Qns1;-What are the various factors which may influence the demand for intermediate goods like cables? Explain the most appropriate method of forecasting the demand for such an item.
The market demand curve will be the sum of all individual demand curves. It shows the quantity of a good consumers plan to buy at different prices.
Change in price
A change in price causes a Movement along the Demand Curve.
E.g. if there is an increase in price from £9 to £12 then there will be a fall in demand from 30 to 22
Shifts in the demand curve
This occurs when, even at the same price, consumers are willing to buy a higher (or lower) quantity of goods. This will occur if there is a shift in the conditions of demand.
A shift to the right in the demand curve can occur for a number of reasons:
Income. An increase in disposable income enabling consumers to be able to afford more goods. Higher income could occur for a variety of reasons, such as higher wages and lower taxes.
Quality. An increase in the quality of the good e.g. better quality digital cameras encourage people to buy one.
Advertising can increase brand loyalty to the goods and increase demand. For example, higher spending on advertising by Coca Cola has increased global sales.
Substitutes. An increase in the price of substitutes, e.g. if the price of Samsung mobile phones increases, this will increase the demand for Apple iPhones – a major substitute for the Samsung.
Complements. A fall in the price of complements will increase demand. E.g. a lower price of Play Station 2 will increase the demand for compatible Play Station games.
Weather: In cold weather there will be increased demand for fuel and warm weather clothes.
Expectations of future price increases. A commodity like gold may be bought due to speculative reasons; if you think it might go up in the future, you will buy now
Fall in demand
A fall in demand could occur due to lower disposable income or decline in popularity of the good.
For some luxury goods income will be an important determinant of demand. E.g. if your income increased you would buy more restaurant meals, but probably not more salt.
Advertising is important for goods in which branding is important, e.g. soft drinks but not for bananas.
Other types of demand
Effective demand: This occurs when a consumers desire to buy a good can be backed up by his ability to afford it.
Derived demand: This occurs when a good or factor of production such as labour is demanded for another reason
A Giffen good is a good where an increase in price of a basic item leads to an increase in demand, because very poor people cannot afford any other luxury goods.
An ostentatious good, is a good where an increase in price leads to an increase in demand because people believe it is now better.
Composite demand – A good which is demanded for multiple different uses
Joint demand – goods bought together e.g. printer and printer ink.
In economics derived demand is demand for a factor of production or intermediate good that occurs as a result of the demand for another intermediate or Economics help – Derived In essence, the demand for one is dependent on that whose demand its demand is derived from. For example, if the demand for a good such as wheat increases, then this leads to an increase in the demand for labour. For another example, demand for steel leads to derived demand for steel workers, as steel workers are necessary for the production of steel. As the demand for steel increases, so does its price. The increase in price means manufacturers of steel can gain more in revenue if they produce more steel, thus leading to a higher demand for the resources involved in producing steel.
Demand for transport is another good example of derived demand, as users of transport are very often consuming the service not because they benefit from consumption directly (except in cases such as pleasure cruises), but because they wish to partake in other consumption elsewhere.
Derived demand applies to both consumers and producers. Producers have a derived demand for employees. The employees themselves do not appear in the employer’s utility function; rather, they enable employers to profit by fulfilling the demand by consumers for their product. Clearly, the demand for labour is a derived demand from the demand for goods and services.
Another example is farm production and the demand for fertilizer. The demand for farm crops leads to the demand for fertilizer with which to grow them.
This is similar to the concept of joint demand or complementary goods, the quantity consumed of one of them depending positively on the quantity of the other consumed.
In virtually every decision they make, executives today consider some kind of forecast. Sound predictions of demands and trends are no longer luxury items, but a necessity, if managers are to cope with seasonality, sudden changes in demand levels, price-cutting maneuvers of the competition, strikes, and large swings of the economy. Forecasting can help them deal with these troubles; but it can help them more, the more they know about the general principles of forecasting, what it can and cannot do for them currently, and which techniques are suited to their needs of the moment. Here the authors try to explain the potential of forecasting to managers, focusing special attention on sales forecasting for products of Corning Glass Works as these have matured through the product life cycle. Also included is a rundown of forecasting techniques.
To handle the increasing variety and complexity of managerial forecasting problems, many forecasting techniques have been developed in recent years. Each has its special use, and care must be taken to select the correct technique for a particular application. The manager as well as the forecaster has a role to play in technique selection; and the better they understand the range of forecasting possibilities, the more likely it is that a company’s forecasting efforts will bear fruit.
