and this outcome is "nown
precisely.
MANAGERIAL DECISIONS

R!26 refers to a situation in which there

is more than one possible outcome to a
decision and the probability of each
specifc outcome is "nown or can be
estimated.

!n general, the greater the variability

3i.e., the greater the number and range4
of possible outcomes, the greater is the
ris" associated with the decision or
action.
MANAGERIAL DECISIONS

-&CERT!&T5 is the case when there

is more than one possible outcome to
a decision and where the probability
of each specifc outcome is not
"nown or even meaningful.

!n e#treme forms of uncertainty not

even the outcomes themselves are
"nown.
ECONOMIC PROBLEM
ll societies face the three economic
problems

7hat to produce,

how to produce and

for whom to produce

ECONOMIC SYSTEM

)etwork of organisations used by

a society to resolve the basic
problem of what, how and for whom
to produce.

There are three categories of

economic system.

$ree mar"et economy

.lanned or command economy

Mi#ed economy
ECONOMIC PROBLEM
What goods and services to produce

Resources are limited

Everything cannot be produced

!n a full employment economy, the

production of additional 0uantity of
any commodity can only be at the
e#pense of some other commodity.
ECONOMIC PROBLEM
+ow best to produce goods and services

This is a problem of production and it depends

on three factors, vi1.,
The e#tend of resources available to the economy in
terms of natural resources, labour and capital
The 0uality or e9ciency of these factors of
production and;
The nature of technology available to the
community.

Every economy must decide

how its limited resources ) vi1., land, labour and
capital : can best be used to achieve ma#imum
production, and
how these resources themselves can be increased
so as to produce more for future.
ECONOMIC PROBLEM
,or whom to produce?

7hat is the best method of distributing

products to ensure the highest level of wants
and needs are met;

!n every society, the production and supply of

goods is always smaller than demand for them.

!n a dictatorship, the government can allocate

goods and services according to the wishes of
the dictator or according to some principle of
e0ual division.

!n a pure capitalist enterprise economy, goods

and services are distributed among those who
can pay for them.
SECTORS OF PRODUCTION IN
THE ECONOMY

.rimary sector( This involves

e#traction of natural resources e.g.
agriculture, forestry, fshing,
0uarrying, and mining

2econdary sector( This involves the

manufacturing of goods in the
economy

Tertiary sector- the tertiary sector

provided services such as ban"ing,
fnance, insurance, retail, education
and travel and tourism
BASIC ASSUMPTIONS

.ositive statements are ob<ective

statements that can be tested or re<ected
by referring to the available evidence.

.ositive economics deals with ob/ective

e'planation and the testing and re<ection
of theories. $or e#ample(

rise in consumer incomes will lead to a

rise in the demand for new cars.

fall in the e#change rate will lead to an

increase in e#ports overseas.
BASIC ASSUMPTIONS

)ormative statements e#press an

opinion about what ought to be.

They are sub<ective statements) i.e.

they carry value <udgments. $or
e#ample(

The government is right to introduce a

ban on smo"ing in public places.

The government ought to provide

fnancial subsidies to companies
manufacturing and developing wind
farm technology.
BASIC ASSUMPTIONS

&eteris .aribus

%atin phrase

=7ith other things 3being4 the same> or =all

other things being e0ual>.

"ationality

Consumers ma#imi1e utility sub<ect to given

money income.

.roducers ma#imi1e proft sub<ect to given

resources or minimi1e cost sub<ect to target
return.
ECONOMIC PROFIT V/S
ACCOUNTING PROFIT
(ccounting .roft 0 1usiness .roft

To an accountant, ?proft* means the

e#cess of revenue over all paid:out costs

ccounting proft @ TR ) 37ARA!AM4

or TR ) 3E#plicit cost4

7here TR @ Total revenue; 7@7ages; R@Rent;

!@ !nterest; M @ cost of material

E'plicit costs are actual payment made to

other parties

ppear in all boo"s of accounts and fnancial

statements
ECONOMIC PROFIT V/S
ACCOUNTING PROFIT
Economic .roft 0 .ure .roft 0 (bove
)ormal .roft

Economic .roft @ Total Revenue ) Total

Economic Cost

Economic Cost @ 3E#plicit Cost A !mplicit

Cost4

!mplicit Cost refers to the value of the inputs

owned and used by the frm for its own
production process

!nputs owned by the frm are not free to the

frm even though no outBow of cash is
involved. They represent value of foregone
opportunities.

