Business Economics Report: Demand Forecasting and Market Structures

This report provides a comprehensive analysis of business economics, beginning with an exploration of qualitative and quantitative demand forecasting methods, including a discussion of their suitability for different scenarios, specifically highlighting the use of quantitative methods for expensive mobile demand forecasting using time-series and associative models. The report then delves into market structures, contrasting oligopoly with perfect competition, and examining how producers in an oligopoly market promote their interests, including the concept of the kinked demand curve. Finally, the report investigates consumer utility maximization and producer cost maximization, supported by relevant diagrams like indifference curves and isoquants, as well as the features of cross elasticity of demand in comparison to other elasticity concepts. The report concludes with a summary of the key findings and a list of references.

BUSINESS
ECONOMIES

Contents
INTRODUCTION...........................................................................................................................1
CONCEPT AND APPLICATION..................................................................................................1
1. Explaining different qualitative and quantitative methods of demand forecasting and
describing which one is suitable..................................................................................................1
2. Describing Oligopoly, its difference with Perfect competition and explaining how producers
of market promote their own interest...........................................................................................3
3 (a) Explaining how consumer attains utility maximisation and producers ensure cost
maximisation with diagrams........................................................................................................6
3 (b) Explaining features of cross elasticity and comparing it with other elasticity of demand..9
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

TABLE OF FIGURES
Figure 1: Kinked Demand Curve Diagram......................................................................................5
Figure 2: Utility Maximisation........................................................................................................6
Figure 3: Indifference curve............................................................................................................7
Figure 4: Cost Maximisation...........................................................................................................8
Figure 5: Cross elasticity of demand...............................................................................................9

