Professional Documents
Culture Documents
Prof. Lionel Robbins defined Economics as the science, which studies human
behaviour as a relationship between ends and scarce means which have alternative
uses. With this, the focus of economics shifted from wealth to human behaviour.
Microeconomics
The study of an individual consumer or a firm is called microeconomics (also called the
Theory of Firm). Micro means one millionth. Microeconomics deals with behavior and
problems of single individual and of micro organization. Managerial economics has its
roots in microeconomics and it deals with the micro or individual enterprises. It is
concerned with the application of the concepts such as price theory, Law of Demand
and theories of market structure and so on.
Macroeconomics
The study of aggregate or total level of economics activity in a country is called
macroeconomics. It studies the flow of economics resources or factors of production
(such as land, labour, capital, organization and technology) from the resource owner to
the business firms and then from the business firms to the households. It deals with
total aggregates, for instance, total national income total employment, output and total
investment. It studies the interrelations among various aggregates and examines their
nature and behaviour, their determination and causes of fluctuations in the. It deals
with the price level in general, instead of studying the prices of individual commodities.
It is concerned with the level of employment in the economy. It discusses aggregate
consumption, aggregate investment, price level, and payment, theories of employment,
and so on.
Though macroeconomics provides the necessary framework in term of government
policies etc., for the firm to act upon dealing with analysis of business conditions, it has
less direct relevance in the study of theory of firm.
Management
Management is the science and art of getting things done through people in formally
organized groups. It is necessary that every organization be well managed to enable it
to achieve its desired goals. Management includes a number of functions: Planning,
organizing, staffing, directing, and controlling. The manager while directing the efforts
of his staff communicates to them the goals, objectives, policies, and procedures;
coordinates their efforts; motivates them to sustain their enthusiasm; and leads them
to achieve the corporate goals.
Welfare Economics
Welfare economics is that branch of economics, which primarily deals with taking of
poverty, famine and distribution of wealth in an economy. This is also called
Development Economics. The central focus of welfare economics is to assess how well
things are going for the members of the society. If certain things have gone terribly bad
in some situation, it is necessary to explain why things have gone wrong. Prof.
AmartyaSen was awarded the Nobel Prize in Economics in 1998 in recognition of his
contributions to welfare economics. Prof. Sen gained recognition for his studies of the
1974 famine in Bangladesh. His work has challenged the common view that food
shortage is the major cause of famine.
In the words of Prof. Sen, famines can occur even when the food supply is high but
people cannot buy the food because they dont have money. There has never been a
famine in a democratic country because leaders of those nations are spurred into action
by politics and free media. In undemocratic countries, the rulers are unaffected by
famine and there is no one to hold them accountable, even when millions die.
Welfare economics takes care of what managerial economics tends to ignore. In other
words, the growth for an economic growth with societal upliftment is countered
productive. In times of crisis, what comes to the rescue of people is their won literacy,
public health facilities, a system of food distribution, stable democracy, social safety,
(that is, systems or policies that take care of people when things go wrong for one
reason or other).
Managerial Economics
Introduction
Managerial Economics as a subject gained popularity in USA after the publication of the
book Managerial Economics by Joel Dean in 1951.
Managerial Economics refers to the firms decision making process. It could be also
interpreted as Economics of Management or Economics of Management. Managerial
Economics is also called as Industrial Economics or Business Economics.
As Joel Dean observes managerial economics shows how economic analysis can be used
in formulating polices.
drawn
from
different
subjects
such
as
economics,
management,
Production
Reduction/control of
cost
Determination of
price of a given
product
Concepts &
Make/buy decision
Inventory
Optimum
management
solutions
Techniques of
ME
Capital management
Profit planning
management
Input output
decisions
5. Profit analysis
6. Capital or Investment analysis
7. Strategic planning
1. Demand Analyses and Forecasting:
A firm can survive only if it is able to the demand for its product at the right time,
within the right quantity. Understanding the basic concepts of demand is essential for
demand forecasting. Demand analysis should be a basic activity of the firm because
many of the other activities of the firms depend upon the outcome of the demand
forecast. Demand analysis provides:
1. The basis for analyzing market influences on the firms; products and thus helps
in the adaptation to those influences.