The implicit costs are what these same inputs

could earn in their best alternate use outside
the frm
MICRO AND MACRO ECONOMICS

Microeconomics is a study of the

economic behaviour of individual decision
ma"ing units, such as individual consumers,
resource owners and business frms, in a
free enterprise system.

Macroeconomics is the study of the total

or the aggregate level of output, income,
employment, consumption, investment and
prices for the economy viewed as a whole.

Micro and Macro are related terms and not

absolute terms.
MARGINAL ANALYSIS

Marginal analysis( The analysis of the

benefts and costs of the marginal unit
of a good or input.
3Marginal @ the ne#t unit4

Marginal analysis focuses upon whether

the control variable should be increased
by one more unit or not.
Procedure for Using Marginal Analysis

!dentify the control variable 3cv4.

'etermine what the increase in total

benefts would be if one more unit of the
control variable were added.
This is the marginal beneft of the added
unit.

'etermine what the increase in total cost

would be if one more unit of the control
variable were added.
This is the marginal cost of the added unit.

!f the unitCs marginal beneft e#ceeds 3or

e0uals4 its marginal cost, it should be
added
KEY PROCEDURE FOR USING
MARGINAL ANALYSIS

This is the marginal cost of the added

unit.

!f the unitCs marginal beneft e#ceeds

3or e0uals4 its marginal cost, it should
be added.
UTILITY

'efned as psychological feeling of

satisfaction, pleasure, happiness or
well being, which a consumer derives
from the consumption, use or
possession of a commodity.

-tility is ethically neutral

TOTAL UTILITY

2uppose a consumer consumes four units of

commodity, D, at a times and derives utility
from successive units of consumption as uE, uF,
uG and uH. Iis total utility 3-'4 from commodity
D can be measured as
-' @ u
2Au3Au4Au5

!f a consumer consumes n number of commodities, his total utility, T-n, is the sum
of utility derived from each. $or e#ample, if the consumption of goods are D, 5 and
J and their total respective utilities are -#, -y and -1, then
T-n @ -# A -y A -1
MARGINAL UTILITY

The additional satisfaction a consumer gains from

consuming one more unit of a good or service.

Marginal -tility 3M-4 refers to change in total

utility 3i.e. KT-4 obtained from the consumption of
an additional unit of a commodity, say D. !t may
be e#pressed as

M-# @ KT-#
KL#

where KT-# @ total utility, and KL# @ change in

0uantity consumed by one unit.

nother way of e#pressing marginal utility 3M-4,

when the number of units consumed is n, can be
as follows

M- of nth unit @ T-n ) T-n62

Utility form last unit consumed is the marginal

utility
LAW OF DIMINISHING MARGINAL
UTILITY

This law states that as the 0uantity

consumed goes on increasing, the
utility derived from each successive
unit goes on diminishing, consumption
of all other commodities remaining the
same.
Units of commodity X Total Utility (TUx) Ma!inal Utility (MUx)
0 0 --
1 30 30
2 50 20
3 60 10
4 65 5
5 60 -5
6 45 -15

%t
ilit
y
%
'
an
d
M
%'
TUx
65
4 5 M%' 7%()I8
%ILI8

There are mainly two "inds of

measurement of utility implemented
by economists(

cardinal utility and

ordinal utility.
INDIFFERENCE CURVE

!ntroduction

+asic ssumptions

$eatures of !ndiMerence Curve

Marginal Rate of 2ubstitution

+udget %ine
INDIFFERENCE CURVE

The aim of indiMerence curve

analysis is to analyse how a rational
consumer chooses between two
goods.

n indiMerence curve is a line that

shows all the possible combinations
of two goods between which a
person is indiMerent.

