ASSIGMENT A

Answer 01Demand

Demand for a commodity refers to the quantity of the commodity which an individual/ consumer or a household is willing to purchase per unit of time at a particular price.

Term company demand denotes demand for a particular product of a particular firm. When we add demand for a particular product faced by all the companies producing that product, we get what is called an industry demand. Industry demand refers to the total demand for the product of a particular industry. It may be noted that we can add up the demand of various firms only if either all firm produce exactly the same commodity or these should be close substitutes for each other. Eg. Tooth paste.

If the products in the industry are similar or close substitutes, we can get industry demand schedule which represent the relation of price of the product in the industry with the total quantity of the goods demanded from all the firms in the industry.

But it must be not that from the point of view of a manager the knowledge of industry is much less important as compared to that of the company demand. He needs to know the share of his companys demand Vis a -Vis the share of other companies demands in the industry. However the industry demand is a useful guide for studying the company demand and the projection of industry demand is the initial step in forecasting companys demand or sales.

Since individual company faces competition from its rivals in the industry, the company demand is generally more price elastic than the industry demand. However, the degree of price demand relationship of company demand depends upon the structure of the market.

answer 2 The long run and the short run do not refer to a specific period of time such as 3 months or 5 years. The difference between the short run and the long run is the flexibility decision makers have. The 2nd edition of Parkin and Bade's "Economics" gives an excellent distinction between the two:

"The short run is a period of time in which the quantity of at least one input is fixed and the quantities of the other inputs can be varied. The long run is a period of time in which the quantities of all inputs can be varied.

There is no fixed time that can be marked on the calendar to separate the short run from the long run. The short run and long run distinction varies from one industry to another." (239)

I find examples helpful, so we'll consider a hockey stick manufacturer. A company in that industry will need the following to manufacture sticks:

* Raw materials such as lumber * Labor * Machinery * A factory

Suppose the demand for hockey sticks has greatly increased, prompting our company to produce more sticks. We should be able to order more raw materials with little delay, so we consider raw materials to be a variable input. We'll need extra labor, but we can likely increase our labor supply by running an extra shift and getting existing workers to work overtime, so this is also a variable input. The equipment on the other hand, may not be a variable input. It may be time consuming to implement the use of additional equipment. It depends how long it would take us to buy and install the equipment and how long it would take us to train the workers to use it. Adding an extra factory is certainly not something we could do in a short period of time, so this would be the fixed input.

(iii) economics, a durable good or a hard good is a good that does not quickly wear out, or more specifically, one that yields utility over time rather than being completely consumed in one use. Items like bricks could be considered perfectly durable goods, because they should theoretically never wear out. Highly durable goods such as refrigerators, cars, or mobile phones usually continue to be useful for three or more years of use,[1] so durable goods are typically characterized by long periods between successive purchases. Examples of consumer durable goods include cars, household goods (home appliances, consumer electronics, furniture, etc.), sports equipment, and toys. Nondurable goods or soft goods (consumables) are the opposite of durable goods. They may be defined either as goods that are immediately consumed in one use or ones that have a lifespan of less than 3 years. Examples of nondurable goods include fast moving consumer goods such as cosmetics and cleaning products, food, fuel, beer, cigarettes, medication, office supplies, packaging and containers, paper and paper products, personal products, rubber, plastics, textiles, clothing and footwear.

Q 2 answer Demand forecasting Demand forecasting is not a speculative exercise into the unknown. It is essentially a reasonable judgment of future market movements based on scientific statistical methods of enquiry. Forecasting is important for effective planning, and reduces the dependence on chance. Factors involved in demand forecasting Listed below are some of the factors that have to be considered while undertaking forecasting To overcome the problem of time frame of a forecast there are shortrun forecasts (upto one year) and long-run forecasts for periods of 5,10 ,15,20 years How far ahead forecasts have to be made will depend on the nature of the industry if the projects have long gestation period ,like in the petroleum exploration, mining industry ,shipyards etc .These industries have high levels of capital cost, and risks so it requires long term forecasts to mitigate the adverse effects.

