Demand forecasting : It is estimation of future demand.

It can not be hundred percent precise. But it gives a reliable

approximation regarding possible outcome with a reasonable

accuracy.

Demand forecasting is done at

1 : Micro level : Individual firm makes demand forecasting.

2 :Industry Level : It means demand estimate for a product

of industry.

3 : Macro Level : It refers to aggregate demand for Industrial

output by the nation as a whole.

Why demand forecasting :

Production planning.

Sales forecasting

Control of business

Inventory control

Growth and long term Investment pro gramme

Stability

Economic Planning and policy making.

For business decision making purpose firm may undertake

short term and long term forecasting.

Short term forecasting : Why?

1 : Evolving sales policy

2 : Determining Pricing policy

3 : Evolving a purchase policy

4 : fixation of sales target

5 : determining short term financial planning

Long Term Forecasting : Why?

1 : Business planning

2 : Manpower planning

3 : Long term financial planning

Method of Demand forecasting :

1 : Expert opinion method

2 : Opinion poll or market research method

3 : Survey of Spending Plans

4 : Economic indicators

5 ; Projections

6 : Econometric models

Export opinion method :

There are two Important methods

a) Jury of Executive Opinion

b) Delphi Method

Jury of executive opinion :

Forecast are generally generated by group of corporate

executives assemble together. Members are from different

functional areas within the corporations are from different

corporations. This is a successful technique. But the danger

is panel member who is not knowledgeable but persuasive

may influence result to a great extent.

Delphi Method :

In this method panel of expert is form but it does not meet .

The process is carried out by sequential series of questions

and answers. Process is carried out till differences in

answers are narrowed down.

Opinion Poll and Market Research :

Rather than soliciting expert opinion poll survey a

population whose activity may determine future trends.

Choice of sample is of utmost importance because the

use of an unrepresentative sample may give completely

misleading results. Market research is closely related to

opinion polling. It provides lot more information about

why a consumer is buying or not buying, what

characteristics a consumer thinks are most important etc.

Survey of spending plan :

The use of survey of spending plan is quite similar to

opinion poll and market research and the method of data

collection are also quite alike. However data collected is of

macro type that is related to whole economy.

Economic Indicator :

to make correct forecasting it is very much essential to

identify correct indicator whose direction is able to predict

future trend of demand.

There are three types of indicators

1 ) Leading: It tells us where we are going. e.g. Building

permits, stock market index, money supply etc.

2 ) coincidence : It indicates where we are. e.g. Sales,

Personal Income, industrial Production etc.

3 ) Lagging : It indicates where we have been. e.g change

in labour cost per unit of output,loans outstanding, ratio of

manufacturing and trade inventories to sales.

Projections :

Past data is projected into future without taking into

consideration reasons for the change. It is simply

assume that past trends will continue.

Following are projection techniques :

Compound growth rate

Visual time series projections

Time series projections .

Time series projections using least squares technique

Constant compound growth rate :

In this case first and last years of data is required and to calculate

the constant growth rate it is necessary to go from the

amount in the first year to the amount in the last year. This

problem is solved in the same way as if we were to calculate how

much a specific sum deposited in an interest bearing account

grows in a certain numbers of years at a constant rate of interest

that is compounded annually.

Formula

( 1 + i ) to power n = E / B

E- Last year's amount, B – first year's amount, i – Growth rate

n – No of years.

Visual time series Projections - Past data is plotted on a graph

and most fitted curve is plotted.

Time series analysis :

Q TC TFC TVC AC AFC AVC MC

0 150 x x x x

1 300

2 280

3 176

4 72

5 500

6 140

7 127

8 1099

9 146

10 210

Q 1 : Find the average cost when Q = 2

Q 2 : Find total cost when Q = 4

Q 3 : Find marginal cost when Q = 6

Q 4 : Find total variable cost when Q =10

Q 5 : Find average variable cost when Q = 8

Following are different algebraic expression of production

functions. Decide whether each one has constant, increasing or

returns to scale.

1 : Q = 100 + 50L + 50K

2 : Q = 50L + 50 K = 50LK

3 : 50L² + 50K ²

4 : Q = 100L½ K½

Q TC TFC TVC AC AFC AVC MC

0 150 150 0 x x x x

1 300 150 150 300 150 150 150

2 430 150 280 215 75 140 130

3 528 150 378 176 50 126 98

4 600 150 450 150 37.5 112.5 72

5 650 150 500 130 30 100 50

6 840 150 690 140 25 115 190

7 1039 150 889 148.42 21.42 127 199

8 1249 150 1099 156.12 18.75 137.37 210

9 1464 150 1314 162.66 16.66 146 215

10 1674 150 1524 167.4 15 152.4 210

Q TC TFC TVC AC AFC AVC MC

0 120 x x x x

1 265

2 264

3 161

4 85

5 525

6 120

7 97

8 768

9 97

10 127

Cost functions are give as follows

TC = 100 + 60Q – 3Q² +0.1Q³

TC = 100 + 60Q + 3Q²

TC = 100 + 60Q

Answer the following Question for all the

functions.

Q1 – Find out Average cost for tenth unit of

out.

Q 2 – Find Marginal cost of fourth unit of out

put.

Q 3 – Find total fixed cost of 125th unit.

Q 4 – find total cost of zero unit of out put.

Marks will not be given with out working.

Q 1 : For a product the demand function is given as

Q = 140 – 2P If the product is sold at a price of Rs. 60

calculate the marginal revenue earned from the sale of

the product.

Q 2: The total cost function of a firm is estimated to be

TC = 200 – 6Q + 10Q². If current output is 10 units calculate

marginal cost .

The total cost function of a firm is estimated to be

TC = 150 +12Q. The total revenue is TR = 50Q – 0.25Q². If

out put is 18 units calculate profit.

Q : The production function of Neeraj tool is TP = 80L² – L².

Calculate the maximum possible average product.

Q : The cost function of a company i s AC = 200|Q + 40 + 8Q

calculate the total variable cost of the firm at 25 units of

output.

Q : The production function of a company for labour is

TP = 80L² – L³ calculate maximum possible average product

of labour.

Q : The production function of Kalyani co for labour is

TP = 30L – 1.5 L ². Find out the number of labour after

which marginal product becomes negative.

Q ; The long run cost function of a firm is TC = Q³ - 80Q² +1900

What is the possible average cost.

Q : The cost function of Sudha Ltd. Is TC = 200+8Q + 2Q².

The firm is a perfectly competitive firm and is selling the

product at Rs. 48.

If out produced is 10 units calculate profit earned.

Q : For a monopoly firm demand function is P = 20 – 4Q.

Calculate average revenue if it sells four units of output.

Q : A firm operating in a perfectly competitive market has an

average variable cost function = 800 – 80Q +8Q ².

What is the price below which the firm has to shut down

its operation in the short run.