INTRODUCTION
Demand could be defined to as the process of identifying how many people or customers
in market are willing to buy one particular products and service over certain period of time. Its
forecasting could be very much important for point of view of company so that they could be
able to estimate what would be level of demand in coming year. So in this report various
qualitative and quantitative methods of demand forecasting would be included in analysing that
which type of methods is most suitable. Further different types of markets could be included
stating how are each of them different from each other. At the end concept of customer
maximisation is been studied with the help of curves like that of isoquant and indifference curve.
CONCEPT AND APPLICATION
1. Explaining different qualitative and quantitative methods of demand forecasting and
describing which one is suitable.
Demand forecasting can be determined as the predicting requirements for products. For
each organization, management is required to take up appropriate steps so that they are able to
meet up the customers demand in appropriate manner (Suganthi and Samuel, 2012). In other
words, it can be stated that as the prediction for the future demand for services and products,
this is met based on the past event and prevailing trends that are going on presently. In
situations when proper planning and interpretation is not done by companies, then it can causes
serious loss for their business.
There are two methods that are included in demand forecasting, these are qualitative and
quantitative method. Qualitative method is taken into consideration when key development or
trends are difficult to capture (Taylor, 2010). Use of subjective information are done like
informed opinion or intuition for forecasting future results. These are generally applied for new
products, used in conditions when there are no historic information. Apart from this, it is also
used for primarily long and medium term planning. This are helpful enough to provide rough
idea of the demand that can arise and supply that can be used to meet them. On the other hand,
quantitative method of forecasting make use of historical data and numerical facts in order to
predict the upcoming events. For example, a firm that delivers their customers with shoes, they
have proper understanding of the time period in which they should raise their supply. These are
done based of the previous sales and production that were made by the firm. Generally there are
two main types of quantitative forecasting applied by business analysts. More specifically, for
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time series method and for attempts to correlate two or more variables. Both these forecasting
types have their own set of benefits and disadvantages (Claveria and Torra, 2014). However,
selected among the two are done based on the perception that are carried out by customers and
the type of products or services that are delivered by the company.
Within organization, there are different type of risks that are faced due to which business
operations becomes difficult. Further, there are certain set of decisions that are needed to be
taken, forecasting enables to provide insight in to firm’s capital investment and decisions related
with expansion. Through demand forecasting, companies are able to develop strategies through
which decision make contribute towards attaining goals and objectives of the business in
effective manner (Hong, Dong and Wei, 2011). Further, it also help to prepare budget, there are
high cost involved when production is done for products.
In situations when production made exceeds demand, then it becomes loss for the firm. In
this context, it is important to make sure that appropriate steps are taken in which demand of
customers or clients are met. When firm is able to meet the demand of customers as per what
was forecasted, then it positively affects the sales and profitability. Apart from this, it also helps
to make evaluation for the performance for business and enables to government to coordinate
import and export activities. In addition to this, forecasting helps to cover the gap between
demand and supply of products. Through demand forecasting, it enables to establish
requirement of raw material in future so as to make a regular flow of raw materials. Moreover, it
maximises utilization of resources as all the operations are planned as per the forecast done.
Thus, in all aspects, demand forecasting is highly effective for the business to attain their set of
goals and objectives.
The Best suitable method to forecast demand for expensive mobile
In order to forecast the demand of an expensive mobile most suitable method will be
quantitative method of demand forecasting. The quantitative demand forecasting method is
based on mathematical models and there is nature is objective. They are largely depended on
mathematical calculations. There are mainly two kinds of quantitative methods which can
applied in order to forecast the demand of the expensive mobile in a market(Taylor, 2010).
1. Time-series model – This quantitative method of demand forecasting identify the past
information or pattern of data to predict future on the basis of the pattern included in
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those figures or data. There are various tools or models within the Time-series model
such as -
 Simple mean – It uses an average of all past information and data as a forecast
 Simple moving average – this model utilises an average of specific number of recent
observations, with every observation receiving similar weight.
 Trend projection – This is a method which uses the least squares technique to fit a
straight line to information or data (Claveria and Torra,2014).
2. Associative models – This model is also known as causal models, this method assumes
that the variable being forecasted with regards to other variables within the environment.
They try to project on the basis of those companions (Suganthi and Samuel, 2012)
In order to identify or forecast the demand of expensive mobile it can be beneficial to use
Trend projection model within the Time-series quantitative method as demand of a product can
be easily predicted through analysing past data or information. The organisations can use Time-
series utilises data which is utilized in order to render visual information to the unpredictable
nature of the market. Accurate data can be collected and analysed with the past data and
information, for example if an organisation sold 1,00,000 mobiles last year and received order
upto 1,50,000 mobiles than it can be easy to predict demand of the expensive mobile in the
coming future (Hong,Wei and Dong, 2011) The statistical data and figures recorder by an
organisation are relevant in terms of reliability. Therefore, it is beneficial for the organisation to
use quantitative method of demand forecasting to predict demand of mobile in a particular
market.
2. Describing Oligopoly, its difference with Perfect competition and explaining how producers of
market promote their own interest.
This is that type of market which is dominating with only small number of huge sellers
who are selling similar products to large number of buyers. Oligopolies are the form of various
sellers of products and service who in their part are having monopoly within market resulting to
form collusions (Sunley and Martin, 2017). This is group of all sellers or producers who are
coming together in order to reduce competition and then ultimately leading to increased amount
of price rise. These types of collusions are having their own market structure with few number of
seller and large number of buyers. The reason behind less number of seller is the huge
investment which is required or less access to materials and technology. Each of the oligopolistic
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is having knowledge about one another what actions they are taking or what strategies are they
including within their management and operations working. All decision which one single firm is
taking would be influencing the other in collusion as stated into game theory.
There are many barriers to entry into market with oligopoly strategy this is the reason as
to why lesser number of sellers are there are number of buyers would always be high. The
barriers which are not enabling other company to enter into market like higher amount of
investment, large economies of scale and customer loyalty is very strong (Perroux, 2017). Under
this there is concentration ratio which is form of market share of 4 or 8 largest organisations of
industry this is used to describe market control of firm in that industry. In many countries of
world this coming into collusion is regarded as illegal like that in USA. Some of the
characteristic of Oligopoly which is been included as under:
Profit maximisation condition- as there are only certain numbers of seller into market so there
are huge chances of maximisation of profits for all firms