But it should be remembered that any forecast beyond 10 years usually becomes difficult due the uncertainty of the future and if done unscientifically the projections become rather dubious. A short term forecasting maybe weekly, monthly, quarterly, half-yearly etc. Another classification is according to the decisions to be made or objectives to met Short-term forecasts provides information for tactical decisions ie; day to day operations within the limits of resources currently available. Long-term forecasts provides information for major strategic decisions it is concerned with the extendin Demand forecasting can be undertaken at 3 levels Macro-level concerned with the whole economy measured by appropriate indices :index of industrial production, WPI, GNP,NI etc. Such published data constitute the basis on which businesses base their forecasts

Durable consumer goods While forecasting demand for durable goods the following points should be considered The consumer has to make a choice between whether to use a product longer by repairing it or by replacing it this choice will effect the demand forecasts Durable goods require special facilities for their use like TVs need electricity, cars require roads, etc So the existence and growth of these facilities are an important variable to be considered while forecasting demand. The unit considered while forecasting demand is the household, so the decision to purchased a durable good is influenced by the members of the household, which in turn depends on the characteristics of the family. When forecasting demand total demand consists of (a) a new owner demand and (b) a replacement demand. Replacement demand tends to grow with growth in total stock of the product with the consumers. Again once the consumer gets used to a product he is going to demand it in the future, this makes replacement demand regular and predictable. When purchasing power increases the scrappage tends to increase as is seen in affluent countries New owner demand is harder to forecast since there is no pervious consumption pattern data to rely on. So here d = N+R

Q3 A:

Media vehicle selection, number of insertions and message structure depend on the budget allotted for the communication program. A popular channel may charge more for advertisement but organization gets better viewership. A newspaper having high circulation charges premium for the advertisement but all the organization may not have enough budgets to support such campaign. Hence marketer would like to decide what is the budget for the communication program? And how shall it be allotted optimally? There are four different methods on which a media planner decides the allocation of advertisement budget.

Affordable method: This method is used by small companies who dont have enough communication budgets. In this method company allots the fixed amount for the communication program. The advantage of this method is company can have better control over the spending on the communication. The disadvantage is if sales require higher communication effort, company is not in a position to allocate the budget.

Percentage of sales method: In this method company allots the budget on the basis of total sales forecasted. This is the simplest method. Marketer can have better control over the budget and also have flexibility to allocate the budget.

Follow the Competitor method: The Company sets its promotion budget on the basis of competitors advertising effort. Here company closely monitors the developments of the competitors communication program and study the industry trends in communication budget prior to setting up communication budget.

Objective and task method:

The procedure involved in estimating the advertisement budget by this method are First, Objectives are set for the communication programs. Second, identifying the task to be performed to achieve the objective and third, estimating the cost of achieving these objectives.

Q4
Long Run Costs Curve In the short-period the firm does not have enough time to change the scale or size of the production unit or of the firm. But in long run there is no such problem because there is adequate time for the manager to adjest the requirement. Therefore there are no fixed factors in the Long-run. If suppose there is a increase in the demand for the product, there is time to increase the production of the firm. In long run every thing is variable including management, labour or be it machinery, when the scale of operations is changed, we need to draw a new short- run cost curve of the firm, because the old cost curve becomes outdated due to change in the scale of operations. That is why we have not one but many cost curve with past experience the firm will choose the best short- run cost curve and implement in the long run. We can thus draw a long- run average cost curve which will indicate the long- run cost of producing each level of output or different scale of production.

1) Long Run Average Cost Curve (LAC)

LAC is the sum of various short- run cost curves depicting different production plan A at different time periods. In the long run, all inputs (factors of production) are variable and firms can enter or exit any industry or market. Consequently, a firm's output and costs are unconstrained in the sense that the firm can produce any output level it chooses by employing the needed quantities of inputs (such as labor and capital) and incurring the total costs of producing that output level. The Long Run Average Cost, LRAC, curve of a firm shows the minimum or lowest average total cost at which a firm can produce any given level of output in the long run (when all inputs are variable). In the long run, a firm will use the level of capital (or other inputs that are fixed in the short run) that can produce a given level of output at the lowest possible average cost. Consequently, the LRAC curve is the envelope of the short run average total cost (SR ATC) curves, where each SR ATC curve is defined by a specific quantity of capital (or other fixed input).

