Befa Unit - I

Business Economics and Financial Analysis Unit I
UNIT-1
BUSINESS AND ECONOMICS
BUSINESS:
A business is an organizational entity and legal entity made up of an association of people, be
they natural, legal, or a mixture of both who share a common purpose and unite in order to focus their
various talents and organize their collectively available skills or resources to achieve specific
declared goals and are involved in the provision of goods and services to consumers.
Business is the activity of making one's living or making money by producing or buying and
selling products (such as goods and services).
Business is "any activity or enterprise entered into for profit. It does not mean it is a company, a
corporation, partnership, or has any such formal organization, but it can range from a street peddler to
General Motors.
FEATURES OR CHARACTERISTICS OF BUSINESS:
1. Dealing Goods & Services: Business deals with goods and services. The goods may be consumer goods
such as sweets, bread, cloth, shoes, electronics etc. They may be producer's goods such as machinery,
equipment, etc. which are used to further produce another set of goods for consumption.
2. Production and Exchange: You can call an economic activity a 'business' only when there is production
or transfer or exchange or sale of goods or services for value. If goods are produced for self-consumption
or presentation as gift, such activities shall not be treated as business. In a business activity, there must be
two parties i.e., a buyer and a seller. Such activity should concern with the transfer of goods or exchange
of goods between a buyer and a seller.
3. Continuity and regularity in Dealings: A single transaction shall not be treated as business. An activity
is treated as business only when it is undertaken continually or at least recurrently. A business is believed
to be a going concern.
4. Profit Motive: Earning profit is the primary motive of business. This is not to undermine the importance
of the social objectives or human element in the business activity. Profits are essential to enable the
business to survive, to grow, expand, and to get recognition. By reinvesting the profits the business
increases its capital and contributes to the wealth of the owners.
5. Usage of Resources: Any business need one or many of the four productive factors or resources namely
land, labour, capital and enterprise to earn profit from the business. All the four resources are always in
limited supply (scarcity) and the business must use them efficiently and effectively to produce goods and
services.
6. Element of Risk: The element of risk exists due to a variety of factors which are outside the control of
the business enterprise. There are two kinds of risks; one whose probability can be calculated and can be
insured like losses due to fire, floods, theft, etc. and the other whose probability cannot be calculated and
which cannot be insured against, e.g. changing technology, fall in demand etc.
Dr. M.Kondala Rao, Associate Professor Department of Management Studies

BUSINESS OBJECTIVES:
Business organizations are economic in nature but they also have human and social aspect associated
with them.
Economic objectives
 Earning of satisfactory profits and fair return on investment for stakeholders
 Exploring new markets and Creation of new customers
 Growth and expansion of business operations of the firm
 Making innovations and improvements in goods and services
Social objectives
 Supply of quality goods and services at reasonable costs
 Providing goods and rescannable prices
 Ensure that fair returns to investors
 Providing employment opportunities to the people in the country
Human objectives
 Fair deal to employees in terms of wages and incentives
 Providing better working conditions and environment to the employees
 Provide job satisfaction and Provide the employees more growth opportunities
FUNCTIONS OF BUSINESS
There are many function need for running a business. These are given below:-
1. Planning 5. Insurance
2. Purchase 6. Market research
3. Production 7. Grading & Standardization
4. Sale 8. Advertisement & Publicity
1. Planning: Planning is an essential function of any organization. It is very much essential for production,
and investment. Without planning any business can’t achieve their destiny. Ex: Right from procurement
of capital to distributing and selling products to ultimate customer every stage is required plan.
2. Purchase: To continue the process of production, businessmen purchase raw-materials from the
suppliers and other resources from the various areas.
3. Production: Production or creating utility is the primary function. By producing goods and delivering
services, business organizations try to fulfill the needs of the people.
4. Sale: Sale means transfer of the ownership of goods and delivery services to another person.
5. Insurance: In business there are many types of risks such as deflation, price falling, fire and accident
etc. For that reason should take insurance policy.
6. Market research: By market research businessmen get the information about the customer’s need,
demand, purchasing power, expectation.

7. Grading & Standardization: Grading means to classify the products according to their criteria,
quantity, value and nature. Standardization means to divide the product according to the quality.
Ex: ABC analysis
8. Advertisement & Publicity: Business organization should make advertisement and publicity to create
customer and inform them about the design, size, quality, quantity and price of product (s).
What is a ‘Firm’?
A firm is a business organization, such as a corporation, limited liability company or partnership,
that sells goods or services to make a profit.
What is the 'Theory of the Firm’?
The theory of the firm is the microeconomic concept founded in neoclassical economics that states
that firms (including businesses and corporations) exist and make decisions to maximize profits. Firms
interact with the market to determine pricing and demand and then allocate resources according to models
that look to maximize net profits.
In the theory of the firm, the behavior of a particular business entity is said to be driven by profit
maximization. This theory governs decision making in a variety of areas including resource allocation,
production technique, pricing adjustments and quantity produced.
The theory of the firm goes along with the theory of the consumer, which states that consumers seek
to maximize their overall utility. In this case, utility refers to the perceived value a consumer places on a
good or service, sometimes referred to as the level of happiness the customer experiences from the good or
service. Example, when consumers purchase a good for Rs.10, they expect to receive a minimum of Rs.10 in
utility from the purchased good.
Modern takes on the theory of the firm sometimes distinguish between long-run motivations, such as
sustainability, and short-run motivations, such as profit maximization. The theory is always being analyzed
and adapted to suit changing economies and markets. Early economic analysis focused on broad industries,
but as the19th century progressed, more economists began to look at the firm level to answer basic
questions about why companies produce what they do, and what motivates their choices when allocating
capital and labor.
TYPES OF BUSINESS ENTITIES
Business Entity
A business entity is an entity that is formed and administered as per corporate law in order to engage
in business activities, charitable work, or other activities allowable. Most often, business entities are formed
to sell a product or a service.
In simplest terms, a business entity is an organization created by an individual or individuals to
conduct business engage in a trade, or conduct activities which will make profits.
A business entity refers to the structure of a business.
This decision is based on various factors such as nature of business activities, scale of operations,
capital requirement, availability of recourses and other factors

I. PRIVATE SECTOR
An organization which is owned, managed and controlled by private person(s) or individual(s) is known as
private sector organization.
1. SOLE TRADING CONCERN:
The sole trader firm is the simplest, oldest and natural form of business organisation. It is also called sole
proprietorship. ‘Sole’ means one. ‘Sole trader’ implies that there is only one trader who is the owner of the
business.
Sole trader or Entrepreneur The person who creates a new enterprise and faces every challenge for its
development and operation is known as an entrepreneur.
Entrepreneurship refers to the process of creating a new enterprise and bearing any of its risks, with the
view of making the profit. Or “A sole-trader is a person who carries on business exclusively by and for
himself, he is not only the owner of the capital of the undertaking, but is usually to organise and manage and
takes all the profits or responsibility for losses.”
Features of sole trader:
• It is easy to start a business under this form and also easy to close.
• He introduces his own capital. Sometimes, he may borrow, if necessary.
• He enjoys all the profits and in case of loss, he alone suffers.
• He has unlimited liability which implies that his liability extends to his personal properties in case of
loss.
• He has a high degree of flexibility to shift from one business to the other.
• Except in such businesses where license is required for instance, hotels and so on, the sole trader is free
to take up any business.
• As he is alone, he has to look after by him/herself all the activities related to purchase, sale, cash
accounts and taking care of the customers.
• He may take the help of his family members or paid employees in carrying out the business.

