20PNC102 –

MANAGERIAL ECONOMICS AND INDIAN

ECONOMY
MODULE 01-INTRODUCTION
 What do we learn?

✔Economics and managerial decision making.

✔Review of economic terms.

✔Micro Vs Macro Economics.

✔Law of Demand and Supply.

✔Factors affecting Demand and Supply.

✔Demand forecasting techniques. 2

 Economics and managerial decision
making

Economics

Deals with different choices made by

Individuals, Business and Governments in
allocating scarce resources for production,
distribution and consumption of goods and
services to achieve maximum output.

3
 Economics and managerial decision
making

Management

The science of organizing and allocating a

scarce resources (Land, Labour, Capital and
Entrepreneurship) to achieve desired
objectives (Maximise Profit/Maximise share
holders value, Minimise the cost of an
Organisation, Welfare of the society (in case
of Government Organisations).
4
 Economics and managerial decision
making

Managerial Economics

The use of economic tools to make business

decisions involving allocation of an organization’s
scarce resources in a manner that they are put to best
of their use .

5
Economics and Managerial decision
making-Relationship to other business disciplines

Marketing: demand, price elasticity.

Finance: capital budgeting, breakeven analysis,
opportunity cost, value added cost.
Management science: linear programming,
regression analysis, forecasting.
Strategy: types of competition, structure, conduct
performance Analysis.
Managerial accounting: relevant cost, breakeven
analysis, incremental cost analysis, opportunity
cost.

6
 An Example of Managerial
Decision Making
Starting up a Glassware Industry In Tamil Nadu
✔ What is the World wide Market for the product-Who are the consumers
✔ International overview of Glassware Industry- Market share, Largest
Manufacturer, Raw Materials Required etc.,
✔ How about our Indian Glassware Industry?
✔ Do we have the presence of the plants through out the country?
✔ Does Tamilnadu have the raw materials available.
✔ The Competitors presence in Tamil Nadu.
✔ Capital Required to start a plant in Tamilnadu
✔ Labour availability in Tamilnadu.
✔ Transportation arrangements and Road Connectivity in Tamilnadu.
 Economics and Managerial decision
making-Questions that managers must
answer: What are the economic
conditions in our
What are the economic particular market?
conditions in our ✔ Government
particular market? regulations?
✔ Market structure? ✔ International
✔ Supply and dimensions?
demand?
✔ Future conditions?
✔ Technology?
✔ Macroeconomic
factors?

8
 Economics and Managerial decision
making

How can we maintain a

Should our firm be in competitive advantage
this business? over other firms?
✔ if so, at what price? ✔ cost-leader?
✔ and at what output ✔ product
level? differentiation?
✔ market niche?
✔ outsourcing,
alliances, mergers?
✔ international
perspective?
9
 Economics and Managerial decision
making
What are the risks involved?
✔ shifts in demand/supply conditions?
✔ technological changes?
✔ the effect of competition?
✔ changing interest rates and inflation rates?
✔ exchange rates (for companies in international
trade)?
✔ political risk (for firms with foreign operations)?

1
 Objectives of Managerial Economics

The basic objective of managerial economics is to analyze

the economic problems faced by the business.
1.To integrate economic theory with business practice.
2. To apply economic concepts and principles to solve business
problems.
3. To allocate the scares resources in the optimal manner.
4. To make all-round development of a firm.
5. To minimize risk and uncertainty
6. To helps in demand and sales forecasting.
7. To help in profit maximization.
8. To help other objectives of the firm like industry leadership,
expansion implementation of policies.
 Importance of Managerial Economics
1.It provides tool and techniques for managerial decision
making.
2. It gives answers to the basic problems of business
management.
3. It supplies data for analysis and forecasting.
4. It provides tools for demand forecasting and profit planning.
5. It guides the managerial economist.
6. It helps in formulating business policies.
7. It assists the management to know internal and external
factors influence the business.
 Major areas of decision making in economics

✔ Selection of method of production.

