TASK-1

1. INTRODUCTION

Managerial economics is a branch of economics involving the application of economic

methods in the organizational decision-making process. Economics is the study of the
production, distribution, and consumption of goods and services. Managerial economics
involves the use of economic theories and principles to make decisions regarding the allocation
of scarce resources. It guides managers in making decisions relating to the company's
customers, competitors, suppliers, and internal operations.

Managers use economic frameworks in order to optimize profits, resource allocation and the
overall output of the firm, whilst improving efficiency and minimising unproductive activities.
These frameworks assist organisations to make rational, progressive decisions, by analysing
practical problems at both micro and macroeconomic levels. Managerial decisions involve
forecasting (making decisions about the future), which involve levels of risk and uncertainty.
However, the assistance of managerial economic techniques aid in informing managers in these
decisions.

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1.1 OBJECTIVES OF ECONOMICS

Economics is the study of how humans make decisions in the face of scarcity. These can be
individual decisions, family decisions, business decisions or societal decisions. If you look
around carefully, you will see that scarcity is a fact of life. Scarcity means that human wants
for goods, services and resources exceed what is available. Resources, such as labor, tools,
land, and raw materials are necessary to produce the goods and services we want but they exist
in limited supply. Of course, the ultimate scarce resource is time- everyone, rich or poor, has
just 24 expendable hours in the day to earn income to acquire goods and services, for leisure
time, or for sleep. At any point in time, there is only a finite amount of resources available.

IMPLEMENT ANALYTICAL TOOLS

An objective of managerial economics is to implement devices that will measure and analyze
a broad scale of a company & rsquo;s financial goals. These devices can be as simple as
manually recording production processes to making cost-effective suggestions to developing a
top-scale database program that will help identify obstacles and potential growth areas.

ANALYZE BUSINESS GOALS

Managerial economics helps to assess business goals and stratagem on a continuous basis-
weekly, monthly and quarterly, for example. Using managerial economics helps to scrutinize
the hazards of business choices and evaluate marketing techniques and procedures.

MAKE NEW BUSINESS OR PRODUCT DECISIONS

The process of managerial economics also allows for deciding if an investment in a new
business or product venture is financially sound. After assembling the necessary data, decision
makers are able to develop a strategy and plan for production, quantity, pricing, marketing and
handling. Understanding the risks and cost beforehand will allow the company a better
opportunity to reach its objectives and make a profit.

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1.2 SCOPE OF ECONOMICS

Economists differ in their views regarding the scope of economics. The scope of economics’ is
a broad subject and encompasses not only its subject matter but also various other things, such
as its scientific nature, its ability to pass value judgments, and to suggest solutions to practical
problems.

By making economics a human science, Robbins has unnecessarily widened the scope of the
subject. Thus, in accordance with the view of Robbins, economics would also study the
problem faced by Robinson Crusoe, who lives in an isolated island with no contact with the
rest of the world.

He has to face the problem of choice between work and leisure. He has to spend some time for
his survival — for collecting fruits and roots. He utilises the rest of his time in sleeping or
enjoying leisure. Thus, he has also to face the problem of distributing his time between various
ends. Thus, Robinson Crusoe has also to face the problem of choice and would surely come
within the purview of Robbins’ definition.

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2. METHODOLOGY

2 .1 DIFFERENT TYPES OF ECONOMIC INDICATORS

Economic indicators are key stats about the economy that can help you better understand where
the economy is headed. These indicators can help investors decide when to buy or sell
investments For example, if the stock market is at its peak, you may want to sell. If the market
is low and on the rise, you may want to buy. Economic indicators can help you understand this
ebb and flow of the market, as well as other important financial factors. If you’d rather have a
more hands-off approach and let a professional take these indicators into account then you may
want to consider working with a financial advisor.

TYPES OF ECONOMIC INDICATORS

Economic indicators come in multiple groups or categories. Most economic indicators come
with a specific schedule for release and can be helpful in the right circumstance. Here are the
three important types of economic indicators that we can group most into.