2. Demand analysis also highlights for factors, which influence the demand for a
product. This helps to manipulate demand. Thus demand analysis studies not
only the price elasticity but also income elasticity, cross elasticity as well as the
influence of advertising expenditure with the advent of computers, demand
forecasting has become an increasingly important function of managerial
economics.
2. Pricing and competitive strategy:
Pricing decisions have been always within the preview of managerial economics. Pricing
policies are merely a subset of broader class of managerial economic problems. Price
theory helps to explain how prices are determined under different types of market
conditions. Competitions analysis includes the anticipation of the response of
competitions the firms pricing, advertising and marketing strategies. Product line
pricing and price forecasting occupy an important place here.
3. Production and cost analysis:
Production analysis is in physical terms. While the cost analysis is in monetary terms
cost
concepts
and
classifications,
cost-out-put
relationships,
economies
and
diseconomies of scale and production functions are some of the points constituting cost
and production analysis.
4. Resource Allocation:
Managerial Economics is the traditional economic theory that is concerned with the
problem of optimum allocation of scarce resources. Marginal analysis is applied to the
problem of determining the level of output, which maximizes profit. In this respect
linear programming techniques has been used to solve optimization problems. In fact
lines programming is one of the most practical and powerful managerial decision
making tools currently available.
5. Profit analysis:
Profit making is the major goal of firms. There are several constraints here an account
of competition from other products, changing input prices and changing business
environment hence in spite of careful planning, there is always certain risk involved.
Managerial economics deals with techniques of averting of minimizing risks. Profit
theory guides in the measurement and management of profit, in calculating the pure
return on capital, besides future profit planning.
6. Capital or investment analyses:
Capital is the foundation of business. Lack of capital may result in small size of
operations. Availability of capital from various sources like equity capital, institutional
finance etc. may help to undertake large-scale operations. Hence efficient allocation
and management of capital is one of the most important tasks of the managers. The
major issues related to capital analysis are:
1. The choice of investment project
2. Evaluation of the efficiency of capital
3. Most efficient allocation of capital
Knowledge of capital theory can help very much in taking investment decisions. This
involves, capital budgeting, feasibility studies, analysis of cost of capital etc.
7. Strategic planning:
Strategic planning provides management with a framework on which long-term
decisions can be made which has an impact on the behavior of the firm. The firm sets
certain long-term goals and objectives and selects the strategies to achieve the same.
Strategic planning is now a new addition to the scope of managerial economics with the
emergence of multinational corporations. The perspective of strategic planning is
global.
Mathematical symbols are more convenient to handle and understand various concepts
like incremental cost, elasticity of demand etc., Geometry, Algebra and calculus are the
major branches of mathematics which are of use in managerial economics. The main
concepts of mathematics like logarithms, and exponentials, vectors and determinants,
input-output models etc., are widely used. Besides these usual tools, more advanced
techniques designed in the recent years viz. linear programming, inventory models and
game theory fine wide application in managerial economics.
inventory and stock controls and supply and demand predictions. What used to take
days and months is done in a few minutes or hours by the computers. In fact
computerization of business activities on a large scale has reduced the workload of
managerial personnel. In most countries a basic knowledge of computer science, is a
compulsory programme for managerial trainees.
To conclude, managerial economics, which is an offshoot traditional economics, has
gained strength to be a separate branch of knowledge. It strength lies in its ability to
integrate ideas from various specialized subjects to gain a proper perspective for
decision-making.
A successful managerial economist must be a mathematician, a statistician and an
economist. He must be also able to combine philosophic methods with historical
methods to get the right perspective only then; he will be good at predictions. In short
managerial practices with the help of other allied sciences.