✔ Product line decision.

✔ Determination of price and quantity.
✔ Decision on promotional strategy.
✔ Optimum input combination.
✔ Allocation of resources.
✔ Replacement decision and Shut down decision.
✔ Decision on export and import
✔ Location decision.
✔ Capital budgeting & Make or buy decision.
 Review of economic terms
Microeconomics is the study of individual
consumers and producers in specific markets,
especially:
• supply and demand
• pricing of output
• production process
• cost structure
• distribution of income

1
 Review of economic terms
Macroeconomics is the study of the aggregate
economy, especially:
• national output (GDP)
• unemployment
• inflation
• fiscal and monetary policies
• trade and finance among nations

1
 Review of economic terms

Scarcity is the
condition in which
resources are not
available to satisfy all
Resources are inputs the needs and wants
(factors) of production, of a specified group
notably: of people.
• Land
• Labor
• Capital
• Entrepreneurship
(skills).
1
 Review of economic terms
Allocation of resources
Economic decisions of the
Firm Decisions must be made because
What - begin or stop providing of scarcity.
goods/services (production) Three choices:
How - hiring, staffing, capital What should be produced? How
budgeting should it be produced? For
(resourcing) whom should be produced?
For whom – target the
customers most
likely to purchase
(marketing)
 Review of economic terms

Management is
the ability to
organize resources
and administer
tasks to achieve
objectives
Entrepreneurship is
the willingness to
take certain risks in
the pursuit of goals.

1
 Review of economic terms

Time Value of Money is that the value of money in the

present is worth more than the same sum of money to be
received in the future.

FV = the future value of money

PV = the present value
i = the interest rate or other return that can be earned on the
money
t = the number of years to take into consideration
n = the number of compounding periods of interest per year
 Review of economic terms
Opportunity cost is the amount (or subjective value) that must be
sacrificed in choosing one activity over the next best alternative .It
is the value of the next best alternative foregone

2
TYPES OF ECONOMICS

Managerial Economics

Micro Macro
Economics Economics
Microeconomics
Some theories associated with Micro Economics
 Macro Economics

A few areas that come under Macro

Economics are
(i)National Income and National Output;
(ii)The general price level and interest rates
(iii) Balance of trade and balance of payments
(iv) External value of currency
(v)The overall level of savings and investment
(vi)The level of employment and rate of economic
growth.

2
4
Some theories associated with Macro Economics
 Scope of Managerial Economics

The scope covers two areas of decision making

(A) Operational or Internal Issues and

(B) Environmental or External Issues.

 Operational or internal issues
Operational issues include all those issues that arise within the
organization and fall within the purview and control of the
management.
A few examples of operational issues.
Demand analysis and forecasting
Production and cost analysis
Inventory Management
Market structure and pricing
Resource Allocation
Capital Investment Decisions
Profit Analysis
Risk and uncertainty analysis
 Environmental or External issues

The type of economic system

Stage of business cycle
National income, employment, prices, saving and investment
Government’s economic policies like industrial policy,
competition policy, monetary and fiscal policy,
Price policy, foreign trade policy and globalization policies
 Environmental or External issues

Working of Financial sector and capital market

Socio-economic organizations like trade unions, producer and
consumer unions and cooperatives
Social and political environment
Business decisions cannot be taken without considering these
present and future environmental factors. As the management of
the firm has no control over these factors, it should tune its policies
to minimize their adverse effects..
 Functions and Responsibilities of
Managerial economist
A managerial economist can play an important role by assisting the
management to solve the difficult problems of decision making and forward
planning.

Managerial economists have to study external and internal factors influencing

the business while taking the decisions.

Is competition likely to increase or decrease?

What are the population shifts and their influence in purchasing power?

Will the price of raw materials increase or decrease?