Leading Indicators: Leading indicators point to future changes in the economy. They are
extremely useful for short-term predictions of economic developments because they
usually change before the economy changes.

Lagging Indicators: Lagging indicators usually come after the economy changes. They
are generally most helpful when used to confirm specific patterns. You can make economic
predictions based on the patterns, but lagging indicators cannot be used to directly predict
economic change.

Coincident Indicators: Coincident indicators provide valuable information about the

current state of the economy within a particular area because they happen at the same time
as the changes they signal.

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2.2 ECONOMIC GROWTH

Economic growth can be defined as the increase or improvement in the inflationadjusted

market value of the goods and services produced by an economy in a financial year.
Statisticians conventionally measure such growth as the percent rate of increase in the real and
nominal gross domestic product (GDP).
Growth is usually calculated in real terms – i.e., inflation adjust terms – to eliminate the
distorting effect of inflation on the prices of goods produced. growth uses national income
growth. Since economic growth is measured as the annual percent change of gross domestic
product (GDP), it has all the advantages and drawbacks of that measure. The economic
growthrates of countries are commonly compared using the ratio of the GDP to population (per-
capita income).
The "rate of economic growth" refers to the geometric annual rate of growth in GDP between
the first and the last year over a period of time. This growth rate represents the trend in the
average level of GDP over the period, and ignores any fluctuations in the GDP around this
trend.
Economists refer to economic growth caused by more efficient use of inputs
(increased productivity of labor, of physical capital, of energy or of materials) as intensive
growth. In contrast, GDP growth caused only by increases in the amount of inputs available for
use (increased population, for example, or new territory) counts as extensive growth.

2.3 NATURE AND SCOPE OF MANAGERIAL ECONOMICS

Managerial economics has often been confused with traditional economics but it has a whole
new meaning and purpose. Let us understand the distinction by venturing deeper into its
characteristics:

Microeconomics: It solves microeconomic problems faced by a particular firm—does not

focus on the entire economy.

Pragmatic: Managerial economics is a practical approach—it applies economic principles

in decision-making and problem-solving.

Multidisciplinary: This approach aggregates multiple streams—business, management,

accounting, statistics, finance, and mathematics.

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 Application of Macro Economics: Every firm operates in an external environment—
influenced by legal, political, global, social, economic, technological, competitive, and
demographic factors. Macroeconomics deals with all these threats.

Management Oriented: It educates leaders and managers on how to make crucial

decisions in critical situations.

2.4 Scope of Managerial Economics

The concept is implemented in the following ways:

Microeconomics for Solving Operational Problems

Managers apply microeconomic principles and theories to handle internal issues Given

below are the various microeconomic theories:

1. Production Theory: In order to ensure high productivity with limited resources,

microeconomics studies the impact of production-related decisions: capital
requirement, labor requirement, production capacity, process, methods, techniques,
cost, and quality,
2. Investment Theory: Companies diligently plan their capital investment to ensure
resource utilization—generating higher returns.
3. Demand Theory: To ensure consumer satisfaction, managers analyZe consumer needs
and requirements—they understand consumer attitudes and responses toward company
products or services.
4. Market Structure Pricing Theory: It involves price determination and management—
the business prices its products and services very competitively. To determine the price,
the firms consider production cost, market demand, and marketing cost.
5. Profit Management: Profit maximization is the ultimate aim—this approach focuses
on cost and revenue.

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Macroeconomics for Handling External Environment Issues

Businesses operate in external environments—face unforeseen

challenges. Macroeconomics deals with external challenges with the help of tools like
PESTEL analysis.
Let us go through the components in detail:

Political (P): The government plays a critical role in a firm’s progress. Thus, managerial
economics studies how governance style, political unrest, and foreign collaboration affect
private sector companies.

Economic (E): Business profitability greatly depends on government policies, tax

reforms, GDP, and the nation’s economic stability.

Social (S): The social environment molds businesses. This includes factors like societal
values, beliefs, attitudes, consumer awareness, employment conditions, literacy rate, and
trade unions.