2) Long Run Marginal Cost Curve (LMC) The LMC bears the same relation to the long run LAC that any SMC bears with SAC i.e. LMC cuts LAC from down at the lowest point and till the LMC is lower than LAC it is profitable for the firm, but when the LMC goes above the LAC its indicates loss where as when LAC and LMC intersect each other that is known as the equilibrium point. In the long run the point L2 will be chosen from the figure given below:

Marginal Cost MC is the calculation of the change in rate of total cost. It is the change in TC due to additional unit of variable factor

Q5 Demand forecasting seeks to investigate and measure the forces that determine sales for existing and new products. Generally companies plan their business production or sales in anticipation of future demand. Hence forecasting future demand becomes important. The art of successful business lies in avoiding or minimizing the risks involved as far as possible and face the uncertainties in a most befitting manner.

According to Prof Joel Dean, demand forecasts for a new products can have the following approaches:

Demand Forecasting Approach Evolutionary Approach Opinion Poll Approach Sales Experience Approach Growth Curve Vicarious Approach

To plan for man-power requirement

3. To plan for long term financial requirements

Factors determines demand forecasting 1. Time factor 2. Level of forecasting 3. General or Specific forecasting 4. Problems & methods of forecasting 5. Classification of goods 6. Knowledge of different market conditions 7. Other factors

1. Time factor g periods. It all depends on the nature of the commodity Icecreams, umbrellas etc short period, while, in the case of cement, iron & steel etc long period forecasting is desirable. Demand forecasting may be undertaken at three levels firm level, industry level and macro level Firm level concerned with particular firm Industry level different industry/ trade association Macro level forecasting of business conditions in the entire economy.

2. Level of Forecasting

3. General or Specific forecasting firms requires commodity wise or area wise forecasting specific forecasting.

4. Problems and methods of forecasting problems of forecasting the demand for new products are different from old or it is very difficult to forecast the demand for new product.

5. Classification of Goods producer goods & consumer good durable & non-durable goods etc.

6. Knowledge of different market conditions firm has to face much risk as there are many substitutes.

7. Other factors political factors (elections) sociological factors, psychology of consumers & pattern of to place.

Methods of Demand Forecasting

estimates for future under the changing conditions is a Herculean task. Consumers behaviour is the most unpredictablebecause it is motivated & influenced by a multiplicity of forces. There is no easy method or a simple formula which enables the manager to predict the future. Economists and statisticians have developed several methods of demand forecasting. Each of there methods have its relative advantages & disadvantages. Selection of the right method is essential to make demand forecasting accurate. In demand forecasting a judicious combination of statistical skills & rational judgment needed.

Chart Survey Method The survey method are also called as direct method, the information obtain - future demand for goods

ASSIGNMENT B

Q1
What is National Income? National income measures the monetary value of the flow of output of goods and servicesproduced in an economy over a period of time. Measuring the level and rate of growth of national income (Y) is important for seeing:

The rate of economic growth Changes to average living standards Changes to the distribution of income between groups within the population

Gross Domestic Product

Gross domestic product (GDP) is the total value of output in an economy GDP includes the output of foreign owned businesses that are located in a nation following foreign direct investment. For example, the output produced at the Nissan car plant on Tyne and Wearcontributes to the UKs GDP

There are three ways of calculating GDP - all of which should sum to the same amount: National Output = National Expenditure (Aggregate Demand) = National Income (i) The Expenditure Method - aggregate demand (AD) The full equation for GDP using this approach is GDP = C + I + G + (X-M) where C: Household spending I: Capital Investment spending G: Government spending X: Exports of Goods and Services M: Imports of Goods and Services The Income Method adding together factor incomes GDP is the sum of the incomes earned through the production of goods and services. This is: Income from people in jobs and in self-employment +

Profits of private sector businesses + Rent income from the ownership of land = Gross Domestic product (by factor incomes) Only those incomes that are come from the production of goods and services are included in the calculation of GDP by the income approach. We exclude:

Transfer payments e.g. the state pension; income support for families on low incomes; the Jobseekers Allowance for the unemployed and other welfare assistance such housing benefit

Private transfers of money from one individual to another Income not registered with the tax authorities Every year, billions of pounds worth of activity is not declared to the tax authorities. This is known as the shadow economy.

