Chapter 4

MARKET AND DEMAND ANALYSIS

1. We have to estimate the parameters a and b in the linear relationship
Yt = a + bT
Using the least squares method.
According to the least squares method the parameters are:
TYnTY
b=
T2nT2
a = Y bT
The parameters are calculated below:
Calculation in the Least Squares Method
T
Y
TY
1
2,000
2,000
2
2,200
4,400
3
2,100
6,300
4
2,300
9,200
5
2,500
12,500
6
3,200
19,200
7
3,600
25,200
8
4,000
32,000
9
3,900
35,100
10
4,000
40,000
11
4,200
46,200
12
4,300
51,600
13
4,900
63,700
14
5,300
74,200
T = 105
Y = 48,500
TY = 421,600
T = 7.5
Y = 3,464
TYnTY
b=

421,600 14 x 7.5 x 3,464

=

T2nT2
57,880
=

= 254

227.5
a = Y bT
= 3,464 254 (7.5)
= 1,559
Thus linear regression is
Y = 1,559 + 254 T

1,015 14 x 7.5 x 7.5

T2
1
4
9
16
25
36
49
64
81
100
121
144
169
196
T 2 = 1,015

2. In general, in exponential smoothing the forecast for t + 1 is

Ft + 1 = Ft + et
Where Ft + 1 = forecast for year )
= smoothing parameter
et = error in the forecast for year t = St = Ft
F1 is given to be 2100 and is given to be 0.3
The forecasts for periods 2 to 14 are calculated below:
Period t Data (St)
Forecast
Error
Forecast for t + 1
(Ft)
(et St =Ft)
(Ft + 1 = Ft + et)
1
2
3
4
5
6
7
8
9
10
11
12
13

2,000
2,200
2,100
2,300
2,500
3,200
3,600
4,000
3,900
4,000
4,200
4,300
4,900

2100.0
2070
2109.0
2111.7
2168.19
2267.7
2547.4
2863.2
3204.24
3413
3589.1
3772.4
3930.7

-100
130
-9
188.3
331.81
932.3
1052.6
1136.8
695.76
587.0
610.9
527.6
969.3

F2 = 2100 + 0.3 (-100) = 2070

F3 = 2070 + 0.3(130) = 2109
F4 = 2109 + 0.3 (-9) = 2111.7
F5 = 2111.7 + 0.3(188.3) = 2168.19
F6 = 2168.19 + 0.3(331.81) = 2267.7
F7 = 2267.7 + 0.3(9332.3) = 2547.4
F8 = 2547.4 + 0.3(1052.6) = 2863.2
F9 = 2863.2 + 0.3(1136.8) = 3204.24
F10 = 33204.24 + 0.3(695.76) = 3413.0
F11 = 3413.0 + 0.3(587) = 3589.1
F12 = 3589.1 + 0.3(610.9) = 3773.4
F13 = 3772.4 + 0.3(527.6) = 3930.7
F14 = 3930.7 + 0.3(969.3) = 4221.5

3. According to the moving average method

St + S t 1 ++ S t n +1
Ft + 1 =
n
where Ft + 1 = forecast for the next period
St = sales for the current period
n = period over which averaging is done
Given n = 3, the forecasts for the period 4 to 14 are given below:

Period t

Data (St)

2,000

Forecast
(Ft)

Forecast for t + 1
Ft + 1 = (St+ S t 1 + S t 2)/ 3

2
3
4
5
6
7
8
9
10
11
12
13
14

2,200
2,100
2,300
2,500
3,200
3,600
4,000
3,900
4,000
4,200
4,300
4,900
5,300

2100
2200
2300
2667
3100
3600
3833
3967
4033
4167
4467

F4 = (2000 + 2200 + 2100)/3 = 2100

F5 =(2200 + 2100 + 2300)/3= 2200
F6 = (2100 + 2300 + 2500)/3 = 2300
F7 = (2300 + 2500 + 3200)/3= 2667
F8 = (2500 + 3200 + 3600)/3 = 3100
F9 = (3200 + 3600 + 4000)/3 = 3600
F10 = (3600 + 4000 + 3900)/3 = 3833
F11 = (4000 + 3900 + 4000)/3 =3967
F12 =(3900 + 4000 + 4200)/3 = 4033
F13 = (4000 + 4200 + 4300)/3 = 4167
F14 = (4200 + 4300 + 4900) = 4467

4.
Q1 = 60
Q2 = 70
I1 = 1000
I2 = 1200

Q1 Q2

Income Elasticity of Demand E1 =

I1 + I2
x
Q2 Q1

I2 - I1
E1 = Income Elasticity of Demand
Q1 = Quantity demanded in the base year
Q2 = Quantity demanded in the following year
I1 = Income level in base year
I2 = Income level in the following year
70 60
E1 =

1000 + 1200
x

1200 1000

70 + 60

22000
E1 =

= 0.846
26000

5.
P1 = Rs.40
P2 = Rs.50
Q1 = 1,00,000
Q2 = 95,000
Price Elasticity of Demand = Ep =

Q2 Q1

P1 + P2
x

P2 P1

Q2 + Q1

P1 , Q1 = Price per unit and quantity demanded in the base year

P2, Q2 = Price per unit and quantity demanded in the following year
Ep = Price Elasticity of Demand
95000 - 100000
Ep =

40 + 50
x

50 - 40
- 45
Ep =

= - 0.0231
1950

95000 + 100000