Technological (T): Technology enhances the production and distribution of goods or

services.

Environmental (E): When awareness of environmental concerns increases—firms face

pressure to adopt sustainable and eco-friendly practices. This includes the curtailing of
pollution, waste management, preservation of water, and preservation of natural resources.

Legal (L): Businesses must operate within legal boundaries—national laws pertaining to
consumer rights, labor laws, health and safety laws, product labeling regulations, and
advertising guidelines.

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2.5NATURE AND SCOPE OF BUSINESS ECONOMICS

Nature of Business Economics

Business Economics is a Science: Science is a systematized body of knowledge which

establishes cause and effect relationships. Business Economics integrates the tools of decision
sciences such as Mathematics, Statistics and Econometrics with Economic Theory to arrive at
appropriate strategies for achieving the goals of the business enterprises. It follows scientific
methods and empirically tests the validity of the results.

Based on Micro Economics: Business Economics is based largely on Microeconomics. A

business manager is usually concerned about achievement of the predetermined objectives of
his organisation so as to ensure the long-term survival and profitable functioning of the
organization. Since Business Economics is concerned more with the decision making problems
of individual establishments, it relies heavily on the techniques of Microeconomics.

Incorporates elements of Macro Analysis: A business unit does not operate in a vacuum.
It is affected by the external environment of the economy in which it operates such as, the
general price level, income and employment levels in the economy and government policies
with respect to taxation, interest rates, exchange rates, industries, prices, distribution, wages
and regulation of monopolies. All these are components of Macroeconomics. A business
manager must be acquainted with these and other macroeconomic variables, present as well as
future, which may influence his business environment.

Business Economics is an art: it involves practical application of rules and principles for
the attainment of set objectives.

Use of Theory of Markets and Private Enterprises: Business Economics largely uses
the theory of markets and private enterprise. It uses the theory of the firm and resource
allocation in the backdrop of a private enterprise economy.

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Pragmatic in Approach: Microeconomics is abstract and purely theoretical and analyses
economic phenomena under unrealistic assumptions. In contrast, Business Economics is
pragmatic in its approach as it tackles practical problems which the firms face in the real world.

Interdisciplinary in nature: Business Economics is interdisciplinary in nature as it

incorporates tools from other disciplines such as Mathematics, Operations Research,
Management Theory, Accounting, marketing, Finance, Statistics and Econometrics.

Normative in Nature: Economic theory has developed along two lines – positive and
normative. A positive or pure science analyses cause and effect relationship between variables
in an objective and scientific manner, but it does not involve any value judgement. As against
this, a normative science involves value judgement. It is prescriptive in nature and suggests
‘what should be’ a particular course of action under given circumstances. Welfare
considerations are embedded in normative science.

Scope of Business Economics

The scope of Business Economics may be discussed under the following two heads:-

1. Microeconomics applied to operational or internal Issues

Demand Analysis and Forecasting: Demand Analysis pertains to the behaviour of consumers
in the market. It studies the nature of consumer preferences and the effect of changes in the
determinants of demand such as, price of the commodity, consumers’ income, prices of related
commodities, consumer tastes and preferences etc.

Demand Forecasting is the technique of predicting future demand for goods and services on
the basis of the past behavior of factors which affect demand. Accurate forecasting is essential
for a firm to enable it to produce the required quantities at the right time and to arrange, well
in advance, for the various factors of production viz., raw materials, labor, machines,
equipment, buildings etc. Business Economics provides the manager with the scientific tools
which assist him in forecasting demand.

Production and Cost Analysis: Production theory explains the relationship between inputs
and output. A business economist has to decide on the optimum size of output, given the
objectives of the firm. He has also to ensure that the firm is not incurring undue costs.