Managerial economist can also help the management in taking decisions

regarding internal operation of the firm.
 The Responsibilities of Managerial
Economists

1.To bring reasonable profit to the company.

2. To make accurate forecast.
3. To establish and maintain contact with individual
and data sources.
4. To keep the management informed of all the
possible economic trends.
5. To prepare speeches for business executives.
6. To participate in public debates.
7. To earn full status in the business team.
 The Important Functions of Managerial
Economist

1.Sales forecasting.
2. Market research.
3. Production scheduling
4. Economic analysis of competing industry.
5. Investment appraisal.
6. Security management analysis.
7. Advise on foreign exchange management.
8. Advice on trade.
9. Environmental forecasting.
10. Economic analysis of agriculture Sales forecasting.
 Characteristics of Managerial Economics

1.Managerial economics is Micro economic in character.

Because it studies the problems of a business firm, not the
entire economy.
2) Managerial economics largely uses the body of
economic concepts and principles which is known as
“Theory of the Firm” or “Economics of the firm”.
3) Managerial economics is pragmatic. It is purely
practical oriented.
 Contd……Characteristics of Managerial
Economics

4) Managerial economics is Normative rather than positive

economics (descriptive economics). Managerial economics is
prescriptive to solve particular business problem by giving
importance to firms aim and objectives.

5) Macro economics is also useful to managerial economics since it

provides intelligent understanding of the environment in which the
business is operating
 Business Cycle

The Business Cycle refers to the periodic boom and slump in

the economic activities reflected by the fluctuations in
aggregate economic magnitudes which includes total
production, employment, investment, bank credits, wages,
prices, etc..
 DEMAND

Demand is the quantity of a commodity which

consumers are willing to buy at a given price for
a particular time frame.

Demand is defined as that want, need or desire

which is backed by willingness and ability to
buy a particular commodity, in a given period of
time

Demand is an effective desire, as it is backed by

willingness to pay and ability to pay
Determinants of Demand
 Demand Function
When we express the relation between demand and its determinants
mathematically, the relationship is known as demand function. Thus, it can
be said that demand for a product X (Dx) is a function of :
1. Price of the Commodity X (Px)
2. Income of the Consumer(Y)
3. Price of Related Goods(Po)
4. Tastes and Preferences(T)
5. Advertising(A)
6. Future Expectations (Ef)
7. Population and Growth of Economy(N)

Demand Function DX = f (PX,Y,P0,T,A,Ef,N)

Independent
Variables
Dependant Variable
 Demand Schedule
Demand Schedule is the list or tabular statement of the
different combinations of price and quantity demanded of a
commodity.

Demand Schedule for Coffee

PRICE (Rs per cup) Demand /Units

15 50
20 40
25 30
30 15
35 10
 Demand Curve
The demand curve shows the relationship between price
of a good and the quantity demanded by consumers,
ceteris paribus.
Linear curve is obtained which shows
P the direct correlation between an
R independent variable and a dependent
I variable.
C
E General Form of linear Equation is
(P)
35 Y = mX + C

15 Y = Dependant Variable
X = Independent Variable
M =Slope
10 50 C= Intercept (constant value)
QUANTITY (Q)
 Law of Demand
Law of demand states that when the price of a
commodity rises, the demand for that commodity
falls and when the price of a commodity falls, the
demand for that commodity rises (When other
things remaining constant / Ceteris paribus)

Law of demand states that ,

ceteris paribus, demand for
a product is inversely
proportional to its price.
 Some Exceptions to Law of Demand

✔ Giffen Goods like salt, rice, wheat will not exhibit the inverse
relationship between price of commodity and quantity demanded as
people can not give up those items or stop consuming them.
✔Veblen Goods like diamonds, precious metals, rare paintings will also
not exhibit this inverse relationship as rich people possess these item
to maintain their stature in the society.
✔ Law of demand does not apply in case of life saving essential goods
and also in times of extraordinary circumstances like inflation,
deflation, war and other natural calamities. Example is demand for
COVID 19 Vaccines in the recent pandemic.
✔Stock markets are the fine examples of speculative demand where
investors and stock brokers desire to hold the shares/bonds.
Some Distinct Concepts of Demand
 Types of Demand –The effect of different
determinants