• There is no continuity. The business comes to a close with the death, illness or insanity of the sole trader.
Business secrets can be guarded well.
• He has total operational freedom. He is the owner, manager and controller.
• He can be directly in touch with the customers. He can take decisions very fast and implement them
promptly.
• Rates of tax, for example, income tax and so on are comparatively very low.
CHARACTERISTICS OF SOLE PROPRIETORSHIP:
1. Individual Initiative: This business is started by the initiative of a single person. He prepares the blue
prints of the venture and arranges various factors of production. He may employ other person for assistance
but ultimate authority and responsibility lies with him. All the profits and losses are taken by the single
individual.
2. Unlimited Liability: In sole trade business liability is unlimited. The proprietor is responsible for all
losses arising from the business. The liability is not limited only to his investments in the business but his
private property is also liable for business obligations.
3. Management and Control: The proprietor manages the whole business himself. He prepares various
plans and executes them under his own supervision. There may be some persons to help him but ultimate
control lies with the owner.
4. Motivation: One person is the sole owner of the business. He takes all profits and bears losses, if any.
There is a direct relationship between efforts and reward. If he works more, he will earn more. He is
motivated to expand his business activities. He will not like to enter speculative business because the risk
involved is more.
5. Secrecy: All important decisions are taken by the owner himself. He keeps all the business secrets only to
himself. Business secrets are very important for small business. By retaining business secrets he avoids
competitors entering the same business.
6. Proprietor and proprietorship are one: Legally, the sole trader and his business are not separate
entities. Loss in his business is his loss and liabilities of the business are his liabilities.
7. Owners and business exist together: In sole-trade business there is no separate existence of the business
with the owner. The business and owner exist together. The business is dissolved if the owner dies, becomes
insolvent or is removed from the scene.
8. Limited area of operations: A sole-trade business has generally a limited area of operations, the reason
being the limited resources and managerial abilities of the sole trader. He can arrange limited funds only and
will be able to supervise a small business. Since all decisions are to be taken by the proprietors, so the area
of business will be limited with his management abilities.
9. Free from Legal Formalities: A sole trade business can be started without performing any legal
formalities. It does not require any formation or registration.

Advantages of Sole Trader:

1. Easy to start and easy to close Formation of a sole trader form of organisation is relatively easy. Even
closing the business is easy.
2. Personal contact with customers directly Based on the tastes and preferences of the customers, the
stocks can be maintained.
3. Prompt decision making To improve the quality of services to the customers, he can take any decision
and implement the same promptly. He is the boss and he is responsible for his business. Decisions relating to
growth or expansion can be made promptly.
4. High degree of flexibility Based on the profitability, the trader can decide to continue or change the
business, if need be.
5. Secrecy Business secrets can well be maintained because there is only one trader.
6. Direct motivation If there are profits, all the profits belong to the trader himself. This is the direct
motivating factor.
7. Total control The ownership, management and control are in the hands of the sole trader
8. Transferability The legal heirs of the sole trader may take the possession of the business.
9. More competition Because it is easy to set up a small business, there is a high degree of competition
among the small business persons and a few who are good in taking care of customer requirements alone can
survive.
10. Low bargaining power He/ She may have to compromise many times regarding the terms and
conditions of purchase of materials and others.
Disadvantages of Sole Trader:
1. Unlimited liability It means that the sole trader has to bring his personal property to clear off the loans of
his business.
2. Limited amounts of capital The resources a sole trader can mobilize cannot be very large and hence this
naturally sets a limit for the scale of operations.
3. No division of labour All the work related to different functions such as marketing, production, finance,
labour and so on has to be taken care of by the sole trader himself.
4. Uncertainty There is no continuity in the duration of the business. On the death, insanity or insolvency
the business may come to an end.
5. Inadequate for growth and expansion This form is suitable for only small size, one-man-show type of
organisations. This may not really work out for growing and expanding organisations.
6. Lack of specialization The services of specialists such as accountants, market researchers, consultants
and so on, are not within the reach of most of the sole traders.
7. Reverse economies of scale: Sole traders will be unable to take advantage of economies of scale in the
same way as limited companies and larger corporations, who can afford to buy in bulk. This might mean
that they have to charge higher prices for their products or services in order to cover the costs.

Suitability: Despite the above disadvantages, the sole trader is a suitable form of organisation where
• Business is of small size and requires low volume of capital
• Business can be managed by one person
• Risk is low
• Personal attention is necessary to take care of the customers
• Products/services need to be provided as per the customer specifications
Examples: Wedding Planners & Photography, Catering Business, Tailoring, Restaurant/ Food Truck,
Poultry Business, Grocery Delivery Service, Sweet Shop, Event management, and others.
2. PARTNERSHIP FIRM
Partnership is an improved form of sole trader in certain respects. Where there are like-minded persons with
resources, they can come together to do the business and share the profits/losses of the business in an agreed
ratio.
The Indian Partnership Act, 1932, Section 4, defined partnership as “the relation between persons who have
agreed to share the profits of business carried on by all or any of them acting for all”.
Features of Partnership Firm:
1. Number of Partners or Persons: As against proprietorship, there should be at least two persons subject
to a maximum of ten persons for banking business and twenty for non-banking business to form a
partnership firm.
2. Profit and Loss Sharing: There is an agreement among the partners to share the profits earned and
losses incurred in partnership business.
3. Contractual Relationship: Partnership is formed by an agreement-oral or written-among the partners.
4. Existence of Lawful Business: Partnership is formed to carry on some lawful business and share its
profits or losses. If the purpose is to carry some charitable works, for example, it is not regarded as
partnership.
5. Utmost Good Faith and Honesty: A partnership business solely rests on utmost good faith and trust
among the partners.
6. Unlimited Liability: Like proprietorship, each partner has unlimited liability in the firm. This means that
if the assets of the partnership firm fall short to meet the firm’s obligations, the partners’ private assets will
also be used for the purpose.
7. Restrictions on Transfer of Share: No partner can transfer his share to any outside person without
seeking the consent of all other partners.
8. Principal-Agent Relationship: The partnership firm may be carried on by all partners or any of them
acting for all. While dealing with firm’s transactions, each partner is entitled to represent the firm and other
partners. In this way, a partner is an agent of the firm and of the other partners.
9. Taxation In the partnership form of organisation, profits of partnership and individual incomes of
partners are taxed separately. The share of profits from the partnership is included in the individual
partners’ incomes only to find out the tax rate applicable.

10. Dissolution The closure of partnership is called ‘dissolution’. When any of the partners die, becomes
insolvent or insane, the partnership is to be dissolved. This means that the duration of the partnership is not
certain. The remaining partners, if they are interested, restart their business with a new name.
11. Implied authority The partner looking after the affairs of the partnership has certain implied authority.
For instance, such a partner is empowered to take decisions of not more than a value of, say, Rs 5,000.
Where the decisions of higher value have to be taken, he has to consult others. Each partner binds others
through his acts since every partner is the agent of the firm.
12. Transferability of share/interest The partners cannot transfer their share in partnership in the firm to
others without the consent of the other partners.
13. Division of labour Because there are more than two persons, the work can be divided among the
partners based on their aptitude.
Advantages of Partnership Firm:
1. Easy Formation: Partnership is a contractual agreement between the partners to run an enterprise.
Hence, it is relatively ease to form. Legal formalities associated with formation are minimal. Though, the
registration of a partnership is desirable, but not obligatory.
2. More Capital Available: Partnership overcomes this problem, to a great extent, because now there is
more than one person who provides funds to the enterprise. It also increases the borrowing capacity of the
firm.
3. Combined Talent, Judgment and Skill: Usually, partners are pooled from different specialised areas to
complement each other. For example, if there are three partners, one partner might be a specialist in
production, another in finance and the third in marketing. This gives the firm an advantage of collective
expertise for taking better decisions.
4. Infusion of Risk: You have just seen that the entire losses are borne by the sole proprietor only but in
case of partnership, the losses of the firm are shared by all the partners as per their agreed profit-sharing
ratios. Thus, the share of loss in case of each partner will be less than that in case of proprietorship.
5. Flexibility: Like proprietorship, the partnership business is also flexible. The partners can easily
appreciate and quickly react to the changing conditions. No giant business organisation can stifle so quick
and creative responses to new opportunities.
6. Tax Advantage: Taxation rates applicable to partnership are lower than proprietorship and company
forms of business ownership.
Disadvantages of Partnership Firm:
1. Unlimited Liability: In partnership firm, the liability of partners is unlimited. Just as in proprietorship,
the partners’ personal assets may be at risk if the business cannot pay its debts.
2. Divided Authority: Sometimes the earlier stated maxim of two heads better than one may turn into “too
many cooks spoil the broth.” Each partner can discharge his responsibilities in his concerned individual
area. But, in case of areas like policy formulation for the whole enterprise, there are chances for conflicts
between the partners.