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Production analysis enables the firm to decide on the choice of appropriate technology and
selection of least - cost input-mix to achieve technically efficient way of producing output,
given the inputs. Cost analysis enables the firm to recognize the behavior of costs when
variables such as output, time period and size of plant change. The firm will be able to identify
ways to maximize profits by producing the desired level of output at the minimum possible
cost.
Inventory Management: Inventory management theories pertain to rules that firms can use to
minimize the costs associated with maintaining inventory in the form of ‘work-in-process,’
‘raw materials’, and ‘finished goods’. Inventory policies affect the profitability of the firm.
Business economists use methods such as ABC analysis, simple simulation exercises and
mathematical models to help the firm maintain optimum stock of inventories.

Market Structure and Pricing Policies: Analysis of the structure of the market provides
information about the nature and extent of competition which the firms have to face. This helps
in determining the degree of market power (ability to determine prices) which the firm
commands and the strategies to be followed in market management under the given competitive
conditions such as, product design and marketing. Price theory explains how prices are
determined under different kinds of market conditions and assists the firm in framing suitable
price policies.

Resource Allocation: Business Economics, with the help of advanced tools such as linear
programming, enables the firm to arrive at the best course of action for optimum utilization of
available resources.
Theory of Capital and Investment Decisions: For maximizing its profits, the firm has to
carefully evaluate its investment decisions and carry out a sensible policy of capital allocation.
Theories related to capital and investment provide scientific criteria for choice of investment
projects and in assessment of the efficiency of capital. Business Economics supports decision
making on allocation of scarce capital among competing uses of funds.

Profit Analysis: Profits are, most often, uncertain due to changing prices and market
conditions. Profit theory guides the firm in the measurement and management of profit under
conditions of uncertainty. Profit analysis is also immensely useful in future profit planning.

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Risk and Uncertainty Analysis: Business firms generally operate under conditions of risk and
uncertainty. Analysis of risks and uncertainties helps the business firm in arriving efficient
decisions and in formulating plans on the basis of past data, current information and future
prediction.

2. Macroeconomics applied to environmental or external issues

Environmental factors have significant influence upon the functioning and performance of

business. The major macro economic factors are related to:- the type of economic system stage

of business cycle the general trends in 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 working

of financial sector and capital market

socio-economic organisations 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 fine-tune its
policies to minimize their adverse effects.

Central Problems of an Economy

An economic problem generally means the problem of making choices that occurs because of
the scarcity of resources. It arises because people have unlimited desires but the means to
satisfy that desire is limited. Therefore, satisfying all human needs is difficult with limited
means.

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Causes of Economic Problems:
Scarcity of resources: Resources like labour, land, and capital are insufficient as compared to the
demand. Therefore, the economy cannot provide everything that people want.

Unlimited Human Wants: Human beings’ demands and wants are unlimited which means they will
never be satisfied. If a person’s one want is satisfied, they will start having new desires. People’s wants
are unlimited and keep multiplying, therefore, cannot be satisfied because of limited resources.

Alternative Uses: Resources being scarce, the same resources are used for different purposes. and it is
therefore essential to make a choice among resources. For instance, petrol is used in vehicles and is also
used for generators, running machines, etc. Therefore, the economy should now make a choice within
the alternative uses.

List of Economic Problems:

What to produce?

1. A country cannot produce all goods because it has limited resources.

2. It has to make a choice between different goods and services.
3. Every economy has to decide what goods and services should be produced.
4. Example: If a farmer has a single piece of agricultural land, then he has to make a
choice between two goods, i.e., whether to grow rice or wheat.
5. Similarly, our government has to decide where to allocate funds, for the production
of defence goods or consumer goods, and if both, then in what proportion.

How to produce?

1. This problem refers to the choice of technique of production. It arises when there is
an availability of more than one way to produce goods and services.
2. There are mainly two techniques of production. These are:
3. Labour intensive technique(greater use of labour)
4. Capital intensive technique(greater use of machines)
5. Labour intensive technique promotes employment whereas capital intensive
technique promotes efficiency and growth.

For whom to produce?

The society cannot satisfy all the wants of all the people. Therefore, it has to decide who
should get how much of the total output of goods and services.

Society has to make choice of whether luxury goods or normal goods have to be produced.
This distribution or proportion directly relates to the purchasing power of the economy.