Another function is security management analysis. This is very important in the case of
defense-oriented industries, power projects, and nuclear plants where security is very
essential. Security management means, also that the production and trade secrets
concerning technology, quality and other such related facts should not be leaked out to
others. This security is more necessary in strategic and defense-oriented projects of
national importance; a managerial economist should be able to manage these issues of
security management analysis.
The sixth function is an advisory function. Here his advice is required on all matters of
production and trade. In the hierarchy of management, a managerial economist ranks
next to the top executives or the policy maker who may be doyens of several projects.
It is the managerial economist of each firm who has to advise them on all matters of
trade since they are in the know of actual functioning of the unit in all aspects, both
technical and financial.
Another function of importance for the managerial economist is a concerned with
pricing and related problems. The success of the firm depends upon a proper pricing
strategy. The pricing decision is one of the most difficult decisions to be made in
business because the information required is never fully available. Pricing of established
products is different from new products. He may have to operate in an atmosphere
constrained by government regulation. He may have to anticipate the reactions of
competitors in pricing. The managerial economist has to be very alert and dynamic to
take correct pricing decision in changing environment.
Finally the specific function of a managerial economist includes an analysis of
environment issues. Modern theory of managerial economics recognizes the social
responsibility of the firm. It refers to the impact of a firm on environmental factors. It
should not have adverse impact on pollution and if possible try to contribute to
environmental preservation and protection in a positive way.
The role of management economist lies not in taking decision but in analyzing,
concluding and recommending to the policy maker. He should have the freedom to
operate and analyze and must possess full knowledge of facts. He has to collect and
provide the quantitative data from within the firm. He has to get information on
external business environment such as general market conditions, trade cycles, and
behavior pattern of the consumers. The managerial economist helps to co-ordinate
policies relating to production, investment, inventories and price.
He should have equanimity to meet crisis. He should act only after analysis and
discussion with relevant departments. He should have diplomacy to act in advisory
capacity to the top executive as well as getting co-operation from different departments
for his economic analysis. He should do well to have intuitive ability to know what is
good or bad for the firm.
He should have sound theoretical knowledge to take up the challenges he has to face in
actual day to day affairs. BANMOL referring to the role of managerial economist points
out. A managerial economist can become a for more helpful member of a management
group by virtue of studies of economic analysis, primarily because there he learns to
become an effective model builder and because there he acquires a very rich body of
tools and techniques which can help to deal with the problems of the firm in a far more
rigorous, a far more probing and a far deeper manner.
THE CONCEPT OF OPPORTUNITY COST
The cost of an alternative that must be forgone in order to pursue a certain action. Put
another way, the benefits you could have received by taking an alternative action.
Example: if a gardener decides to grow carrots, his or her opportunity cost is the
alternative crop that might have been grown instead (potatoes, tomatoes, pumpkins,
etc.).
In both cases, a choice between two options must be made. It would be an easy
decision if you knew the end outcome; however, the risk that you could achieve greater
"benefits" (be they monetary or otherwise) with another option is the opportunity cost.
INCREMENTAL CONCEPT
The Incremental concept is estimating the impact of a business decision on costs and
revenues, stressing the changes in total cost and total revenue that result from changes
in prices, products, procedures, investments, or whatever may be at stake in the
decision.
The two basic concepts in this analysis are incremental cost and incremental revenue.
1. The change in total cost resulting from a decision.
2. The change in total revenue resulting from a decision.
SCARCITY
The basic economic problem that arises because people have unlimited wants but
resources are limited. Because of scarcity, various economic decisions must be made to
allocate resources efficiently.
When we talk of scarcity within an economic context, it refers to limited resources, not
a lack of riches. These resources are the inputs of production: land, labor and capital.
People must make choices between different items because the resources necessary to
fulfill their wants are limited. These decisions are made by giving up (trading off) one
want to satisfy another.