3. Lack of Continuity: Death or withdrawal of one partner causes the partnership to come to an end. So,
there remains uncertainty in continuity of partnership.
4. Risk of Implied Authority: Each partner is an agent for the partnership business. Hence, the decisions
made by him bind all the partners. At times, an incompetent partner may lend the firm into difficulties by
taking wrong decisions. Risk involved in decisions taken by one partner is to be borne by other partners also.
Ex: 1) Tata Group. 2) Maruti Suzuki 3) Delhi Metro Rail Corporation 4) State Bank of India 5) LIC India
6) Mahindra Group others
Suitability
• Requires moderate volume of funds, as much as partners can bring
• Requires more persons of different skills which can be used for the common advantage of all
partners.
PARTNERSHIP DEED
The written agreement among the partners is called ‘the partnership deed’.
 Names and addresses of the firm and partners
 Nature of the business proposed and Duration of partnership
 Amount of capital of the partnership and the ratio for contribution by each of the partners
 Their profit sharing ratio and The amount of salary for active partener
 Rate of interest charged on capital contributed, loans taken from the partnership and the amounts drawn,
if any, by the partners from their respective capital balances
 Procedure to value good will of the firm at the time of admission of a new partner, retirement or death
of a partner
 Allocation of responsibilities of the partners and Procedure for dissolution of the firm
 Special rights, obligations and liabilities of partner(s), if any.
TYPES OF PARTNERS
Active/Managing Partner: An active partner mainly takes part in the day-to-day running of the business
and also takes active participation in the conduct and management of the business firm. He/she carries the
daily business activities on behalf of other partners. He/she may act in different capacities such as manager,
advisor, organiser and controller of affairs of the firm.
Sleeping Partner: A sleeping partner is also known as a “dormant partner”. This partner does not
participate in the day-to-day functioning activities of the partnership firm. A person who has sufficient
money or interest in the firm, but cannot devote his time to the business, can act as a sleeping partner in the
firm. However, he is bound by all the acts of the other partners. A sleeping partner like any other partner
brings share capital to the firm. He also continues to share the profits and losses of the firm.
Nominal Partner: A nominal partner does not have any real or significant interest in the partnership firm.
In simple words, he is only lending his name to the firm and does not have a voice in the management of the
firm. On the strength of his name, the firm can promote its sales in the market or can get more credit from

the market. Ex: A partnership is executed between the partner and the celebrity or a business for the sake of
value addition to the firm and also for promoting branding by using the person’s fame and goodwill.
Minor Partner: A minor is a person who is yet to attain the age of majority in the law of the land.
According to Section 3 of the Indian Majority Act, 1875 a person is deemed to have attained the age of
majority when he attains 18 years of age. However, a minor can also be appointed to claim the benefits of
the Partnership
Secret Partner: In a partnership, the position of secret partner lies between the active and sleeping partner.
The membership of the firm of a secret partner is kept secret from the outsiders and third parties. His
liability is unlimited since he holds a share in profit and shares liabilities for losses in the business. He can
even take part in working for the business.
Outgoing partner: An outgoing partner is a partner who voluntarily retires without dissolving the firm. He
leaves the existing firm; therefore he is called as an outgoing or retiring partner. Such a partner is liable for
all his debts and obligations incurred before his retirement. However, he can be held liable for his future
obligations, if at all he fails to give a public notice stating his retirement from the partnership firm.
Limited partner: A limited partner is a partner whose liability is only upto the extent of his contributions
for the capital of the partnership firm.
3. JOINT STOCK COMPANY
The joint stock company emerges from the limitations of premiership such as joint and several
liability, unlimited liability, limited resources, and uncertain duration and so on. Normally, to take part in a
business, it may need large money and we cannot foretell the fate of business. It is not literally possible to
get into business with little money. Against this background, it is interesting to study the functioning of a
joint stock company. The main principle of the joint stock company form is to provide opportunity to take
part in business with as low investments as possible say Rs 1000.
The system of Joint Stock Company has been very useful for large undertakings which require huge
capital. Here the capital is divided into certain units. Each unit is called a share. The price of each share is
kept so low that even a common man can find it comfortable to pick it up!
Definition
Section 3 (1) of the Companies Act, 1956 defines a company as a company formed and registered under the
Act or an existing company.
A joint stock company is described as a voluntary association of persons recognised by law, having a
distinct name, a common seal, formed to carry on business for profit, with capital divisible into transferable
shares, limited liability, corporate body and perpetual succession.
In brief, it is like an artificial person created by law with perpetual succession and common seal.
Features of Joint Stock Company:
This definition brings out the following features of the company:
1. Artificial person The company has no form or shape. It is an artificial person created by law. It is
intangible, invisible and existing only in the eyes of law.

2. Separate legal existence It has an independent existence. It is separate from its members. It can acquire
the assets. It can borrow for the company. It can sue others if they are in default in payment of dues, breach
of contract with it, if any. Similarly, it can be sued by outsiders for any claim. A shareholder is not liable for
the acts of the company.
3. Voluntary association of persons The company is an association of voluntary association of persons
who want to carry on business for profit. To carry on business, they need capital. So they invest in the share
capital of the company.
4. Limited liability The shareholders have limited liability i.e., liability limited to the face value of the
shares held by him. In other words, the liability of a shareholder is restricted to the extent of his contribution
to the share capital of the company. The shareholder need not pay anything, even in times of loss for the
company, other than his contribution to the share capital.
5. Capital is divided into shares The total capital is divided into a certain number of units. Each unit is
called a share. The price of each share is priced so low that every investor would like to invest in the
company. The companies promoted by promoters of good standing (i.e., known for their reputation in terms
of reliability character and dynamism) are likely to attract huge resources.
6. Transferability of shares In the company form of organisation, the shares can be transferred from one
person to the other. A shareholder of a public company can sell his holding of shares at his will. However,
the shares of a private company cannot be transferred. A private company restricts the transferability of the
shares.
7. Common seal As the company is an artificial person created by law has no physical form; it cannot sign
its name on a paper. So, it has a common seal on which its name is engraved. Every document or contract
should be affixed by the common seal, otherwise the company is not bound by such a document or contract.
8. Perpetual succession ‘Members may come and members may go, but the company continues forever and
ever’. A company has uninterrupted existence because of the right given to the shareholders to transfer the
shares.
9. Ownership and Management separated The shareholders are spread over the length and breadth of the
country, and sometimes, they are from different parts of the world. To facilitate administration, the
shareholders elect some among themselves or the promoters of the company as directors to a Board, which
looks after the management of the business.
10. Winding up Winding up refers to the putting an end to the company. Because law creates it, only law
can put an end to it in special circumstances such as representation from creditors or financial institutions, or
shareholders against the company that their interests are not safeguarded. The company is not affected by
the death or insolvency of any of its members.
11. The name of the company ends with 'limited ' It is necessary that the name of the company ends with
limited (ltd.) to give an indication to the outsiders that they are dealing with the company with limited
liability and they should be careful about the liability aspect of their transactions with the company.