The use of an indiMerence curve does

not try to put a physical measure
onto how much utility a person
receives.
BASIC ASSUMPTIONS

Completeness :can ran" any bas"et of

goods. 3always possible to decide
preference or indiMerence4

Transitivity :N+ and +NC implies N C.

This assumption seems obvious, but can
have contradiction

&on:satiation :more is better.

Conve#ity :given two indiMerent bundles,

always prefer the average to each of them.
!ndiMerence Curve
,eatures of Indi9erence
&urve

Indi9erence curves are downward

sloping as loss of one good must be
compensated by gain in another to give the
same level of satisfaction.

Indi9erence curves are conve' to the

origin as more of good D is consumed, good
5 becomes more highly valued. The rate of
trade:oM between two goods is called the
Marginal Rate of 2ubstitution 3MR24 and it
falls as we move down the indiMerence curve.

Indi9erence curves never intersect

+igher indi9erence curves represent

higher levels of utility and are preferred
to lower ones
Marginal "ate of
#ubstitution

The marginal rate of substitution is the

amount of one good 3i.e. wor"4 that has
to be given up if the consumer is to
obtain one e#tra unit of the other good
3leisure4.

he marginal rate of substitution

:M"#; < change in good = 0 change
in good 8

Iow many units of 5 one is willing to give

up in order to get one more unit of D
OPy / P# @ Ody / d#

Marginal rate of substitution diminishes

due to the principle of diminishing
marginal utility.
OBJECTIVES OF FIRM

2ome important ob<ectives, other

than proft ma#imi1ation are(

.roft Ma#imisation

Ma#imi1ation of the sales revenue

Ma#imi1ation of frm*s growth rate

Ma#imi1ation of Managers utility

function

%ong run 2urvival of the frm and Entry:

prevention and ris":avoidance
OBJECTIVES OF FIRM

Conventional theory of frm assumes

proft ma#imi1ation is the sole
ob<ective of business frms.

Iowever, recent researches on this

issue reveal that the ob<ectives the
frms pursue are more than one.
.roft 1usiness
$b/ectives

Economist*s concept of proft is of

=.ure .roft> called ?economic proft*
or =Qust proft>.

.ure proft is a return over and above

opportunity cost, i. e. the income
that a businessman might e#pect
from the second best alternatives
use of his resources.
#ales "evenue
Ma'imisation

The factors, which e#plain the

pursuance of this goal by the
managers are(

2alary and others earnings of managers

are more closely related to sales
revenue than to profts

+an"s and fnancial corporations loo" at

sales revenue while fnancing the
corporation.

Trend in sales revenue is a readily

available indicator of the performance of
the frm.
Ma'imisation of ,irms
*rowth rate

Managers ma#imi1e frm*s balance growth

rate sub<ect to managerial R fnancial
constrains balance growth rate defned as(
S @ S' ) SC

7here S' @ Srowth rate of demand of frm*s

product

SC@ growth rate of capital supply of capital to

the frm.

!n simple words, frm growth rate is

balanced when demand for its product R
supply of capital to the frm increase at the
same time.
Ma'imisation of Managerial %tility
function

The manager see" to ma#imi1e their own utility

function sub<ect to the minimum level of proft.
Managers utility function is e#press as(
-@ f 32, M, !'4
7here 2 @ additional e#penditure of the staM
M @ Managerial emoluments
!' @ 'iscretionary !nvestments

The utility functions which manager see" to

ma#imi1e include both 0uantifable variables li"e
salary and slac" earnings; non: 0uantifable
variables such as prestige, power, status, Qob
security professional e#cellence etc.
Long run survival > market
share

ccording to some economist, the primary

goal of the frm is long run survival.

2ome other economists have suggested

that attainment R retention of constant
mar"et share is an additional ob<ective of
the frm*s.

This is ensured by entry:prevention of new

competitors and thus ris":avoidance of
loosing mar"et share.