In early 1991, there was a sharp increase in the price of newsprint, the paper used by the newspapers. Since newsprint is the largest expense for India newspapers (after salaries) publishers were concerned about the price hike. Suppose that the demand for newsprint can be represented as follows:
Qi = 17-3 – 0-0092 p +0-0067
Where Q. equals the quantity demanded (in kilograms per capital), P is the price of newsprint (in Rs. Per metric ton) and I is the income per capita (in Rs.),
Q1. If there are 1 million people in the market, and if per capita income equals Rs. 10,000 what is the demand curve for newsprint?
Newsprint is major raw material required for a newspaper. It involves 50% to 60% cost of total expenditure excluding ink, chemical and plates. Soon after Independence, newsprint was controlled by Government through Registrar of Newspaper Institute. RNI used to certify newspaper circulation and Newsprint quota. Which was divided between indigenous and foreign newsprint. In those days sudden growth of a newspaper was difficult as they could not get the newsprint. Even there was no choice about indigenous newspapers mills or quality. Small size newspapers used to sell their quota in black for growing newspapers. Therefore news papers had to purchase all the new print quota by paying godown rents and bank interest for stock. Even they had to use this quota with the strategy of using white paper on front page and yellow paper for inside pages inorder to improve getup or look of a front page on the stall.
Reduction in grammage, i.e. thickness of the paper: As I have mentioned earlier, there was no choice for newspapers but to purchase newsprint. It was licensed to raj and indigenous mills they used to produce newsprint with more thickness i. e. 52 to 53 grammage. It was not even and used to vary every six inches, lengthwise as well as widthwise. In 1982 to 86 all the newspapers shifted themselves form letterpress to offset technology. Offset technology helped them for better printing, photo compose and mainly it became possible for them to use newsprint with less grammage or thickness. As newsprint became import free item, Newspapers started importing fine or thin newsprint up to 45 grammage. Even indigenous mills with new machinery started manufacturing newsprint with 45 gsm. This helped newspapers to get additional length or copies in same weight. Which resulted to save newsprint cost up to 12%. That was the major advantage for all the newspapers. b) Reduction in Width: Standard size width of a newspaper (for two pages) use to be 33.5". Few newspapers like Times of India having double width machinery used to have 67" width reels. As the newsprint prices started rising, Newspapers started demanding the 32" width newsprint. Few new mills introduced 32" width paper (118) and even big newspapers changed their policy to have 32" width. The reduction in width was continued, and Times of India came with an advertisement of their product with words: "It is easy to handle." And all the newspapers started using newsprint with 30" width. Whereas few newspapers started using 28" width. This helped all the newspapers to save expenditure on newsprint up to 9.5%. (3% for 1") c) Height of a newspaper Height of a newspaper depends on the cutoff size of a printing press. It cannot be changed overnight. But looking at price rise in newsprint every management started thinking of it. Whenever they get chance to change the machine which is costly investment they thought of returns by saving newsprint cost which will be long term saving. Whenever they change the machine, it went for 560 m.m. cutoff from traditional 579 cutoff which saved 3% of newsprint cost to pay back their investment. Whereas smaller newspapers purchase machines with 545 m.m. cutoff which saved additional 4% of their newsprint cost. Few newspaper purchased 508 m.m. cut of which helped them to reduce newsprint cost up to 7%. In short journey from 579 to 508 m.m. saved the newsprint cost by 14%.
Q 2. Under these circumstances, what is the price elasticity of demand if the price of newsprint equals Rs. 400 per metric ton?