Advantages Joint Stock Company

The following are the advantages of a Joint Stock Company:
1. Mobilisation of larger resources A joint stock company provides opportunity for the investors to invest,
even small sums, in the capital of large companies. This facilitates rising of larger resources.
2. Separate legal entity The company has separate legal entity. It is registered under Indian Companies
Act, 1956.
3. Limited liability The shareholder has limited liability in respect of the shares held by him. In no case,
does his liability exceed more than the face value of the shares allotted to him.
4. Transferability of shares The shares can be transferred to others. However, the private company shares
cannot be transferred.
5. Liquidity of investments By providing the transferability of shares, shares can be converted into cash.
6. Inculcates the habit of savings and investments Because the share face value is very low, this promotes
the habit of savings among the common man and mobilises the same towards investments in the company.
7. Democracy in management The directors are elected by the shareholders in a democratic way in the
general body meetings. The shareholders are free to make any proposals, question the practices of the
management, suggest the possible remedial measures as they perceive. The directors respond to the issues
raised by the shareholders and have to justify their actions.
8. Economies of large scale production Since the production is in the large scale with large funds at its
disposal, the company can enjoy the internal economies of large scale production.
9. Continued existence The company has perpetual succession. It has no natural end. It continues forever
and ever unless law puts an end to it.
10. Professional management With the larger funds at its disposal, the Board of Directors recruits
competent and professional managers to handle the affairs of the company in a professional manner.
11. Growth and Expansion With large resources and professional management, the company can earn
good returns on its operations, build good amount of reserves and further consider the proposals for growth
and expansion.
Disadvantages of Joint Stock Company
1. Formation of company is a long drawn procedure Promoting a joint stock company involves a long
drawn procedure. It is expensive and involves large number of legal formalities.
2. High degree of government interference The government brings out a number of rules and regulations
governing the internal conduct of the operations of a company such as meetings: voting, audit and so on, and
any violation of these rules results into statutory lapses, punishable under the Companies Act.
3. Inordinate delays in decision making As the size of the organisation grows, the number of levels in the
organisation also increases in the name of specialisation. The more the number of levels, the more is the
delay in decision making. Sometimes, so called professionals do not respond to the urgencies as required. It
promotes delay in administration which is referred to ‘red tape and bureaucracy’.
4. Lack of initiative In most of the cases, the employees of the company at different levels show slack in

their personal initiative with the result, the opportunities once missed do not recur and the company loses the
revenue.
5. Lack of responsibility and commitment In some cases, the managers at different levels are afraid to
take risk and more worried about their jobs rather than the huge funds invested in the capital of the
company. Where managers do not show up willingness to take responsibility, they cannot be considered as
committed. They will not be able to handle the business risks.
6. Conflicting interests The company has divergent groups of people associated with it. The share holders
want maximum dividends. The company wants to maintain good amount of reserves. It is not possible to
pay larger dividends, and yet, to maintain good amount of reserves. It is necessary to reconcile such
conflicting interests. The board of directors usually justifies their actions of declaring low or high rate of
dividend.
7. Promotes speculation Speculation is the process of expecting a higher price for a particular share and
buying it at a lower rate. In the stock markets where shares are bought and sold, speculation is the
undercurrent of all transactions. In this process, there is danger that some shares are manipulated and
common investors are trapped in such manipulation. At times, prices are manipulated.
8. Lobbying with government departments The corporate giants have the capacity to lobby with the
government departments to influence the government policies to suit their business conditions.
9. Tends to monopoly Where the company has grown to larger size, it may fix the price on its own for its
products and services as a monopolist.
10. Higher taxes The rate of income tax is very high when compared to the other forms of organisation.
SUITABILITY
The joint stock company has become indispensable for every business activity, particularly if it is to
be carried out on a large scale. It is more suitable where
 there is a need for a high degree of specialization
 there is need for large funds
 there is a need for growth and expansion and there is need for government control or interference
FORMATION OF A JOINT STOCK COMPANY
There is two stages in the formation of a joint stock company. They are:
(a) to obtain Certificate of Incorporation
(b) to obtain Certificate of Commencement of Business
The Certificate of Incorporation is just like a ‘date of birth’ certificate. It certifies that a company
with such and such a name is born on a particular day. Certificate of Commencement of Business authorises
a public company to start its commercial operations officially.
A public company has to comply with certain requirements to obtain certificate of commencement of
Business. A private company need not obtain the Certificate of Commencement of Business. It can start its
commercial operations immediately after obtaining the Certificate of Incorporation.

MAIN DOCUMENTS IN COMPANY FORMATION

The main documents in company formation are
(A) Memorandum of Association
(B) Articles of Association
(C) Prospectus
While drafting the contents of these documents, the promoters should take a special care to fit their
vision into the contents of these documents. Otherwise, it will be difficult to change its contents at a later
date. The procedure laid under Companies Act to amend the contents of these main documents is very
tedious and cumbersome.
The detailed contents of these documents are famished below:
(A) Memorandum of Association
Memorandum of association is also called the charter or constitution for the company. It is because,
it lays down in precise and clear terms the objectives of the company, defines the scope of its operations and
its relations with the investors and outside world. It is a public document and hence it should be printed and
made available to the public for a price.
The contents of Memorandum of Association are classified into six clauses. They are:
(a) Name clause This clause deals with the name particulars of the company. It is necessary that the name of
a private company should end with the words ‘private limited’ and that of a public company should end with
‘limited’.
(b) Registered or situation clause This clause deals with the particulars of state in which registered office
is proposed to be situated.
(c) Objects clause The objectives of the company, in the short run and long run, are furnished here. The
promoters should take special care to draft the objects clause in particular. The objects should be drafted in
such a way that they provide high degree of operational freedom.
(d) Liability clause This clause specifies that the liability in respect of the shares issued by the company is
limited by the face value of the shares.
(e) Capital clause It specifies the details of authorised capital with which it plans to get registered. This
clause explains the particulars of the amounts of equity and preference share of capital to be issued by the
company.
(f) Subscription clause Here a declaration has to be made that ‘the persons signing this clause have interest
to form this company and they have taken the number of shares as indicated against their names. The
declaration is to be signed by two members in case of a private company and seven members in case of a
public company, and duly witnessed.

(B) Articles of Association

Articles of the association contain the rules of procedure for the internal management and control of
the affairs of the company. It is concerned with the procedural matters in conducting the routine matters of
the company. It supplements the Memorandum of Association and hence it cannot include that which is
prohibited by the Memorandum.
In the case of a private company, the articles should necessarily restrict the company from the issue of
Prospectus, the maximum number to 50 and the transferability of shares. It prohibits any invitation or
acceptance of deposits from persons other than its member, directors or their relatives.
The main contents of Articles of Association are as follows:
(a) Amount of share capital and different types of capital
(b) Methods to increase reduce or alter capital
(c) Different types of shares, their respective rights, calls on shares, forfeiture, conversion of shares
(d) Procedure in respect of transfer and transmission of shares
(e) Procedure to conduct board meetings and general body meetings
(f) Powers, rights and duties of directors in the Board
(g) Procedure in appointment and removal of a director
(h) Remuneration of directors
(i) Matters relating to accounts and audit
(j) Procedure for amending the contents of memorandum of association
(k) Procedure for Distribution of dividend, creation of reserves
(l) How to maintain the statutory books and records
(m) Procedure for winding up
(n) Rules regarding common seal of the company
(C) Prospectus
Prospectus is the first and basic document that supports the structure of the company. An investor
will go through prospectus to assess the feasibility of his investment in the company. It is necessary that the
company discloses full information relating to the amount issued, the rights attached to each type of shares
issued, the property purchased or proposed to be purchased by the company, directors, auditors, bankers,
agents, under writers to the issue and so on. It also should mention the risks, if any, the company faces. The
prospectus should be drafted in terms of Sec 56 read with Schedule H of the Companies Act, 1956 strictly.
Contents of Prospectus
The following are the contents of the Prospectus:
(a) the name of the company and address of its registered office
(b) the nature and business of the company
(c) the main objectives of the company
(d) the number and types of shares and debentures issued in the past
(e) the list of promoters with their names, addresses and their past record