Published figures for GDP by factor incomes will be inaccurate because much activity is not officially recorded including subsistence farming and barter transactions

Value Added and Contributions to a nations GDP

There are three main wealth-generating sectors of the economy manufacturing and construction, primary (including oil& gas, farming, forestry & fishing) and a wide range of service-sector industries.

This measure of GDP adds together the value of output produced by each of the productive sectors in the economy using the concept of value added. .

Value added is the increase in the value of goods or services as a result of the

production process
Value added = value of production - value of intermediate goods Say you buy a pizza from Dominos at a price of 9.99. This is the retail price and will count as consumption. The pizza has many ingredients at different stages of the supply chain for example tomato growers, dough, mushroom farmers and also the value created by Dominos as they put the pizza together and deliver to the consumer. Some products have a low value-added, for example cheap tee-shirts that you might find in a supermarket for little more than 5. These are low cost, high volume, low priced products. Other goods and services are such that lots of value can be added as we move from sourcing the raw materials through to the final product. Examples include designer

jewellery, perfumes, meals in expensive restaurants and sports cars. And also the increasingly lucrative computer games industry. GDP by output the distribution of GDP from different industries The UK is an economy where the majority of GDP comes from the service industries such as banking and finance, tourism, retailing, education and health. In 2008 less than half of one per cent of our GDP came from agriculture. Manufacturing accounted for less than 15 per cent of GDP and construction a further 6 per cent. In contrast, the service industries now contribute nearly three quarters of national income. Manufacturing and service industries are not separate! For example the health of a car exporting business will have a direct bearing on demand, output, profits and jobs in many service businesses such as transportation, design, marketing and vehicle retailing. Equally service businesses such as online banking require plenty of physical inputs such as machinery and infrastructure to be successful. The main service sector industries in the UK are:

Hotels and restaurants, and a range of services provided by local government Transport, logistics, storage and communication Business services and finance, motor trade, wholesale trades and retail trade Land transport and air transport, post and telecommunications Real estate activities, computer and related activities, Education, Health and social work Sewage and refuse disposal Recreational, cultural and sporting activities

The Share of National Output (GDP) for the UK Economy

Notice in the chart above how there are long-term shifts in the value added from the three main sectors the pattern of GDP depends on many factors including the stage of a countrys development and the extent to which a nation has built up industries of competitive advantage in the world economy. Gross National Income (GNI)

Gross National Income (GNI) measures the final value of incomes flowing to UK owned factors of production whether they are located in the UK or overseas. Gross Domestic Income is concerned only with the incomes generated within the geographical boundaries of the country. Fr example the value of the output produced by Toyota in the UK counts towards our GDP but some of the profits made by overseas companies with production plants here in the UK are sent back to their country of origin adding to their GNP. GNI = GDP + Net property income from abroad (NPIA)

NPIA is the net balance of interest, profits and dividends (IPD) coming into the UK from our assets owned overseas matched against the flow of profits and other income from foreign owned assets located within the UK.

There has been an increasing flow of direct investment (FDI) into and out of the UK. Many foreign firms have set up production plants here whilst UK firms have become multinational organisations.