MARGINALISM
Microeconomic theories are based on the principle of marginalism. Marginal changes are
assumed in the relevant phenomena. Marginal changes refer to the addition of just a
single unit more. Thus, these are concepts like marginal utility, marginal cost, marginal
product, marginal revenue, etc. it thus refers to bit by bit change in the total variation.
The theories thus imply equilibrium conditions in terms of margin, such as a consumer
equating marginal utility which price for the maximization of total satisfaction, a
producer equating marginal cost with marginal revenue for maximization of profits, etc.
in practice however, it is difficult to realize the marginal approach.
EQUI-MARGINALISM
The equi-marginal principle is fundamental in economic analysis. It is very significant in
determining optimal condition in resource allocation. According to the equi-marginal
principle, a factor input should be employed in different activities in such a proportion
that its value of marginal product is equal (or the same) in all the uses. So the optimal
level is reached. In symbolic terms, for instance:
(VMPL) a = (VMPL) b = (VMPL) c
(Here, VMPL refers to the value of marginal product of labor: a, b, c are the three
activities)
The equi-marginal principle is greatly useful in investment decisions and in the
allocation of research expenditures.
We use the utility theory to explain consumer demand and to understand the nature of
demand curves. For this purpose, we need to know the condition under which I, as a
consumer, am most satisfied with my market basket of consumption goods. We say
that a consumer attempts to maximize his or her utility, which means that the
consumer chooses the most preferred of goods from what is available. Can we see what
a rule for such an optimal decision would be? Certainly I would not expect that the last
egg I am buying bring exactly the same marginal utility as the last pair of shoes I am
buying, for shoes cost much more per unit than eggs. A more sensible rule would be: If
good A costs twice as much as good B, then buy good A only when its marginal
utility is at least twice as great as good B's marginal utility. This leads to the
equimarginal principle that I should arrange my consumption so that every single good
is bringing me the same marginal utility per dollar of expenditure. In such a situation, I
am attaining maximum satisfaction or utility from my purchases. This is clear concept
of equimarginal principle.
TIME PERSPECTIVE
Economists widely use the concepts of functional time periods, short-run and long-run
in their analysis. This time perspective of short and long period is also important in
business decision making. Especially, the entrepreneur or business manager has to
review the long range effects on costs and revenues of decisions. The really important
problem in decision making is to maintain, the right balance between the long-run,
short-run and intermediate-run perspectives.
DISCOUNTING PRINCIPLE
A present gain is valued more than a future gain. Thus, in investment decision making,
discounting of future value with present one is very essential. The following formula is
useful in this regard.
V = A/ (1 + i)
Where, V = present value, A = annuity or returns expected during the year, i = current
rate of interest.
In business decision making process, thus the discounting principle may be defined as:
if a decision affects costs and revenues at future dates, it is necessary to discount
those costs and revenues to present value before a valid comparison of alternatives is
possible
RISK AND UNCERTAINITY
Every investment is characterized by return and risk. In general, it refers to the
possibility of incurring a loss in a financial transaction. The word risk has a definite
financial meaning.
A person making an investment expects to get some return from the investment from
the future. But as future is uncertain so is the future expected returns can not
predicted. It is the uncertainty associated with the returns from an investment that
introduces risk into an investment.
Thus risk can define as Risk is the potential for variability in returns.
UNIT II
DEMAND ANALYSIS
Introduction & Meaning:
Demand:Demand for a commodity refers to the quantity of the commodity which is
individual consumer or household is willing to purchase a particular price.
A product or service is said to have demand when three conditions are satisfied.
1. Desire of the customer to buy the product
2. His willingness to buy the product,&
3. Ability to pay the specified price for it.
Types of demand:
1. Demand for consumer goods vs producer goods: the different in these two
types of demand are that consumer goods are needed for direct consumption,
while the producer goods are needed for producing other goods. soft drink, milk,
bread etc are the examples of consumer goods, while the various types of
machine, tools etc.