1. Price demand (Price Effect) : Indicates the price effect-explains the

impact of changes in price of a particular product on its quantity
demanded.
2. Income demand (Income Effect) : Shows the income effect - explains the
impact of changes in the income of the consumer on the demand for a
particular product, other things remaining constant. It is positive for
superior goods and negative for giffen goods when disposable income of
people increase.
3. Cross demand: The demand for a Dx is also influenced by the changes in
price of its related goods (substitutes or complementary goods as the case
may be) depends on the nature of its related goods-Substitute and
Complementary goods.
4. Collective/Composite demand: When a commodity is put to several uses,
its total demand in all uses is termed as composite demand. Electricity and
water bills are good examples of such a demand.
 Summary of Types of Demand
Demand for Commodity/Product/Service (Dx)
Mathematical Direction of
Determinants Relationship Effect Expression Demand Curve

Price of Commodity (PX) Inversely Proportional Price Effect Dx= f (PX) Downward sloping

Cross-demand (Substitution)
Price of substitute of Commodity (PS) Directly Proportional effect Dx = f (PS) Upward sloping

Price of complementary good/ Commodity Cross-demand

(Pc) Inversely Proportional (Complementary) effect Dx = f (Pc) Downward sloping

Upward sloping for

Superior goods.
Income Effect (Either Positive Downward sloping
or Negative)/Bandwagon for inferior(giffen)
Disposable income of the Consumer (Yd) Directly Proportional Effect/Demonstration Effect Dx = f (Yd) goods.
Upward sloping
Taste and Preferences of Consumer (T) Directly Proportional Dx = f (T)
Upward sloping
Advertisements for Commodity X (A) Directly Proportional Promotional Effect Dx = f (A)
Upward sloping
Wealth of Consumer/Purchaser (W) Directly Proportional Dx= f (W)

Price expectation Effect Upward sloping

Price Expectation of the Consumer(E) Directly Proportional (Speculative demand) Dx = f (E)
Upward sloping
Population (Pp) Directly Proportional Dx = f (Pp)
Upward sloping
Government Policies (G) Directly Proportional Dx = f (G)
 Assignment Questions

1. Give a brief on the importance of Managerial

Economics in managerial decision making.
(5)

2. Bring out the differences between micro and

macro economics and also brief about the
theories associated with both macro and micro
economics. (15)
 Shift in Demand

Shift in demand curve due to a change in any

of the factors other than price is a change in
demand.

Movement along the same demand curve is

contraction or expansion in quantity
demanded, due to rise or fall in the price of
the commodity.

Demand curve shifts to the right if income

rises and shifts to the left if income falls,
ceteris paribus.
 Shift in Demand

Shift of demand curve due to a change in any of the factors

other than price is a change in demand.

Demand curve shifts

to the right if income
rises and shifts to the
left if income falls,
ceteris paribus.
Factors that Shift Demand Curves
 Criticism of law Demand

Law of demand gives only the direction of change

in quantity demanded in response to a given
change in price of a commodity and does not
measure the responsiveness of demand with
respect to changes in each of its determinants.
Responsiveness of a commodity
(Elasticity) is the amount by
which its quantity demanded
changes in response to a given
change in any of the determinants
of demand .
 Elasticity of Demand

Elasticity of demand measures the degree of

responsiveness of the quantity demanded of a
commodity to a given change in any of the
determinants of demand.
 Price elasticity of demand and its types

Price elasticity of demand is the change or sensitivity in the customer’s

demand for the quantity of a good with respect to a change in its price.