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ECONONMICS AS A TOOL FOR DECISION MAKING:
Business decision making is essentially a process of selecting the best out of alternative
opportunities open to the firm. The steps below put managers analytical ability to test and
determine the appropriateness and validity of decisions in the modern business world.
Following are the various steps in decision making process:

1. Establish objectives
2. Specify the decision problem
3. Identify the alternatives
4. Evaluate alternatives
5. Select the best alternatives
6. Implement the decision
7. Monitor the performance

Modern business conditions are changing so fast and becoming so competitive and complex
that personal business sense, intuition and experience alone are not sufficient to make
appropriate business decisions. It is in this area of decision making that economic theories and
tools of economic analysis contribute a great deal.

Basic Economic Tools in Managerial Economics for Decision Making:

Economic theory offers a variety of concepts and analytical tools which can be of considerable
assistance to the managers in his decision making practice. These tools are helpful for managers
in solving their business related problems. These tools are taken as guide in making decision.

Following are the basic economic tools for decision making

Opportunity Cost Principle

By the opportunity cost of a decision is meant the sacrifice of alternatives required by that
decision. For e.g.

The opportunity cost of the funds employed in one’s own business is the interest that could be
earned on those funds if they have been employed in other ventures.

The opportunity cost of using a machine to produce one product is the earnings forgone
which would have been possible from other products.

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 The opportunity cost of holding Rs. 1000as cash in hand for one year is the 10% rate of
interest, which would have been earned had the money been kept as fixed deposit in bank.

Its clear now that opportunity cost requires ascertainment of sacrifices. If a decision involves
no sacrifices, its opportunity cost is nil. For decision making opportunity costs are the only
relevant costs.

Incremental Principle

It is related to the marginal cost and marginal revenues, for economic theory. Incremental
concept involves estimating the impact of decision alternatives on costs and revenue,
emphasizing the changes in total cost and total revenue resulting from changes in prices,
products, procedures, investments or whatever may be at stake in the decisions.

The two basic components of incremental reasoning are

1. Incremental cost
2. Incremental Revenue

The incremental principle may be stated as under:

“A decision is obviously a profitable one if —

1. it increases revenue more than costs

2. it decreases some costs to a greater extent than it increases others
3. it increases some revenues more than it decreases others and
4. it reduces cost more than revenues”

Principle of Time Perspective

Managerial economists are also concerned with the short run and the long run effects of
decisions on revenues as well as costs. The very important problem in decision making is to
maintain the right balance between the long run and short run considerations.

For example; Suppose there is a firm with a temporary idle capacity. An order for 5000 units
comes to management’s attention. The customer is willing to pay Rs 4/- unit or Rs.20000/- for

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the whole lot but not more. The short run incremental cost(ignoring the fixed cost) is only Rs.3/-
. There fore the contribution to overhead and profit is Rs.1/- per unit (Rs.5000/- for the lot)

Analysis:

From the above example the following long run repercussion of the order is to be taken into
account:

1. If the management commits itself with too much of business at lower price or with a
small contribution it will not have sufficient capacity to take up business with higher
contribution.
2. If the other customers come to know about this low price, they may demand a similar
low price. Such customers may complain of being treated unfairly and feel
discriminated against.

In the above example it is therefore important to give due consideration to the time perspectives.
“a decision should take into account both the short run and long run effects on revenues and
costs and maintain the right balance between long run and short run perspective”.

Discounting Principle

One of the fundamental ideas in Economics is that a rupee tomorrow is worth less than a rupee
today. Suppose a person is offered a choice to make between a gift of Rs.100/- today or Rs.100/-
next year. Naturally he will chose Rs.100/- today. This is true for two reasons-

1. The future is uncertain and there may be uncertainty in getting Rs. 100/- if the present
opportunity is not availed of
2. Even if he is sure to receive the gift in future, today’s Rs.100/- can be invested so as to
earn interest say as 8% so that one year after Rs.100/- will become 108

Equi – Marginal Principle

This principle deals with the allocation of an available resource among the alternative activities.
According to this principle, an input should be so allocated that the value added by the last unit
is the same in all cases. This generalization is called the equi-marginal principle

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CONCEPTS RELATING TO POSITIVE ECONOMICS, NORMATIVE
ECONOMICS
studies and also update ourselves with other knowledgeable facts on the same topic.
What is Positive Economics?