We have defined demand to be elastic when the absolute value of the price elasticity is greater than one. For that to be true, the percentage change in quantity must be greater than the percentage change in price (% change in Q > % change in P). If this were true, what would you expect to happen to a firm’s receipts if the price were lowered? Recall from principles of economics that total revenue (TR) is equal to price (P) times quantity (Q). Consider an extreme case. Suppose that a five-percent cut in price stimulates a fifty-per cent increase in sales (the price elasticity would be 10). You would expect revenues to rise. The relatively small drop in price would be more than compensated for by a large increase in sales
Consider Q = 400 – 4P Þ 4P = 400 – Q Þ P = 100 – 0.25Q Multiplying by Q and taking the first derivative yields: TR = P.Q TR = (100 – .25Q)Q TR = 100Q – 0.25Q2 MR = dTR/dQ MR = 100 – 0.5Q The total revenue and marginal revenue functions along with the demand curve, are plotted in Figure 5.1. Notice that the slope of the marginal revenue function is twice the slope of the demand function. You see in Figure 5.1 that demand is price elastic over the range of quantities for which marginal revenue is positive. Because marginal revenue is the slope of total revenue (remember that MR = dTR/dQ), you can tell that increasing sales by lowering price will cause total revenue to rise over this interval. However, lowering price when demand is inelastic (beyond Q = 200) will result in reduced revenues. From an examination of Figure 5.1 and Table 5.2, we can reach some important conclusions about the relationship between elasticity and total revenue. As is evident from the above discussion, the change in expenditure when price changes is related to the elasticity of demand. If elasticity is less than unity (inelastic), the percentage change in price can exceed the percentage change in quantity. The price change will then be the dominant one of the two changes and the revenue will change in the same direction as the price change. If however, elasticity exceeds unity (elastic), the percentage change in quantity will exceed the percentage change in price
Q3. According to a study, the demand curve for newsprint in India is:
Q2 = 2672 -- 0-51 p
Where, Q2 is the number of metrix tons of newsprint demanded (in thousand). What is the price elasticity of demand for newsprint in India if price equals Rs. 500 per metric ton?
A paper recycling company converts newspaper, mixed paper, white office paper, and cardboard into pulp for newsprint, packaging paper, and print stock quality paper. The following table summarizes the yield for each kind of pulp recovered from each ton of recycled material. For instance, a ton of newspaper can be recycled using a technique that yields 0.85 tons of newsprint pulp. Alternatively, a ton of newspaper can be recycled using a technique that yields 0.80 tons of packaging paper. Similarly, a ton of cardboard can be recycled to yield 0.80 tons of newsprint or 0.70 tons of pack aging paper pulp. Note that newspaper and cardboard cannot be converted to print stock pulp using the techniques available to the recycler. The cost of processing each ton of raw material into the various types of pulp is summarized in the following table along with the amount of each of the four raw materials that can be purchased and their costs. The recycler wants to determine the least costly way of producing 500 tons of newsprint pulp, 600 tons of packaging paper pulp, and 300 tons of print stock quality pulp.
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Section C (MCQ)
If demand is ___________ then price cuts will __________ spending
- "inelastic, increase
- "elastic, increase"
- " elastic, decrease
- none of the above
Positive cross-elasticities suggest that goods are _________ and negative cross-elasticities that goods are __________
- "substitutes, inferior"
- "normal, complements"
- "substitutes, complements"
- "normal, inferior"
A measurement showing how quantity demanded varies with income is the
- price elasticity of demand
- cross-price elasticity of demand
- budget elasticity of demand
- income elasticity of demand
Inferior goods have ___________ and luxury goods have ____________
- "negative income elasticities, income elasticities greater than 1"
- " income elasticities greater than 1, negative income elasticities"
- "positive income elasticities, negative income elasticities"
- none of the above
"If your income doubles and the prices of the goods you buy double, then your demand for these goods will likely ________
- not change
The income effect of a price increase of a normal good is to __________ of that good and the substitution effect is to _______ of that good
- "increase quantity demanded, reduce quantity demanded"
- "increase quantity demanded, increase quantity demanded
- "reduce quantity demanded, reduce quantity demanded"
- "reduce quantity demanded, increase quantity demanded"
The opportunity cost of a student is
- Course fees and rent
- A loan from the bank
- What the student could have earned in the best job available by not studying
- What the student will earn after graduation
Economics assumes that people consume goods and services to achieve
The extra utility from consuming one more unit of a good is called
- Marginal utility
- Additional utility
- Surplus utility
- Bonus utility
Adding up the quantities demanded of a good by different people facing the same price gives us the
- Supply curve
- Market demand curve
- Demand curve
- Market supply curve
Firms are assumed to _________ costs and to _________ profits
- "incur, desire"
- " pay, make"
- " charge, earn"
- "minimize, maximize"
The increase in total cost when one more unit is produced is known as
- marginal cost
- opportunity cost
- limited cost
- average cost
Marginal revenue is the _________ when output is ____________
- "change in average revenue, increased"
- "change in total revenue, increased by one unit"
- "change in average revenue, increased by one unit"
- "change in total revenue, increased"
Profits are maximized when _________________
- costs are minimized
- revenue is maximized
- average cost is less than average revenue
- marginal cost equals marginal revenue
If a firm´s wage costs increase this will cause __________ and ________
- "marginal cost to increase, output to fall"
- "marginal revenue to increase, output to fall"
- "opportunity cost to increase, the firm will close"
- "average cost will rise, output will increase"