Firms often collect this data on the consumer response to price changes. This
helps them adjust the price to maximize profits.

e P
=
 Price Elasticity of Demand

The four factors that affect price elasticity of demand

(1) Availability of substitutes,

(2) If the good is a luxury or a necessity,

(3) The proportion of income spent on the good, and

(4) How much time has elapsed since the time the price

changed.
Types of Price Elasticity of Demand
 Perfectly Elastic Demand

A small rise in price results in fall in

demand to zero, while a small fall in
price causes increase in demand to
infinity.

Demand is said to be perfectly elastic if

negligible change in price would lead
to infinite change in the quantity
demanded. Eg.Normal Goods

Flatter the slope of the demand curve,

higher the elasticity of demand.
 Perfectly Inelastic Demand

When the demand for a commodity

does not change despite change in
price, the demand is said to be
perfectly inelastic. Perfectly
inelastic demand is a theoretical
concept and cannot be applied in a
practical situation.

However, in case of essential

goods, such as salt, the demand
does not change with change in
price. Therefore, the demand for
essential goods is perfectly
inelastic.
 Unitary Elastic Demand

When the percentage change

in the quantity demanded is
equal to the percentage
change in price, the demand
for a commodity is said to be
unitary elastic demand.

The numerical value for

unitary elastic demand is equal
to one (ep=1). For example,
10% change in price causes
10% change in demand.
 Relatively Elastic Demand

When the percentage change in

the quantity demanded for a
commodity is more than
percentage change in price, it is
called relatively elastic demand.

For example, if 10% change in

price results, 20% change in
quantity demanded.
 Relatively Inelastic Demand

When the percentage change in

the quantity demanded of a
commodity is less than
percentage change in the price,
it is called relatively inelastic
demand.

For example, when 20%

change in price causes 10%
change in demand.
 Values of Price Elasticity

Value of Price Elasticity Type of Price Elasticity

ep=∞ Perfectly elastic Demand

ep = 0 Perfectly inelastic Demand

ep >1 Relatively elastic Demand

ep<1 Relatively inelastic Demand

ep= 1 Unitary Elastic Demand

e p is Co-efficient of elasticity
 Solved Problems-Price Elasticity

1.The price of a commodity decreases from ` 6 to ` 4 and quantity

demanded of the good increases from 10 units to 15 units. Find the
coefficient of price elasticity.

2.A 5% fall in the price of a good leads to a 15% rise in its demand.
Determine the elasticity and comment on its value.

3.The price of a good decreases from ` 100 to ` 60 per unit. If the

price elasticity of demand for it is 1.5 and the original quantity
demanded is 30 units, calculate the new quantity demanded.
 Income Elasticity of Demand

This is the responsiveness of demand for a product

with respect to the change in income.

Helps to measure the increase or decrease in

demand when the income of the consumer
increases or decreases.
 Solved Problems- Income Elasticity

1. A medium sized company finds out that the average income

of people in a city has increased to Rs.600,000 from last
year’s Rs. 500, 000 and the yearly sales of their product is
50000 units compared to 40000 units last year. Find the
income elasticity (e Y)

Percentage change in the quantity demanded ( 50000 –

40000) / 40000
= 0.25
Percentage change in the income = (600000 – 500000)/
500000
= 0.2
e Y = 0.25/ 0.2
= 1.25
 Cross Elasticity of Demand

This indicates the consumer reaction to demand

a particular good in accordance with price
changes of other goods.
 Supply

Supply refers to the quantities of a good or service

that the seller is willing and able to provide at a
price, at a given point of time, ceteris paribus

Supply is positively related to price of the

commodity
 Law of Supply

The law of supply states that other things

remaining the same, the higher the price of
a commodity, the greater is the quantity
supplied
Supply schedule of a commodity is a list or a
tabular statement of the different
combinations of price and quantity supplied
of that commodity