2. Autonomous demand vs derived demand:
the demand for products and services directly. The demand for the services of a
super specialty hospital can be considered as autonomous whereas the demand
for the hotels around the hospital is called a derived demand.
3. Demand for durable goods vsperishable goods: Here the demand for goods
is classified based on their durability. Durable goods are these goods which gives
services relatively for a long period. The use of perishable goods is very less may
be in hours or days. Durable goods meet the both the current as well as future
demand, whereas perishable goods meet only the current demand.
Example of perishable goods: milk, vegetables, fish etc
Example of durable goods: rice, wheat, sugar etc.
4. Firm demand vs industry demand:the firm is a single business unit whereas
industry refers to the group of firm carrying on similar activity.
The quantity of goods demanded by single is called firm demand and the
quantity demanded by industry as a whole is called industry demand.
5. Short run demand vs long run demand :The short run and long run cannot
be clearly defined other than in terms of duration of time. The demand for
particular product /service in a given region for a particular day can be viewed as
long run demand.
Short run refers to a period of shorter duration and long run refers to the
relatively period of longer duration.
6. New demand vs replacement demand: new demand refers to the demand of
the new products and it is the addition to the existing stock.
In replacement demand, the item is purchased to maintain the asset in good
condition. The demand for cars in new demand and the demand spare parts is
replacement demand. Replacement demand may also refer to the demand
resulting out of replacing the existing assets with the new ones.
7. Totalmarket vs segment market demand:let us takethe consumption of
sugar in a given region. The total demand for sugar in the region is the total
market demand. The demand for the sugar from the sweet making industry from
this region is the segment market demand. The aggregate demand for all the
segment market is called the total market demand.
Law of deman
nd
Law of demand shows
s
the relation between
b
p
price and quantity d
demanded of a
commod
dity in the market.
m
In the
t
words of
o Marshall,, the amou
unt demand
d increases with
a fall in price and diminishes
d
with
w
a rise in price.
A rise in
n the price of a comm
modity is fo
ollowed by a reduction in deman
nd and a fa
all in
price is followed
f
by
y an increas
se in deman
nd, if a condition of de
emand remains consta
ant.
The law of demand
d may be ex
xplained witth the help of the follo
owing dema
and schedule.
d Schedule
e.
Demand
Price of Appel (In. Rs.)
Quan
ntity Deman
nded
10
When th
he price fallls from Rs. 10 to 8 quantity
q
de
emand incre
eases from
m 1 to 2. In
n the
same way
w
as pric
ce falls, qu
uantity dem
mand incre
eases on tthe basis o
of the dem
mand
schedule
e we can drraw the dem
mand curve
e.
Price
The
de
emand
curve
D
DD
shows
the
inverse
and quantity
Demand
d
of
sloping.
Assump
ptions:
Price
ELASTICITY OF DEMAND
Elasticity of demand: Elasticity of demand is a quantitative relative measurement of
the change in demand on account of a given change in demand determinants.
Elasticity of demand explains the relationship between a change in price and
consequent change in amount demanded. Marshall introduced the concept of
elasticity of demand. Elasticity of demand shows the extent of change in quantity
demanded to a change in price.
Elastic demand: A small change in price may lead to a great change in quantity
demanded. In this case, demand is elastic.
In-elastic demand: If a big change in price is followed by a small change in
demanded then the demand in inelastic.
Types of Elasticity of Demand:
There are four types of elasticity of demand:
1. Price elasticity of demand
2. Income elasticity of demand
3. Cross elasticity of demand
4. Advertisement elasticity of demand
1. Price elasticity of demand:
Marshall was the first economist to define price elasticity of demand. Price elasticity of
demand measures changes in quantity demand to a change in Price. Price elasticityis
always negative which indicates that the consumer buy more with every fall in the
price.It is the ratio of percentage change in quantity demanded to a percentage change
in price.