Nominal and Real - Measuring Real National Income

When we want to measure growth in the economy we have to adjust for the effects of inflation Real GDP measures the volume of output. An increase in real output means that AD has risen faster than the rate of inflation and therefore the economy is experiencing positive growth. Consider this example

The money value of a countrys GDP is calculated to be $4,000m in 2007 In 2008, the money value of GDP expands to $4,500m but during the year, inflation is 3% causing the general index of prices to rise from a 2007 base year value of 100 to 103 in 2008. The real value of GDP in 2008 is calculated thus: Real GDP = money value of GDP in 2008 x 100 / general price index in 2008 = 4,500 x 100/103 = $4,369 (measured at constant 2007 prices)

Note here that the real GDP data is expressed at constant prices which mean that we have made an inflation adjustment. Look for this in the data response questions in the exam.
Total and Per Capita Measuring Income per capita How much does each person earn on average? We use per capita measures to give us a guide to this.Income per capita is a way of measuring the standard of living for the inhabitants of a country. Gross National Income per capita = Gross National Income / Total Population Our next chart shows two pieces of economic data

The level of UK gross national income (GNI) which has been expressed in real terms (i.e. it is inflation adjusted) and is measured in pounds sterling The annual rate of change of real gross national income measured in percentage terms

The chart shows that real incomes per head of the population have risen over the years, i.e. average living standards have improved but that the rate of improvement is not uniform each year. We see that economic growth in the UK fluctuates from year to year, i.e. there is an economic cycle with periodic recessions (where the value of real national income declines.)

Real Gross National Income for the UK Economy During the recession (2008 to 2009) GDP per head decreased by 5.5 per cent
Remittances and Gross National Income Remittances are transfers of money across national boundaries by migrant workers. Despite a dip because of the global recession, remittance flows have grown in the world economy over the longer-term as the scale of migration between countries has grown. For many developing countries, money coming in from remittances is an importance source of income. Using data from the World Bank, for the world as a whole in 2010:

Stock of immigrants: 215.8 million or 3.2 percent of population Females as percentage of immigrants: 48.4 percent Refugees: 16.3 million or 7.6 percent of the total immigrants

Top 10 remittance recipients in 2010 (billions): India ($55.0bn), China ($51.0bn), Mexico ($22.6bn), Philippines ($21.3bn), France ($15.9bn), Germany ($11.6bn), Bangladesh ($11.1bn), Belgium ($10.4bn), Spain ($10.2bn), Nigeria ($10.0bn) Top 10 remittance recipients in 2009 (percentage of GDP): Tajikistan (35.1 percent), Tonga (27.7 percent), Lesotho (24.8 percent), Moldova (23.1 percent), Nepal (22.9

percent), Lebanon (22.4 percent), Samoa (22.3 percent), Honduras (19.3 percent), Guyana (17.3 percent), and El Salvador (15.7 percent)

Q2. The term investment multiplier refers to the concept that any increase in public or private investment spending has a more than proportionate positive impact on aggregate income and the general economy. The multiplier attempts to quantify the additional effects of a policy beyond those that are immediately measurable.

The background here is that there are two problems with estimating multipliers relevant to our current situation. First, you need to look at what happens under liquidity-trap conditions and except in Japan,these havent prevailed anywhere since the 1930s. The second is that in the United States, fiscal policy was never forceful enough to provide a useful natural experiment. We didnt have a really big fiscal expansion until World War II; and WWII isnt a good experiment because the surge in defense spending was accompanied by government policies that suppressed private demand, such as rationing and restrictions on investment.*

What E&R do here is use a broad international cross-section to overcome this problem. This works because a number of countries had major military buildups during the 1930s fiscal expansions that can be regarded as exogenous to the economic situation, since they were

driven above all by Hitlers rearmament programmes and other nations efforts to match the Nazis in this sphere, and by one-off events like Italys war in Abyssinia.

Q3 There are four phases of the business cycle: Peak/boom Recession Trough Recovery Let's briefly discuss each phase now: Peak/Boom: This is the stage when the business activity is at its maximum, although this level of activity is temporary. Recession: After operating at maximum activity, the business goes into the recession phase. This phase witnesses a decrease in total output, employment and trade. Recession may last for about 6 months or more. Trough: At this stage, output and employment are at their lowest. This is also referred to as the stage of depression. This stage may be short term or may be long term depending on circumstances and market conditions. Recovery: The recovery stage, as the name suggests is the rise in output, employment and trade after the depression stage. The employment levels increase till maximum employment is reached.