Supply curve represents the quantities

supplied of a commodity at different price
levels
 Determinants of Supply

• Price of the commodity

• Cost of Production

• State of Technology

• Number of Firms

• Government Policies
 Supply Function & Curve

Supply function Sx = (PX,C,T,N,G) Supply Curve

Price of the commodity(Px)

Cost of Production(C)

State of Technology(T)

Number of Firms(N)

Government Policies(G)
Supply curve slopes upward indicating
the direct relationship between the
quantity of a commodity supplied and
its price, keeping other factors constant
 Shifts in Supply curves

Change in supply causes shifts supply curve due to

change in factors like change in raw material/ input
prices, advanced/improved technologies of production
etc.
Factors causing shifts in Supply curves
 Elasticity of Supply

Elasticity of supply (Es) shows about the proportionate

change in the supply and the proportionate change in price
(explains how much change in the price leads to how much
change in the supply).

It is measured as the ratio between the percentage change in

quantity supplied and the percentage change in the price of
the commodity.
 Types of elasticity of Supply

1.Perfectly elastic Supply (Es=∞)

Elasticity of supply said to be infinite when nothing is supplied at a
lower price, but a small increase in price causes supply to rise from zero
to an infinitely large amount indicating that producers will supply any
quantity demanded at that price. Examples are Non-Essential goods

2.Perfectly Inelastic Supply (Es = 0)

If as a result of a change in price, the quantity supplied of a good
remains unchanged, we say that the elasticity of supply is zero or the
good has perfectly inelastic supply. Examples are medicine and other
essential goods.

3.Relatively elastic Supply (Es>1)

If the proportionate change in supply is more than proportionate change
in the price. It means a less change in the price leads to more
change in supply and the value of Es is greater one. The Supply curve in
this case also slopes down wards from right to left.
 Types of elasticity of Supply

4.Relatively Inelastic Supply (Es <1)

If the proportionate change in Supply is less than proportionate

change in the price. It means a more change in the price leads
to less change in supply and the value of Es is less than one. The
Supply curve in this case also slopes up wards from left to right.

5.Unitary elastic Supply: (Es =1)

If the proportionate change in the supply is equal to the

proportionate change in the price. It means the change in the
supply and change in price are same. Here the value of Es is 1.
Unitary elastic supply curve also slopes downwards from left to
right.
Types of Price Elasticity of Supply-
Diagrams
 Solved Problems for Price elasticity of
supply

1. A firm supplies 1000 units of small machinery parts at a price of

Rs.100 per unit and find out the elasticity of supply if the quantity
supplied increased to 1500 when the price increases to Rs.120.

Initial Price (P) = Rs. 100

Change in Price (ΔP) = Rs. 20
Total Quantity Supplied (Q) = 1500
Change in Quantity (ΔQ) = 500

Es =?

2. The quantity of the goods supplied is 300 units. Now, price of goods
decreases from Rs.600 to Rs.500 per unit and if the elasticity of
supply is 1, find out the quantity supplied at the new price.
 Solved Problems

Which of the following goods are likely to have elastic

demand, and which are likely to have inelastic demand?

Gas for cooking

Pepsi
Chocolate
Water
Heart medication
Fresh Juice
Elastic demand: Pepsi, Chocolates, Fresh juice
Inelastic demand: Gas for Cooking,Water, Heart
Medication
 Market Equilibrium

When the supply and demand curves intersect, the market is

in equilibrium. This is where the quantity demanded and
quantity supplied are equal. The corresponding price is the
equilibrium price or market-clearing price, the quantity is
the equilibrium quantity.

Price of the Demand of Supply of

commodity the the
(In Rs) commodity commodity
(Q) (S)
5 100 20
10 80 40
15 60 60
20 40 80
25 20 100
 Managerial Decision Making and
Elasticity of Demand
Pricing Decisions

✔If the demand for a product of the firm happens to be elastic and if the
firm raises the price, it might result in fall in its total revenue.
✔On the other hand, if the demand for the product of a firm happens to be
inelastic, then increase in price will raise its total revenue. Thus, Price
elasticity of demand has to be considered to fix a profit maximising price.