(f) the list of directors with their names, addresses and occupations
(g) the list of signatories to the Memorandum of Association and their names, addresses
(h) details of the brokers, underwriters, merchant bankers, bankers to the public
(i) rights and restrictions as applicable to each class of share or debenture
(j) amount of minimum subscription to be received before the allotment of shares
(k) opening date and closing date of public offer
(1) minimum number of shares to be applied and how much is to be paid per share on application
(m) preliminary expenses incurred
(n) property purchase or proposed to be purchased
(o) amount of reserve fund and how it is to be utilized
(p) the names of auditors, bankers and solicitors
4. JOINT HINDU FAMILY BUSINESS
The Joint Hindu Family Business is a distinct form of organisation peculiar to India. Joint Hindu
Family Firm is created by the operation of law. It does not have any separate and distinct legal entity from
that of its members.
The business of Joint Hindu Family is controlled under the Hindu Law instead of Partnership Act.
The membership in this form of business organisation can be acquired only by birth or by marriage to a male
person who is already a member of Joint Hindu Family.
Characteristics of Joint Hindu Family Business:
1. Governed by Hindu Law The business of the Joint Hindu Family is controlled and managed under the
Hindu law.
2. Management All the affairs of a Joint Hindu Family are controlled and managed by one person who is
known as ‘Karta’ or ‘Manager’. The Karta is the senior most male member of the family. He works in
consultation with other members of the family but ultimately he has final say.
3. Membership by Birth The membership of the family can be acquired only by birth. As soon as a male
child is born in family, he becomes a member. Membership requires no consent or agreement.
4. Liability Except the Karta, the liability of all other members is limited to their shares in the business. The
Karta is not only liable to the extent of his share in the business but his separate property is equally
attachable and amount of debt can be recovered from his separate property.
5. Permanent Existence The death, lunacy or insolvency of any member of the family does not affect the
existence of the business of Joint Hindu Family. The family goes on doing its business.
6. Implied Authority of Karta In a joint family firm, only Karta has the implied authority to contract debts
and pledge the credit and property of the firm for the ordinary purpose of the businesses of the firm.
7. Minor also a Partner In a partnership, minor cannot become co-partner though he may be admitted to
the benefit of partnership. In a Joint Hindu Family firm minor is a partner.
8. Dissolution The Joint Hindu Family Business can be dissolved only at the will of all the members of the
family. Any single member has no right to get the business dissolved.

Advantages of Joint Hindu family business:

1. Easy to Start It is very easy to start the Joint Hindu Family Business. No legal formalities are required to
be faced, such as registration. It requires no agreement.
2. Efficient Management The management of Joint Hindu Family Business is centralised in the hands of
Karta of family. In this business, Karta takes all decisions and gets them implemented with the help of other
member. No other member interferes in his management.
3. Secrecy In Joint Hindu Family Business, all the decisions are taken by the ‘Karta’ himself. He is in a
position to keep all the affairs to him and maintains perfect secrecy in all matters.
4. Prompt Decision The Karta is the only person who exercises control and direction over the business. He
may not consult anyone in taking decisions. This ensures prompt or quick decisions. Being the sole master,
he takes prompt decisions and makes advantage of the opportunity.
5. Economy For the success of any business, economy is a must. It is well- balanced and maintained in
Joint Hindu Family Business. The Karta of family spends money with great caution and economy.
Disadvantages of Joint Hindu family business:
1. Limited Membership The membership of the business is limited to the members of family only. No
outsider can become the member of Joint Hindu Family Business.
2. Limited Sources of Capital The capital is limited only upto the resources of one family. This is not
sufficient to meet the business requirements for expansion. Thus the size of the business remains small. The
Karta cannot take the advantage of economies of large size due to limited finance.
3. Limited Managerial Skill All the managerial functions which are essential for the successful operation
of a business are performed by the Karta of the family. The Karta may not be able to perform all managerial
functions because of limitation of time, energy and skills.
4. Unlimited Liability The liability of the Karta is unlimited. The Karta is not only liable to the extent of
his share in the business but his separate property is equally attachable and amount of debt can be recovered
from his separate property. This factor puts a ceiling on the growth and expansion of the business.
5. Misuse of Power The management of a Joint Hindu Family Business is centralised in the hands of Karta
of the family. No other member can interfere in his management. This may lead to the misuse of power and
the Karta may use the power for his personal interest.
5. COOPERATIVE SOCIETIES
The industrial revolution created several imbalances in the society. The gap between the haves and
the have-nots increased substantially. The rich exploited the have-nots in terms of long hours of work, lower
wages, higher prices and bad service conditions. The working class and weaker sections suffered so badly
that they were compelled to think of an organised action for mutual help in order to better their economic
conditions.
A cooperative society is a society registered under the Cooperative Societies Act, 2012. A
cooperative society is an association of the weak who come together to uplift themselves from weakness to
strength though organised efforts.

The features of a cooperative society can be described as follows:

1. It is a voluntary association People join the society on their own. They have a common interest of
improving their economic status through joint efforts. They are free to leave the society am, giving notice.
2. Separate legal entity The society is to be registered under the Cooperative Societies Act. It has separate
legal existence. It can sue and be sued. It can buy and sell the assets.
3. Compulsory registration Every cooperative society has to be registered under the Cooperative Societies
Act.
4. Membership Membership is open, usually, membership is available to all irrespective of their
background in terms of caste, religion, political affiliation and so forth.
5. Finances A cooperative society raises its finances through the sale of shares to its members. Each
member cannot subscribe to more than 10 percent of the total share capital of Rs. 1000 whichever is higher.
Finances are also raised by way of loans from the government and apex cooperative institutions. Set-up is
democratic.
6. Service objective The main objective of the members is not to make profit but to improve their own
economic well-being.
7. Restricted reward to capital The contribution to capital will yield a minimum rate of interest only. 8.
Non-transferability of shares Shares in cooperative cannot be transferred.
9. Equitable distribution of surplus There are clear cut guidelines regarding issues such as distribution of
surplus among members in various types of cooperative societies, transfer of surplus to reserves, payment of
bonus, utilisation of a portion of surplus for the welfare of the locality.
Advantages of Cooperative Society
1. Voluntary organisation A cooperative society is viewed as a synthesis of personal liberty and social
justice. People join a society to improve their economic conditions.
2. Equal voting rights ‘One man, one vote’ principle prevents domination by a few members.
3. Economic justice Profits are distributed among the members on the basis of their individual contribution
to the profits of the society.
4. Limited liability The members of the cooperative society have liability limited by the face value of the
share.
5. Continuous existence The society has separate legal existence.
6. Each for all and all for each This is the main slogan of the cooperation movement. All will be helpful
for one and one is helpful for all.
7. Self government The society trains its members in different fields of business to make them proficient in
their activities. With the help of the training they receive, they can monitor activities better.
8. Larger identity of interests The cooperative society operates in a limited geographical area or economic
group, there is larger identity of interests among the members. Members can work for a healthier work
environment and manage their activities more effectively.
9. Government support The government extends all support to the cooperative societies in terms of loans