2hort term proft motive can be sacrifced

to ensure long term survival
CONSUMER SURPLUS

Consumer surplus is the diMerence

between the total amount that
consumers are willing and able to
pay for a good or service 3indicated
by the demand curve4 and the total
amount that they actually do pay
3i.e. the mar"et price for the
product4.

consumer surplus occurs when the

consumer is willing to pay more for a
given product than the current
mar"et price.
CONSUMER SURPLUS
CONSUMER SURPLUS

7e have consumer surplus basically

because we pay the same amount
for each unit of commodity that we
buy, from the frst to the last.

Iowever, according to law of

diminishing marginal utility, the
earlier units are worth more to us
than the last unit.

Thus, we en<oy surplus on each of

these earlier units.
DEMAND

%aw of 'emand

$actors EMecting 'emand

Change in Luantity 'emanded

$actors EMecting 'emand

Change in 'emand

Types of 'emand

2ubstitution and !ncome EMect

Law of !emand

decrease in the price of a good, all

other things held constant, will cause
an increase in the 0uantity
demanded of the good.

n increase in the price of a good, all

other things held constant, will cause
a decrease in the 0uantity demanded
of the good.
,actors E9ecting
!emand

.rice

vailability of Related Soods

Complimentary Soods

2ubstitutes

!ncome of the consumer

dvertising E#penditure

Taste of Consumer

.opulation
&hange in 7uantity
!emanded
Quantity
Price
P
0
Q
0
P
1
Q
1
An increase in price
causes a decrease in
quantity demanded.
,actors E9ecting
!emand

Change in +uyers* Tastes

Change in +uyers* !ncomes

&ormal Soods

!nferior Soods

Change in the &umber of +uyers

Change in the .rice of Related

Soods

2ubstitute Soods

Complementary Soods
&hange in !emand
Quantity
Price
P
0
Q
0
Q
1
An increase in demand
refers to a rightward shift
in the maret demand
cur!e.
&hange in !emand
Quantity
Price
P
0
Q
1
Q
0
A decrease in demand
refers to a "eftward shift
in the maret demand
cur!e.
!emand &urve ,aced by a ,irm
!epends on the ype of .roduct

'urable Soods

.rovide a stream of services over time

'emand is volatile

&ondurable Soods and 2ervices

.roducers* Soods

-sed in the production of other goods

'emand is derived from demand for

fnal goods or services
#ubstitution > Income
E9ects

7hen price changes, total change in

0uantity demanded is composed of
two parts

2ubstitution eMect

!ncome eMect
#ubstitution > Income
E9ects

2ubstitution eMect

Change in consumption of a good after

a change in its price, when the
consumer is forced by a change in
money income to consume at some
point on the original indiMerence curve

!ncome eMect

Change in consumption of a good

resulting strictly from a change in
purchasing power
Elasticity of Demand

.rice Elasticity of 'emand

$actors Mecting .rice Elasticity of

'emand

Calculating .rice Elasticity of 'emand

Computation of Elasticity ,ver an

!nterval

Computation of Elasticity at a .oint

Marginal Revenue R .rice Elasticity

!ncome Elasticity

Cross:.rice Elasticity

P R Q are inversely related by the law of

demand so E is always negative

The larger the absolute value of E, the more

sensitive buyers are to a change in price
.rice Elasticity of !emand
:E;
M"as#"s "s$onsi%"n"ss o s"nsiti%ity
of cons#m"s to c&an!"s in t&" $ic" of
a !ood
#
% Q
E
% P

,actors (9ecting .rice Elasticity of !emand

vailability of substitutes

The better R more numerous the

substitutes for a good, the more elastic is
demand

.ercentage of consumer*s budget

The greater the percentage of the

consumer*s budget spent on the good, the
more elastic is demand

Time period of ad<ustment

The longer the time period consumers have

to ad<ust to price changes, the more elastic
is demand
&alculating .rice Elasticity of
!emand