The following questions can be answered with the help of Price Elasticity.
Egs. (a) What will be the effect on sales if a firm decides to raise the price of its
product, say by 5 or 10 per cent. (b) How much reduction in price is required to
increase sales by 20%.

Fiscal Policy
If the government decides to increase the excise duty (now applicable for
petroleum after GST regime) for a product which is inelastic, then the revenue
would increase. The revenue would decrease, when the demand of the
product is elastic.
 Summary of Elasticity of Demand and Supply

Value of
Co-effic
Value of ient of
Types of Co-efficient of Types of Elasticit
Elasticity of Elasticity of Elasticity y of
Demand Formula Demand of Supply Formula Supply
Price Elasticity
(i) Perfectly (i) Perfectly
Elastic ep=∞ Elastic Es=∞
(ii) Perfectly (ii) Perfectly
Inelastic ep=0 Inelastic E s= 0
(iii) Unitary (iii) Unitary
Elastic ep = 1 Elastic Es=1

(iv) Relatively (iv) Relatively

Elastic ep>1 Elastic Es>1

(v) Relatively (v) Relatively E s = (ΔQ/ ΔP) X

Inelastic e p = (ΔQ/ ΔP) X (P/Q) e p < 1 Inelastic (P/Q) Es<1
Income
Elasticity E d = (ΔD / ΔI) X D / I
Cross Price
Elasticity of E c = (ΔQx/ΔPy) X
Demand Py/ Qx
 Demand Forecasting and steps

Demand Forecasting is a systematic and scientific

estimation of future demand for a product. The
prediction is based on past behavior patterns and
the continuing trends in the present.
 Purpose of Demand Forecasting

The purpose differs for short run forecast and long run
forecast

Short run forecast helps to avoid over- stocking by

proper scheduling or production.

Seasonal patterns are identified and the marketing or

advertising strategy is planned accordingly.

Long run forecasts help to plan for capital needed for the
plant and machineries.

Manhours, machine-time and capacity, financial

requirements are planned using long run forecast.
Demand Forecasting Techniques
 Demand Forecasting Methods- Opinion
Polling Methods

QUALITATIVE TECHNIQUES Collects information

about views or beliefs
of given sample of
respondents through
series of standardized
questions.

Generally, the opinion polls

are based individual/ group of
people’s opinion and they are
not derived scientifically.
 Demand Forecasting Methods- Opinion
Polling Methods

(a) Consumer Survey or Survey of buyer’s intentions

When the demand needs to be forecasted in the short run, say a year, then the
most feasible method is to ask/interview the potential customers directly that
what are they intending to buy in the forthcoming time period by using one of
the following methods
Complete Enumeration Method- Nearly all the potential buyers are asked
about their future purchase plans.
Sample Survey Method- Sample of potential buyers are chosen scientifically
and only they are interviewed.
End-use Method –Final/End users i.e. the consuming industries and other
sectors are identified. The desirable norms (like specific taste of food items,
colour / texture of product) of consumption are fixed. These norms are applied
to the estimated and targeted output levels. The future demand of the inputs
are then forecasted.
Eg-If the estimated output level is some 100kg of sweets preparation, then, the
forecast would be able to provide information as to whether the taste or the
colour/texture matter the most. Accordingly, the demand for the inputs factors
(taste or colour) can be forecasted.
 Demand Forecasting Methods- Opinion
Polling Methods
(b) Sales Force or Collective Opinion
✔ The sales person of a firm (as he is closer to customers and can have better
information about their preferences, purchasing poer etc.,) predicts the estimated
future sales in their region and these individual estimates are aggregated to
calculate the total estimated future sales.