at low rate of interest and taxes, subsidies, providing tool kits, and so on.
10. Exploitation eliminated The members are free from the clutches of the middlemen and hence they can
reach their customers directly. Even this reduces the costs of operations also.
11. Open Membership Persons having common interest can form a co-operative society. Any competent
person can become a member at any time he/she likes and can leave the society at will.
Disadvantages of Cooperative Society
Limited Capital The amount of capital that a cooperative society can raise from its member is very limited
because the membership is generally confined to a particular section of the society. Again due to low rate of
return the members do not invest more capital.
Problems in Management Generally it is seen that co-operative societies do not function efficiently due to
lack of managerial talent. The members or their elected representatives are not experienced enough to
manage the society.
Lack of Motivation Every co-operative society is formed to render service to its members rather than to
earn profit. This does not provide enough motivation to the members to put in their best effort and manage
the society efficiently.
Lack of Co-operation The co-operative societies are formed with the idea of mutual co-operation. But it is
often seen that there is a lot of friction between the members because of personality differences, ego clash,
etc. The selfish attitude of members may sometimes bring an end to the society.
Dependence on Government The inadequacy of capital and various other limitations make cooperative
societies dependant on the government for support and patronage in terms of grants, loans subsidies, etc.
Due to this, the government sometimes directly interferes in the management of the society and also audits
their annual accounts.
Shortage of funds There is restricted reward on the capital provided to the society. Therefore finding
necessary resources may be a constant problem.
Many legal formalities The society is registered under the Societies Act. The formation, administration,
conducting meetings, liquidation, and so on are subject to the procedures in the Act.
Shifting loyalties among members Sometimes, the members of one society shift to another to get higher
benefits.
Misuse of funds for sectional interests The financial discipline is the secret of the success of many of the
cooperative societies. Where this is lacking, funds are misused and mismanaged.
Recurring losses Due to inefficient handling of affairs, the societies continue to get losses. This leads to
loss of interest and faith in the system.
Suitability: Cooperative society is suitable where
 members come together spontaneous with a common interest
 members are loyal, committed and united
 members have government support

PUBLIC ENTERPRISES OR SECTOR

Public enterprises occupy an important position in the Indian economy. Today, public enterprises
provide the substance and heart of the economy. Its investment of over Rs 10,000 crore is in heavy and basic
industry, and infrastructure like power, transport and communications. The concept of public enterprise in
India dates back to the era of pre-independence.
Need for Public Enterprise
The Industrial Policy Resolution 1956 states the need for promoting public enterprises as follows:
i. to accelerate the rate of economic growth by planned development
ii. to speed up industrialisation, particularly development of heavy industries and to expand public sector
and to build up a large and growing cooperative sector
iii. to increase infrastructural facilities
iv. to disperse the industries over different geographical areas for balanced regional development
v. to increase the opportunities of gainful employment
vi. to help in raising the standards of living
vii. to reducing disparities in income and wealth
Forms of Public Enterprise
Public Enterprises can be classified into three forms:
(a) Departmental undertaking
(b) Public corporation
(c) Government company
(a) DEPARTMENTAL UNDERTAKING
This is the earliest form of public enterprise. Under this form, the affairs of the public enterprise are
carried out under the overall control of one of the departments of the government. The government
department appoints a managing director (normally a civil servant) for the departmental undertaking. He
will be given the executive authority to take necessary decisions. The departmental undertaking does not
have a budget of its own. As and when it wants, it draws money from the government exchequer and when it
has surplus money, it deposits it in the government exchequer.
Ex: The Indian Railways are managed by the Ministry of Railways. Post and Telegraph services are run as a
department, in the Ministry of Communication. All India Radio, Doordarshan are other examples of
departmental undertakings.
Features of departmental undertaking
Under the control of a government department The departmental undertaking is not an independent
organisation. It has no separate existence. It is designed to work under close control of a government
department. It is subject to direct ministerial control.
Formation: A departmental undertaking is established either as a separate full-fledged ministry or as a sub-
division of a ministry (i.e. department) of the Government.

More financial freedom The departmental undertaking can draw funds from government account as per the
needs and deposit back when convenient.
Like any other government department The departmental undertaking is almost similar to any there
government department.
Budget, accounting and audit controls The departmental undertaking has to follow guidelines (as
applicable to the other government departments) underlying the budget preparation, maintenance of
accounts, and getting the accounts audited internally and by external auditors.
Ultimate Responsibility with the Minister The ultimate responsibility for the management of a
departmental undertaking lies with the minister concerned; who is responsible to the Parliament or State
Legislature for the affairs of the departmental undertaking.
Governmental Financing The departmental undertaking is financed through annual budget appropriations
by the Parliament or the State Legislature. The revenues of the undertaking are paid into the treasury.
Advantages departmental undertaking
Easy Formation It is easy to set up a departmental undertaking. The departmental undertaking is created by
an administrative decision of the Government, involving no legal formalities for its formation.
Direct Control of Parliament or State Legislature: The departmental undertaking is directly responsible
to the Parliament or the State legislature through its overall head i.e. the minister concerned.
Effective control Control is likely to be effective because it is directly under the Ministry.
Responsible executives Normally the administration is entrusted to a senior civil servant. The
administration will be organised and effective.
Secrecy Maintained: The departmental undertaking can maintain secrecy of important policy matters; as
the Government can withhold any information, in public interest.
Less scope for misutilisation of funds Departmental undertaking does not draw any money more than is
needed, that too subject to ministerial sanction and other controls. So chances for misutilisation are low.
Adds to Government revenue The revenue of the government is on the rise when the revenue of the
departmental undertaking is deposited in the government account.
Disadvantages departmental undertaking
Decisions delayed Control is centralised. This results in lower degree of flexibility. Officials in the lower
levels cannot take initiative. Decisions cannot be fast and actions cannot be prompt.
No incentive to maximise earnings The departmental undertaking does not retain any surplus with it. So
there is no incentive for maximising the efficiency or earnings.
Slow response to market conditions Since there is no competition, there is no profit motive, there is no
incentive to move swiftly to market needs.
Redtapism and bureaucracy The departmental undertakings are in the control of a civil servant and under
the immediate supervision of a government department. Administration gets delayed substantially.
Incidence of more taxes At times, in case of losses, these are made up by the government funds only. To
make up these, there may be a need for fresh taxes which is undesirable.

Political Influence A departmental undertaking is subject to excessive political influence. Its fate depends
on the balance of power between the ruling party and the opposition. As such, a departmental undertaking
becomes a political organisation rather than an economic or business organisation.
(b) PUBLIC CORPORATION
Public corporation is a ‘right mix of public ownership, public accountability and business
management for public ends'. The public corporation provides a machinery which is flexible, while at the
same time retaining public control. A public corporation has total freedom in planning, management and
control of its operations. It can formulate its own budget. It can recruit staff at different levels based on the
necessary specialisation. Public corporation is also called statutory corporation.
Ex: Life Insurance Corporation of India, Unit Trust of India, Industrial Finance Corporation of India, and
others.
Features of public corporation
1. A body corporate It has a separate legal existence. It is a separate company by itself. It can raise
resources, buy and sell properties, by name sue and be sued.
2. More freedom in day-to-day operations A public corporation has a high degree of operational freedom
in its day-to-day affairs. It is relatively free from any type of political interference. It enjoys administrative
autonomy.
3. Freedom regarding personnel The employees of public corporation is not government civil servants.
The corporation has absolute freedom to formulate its own personnel policies and procedures, and these are
applicable to all the employees including directors.
4. Perpetual succession A Statute in Parliament or State Legislature creates it. It continues forever and till a
statute is passed to wind it up.
5. Financial autonomy Though the public corporation is a fully owned government organisation, and the
initial finances are provided by the Government, it enjoys total financial autonomy. Its income and
expenditure are not shown in the annual budget of the government. However, for its freedom it is restricted
regarding capital expenditure beyond the laid down limits, and raising the capital through capital market.
6. Commercial audit Except in the case of banks and other financial institutions where chartered
accountants are auditors, in all corporations, the audit 1s entrusted to the Comptroller and Auditor General
of India.
7. Run on commercial principles As far as the discharge of functions, the corporations shall act as far as
possible on sound business principles.
8. Special Statute A public corporation is created by a special Act of the Parliament or the State
Legislature. The Act defines its powers, objectives, functions and relations with the ministry and the
Parliament (or State Legislature).
9. Capital provided by the Government The capital of a public corporation is provided by the
Government or by agencies controlled by the government. However, many public corporations have also
begun to raise money from the capital market.

