All firms forecast demand, but it would be difficult to find any two firms that forecast demand in exactly the same way. Over the last few decades, many different forecasting techniques have been developed in a number of different application areas, including engineering and economics. Many such procedures have been applied to the practical problem of forecasting demand in a business system, with varying degrees of success. Most commercial software packages that support demand forecasting in a business system include dozens of different forecasting algorithms that the analyst can use to generate alternative demand forecasts. While scores of different forecasting techniques exist, almost any forecasting procedure can be broadly classified into one of the following four basic categories based on the fundamental approach towards the forecasting problem that is employed by the technique. Judgmental Approaches. The essence of the judgmental approach is to address the forecasting issue by assuming that Continue reading
Economics Basics
Demand Forecasting in Managerial Economics
One of the crucial aspects in which managerial economics differs from pure economic theory lies in the treatment of risk and uncertainty. Traditional economic theory assumes a risk-free world of certainty; but the real world business is full of all sorts of risk and uncertainty. A manager cannot, therefore, afford to ignore risk and uncertainty. The element of risk is associated with future which is indefinite and uncertain. To cope with future risk and uncertainty, the manager needs to predict the future event. The likely future event has to be given form and content in terms of projected course of variables, i.e. forecasting. Thus, business forecasting is an essential ingredient of corporate planning. Such forecasting enables the manager to minimize the element of risk and uncertainty. Demand forecasting is a specific type of business forecasting. Concepts of Demand Forecasting The manager can conceptualize the future in definite terms. If he Continue reading
Official Actions to Influence Foreign Exchange Rates
As in some other major industrial nations with floating exchange rate regimes, in the United States there is considerable scope for the play of market forces in determining the dollar exchange rate. But also, as in other countries, U.S. authorities do take steps at times to influence the exchange rate, via policy measures and direct intervention in the foreign exchange market to buy or sell foreign currencies. As noted above, in practice, all foreign exchange market intervention of the U.S. authorities is routinely sterilized–that is, the initial effect on U.S. bank reserves is offset by monetary policy action. No one questions that monetary policy measures can influence the exchange rate by affecting the relative attractiveness of a currency and expectations of its prospects, although it is difficult to find a stable and significant relationship that would yield a predictable, precise response. But the question of the effectiveness of sterilized intervention, Continue reading
Law of Demand – Meaning, Assumptions and Exceptions
Suppose you want to buy mangoes at Rs.100 per dozen you buy 6 dozens. If the price of mangoes increase to 200/- then how much will you buy? Definitely less quantity of goods. What kind of relationship is there between the price and quantity demanded? There is inverse relation. The law of demand explains the functional relationship between price of a commodity and the quantity demanded of the same. It is observed that the price and the demand are inversely related which means that the two move in the opposite direction. An increase in the price leads to a fall in the demand and vice versa. The law of demand states that “Ceteris paribus (other things remaining the same), higher the price, lower the demand and vice versa”. The law is stated primarily in terms of the price and quantity relationship. The quantity demanded is inversely related to its price. Continue reading
Demand-Pull and Cost-Push Inflation
The term ‘inflation’ is used in many senses and it is difficult to give a generally accepted, precise and scientific definition of the term. Popularly, inflation refers to a rise in price level. Read More: Definition of Inflation and it’s Types Causes and Effects of Inflation The Stages of Inflation Keynesian View of Inflation Effects of Inflation on Different Groups of Society We can distinguish between two kinds of inflation on the basis of their causes, viz., demand-pull and cost-push inflation. Demand-Pull Inflation The most common cause for inflation is the pressure of ever-rising demand on a stagnant or less rapidly increasing supply of goods and services. The expansion in aggregate demand may be due to rapidly increasing private investment or expanding government expenditure for war or economic development. At a time when demand is expanding and exerting pressure on prices, attempts are made to expand production. However, this may Continue reading
Arguments in Favor of Firms Profit Maximization Objective
Profit maximization is the most important assumption, which helps the economists to introduce the price and production theories. The traditional economic theory assumes that the profit maximization is the only objective of business firms. According to this theory, profits must be earned by business to provide for its own survival, coverage of risks, growth and expansion. It is a necessary motivating force and it is in terms of profits that the efficiency of a business is measured. It forms the basis of conventional price theory. Profit maximization is regarded as the most reasonable and analytically the most productive business objective. The profit maximization assumption in this theory helps in predicting the behavior of business firms and also the behavior of price and out pet under different market conditions. No alternative hypothesis or assumption explains and predicts the behavior of firms better than the profit maximization assumption. The traditional theory supports Continue reading