These stages are often depicted as a graph. The graph would look like a wave. The peak of the wave is the boom phase, the decreasing slope is recession, the rock bottom of the wave is the trough/depression, and recovery phase is shown as the increasing slope after the trough. The vertical axis measures real output and the horizontal axis measures time.

(1) The business cycle or economic cycle refers to the ups and downs seen somewhat simultaneously in most parts of an economy. The cycle involves shifts over time between periods of relatively rapid growth of output (recovery and prosperity), alternating with periods of relative stagnation or decline (contraction or recession). These fluctuations are often measured using the real gross domestic product. To call those alternances "cycles" is rather misleading, as they don't tend to repeat at fairly regular time intervals. Most observers find that their lengths (from peak to peak, or from trough to trough) vary, so that cycles are not mechanical in their regularity. (ii)

Monetary policy is the use of the money supply and credit to stabilize the economy. Read the explanation of monetary policy and refer to the graph below. The demand for money consists of consumers borrowing for such items as cars and homes, firms borrowing for such items as factories and equipment, and the government borrowing to finance the national debt. The supply of money is set by the Federal Reserve Board of Governors, the central banking system for the United States. The supply and demand for money determine the interest rate that must be paid for the use of borrowed money. So if the Federal Reserve increases the money supply, interest rates will fall, making it less expensive to borrow money. In that case, those wishing to borrow money will be more likely to do so-- and be more likely to spend that money on products. If the Federal Reserve reduces the money supply, interest rates will rise, so less will be borrowed and spent (because of the higher cost of borrowing). The Federal Reserve has three primary tools available to change the money supply. First, during periods of recession, Keynes recommends that the Fed buy bonds on the open market. By increasing the reserves the banks hold, the banks have more money available to loan and can reduce their interest rates. At lower interest rates, consumers and firms are more willing to borrow to make purchases, and aggregate demand can increase. Secondly, Keynes recommends that the Fed lower the discount rate. When the Fed reduces the interest rate member banks must pay to borrow from the Fed, banks become more willing to borrow, to make money available for loans at lower interest rates. In this case, again, consumers and firms are more willing to borrow and spend, increasing aggregate demand. Third, Keynes recommends that the Fed reduce the reserve requirement during a serious recession. If banks are allowed to release more of their reserved funds for loans, the lowered interest rate will again entice consumers and firms to borrow funds to make purchases, increasing the aggregate demand. Keynes advocates the opposite positions during times of rapid inflation: reducing the money supply to raise interest rates, making it less likely consumers and firms will borrow to purchase products.

Keynes recommends that,during periods of recession, Congress should increase government spending in order to prime the pump of the economy. At the same time, he recommends, Congress should decrease taxes in order to give households more disposable income with which they can buy more products. Through both methods of fiscal policy, the increase in aggregate demand stimulates firms to increase production, hire workers, and increase household incomes to enable them to buy more. Keynes advocates the opposite positions during times of rapid inflation. In order to slow down the economy, Keynes calls for Congress reduce government spending in order to reduce pressure on aggregate demand. For the same reason he calls for tax increases in inflationary times, to reduce consumers' disposable income The reduction in aggregate demand brought about by such actions leads firms to produce fewer products, slows hiring, and reduces inflationary pressure. While both tools are effective, Keynes advocated change in government spending as the more effective fiscal policy tool, because any change in government spending has a direct effect on aggregate demand. However, if taxes are reduced, consumers most likely will not spend all of their increase in disposable income; they are likely to save some of it. In the same way, if

taxes are raised, consumers are not likely to reduce their consumption of products by the same amount as the tax; they are likely to dip into savings to cover some of the change in tax rates.

Q4
This problem should be answered by using incremental profit analysis. The analysis deals only with the incremental revenues and costs associated with the decision to engage in further processing.

Incremental revenue per unit ($300 - $250) Incremental variable cost per unit ($30 + $5 + $2)

$50 -$37

Incremental profit contribution per unit

$13

Yearly output volume in units Incremental variable profit per year Incremental fixed cost per year Yearly incremental profit

15,000 $195,000 -$20,000 $175,000

Since the incremental profit is positive, the decision to engage in further processing would be more profitable than continuing the present operating policy.