Proportionate change in the quantity demand of commodity
Price elasticity =
(Q2-Q1)/Q1
Edp=
--------------(P2-P1)/p1
Where
Q1=Quantity demanded before price change
Q2=Quantity demanded after price change
P1=price before change
P2=price after change
There are five cases/measurements of price elasticity of demand
A. Perfectly elastic demand:when any quantity can be sold at a given price, and
when there is no need to reduce price, the demand is said to be perfectly elastic.
Figure re
eveals thatt the quantity demand
ded increase
es from 0Q
Q to 0Q1, frrom 0q1 to 0Q2
even tho
ough there is no chang
ge in price. Price is fix
xed at 0P.
B. Perfectly
P
In
nelastic De
emand
The dem
mand is saiid to be pe
erfectly inelastic when
n there is n
no change in the qua
antity
demanded even tho
ough there is a big change in pricce.
--------------(I2-I1
1)/I1
As incom
me increase
es from OY to OY1, quantity dem anded neve
er changes..
B. Nega
ative Incom
me elastic
city:
When in
ncome incrreases, qua
antity dema
anded fallss. In this ccase, incom
me elasticitty of
demand is negative
e. i.e., Ey<
< 0.
When in
ncome incre
eases from OY to OY1,, Quantity d
demanded also increa
ases from O
OQ to
OQ1.
D. Income elastic
city greate
er than unity:
more than proportion
In this case,
c
an in
ncrease income brings
s about a m
nate increas
se in
quantity
y demanded
d. Symbolic
cally it can be
b written a
as Ey> 1.
It shows
s high-incom
me elasticitty of deman
nd. When in
ncome incre
eases from OY
to OY1, Quantity de
emanded in
ncreases fro
om OQ to O
OQ1.
E. Incom
me elastic
city leas th
han unity:
When
income
in
ncreases
quantity
demanded
also
inccreases
b
but
less
than
An incre
ease in inco
ome from OY
O to OY, brings wha
at an increa
ase in quan
ntity demanded
from OQ
Q to OQ1, But
B the incrrease in qua
antity dema
anded is sm
maller than the increase in
income. Hence, inc
come elastic
city of demand is less than one.
3. Cross
s elasticity
y of Demand:
A change in the price of one commodity
c
leads to a change in the quantitty demande
ed of
another commodity
y. This is called
c
a cro
oss elasticitty of demand. The formula for c
cross
elasticity
y of demand is:
Proportion
nate change
e in the qua
antity dema
and of comm
modity X
Cross elasticity
e
=
-------------------------------------------------------------------------Proportion
nate change
e in the pricce of comm
modity
(Q2-Q1))/Q1
Edc=
----------------
(P2Y-P1Y
Y)/P1Y
a.In cas
se of subs
stitutes, cro
oss elasticitty of demand is positiv
ve. Eg: Cofffee and Tea
When th
he price off coffee increases, Quantity
Q
de manded off tea incre
eases. Both
h are
substitutes.
Price of Coffee
b.Incas
se of comp
pliments, cross
c
elastiicity is neg ative. If increase in tthe price off one
commod
dity leads to
o a decreas
se in the qu
uantity dem
manded of another and
d vice versa
a.
Quantity
y
dem
manded
commod
dity
unchang
ged
due
e to a change
in the price of
ed
unrelate
goo
ods.
of
rem
mains
4. Adve
ertising elasticity of
o demand
d: It referss to increa
ase in the sales revenue
because
e of change in the Advertising
A
expenditu
ure. Adverttising elastticity is alw
ways
positive..
-----------------(A2-A1)/A1
4. Postponement of demand:
If the consumption of a commodity can be postponed, than it will have elastic demand.
On the contrary, if the demand for a commodity cannot be postpones, than demand is
in elastic. The demand for rice or medicine cannot be postponed, while the demand for
Cycle or umbrella can be postponed.
2. Production:
Producers generally decide their production level on the basis of demand for the
product. Hence elasticity of demand helps the producers to take correct decision
regarding the level of cut put to be produced.