Advantages of public corporation

1. Independence, initiative and flexibility The corporation has an autonomous set up. So it is independent,
take necessary initiative to realise its goals, and it can be flexible in its decisions as required.
2. Scope for Redtapism and bureaucracy minimised The corporation has its own policies and procedures.
If necessary they can be simplified to eliminate redtapism and bureaucracy, if any.
3. Public interests protected The corporation can protect the public interests by making its policies more
public friendly. Public interests are protected because every policy of the corporation is subject to ministerial
directives and broad parliamentary control.
4. Employee friendly work environment Corporation can design its own work culture and train its
employees accordingly. It can provide better amenities and better terms of service to the employees and
thereby secure greater productivity.
5. Competitive prices The corporation is a government organisation and hence can afford with minimum
margins of profit. It can offer its products and services at competitive prices.
6. Economies of scale By increasing the size of its operations, it can achieve economies of large Scale
production.
7. Public accountability It is accountable to the Parliament or legislature. It has to submit its annual report
on its working results.
Disadvantages of public corporation
1. Continued political interference The autonomy is on paper only and in reality, the continued political
interference disturbs the work environment of the corporations. Pressures for employment, providing
facilities, operating at low margins restrict the freedom of the public corporation.
2. Misuse of power In some cases, the greater autonomy leads to misuse of power. It takes time to unearth
the impact of such misuse on the resources of the corporation. Cases of misuse of power defeat the very
purpose of the public corporation.
3. Burden for the government Where the public corporation ignores the commercial principles and suffers
losses, it is burdensome for the government to provide subsidies to make up the losses.
(c) GOVERNMENT COMPANY
Section 617 of the Indian Companies Act defines a government company as “any company in which
not less than 51 percent of the paid up share capital is held by the Central Government or by any State
Government or Governments or partly by Central Government and partly by one or more of the State
Governments and includes a company which is subsidiary of government company as thus defined."
Some government companies are promoted as
1) Industrial undertakings (such as Hindustan Machine Tools, Indian Telephone Industries, and so on)
2) Promotional agencies (such as National Industrial Development Corporation, National Small Industrial
Corporation, and so on) to prepare feasibility reports for promoters who want to set up public or private
companies.

3) Agency to promote trade or commerce. For example, State Trading Corporation, Export Credit Guarantee
Corporation and so such like.
4) A company to take over the existing sick companies under private management (eg. Hindustan Shipyard)
5) A company established as a totally state enterprise to safeguard national interests such as Hindustan
Aeronautics Ltd., and so on.
6) Mixed ownership company in collaboration with a private consultant to obtain technical know-how and
guidance for the management of its enterprises. eg. Hindustan Cables.)
Features of Government company
The following are the features of a government company:
1. Like any other registered company It is incorporated as a registered company under the Indian
Companies Act, 1956. Like any other company, the government company has separate legal existence,
common seal, perpetual succession, limited liability, and so on.
2. Shareholding The majority of the shares are held by the Government, Central or State, partly by the
Central and State Government (s), in the name of the President of India. It is also common that the
collaborators are allotted some shares for providing the transfer of technology.
3. Directors are nominated As the government is the owner of the entire or majority of the share capital of
the company; it has freedom to nominate the directors to the Board. Government may consider the
requirements of the company in terms of necessary specialisation and appoints the directors accordingly.
4. Administrative autonomy and financial freedom A government company functions independently with
full discretion and in the normal administration of the affairs of the undertaking.
5. Subject to ministerial control Concerned minister may act as the immediate boss. It is because, it is the
government that nominates the directors, the minister issues directions for a company and he can call for
information related to the progress and affairs of the company any time.
6. Registration Under the Companies Act A Government company is formed through registration under
the Companies Act, 1956; and is subject to the provisions of this Act, like any other company.
7. Executive Decision of Government A Government company is created by an executive decision of the
Government, without seeking the approval of the Parliament or the State Legislature.
8. Separate Legal Entity A Government company is a legal entity separate from the Government. It can
acquire property; can make contracts and can file suits, in its own name.
9. Whole or Majority Capital Provided by Government The whole or majority (at least 51%) of the
capital of a Government company is provided by the Government; but the revenues of the company are not
deposited into the treasury.
10. Majority of Government Directors Being in possession of a majority of share capital, the Government
has authority to appoint majority of directors, on the Board of Directors of a government company.

Advantages of Government company

1. Formation is easy There is no need for an Act in legislature or parliament to promote a government
company. A government company can be promoted as per the provisions of the Companies Act, which is
relatively easier.
2. Separate legal entity It retains the advantages of public corporation such as autonomy, legal entity
3. Ability to compete It is free from the rigid rules and regulations. It can smoothly function with all the
necessary initiative and drive necessary to compete with any other private organisation.
4. Flexibility A government company is more flexible than a departmental undertaking or public
corporation. Necessary changes can be initiated, within the framework of the company law.
5. Quick decisions and prompt actions In view of the autonomy, the government companies can take
decisions quickly and ensures that the actions are initiated promptly.
6. Private participation facilitated Government company is the only form providing scope for private
participation in the ownership. This facilitates to take the best, necessary to conduct the affairs of business,
from the private sector and also from the public sector.
Disadvantages of Government company
1. Continued political and government interference Government seldom leaves the government company
to function on its own. Government is the major shareholder and it dictates its decisions to the Board. The
Board of Directors gets these approved in the general body.
2. Higher degree of government control The degree of government control is so high that the government
company is reduced to mere adjuncts to the ministry and is, in majority of the cases, not treated better than
the subordinate organisation or offices of the government.
3. Evades constitutional responsibility A government company is created by executive action of the
government without the specific approval of the Parliament or Legislature.
4. Poor sense of attachment or commitment The members of the Board of Management of g0vemment
companies are from the ministerial departments in their ex-officio capacity. They lack the sense of
attachment and do not reflect any degree of commitment to lead the company in a competitive environment.
5. Divided loyalties The employees are mostly drawn from the regular government departments for a
defined period. After this period, they go back to their government departments and hence their divided
loyalty dilutes their interest towards their job in the government company.

LIMITED LIABILITY COMPANIES

On the basis of number of members, a company may be:
(1) Private Company (2) Public Company
1) Private Company
According to Sec. 3(1) (iii) of the Indian Companies Act, 1956, a private company is that company which by
its articles of association:
i. limits the number of its members to fifty, excluding employees who are
ii. members or ex-employees who were and continue to be members
iii. restricts the right of transfer of shares, if any
iv. prohibits any invitation to the public to subscribe for any shares or debentures of the company.
Where two or more persons hold share jointly, they are treated as a single member. According to Sec 12 of
the Companies Act, the minimum number of members to form a private company is two. A private company
must use the word “Pvt” after its name.
Characteristics or Features of a Private Company. The main features of a private company are as follows
i) A private company restricts the right of transfer of its shares. The articles generally state that whenever
a shareholder of a private company wants to transfer his shares, he must first offer them to the existing
members of the existing members of the company.
ii) It limits the number of its members to fifty excluding members who are employees or ex-employees
who were and continue to be the member.
iii) Where two or more persons hold share jointly they are treated as a single member.
iv) The minimum number of members to form a private company is two.
v) A private company cannot invite the public to subscribe for its capital or shares of debentures. It has to
make its own private arrangement.
B. Public company
According to Section 3 (1) (iv) of Indian Companies Act. 1956 “A public company which is not a Private
Company”. If we explain the definition of Indian Companies Act. 1956 in regard to the public company, we
note the following :
i) The articles do not restrict the transfer of shares of the company
ii) It imposes no restriction no restriction on the maximum number of the members on the company.
iii) It invites the general public to purchase the shares and debentures of the companies
Differences between Public Company and Private Company
1. Minimum number: The minimum number of persons required to form a public company is 7. It is 2 in
case of a private company.
2. Maximum number: There is no restriction on maximum number of members in a public company,
whereas the maximum number cannot exceed 50 in a private company.
3. Number of directors. A public company must have at least 3 directors whereas a private company must
have at least 2 directors.