Positive economics is the stream of economics that has an objective approach, relied on facts.
It concentrates on the description, quantification, and clarification of economic developments,
prospects, Positive and Normative Economics is rightly known as the two arms of Economics.
Positive economics deals with various economic phenomena, while normative economics
focuses on what economics should be, this branch of economics talks about the value of the
company’s fairness. In lucid language, positive economics answers the ‘what’ factor, whereas
normative economics mandates the ‘should be’ or ‘ought to be’ section of economics.

Well, this was only a preface about the entire discussion. We will look forward to discussing
‘What is Positive and Normative Economics?’, we will take up the point of conflict between
these two and allied matters. This subdivision of economics relies on objective data analysis
and relevant facts and figures. Therefore, it tries to establish a cause-and-effect relationship or
behavioral relationship that can help determine as well as test the advancement of economic
theories.

Here, the study of economics is more objective and focuses more on facts. Moreover, the
statements are precise, descriptive, and measurable. Such reports can be quantified with respect
to noticeable evidence and historical references.

A positive economics example is a statement, “Government-funded healthcare surges public

expenditures.” This statement is based on facts and has a considerable value judgment involved
in it. Therefore, its credibility can be proven or dis-proven via a study of the government’s
involvement in healthcare.

What is Normative Economics?

Normative economics deals with prospective or theoretical situations. This division of

economics has a more subjective approach. It focuses on the ideological, perspective-based,

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opinion-oriented statements towards economic activities. The aim here is to summarise the
desirability quotient among individuals and quote factors like ‘what can happen’ or ‘what ought
to be’.
What is the Importance of Positive and Normative Type Economics?

Even though normative economics is a subjective study, it acts as a base or a platform for outof-
the-box thinking. These concepts will provide a basic foundation for the innovative ideas that
will ignite to reform an economy.

However, all the decisions cannot rely on them altogether. On the other hand, Positive
economics is needed to provide an objective approach. Positive economics is focused on the
facts and analyses of the effects of such decisions in society and thereby it helps by providing
a statement that comprises the necessary information to make a sound economic decision.

Normative economics is thus useful in creating and generating newer ideas from another or
different perspectives, also note it cannot be the only basis for making decisions on important
economic issues, and here the positive economics come into action thus complementing each
other.

So, Positive economic theory can help the economic policymakers to implement the normative
value judgments. Like - it can describe how the government is in power to impact inflation by
printing more money or restructuring the banking reforms, this economics can support that
statement with strong facts and analysis with relationships between inflation and growth in the
money supply of an economy.

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 TASK-2
3. DEMAND FORECASTING
Demand forecasting is an amalgamation of two words; the first one is known as demand, and
another one is forecasting. The meaning of demand is the outside requirements of a
manufactured product or a useful service. In general aspects, forecasting usually means making
an approximation in the present for an event that would be occurring in the future.
All the companies use these predictions to format their approach to marketing and sales. It
contributes hugely towards increasing their profit margins. Here, we are stepping forward to
elaborate on demand forecasting, its features and its usefulness. Moreover, we will also see its
applications.

3.1 Definition of Demand Forecasting

Demand forecasting is a technique that is used for the estimation of what can be the demand
for the upcoming product or services in the future. It is based upon the real-time analysis of
demand which was there in the past for that particular product or service in the market present
today. Demand forecasting must be done by a scientific approach and facts, events which are
related to the forecasting must be considered.
Hence, in simple words, if someone asks what demand forecasting is, we can answer that after
fetching information about different aspects of the market and demand which is dependent on
the past, an attempt might be made to analyze the future demand.
This whole concept of analyzing and approximations are collectively called demand
forecasting. In order to understand it more clearly, we can consider the following equation so
that we can understand the concept of demand forecasting more easily.
For example, if we sold 100,150, 200 units of product Z in January, February, and March
respectively, now we can approximately say that there will be a demand for 150 units of product
Z in April. However, there is also a clause that the condition of the market should remain the
same.