Entry and exit- there are many barriers to entry into market major one is huge investment within
company other than that patents, complex technology or government restrictions are there.
Product differentiation- oligopoly market conditions would be having both types of goods
including homogeneous like that of steel or oil and differentiated in automobiles.
Perfect competition on the other hand is having large number of sellers and larger number
of buyers within market analysing the price of products through market demand and supply. In
perfect competition there are element like that of monopoly is generally not there and there is no
control on prices. So this would be included as major difference between perfect competition and
oligopoly other would be included as under:
Characteristic Perfect competition Oligopoly
Number of firm Many Few
Types of products Identical Homogeneous or
Differentiated
Ease of entry High Low
Example of industry Apples, wheat and other
vegetables
Manufacturing computers,
automobiles and oil.
In this type of market structure where only certain number of firms are having
domination in terms of share within market. If there are 5 firms within market then they all
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would be having concentration ratio which must be greater than 50% (Brander and Spencer,
2015). All the firms within oligopoly market are interdependent on each other in terms of taking
decisions like that of price and output. Both these decision would be depending upon how the
rival firm is behaving within market area. So in this respect kinked demand curve would be
suggesting how the firm would be gaining maximisation of profits within Oligopoly market.
Figure 1: Kinked Demand Curve Diagram
[Source: How firms in Oligopoly compete, 2018]
In the above diagram it could be analysed that if the company is increasing their price of
product at P1 point like in OPEC which is collusion that consumer would be then buying from
other firms. Thus there are chances of losing larger number of shares but the demand would
remain elastic only if other company increase the price then their revenue would be lost. If the
company which has initially lower down their price then they are to gain increased into their
market share but other firms would not be allowing this to happen. All the rest firm within
market would be following the same as other and then cutting down their price but causing an
increase in demand but in smaller amount. This clearly shows that demand in terms of Oligopoly
market is very much inelastic in terms of decrease in price and revenue would be falling.
In this type of model there would be noted that price is rigid factor as no plus points are
involved for company if they are changing their price of product. Various promotional activities
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of oligopoly firm would be having very important aspect (Aalami, Moghaddam and Yousefi,
2015). As if company like that of OPEC is making huge investment in their promotion task this
would be leading to increase in sales of product thus seen in cold drink companies.
3 (a) Explaining how consumer attains utility maximisation and producers ensure cost
maximisation with diagrams.
Consumer could be defined to as that aspect of market due to which producer or company
is attaining profit maximisation they are the one who actually at the end is consuming the
product. It is necessary for them that they are attaining maximisation of number of product
consumed by them. As all the consumers are having limited amount of income as resource so it
is normal that they are facing constraint into budget. The concept of consumer utility
maximization would be responding to customer deciding over their allocation of budget which
they are having such that they are spending on purchase of products that each additional unit is
yielding extra amount of marginal utility (Mohajeryami, Schwarz and Baboli, 2015).
Figure 2: Utility Maximisation
[Source: UTILITY MAXIMIZATION MODEL, 2018]
Under the theory of consumer behaviour it could be stated that consumer being rational
decide over their purchase in such a manner that they are attaining customer equilibrium. The
model of utility maximisation would be based on certain assumptions like that of:
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1. Customer is rational in nature they always try to get maximum value of their money.
2. They are having limited income due to budget constrain.
3. They are having very clear preference of which product to choose from and they know
what their marginal utility is for each of their successive unit product.
4. All the product which they are purchasing is having its price so they should be choosing
from all goods with their income.
Thus this rule would be including that consumer is always deciding upon to allocate their
money in way which is most appropriate and getting them extra marginal utility as well. In the
form of mathematical equation it could be stated that MU of product A/ price of product A= MU
of product B/ price of product B and so on. Consumer would be buying that product which is
yielding them higher utility from each extra unit of product consumed by them. But over certain
period of time the Marginal unit would be tending to decrease even after more unit of product is
been consumed by them (Swait, Argo and Li, 2018). This law is known as diminishing law of
return where MU is decreasing with increase of any one unit of products.
Figure 3: Indifference curve
[Source: Swait, Argo and Li, 2018 ]
Indifference curve is that which is showing all different combination of two verity of
product which is giving the same level of satisfaction to the consumer who is consuming it. The
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highest point on this curve would be that which is showing highest level of satisfaction of the
customer. In this it could be clear that no customer would be having only one particular
preference of products to choose and they are having two products with them. Each point on an
indifference curve would be indicating same level of satisfaction which is there after customer is
consuming the product. The highest point is shown as consumer equilibrium which is the
maximum total utility derived from each level of consumption of products.
Figure 4: Cost Maximisation
[Source: What Is Cost Minimization, 2018]
On the other hand producer in the same way should always be ensuring maximization of
cost of product. This includes what would be the level of use of labour and capital used by
producers to ensure that they are having maximum output with lowest cost at each level of
production. This could also be defined to as undertaking those methods of cost effectiveness so
that they are generating good amount of products with delivering goods and service that too at
desired level of output (Amin, Cummings and Roth, 2015). It is required on hand of producer
that they are optimising output and maximising cost of the product this is called to as production
theory.
At the time of long run producer would be having more amount of flexibility of deciding
over what they have to produce or how many workers they need to hire and which technology
they are to use. So the long run production function is having more capital and labour so there
numerous ways in which quantity of output could be created.
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3 (b) Explaining features of cross elasticity and comparing it with other elasticity of demand.
Cross elasticity of demand could be included to as measurement of quantity of good
demanded over the price change of the good and vice versa. It could be measured into percentage
of change in demand of one product over the percentage change in price of other product. Like if
there is percentage of change in demand of new cars to 10% then what would be the percentage
change in price of old car would be decreased by 20% so this could be called to as cross
elasticity of demand. This is always negative in terms of complement products and positive at
terms of substitute products (Aalami, Moghaddam and Yousefi, 2015). There would be high
cross elasticity of new and old car as if the price of old car is increasing then the demand of new
car could be automatically decreasing.
Figure 5: Cross elasticity of demand
[Source:]
Cross elasticity of demand of old and new car would be high as both of them are having
strong relationship between both of them. There is many difference between cross elasticity and
other elasticity of demand like that of income or price elasticity of demand.
Income elasticity of demand-
This is referred to as percentage change in income of consumer would be leading to
change in their demand of products and services. There are difference between cross and income
elasticity of demand which would be meaning that both of them could be causing change in
demand of products.
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