.rice elasticity can be measured at

an interval 3or arc4 along demand, or
at a specifc point on the demand
curve

!f the price change is relatively

small, a point calculation is suitable

!f the price change spans a si1able

arc along the demand curve, the
interval calculation provides a
better measure
Computation of Elasticity ,ver an !nterval

7hen calculating price elasticity of

demand over an interval of demand,
use the interval or arc elasticity
formula
Q P
E
P Q

Average
Average
&omputation of Elasticity at a
.oint

7hen calculating price elasticity at

a point on demand, multiply the
slope of demand 3Q/P4, computed
at the point of measure, times the
ratio P/Q, using the values of P and
Q at the point of measure

Method of measuring point elasticity

depends on whether demand is
linear or curvilinear
Marginal "evenue > .rice
Elasticity

$or all demand R marginal revenue

curves, the relation between marginal
revenue, price, R elasticity can be
e#pressed as
1
1 MR P
E

= +


Income Elasticity
!ncome elasticity $E
M% measures the responsiveness of
0uantity demanded to changes in income, holding the price of the good R
all other demand determinants constant

.ositive for a normal good

&egative for an inferior good

d d
M
d
% Q Q
M
E
% M M Q

= =

&ross6.rice Elasticity
Cross:price elasticity $E
XY% measures the responsiveness of
0uantity demanded of good X to changes in the price of related good Y, holding
the price of good X R all other demand determinants for good X constant

.ositive when the two goods are substitutes

&egative when the two goods are complements

X X Y
XY
Y Y X
% Q Q P
E
% P P Q

= =

!EM()! ,$"E&(#I)*

!emand forecasting is the activity of

estimating the 0uantity of a product or
service that consumers will purchase.

'emand forecasting may be used in ma"ing

pricing decisions, in assessing future
capacity re0uirements, or in ma"ing
decisions on whether to enter a new
mar"et.
!emand ,orecasting
ccurate demand forecasting is essential for
a frm to enable it to produce the re0uired
0uantities at the right time and arrange well
in advance for the various factors of
production, vi1., raw materials, e0uipment,
machine accessories, labour, buildings, etc.
$actors involved in 'emand
$orecasting
E. Iow far ahead;
a. %ong term ) eg., petroleum, paper, shipping. Tactical
decisions. 7ithin the limits of resources already
available.
b. 2hort:term ) eg., clothes. 2trategic decisions.
E#tending or reducing the limits of resources.
,actors involved in !emand
,orecasting
-nderta"en at three levels(
a. Macro:level
b. !ndustry level eg., trade associations
c. $irm level
G. 2hould the forecast be general or specifc
3product:wise4;
H. .roblems or methods of forecasting for =new>
vis:T:vis =well established> products.
U. Classifcation of products ) producer goods,
consumer durables, consumer goods, services.
V. 2pecial factors peculiar to the product and the
mar"et ) ris" and uncertainty. 3eg., ladies*
dresses4
,$"E&(#I)*
E&+)I7%E#