✔These estimates are reviewed in the light of factors like future changes in the
selling price, product designs, changes in competition, advertisement campaigns,
the purchasing power of the consumers, employment opportunities, population,
etc.

( c ) Expert Opinion Method

Usually, market experts have explicit knowledge about the factors affecting
demand. Their opinion can help in demand forecasting. The Delphi technique,
developed by Olaf Helmer is one such method, where experts are given a series of
carefully designed questionnaires and are asked to forecast the demand. They are
also required to give the suitable reasons. The opinions are shared with the other
experts to arrive at a conclusion. This is a fast and cheap technique.
 Demand Forecasting Methods- Trend
Projections

Most classical method

of business
forecasting, which is
QUANTITATIVE concerned with the
TECHNIQUES movement of
variables through
time.
 Demand Forecasting Methods- Trend Projections,
Examples for Time Series Data

Production of Sugarcane in tons

Sales in number of units

Demand Forecasting Methods- Trend Projections,
Components &Pattern of Time Series Data

Any time series will have all or some of

these components /patterns: trend,
seasonal, cyclic , noise.
 Demand Forecasting Methods- Trend Projections,
Method of Least Squares

When we have to determine the equation of line of best fit for the given data,
then we first use the following formula.
Line of best fit equation or Linear Equation
Y = a + bX
Normal equation for ‘a’
∑Y = na + b∑X
Normal equation for ‘b’
∑XY = a∑X + b∑X2

Y = Dependant Variable; X= Independent Variable

a = Constant (measures the value of Y when X = 0)
b = Slope (Measures the rate of change, that is how much Y changes for each
one-unit change in X)
Ŷ- estimated value of Y
Solving these two normal equations we can get the required trend line equation.
The following conditions to be satisfied to obtain the best line of fit.
(i) The sum of the deviations of the actual values of Y and Ŷ ) is Zero, that
is Σ(Y–Ŷ) = 0.
(ii) The sum of squares of the deviations of the actual values of Y and Ŷ is
least, that is Σ(Y–Ŷ)2 is least.
 Demand Forecasting Methods- Trend Projections,
Decomposing Time Series

Decomposition is a forecasting technique

that separates or decomposes
historical data into different
components and uses them to create a
forecast that is more accurate than a
simple trend line. Often this is done to
help improve forecast accuracy.

Decomposition factors are

Level: The average value in the series.

Trend: The increasing or decreasing value
in the series.
Seasonality: The repeating short-term
cycle in the series.
Noise: The random variation in the series.
 Demand Forecasting Methods- Trend Projections,
Smoothing and ARIMA models

ARIMA (autoregressive integrated

moving average) models aim to
describe the autocorrelations
(relationship between present and
current value of data) in the data.

The final objective of the model is to

predict future time series movement by
Smoothing models are examining the differences between
suitable for forecasting data with no values in the series instead of through
clear trend or seasonal pattern. Under actual values.
exponential smoothing method
proper weightages are assigned to ARIMA models are applied in the cases
data (observations) to remove where the data shows evidence of
random variation. For example, non-stationarity. Stationary of series
it may be sensible to attach larger means the statistical properties (mean,
weights to more recent observations variance) do not vary with time.
than to observations from the distant
past. Forecasts are calculated using
weighted averages.
Demand Forecasting
Methods-Barometric Methods The basic approach
followed in barometric
methods of demand
analysis is to prepare an
index of relevant
economic indicators and
forecast future trends
based on the
movements shown in
the index.
Demand Forecasting Methods-
Econometric Models Make use of statistical
tools combined with
economic theories to
assess various
economic variables for
forecasting demand
Reference Text Books
1.Managerial Economics – Analysis, Problems
and Cases.P.L. Mehtha

2.Managerial Economics Varshney And

Maheshwari.

3.Paul A. Samuelson, William D. Nordhaus,

SudipChaudhuri and Anindya Sen. Economics
(19th ed), Tata McGraw Hill