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Market Failure and Government Intervention

If you are in a planning department or any department which must make forecasts, you will need an understanding of statistics and forecasting methods.  The yard stick of success in forecasting studies is the accuracy of their predictions. A forecaster tries to minimize the difference between predictions and the realized values of economic quantities that are essential to a firm's planning. This difference is called the error of prediction.  Even if you do not conduct the forecasts yourself, you will need to know the assumptions behind such studies and be familiar enough with forecasting methods like regression analysis to be able to discuss the ways in which the predictions may impact on a company's plans.  Many of the studies presented below make use of the statistical and forecasting skills that will be studied in chapters 4 and 6.

B.  Maximizing Sales:  Demand, Marketing, Advertising Studies

Most large firms have marketing departments which attempt to maximize sales of the firm's product or services.  If you are a marketing analyst you will become very familiar with ways to quantify what potential buyers are willing and able to buy. The potential "sales," "product," "revenues," or "shipments"  may be measured in physical units of product or in terms of dollars over a given period of time.  You will attempt to learn the present boundaries of the firm's markets, who the potential buyers in the markets are, and the mechanisms available  for reaching those potential buyers.  You will need to know how market demand will change which requires an awareness of the determinants of demand which include income, the price of other goods, buyer expectations, and preferences.  You may undertake demand and marketing studies to develop marketing strategies, advertising campaigns, distribution channels, pricing policies and other choices available to maximize the firm's sales.  Demand analysis is at the core of such marketing studies as we will see in chapters 4 through 7.

C.  Maximizing Output or Minimizing Cost: Supply and

Cost Effectiveness Studies

Many departments in a firm contribute to the minimization of costs of producing a firm's goods or services.  The transformation of resources (inputs) into goods or services (outputs) is called production.  Frequently more than one way can be found to produce a good or service.  If you work in  engineering, production,  or in a research and development department you'll be contributing to a manager's choice of the most efficient production process or least cost resources.  In any of these departments you could measure success in terms of productivity, which is the amount of output of a product divided by the amount of inputs used in making the product.

   Other departments contribute to lower costs by holding down the dollar value (cost) of the resources used in production.  Total cost is the sum of physical amounts of resources multiplied by their respective resource prices.  If you work in a personnel department or as a labor negotiator you will try to cut labor costs.  On the other hand, a job in a purchasing department requires investigation to find the lowest price sources for production inputs and the most efficient way to inventory both production inputs and outputs.

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