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BUSINESS economics

BUSINESS economics. Class 9 9 December, 2009. Recap. Cost Curves Marginal Cost Curve Average Cost Curve Fixed and Variable Costs Short-run and Long-run Costs Price Control Ceiling and floor pricing Support price Monopoly restrictions. Price Controls. Criticism

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BUSINESS economics

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  1. BUSINESS economics Class 9 9 December, 2009

  2. Recap • Cost Curves • Marginal Cost Curve • Average Cost Curve • Fixed and Variable Costs • Short-run and Long-run Costs • Price Control • Ceiling and floor pricing • Support price • Monopoly restrictions

  3. Price Controls • Criticism • Prices kept artificially low • Demand is increased to the point where supply can not keep up • Shortages in the price-controlled product. • Shortages lead to black markets where prices for the same good exceed those of an uncontrolled market. • Once controls are removed, prices will immediately be subject to rampant inflation, which can temporarily shock the economic system. • Example of how price controls cause shortages • Arab oil embargo between October 19, 1973 and March 17, 1974. • Long lines of cars and trucks quickly appeared at retail gas stations in the U.S. and some stations closed because of a shortage of fuel. • The fixed price was below what the market would otherwise bear and, as a result, the inventory disappeared.

  4. Forecasting Techniques • Forecasting is the establishment of future expectations by the analysis of past data, or the formation of opinions. • Forecasting is an essential element of capital budgeting. • Capital budgeting requires the commitment of significant funds today in the hope of long term benefits. The role of forecasting is the estimation of these benefits.

  5. Forecasting Techniques and Routes

  6. Quantitative Forecasting • Quantitative: Regression with related variable • Data set of ‘Sales’ as related to both time and the number of households.

  7. Quantitative Forecasting • Quantitative: Sales plotted related to households.

  8. Regression • Straight line Y = mx + C is the trend line that represents the regressed data • Co-efficient of the Y axis intercept and slope can be derived using regression analysis.

  9. Regression Analysis • Predicting with the regression output. • Regression equation is: • Sales(for year) = -348.218 + ( 3.316 x households). • Assuming that a separate data set forecasts the number of households at 1795 for the year 2006, then: • Sales(2006) = -348.218 + ( 3.316 x 1795) = 5,604 units.

  10. Time series • Sales plotted as a function of time.

  11. Regression: Auto Forecast by Excel.

  12. Moving Average

  13. Forecasting Routes Top-Down where international and national events affect the future behaviour of local variables.

  14. Forecasting Routes Where local events affect the future behaviour of local variables. Bottom-Up

  15. Forecasting: Summary • Sophisticated forecasting is essential for capital budgeting decisions • Quantitative forecasting uses historical data to establish relationships and trends which can be projected into the future • Qualitative forecasting uses experience and judgment to establish future behaviours • Forecasts can be made by either the ‘top down’ or ‘bottom up’ routes.

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