3. Distribution:
Elasticity of demand also helps in the determination of rewards for factors of
production. For example, if the demand for labour is inelastic, trade unions will be
successful in raising wages. It is applicable to other factors of production.
4. International Trade:
Elasticity of demand helps in finding out the terms of trade between two countries.
Terms of trade refers to the rate at which domestic commodity is exchanged for foreign
commodities. Terms of trade depends upon the elasticity of demand of the two
countries for each other goods.
5. Public Finance:
Elasticity of demand helps the government in formulating tax policies. For example, for
imposing tax on a commodity, the Finance Minister has to take into account the
elasticity of demand.
6. Nationalization:
The concept of elasticity of demand enables the government to decide about
nationalization of industries.
Demand Forecasting
Introduction:
The information about the future is essential for both new firms and those planning to
expand the scale of their production. Demand forecasting refers to an estimate of
future demand for the product.
It is an objective assessment of the future course of demand. In recent times,
forecasting plays an important role in business decision-making. Demand forecasting
Methods of forecasting:
Several methods are employed for forecasting demand. All these methods can be
grouped under survey method, statistical method and other methods. Survey methods
and statistical methods are further subdivided in to different categories.
1. Survey Method:
Under this method, information about the desires of the consumer and opinion of
exports are collected by interviewing them. Survey method can be divided into two
types viz., survey of buyer intention, Option survey method;
Suppose there are 10,000 buyers for a particular product. If the company wishes to
elicit the opinion of all the buyers, this method is called census method.
On the other hand, the firm can select a group of buyers who can represent
the whole population. This method is called the sample method.
This method considers that the average of past events determine the future events
under this method, the average keeps on moving depending up on the number of years
selected. This method is easy to compute.
b. Barometric Technique:
Under Barometric method, present events are used to predict the directions of change
in future. This is done with the help of economics and statistical indicators. Those are
(1) Construction Contracts awarded for building materials (2) Personal income (3)
Agricultural Income. (4) Employment (5) Gross national income (6) Industrial
Production (7) Bank Deposits etc.
C.Simultaneous equation method:
In this method, all variables are simultaneously considered, with the convention that
every variable influence the other variables.
d. Regression and correlation method:
Regression and correlation are used for forecasting demand. Based on post data the
future data trend is forecasted. If the functional relationship is analyzed with the
independent variable it is simple correction. When there are several independent
variables it is multiple correlation. In correlation we analyze the nature of relation
between the variables while in regression; the extent of relation between the variables
is analyzed. The results are expressed in mathematical form. Therefore, it is called as
econometric model building. The main advantage of this method is that it provides the
values of the independent variables from within the model itself.
3. Other methods:
a. Expert opinion method:
Apart from salesmen and consumers, distributors or outside experts may also use for
forecasting. In the United States of America, the automobile companies get sales
estimates directly from their dealers. Firms in advanced countries make use of outside
experts for estimating future demand. Various public and private agencies all periodic
forecasts of short or long term business conditions.
b.Test marketing: In this method manufactures test their product /services in a
limited market as test run before they launch their products in national wide.
The primary objective of this method is to know whether the customer will
accept the product in the present form or not.
C. Delphi Method:
A variant of the survey method is Delphi method. It is a sophisticated method to arrive
at a consensus. Under this method, a panel is selected to give suggestions to solve the
problems in hand. Both internal and external experts can be the members of the panel.
Panel members one kept apart from each other and express their views in an
anonymous manner. There is also a coordinator who acts as an intermediary among the
panelists. He prepares the questionnaire and sends it to the panelist. At the end of each
round, he prepares a summary report. On the basis of the summary report the panel
members have to give suggestions. This method has been used in the area of
technological forecasting. It has proved more popular in forecasting. It has provided
more popular in forecasting non-economic rather than economic variables.
d.Judgmental approach:
Whennone of the above methods are directly related to the given product/service, the
management has no alternative other than using its own judgments.