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3.2 Methods of Demand Forecasting
There are two main methods of demand forecasting:
Based on Economy
There is a total of three methods of demand forecasting based on the economy:

Macro-level Forecasting: It generally deals with the economic environment which is

related to the economy as calculated by the Index of Industrial Production(IIP), national
income and general level of employment, etc.

Industry-level Forecasting: Industry-level forecasting usually deals with the demand

issued for the industry’s products as a whole. We can consider the example where there is
a demand for cement in India, Demand for clothes in India, etc.

Firm-level Forecasting: It is a major type of demand forecasting. Firm-level forecasting

means that we need to forecast the demand for a specific firm’s product. We can consider
the following examples as Demand for Birla cement, Demand for Raymond clothes, etc.

Based on the Time

Forecasting based on time may be either short-term forecasting or long-term forecasting.

Short-term Forecasting: It generally covers a short period which depends upon the nature
of the industry. It is done generally for six months or can be less than one year. Short-term
forecasting is apt for making tactical decisions.

Long-term Forecasting: Long-term forecasts are generally for a longer period. It can be
from two to five years or more. It gives data for major strategic decisions of the company.
We can consider the example of the expansion of plant capacity or on opening a new unit
of business, etc.

3.2 Steps Used in Demand Forecasting

The process of demand forecasting can be divided into five simple steps:

Setting an Objective: The first step involves clearly deciding on the purpose of the
analysis. That is, the manufacturers define their goals that are achievable through the
analysis and compatible with their needs.

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 Determining the Time Period: In this step, the manufacturer decides whether the analysis
will be carried out for a short or long duration of time. Many forecasts run for a long
duration as they offer more and consistent data.

Selecting a Demand Forecasting Method: In the next step, the manufacturer decides
along with the analysts which method will give the best results.

Collection of Data: In the penultimate step, the data is collected according to the
preconceived attributes for the analysis.

Evaluation of Data: In the last step, the collected data is evaluated to obtain conclusions
for the forecast.

3.4 IMPORTANCE OF DEMAND FORECASTING

Demand forecasting plays a crucial role in business by enabling improved planning, cost
reduction, better customer service, enhanced financial performance, and gaining a competitive
advantage over competitors.

Improved Planning and Decision Making: By accurately forecasting demand, companies

can make informed decisions about production, inventory management, staffing, and
pricing. This helps companies to avoid overstocking and understocking, which can result
in wasted resources, lost sales, and decreased customer satisfaction.

Increased Efficiency: Accurate demand forecasting allows companies to optimize their

operations, minimize waste, and reduce costs. For example, by knowing exactly how much
of a product will be needed in the future, companies can reduce the amount of raw materials
and other resources they need to purchase, which can help lower their costs.

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Better Customer Service: By forecasting demand, companies can ensure that they have
the right products available in the right quantities at the right time to meet customer
demand. This helps to minimize stock shortages and increase customer satisfaction, which
can lead to increased sales and customer loyalty.

Enhanced Financial Performance: By improving planning, efficiency, and customer

service, demand forecasting can help companies to achieve better financial performance.
This can include increased sales, lower costs, and improved profitability, which can result
in increased shareholder value and stronger long-term growth prospects.

Competitive Advantage: Accurate demand forecasting can give companies a competitive

advantage over their competitors. By knowing exactly how much of a product will be
needed in the future, companies can make informed decisions about production, pricing,
and other critical aspects of their operations, which can help them stay ahead of the
competition.

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Heddle, Nancy 2012-02-01 NASA Technical Reports Server (NTRS) Stern, Daniel C.; Levine,
Allen J.; Pitt, Karl J. 1994-01-01
Sanzad PubMed Ghalehkhondabi,
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