There are various types of demand

forecasting techni0ues which include(

2urvey techni0ue

2tatistical method
#%"?E8 E&+)I7%E

2urvey techni0ue

Complete enumeration survey

2ample survey

e#perts opinion

End user survey

Methods of demand
forecasting
&hough statistica" techniques are essentia" in c"arifying re"ationships and
pro!iding techniques of ana"ysis' they are not su(stitutes for )udgement.
*hat is needed is some common sense mean (etween pure guessing and
too much mathematics.
1. Sur!ey of (uyers+ intentions, a"so nown as -pinion sur!eys. Usefu" when
customers are industria" producers. $.owe!er' a num(er of (iases may
creep up%. /ot !ery usefu" for househo"d consumers.
0imitation, passi!e and 1does not e2pose and measure the !aria("es under
management+s contro"3
4. 5e"phi method, it consists of an effort to arri!e at a consensus in an
uncertain area (y questioning a group of e2perts repeated"y unti" the
resu"ts appear to con!erge a"ong a sing"e "ine of the issues causing
disagreement are c"ear"y defined.
5e!e"oped (y 6and 7orporation of the U.S.A in 1890s (y -"af .e"mer'
5a"ey and :ordon. Usefu" in techno"ogica" forecasting $non-economic
!aria("es%.
!elphi method
Ad!antages
1. ;aci"itates the maintenance of anonymity of the respondent+s
identity throughout the course.
4. Sa!es time and other resources in approaching a "arge num(er
of e2perts for their !iews.
0imitations<presumptions,
=. Pane"ists must (e rich in their e2pertise' possess wide
now"edge and e2perience of the su()ect and ha!e an aptitude
and earnest disposition towards the participants.
9. Presupposes that its conductors are o()ecti!e in their )o('
possess amp"e a(i"ities to conceptua"i>e the pro("ems for
discussion' generate considera("e thining' stimu"ate dia"ogue
among pane"ists and mae inferentia" ana"ysis of the
mu"titudina" !iews of the participants.
E'pert opinion
&o as 1e2perts in the fie"d3 to pro!ide estimates' eg.' dea"ers' industry
ana"ysts' specia"ist mareting consu"tants' etc.
Ad!antages,
1. ?ery simp"e and quic method.
4. /o danger of a 1group-thin3 menta"ity.
7o""ecti!e opinion method
A"so ca""ed 1sa"es force po""ing3' sa"esmen are required to estimate e2pected
sa"es in their respecti!e territories and sections.
Ad!antages,
=. Simp"e no statistica" techniques.
9. @ased on first hand now"edge.
A. Quite usefu" in forecasting sa"es of new products.
5isad!antages,
B. A"most comp"ete"y su()ecti!e.
C. Usefu"ness restricted to short-term forecasting.
D. Sa"esmen may (e unaware of (roader economic changes.
#(I#I&(L ME+$!

2tatistical method

diMusion inde#

Regression and correlation

trend analysis

barometric techni0ue

econometric techni0ue
(nalysis of time series and
trend pro/ections

&he time series re"ating to sa"es represent the past pattern

of effecti!e demand for a particu"ar product.

&he most popu"ar method of ana"ysis of the time series is

to project the trend of the time series.

Popu"ar (ecause, simp"e' ine2pensi!e' time series data

often e2hi(it a persistent growth trend.

5isad!antage, this technique yie"ds accepta("e resu"ts so

"ong as the time series shows a persistent tendency to
move in the same direction. *hene!er a turning point
occurs, howe!er' the trend projection breaks down.
&he rea" cha""enge of forecasting is in the prediction of
turning points rather than in the pro)ection of trends.
(nalysis of time series and
trend pro/ections

;our sets of factors, secu"ar trend $&%' seasona"

!ariation $S%' cyc"ica" f"uctuations $7 %' irregu"ar
or random forces $I%.
- $o(ser!ations% E &S7I
Assumptions,
1. &he ana"ysis of mo!ements wou"d (e in the order
of trend' seasona" !ariations and cyc"ica" changes.
4. Fffects of each component are independent of
each other.
%se of economic indicators
&he use of this approach (ases demand forecasting on certain economic
indicators' eg.'
1. 7onstruction contracts sanctioned for the demand of (ui"ding materia"s'
say' cementG
4. Persona" income for the demand of consumer goodsG
=. Agricu"tura" income for the demand of agricu"tura" inputs' imp"ements'
ferti"i>ers' etc'G and
9. Automo(i"e registration for the demand of car accessories' petro"' etc.
Steps for economic indicators,
A. See whether a re"ationship e2ists (etween the demand for the product
and certain economic indicators.
B. Fsta("ish the re"ationship through the method of "east squares and
deri!e the regression equation. $HE a I (2%
C. -nce regression equation is deri!ed' the !a"ue of H $demand% can (e
estimated for any gi!en !a"ue of 2.
D. Past re"ationships may not recur. .ence' need for !a"ue )udgement.
#teps in ,orecasting
!emand

'etermine the use of the forecast

2elect the items to be forecast

'etermine the time hori1on of the

forecast

2elect the forecasting model3s4

Sather the data

Ma"e the forecast

Walidate and implement results