4. Restriction on appointment of directors. In the case of a public company, the directors must file with
the Register consent to act as directors or sign an undertaking for their qualification shares. The directors
or a private company need not do so.
5. Restriction on invitation to subscribe for shares. A public company invites the general public to
subscribe for shares. A public company invites the general public to subscribe for the shares or the
debentures of the company. A private company by its Articles prohibits invitation to public to subscribe
for its shares.
6. Name of the Company: In a private company, the words “Private Limited” shall be added at the end of
its name.
7. Public subscription: A private company cannot invite the public to purchase its shares or debentures. A
public company may do so.
8. Issue of prospectus: Unlike a public company a private company is not expected to issue a prospectus
or file a statement in lieu of prospectus with the Registrar before allotting shares.
9. Transferability of Shares: In a public company, the shares are freely transferable. In a private company
the right to transfer shares is restricted by Articles.
10. Special Privileges: A private company enjoys some special privileges. A public company enjoys no
such privileges.
11. Quorum: If the Articles of a company do not provide for a larger quorum. 5 members personally present
in the case of a public company are quorum for a meeting of the company. It is 2 in the case of a private
company.
12. Managerial remuneration: Total managerial remuneration in a public company cannot exceed 11 per
cent of the net profits. No such restriction applies to a private company.
13. Commencement of business: A private company may commence its business immediately after
obtaining a certificate of incorporation. A public company cannot commence its business until it is
granted a “Certificate of Commencement of business”.
SOURCES OF CAPITAL FOR A COMPANY
Capital
Capital is the money or wealth needed to produce goods and services. In the most basic terms, it is
money. All businesses must have capital in order to purchase assets and maintain their operations.
Capital is defined as wealth, which is created over a period of time through abstinence to spend.
There are different forms of capital: property, cash or titles to wealth. It is the aggregate of funds used in the
short run and long-run.
An economist views capital as the value of total assets available with the business. An accountant
sees the capital as the difference between the assets and liabilities.
Generally, capital consider as the total amount of finances required by the business to conduct its
business operations both in the short-run and long-run.

Significance of Capital
Capital plays a very significant role in the modern production system. It is very difficult to imagine
the process of production without capital. Capital accumulation and technological advancement are closely
related to each other. Capital creates and enhances the level of employment opportunities. It has a strategic
role in enhancing productivity. Capital is necessary not only for micro-enterprises but also to the
governments. Capital is a scarce resource and every country has to utilise the same judiciously.
Need for Capital
The business needs for capital are varied. They are:
1. To promote a business Capital is required at the promotion stage. A large variety of expenses have to be
incurred on project reports, feasibility studies and reports, preparation and filing of various documents, and
for meeting various other expenses in connection with the raising of capital from the public.
2. To conduct business operations smoothly Business firms also need capital for the purpose of
conducting their business operations such as research and development, advertising, sales promotion,
distribution and operating expenses.
3. To expand and diversify The firm requires a lot of capital for expansion and diversification purposes.
This includes development expense such as purchase of sophisticated machinery and equipment and also
payment towards sophisticated technology.
4. To meet contingencies A firm needs funds to meet contingencies such as a sudden fall in sales, major
litigation (legal cases), natural calamities like fire, and so on.
5. To pay taxes The firm has to meet its statutory commitments such as income tax and sales tax, excise
duty and so on.
6, To pay dividends and interests -The business has to make payment towards dividends and its interests to
shareholders and financial institutions respectively.
7. To replace the assets The business needs to replace its assets like plant and machinery alter a certain
period of use. For this purpose the firm needs funds to make suitable replacement of assets in place of old
and worn-out assets.
8. To support welfare programmes The company may also have to take up social welfare programmes
such as literacy drive, and health camps. It may have to donate to charitable trusts, educational institutions or
public service organizations.
9. To wind up At the time of winding up, the company may need funds to meet the liquidation expenses.
METHODS AND SOURCES OF CAPITAL
Method of finance is the type of finance used-such as a loan or a mortgage. The source of finance
would be where the money was obtained from - a loan may be obtained from a bank while the mortgage
may be obtained from a credit society. It is necessary to notice the difference between methods and sources
of finance to identify which type of asset can be bought from what source of funds.

Ex: Fixed asset can be bought only from long-term source of funds. If you buy a long-term asset utilising
funds from short-term sources, the asset has to be sold off to repay the short-term loan, in the event of
pressure to repay the loan.
Methods of Finance
The following are the common methods of finance:
1. Long-term finance
2. Medium-term finance
3. Short-term finance
SOURCES OF FINANCE
The following are the different sources under various methods of finance.
Time Period Point of View

I. LONG-TERM FINANCE
Long-term finance refers to that finance available for a long period say five years and above. The
long-term methods outlined below are used to purchase fixed assets such as land and buildings, plant and so
on.
Purpose of long term finance:
a) To Finance fixed assets: Business requires fixed assets like machines, Building, furniture etc. Finance
required to buy these assets is for a long period, because such assets can be used for a long period and are
not for resale. Long-term finance is useful for reducing cost by undertaking large-scale economic activities
and to sustain the competition.
b) To finance the permanent part of working capital: Business is a continuing activity. It must have a
certain amount of working capital which would be needed again and again. This part of working capital is of
a fixed or permanent nature. This requirement is also met from long term funds.
c) To finance growth and expansion of business: Expansion of business requires investment of a huge
amount of capital permanently or for a long period.
Factors determining long-term financial requirements:
The amount required to meet the long term capital needs of a company depend upon many factors.
These are:

(a) Nature of Business: The nature and character of a business determines the amount of fixed capital. A
manufacturing company requires land, building, machines etc. So it has to invest a large amount of capital
for a long period.
(b) Nature of goods produced: If a business is engaged in manufacturing small and simple articles it will
require a smaller amount of fixed capital as compared to one manufacturing heavy machines or heavy
consumer items like cars, refrigerators etc. which will require more fixed capital.
(c) Technology used: In heavy industries like steel the fixed capital investment is larger than in the case of a
business producing plastic jars using simple technology or producing goods using labour intensive
technique.
Sources of Long term finance
a. Own Capital
Irrespective of the form of organisation such as sole trader, partnership or a company, the owners of the
business have to invest their own finances to start with. Money invested by the owners, partners or
promoters is permanent and will stay with the business throughout the life of the business.
b. Share Capital
Normally in the case of a company, the capital is raised by issue of shares. The capital so raised is called
share capital. The liability of the shareholder is limited to the extent of his contribution to the share capital of
the company. The shareholder is entitled to dividend in case the company makes profits and the directors
announce dividend formally in the general body meetings.
The share capital can be of two types:
1. Preference share capital
2. Equity share capital.
1. Preference Share Capital
Capital raised through issue of preference shares is called preference share capital.
Preference share A preference shareholder enjoys two rights over equity shareholders:
(a) right to receive fixed rate of dividend and (b) right to return of capital.
After settling the claims of outsiders, preference shareholders are the first to get their dividend and
then the balance will go to the equity shareholders.
However, the preference shareholders do not have any voting rights in the annual general body
meetings of the company.
Types of preference shares
1. Cumulative preference share A cumulative preference shareholder gets his right to the arrears of
dividend cumulated over a period of time. If the company is not in a position to pay dividends during a
particular year due to paucity of profits, it has to pay the same to the cumulative preference shareholders
when it makes profits.
2. Non-cumulative preference shares The holders of these shares do not enjoy any right over the arrears of
dividend. Hence the unpaid dividend in arrears cannot be claimed in future.

3. Participating preference shares The holder of these shares enjoys the dividend two times. They get their
normal fixed rate of dividend as per their entitlement. They participate again along with the equity
shareholders in the distribution of profits.
4. Redeemable preference shares These shares are repaid at the end of a given period. The period of
repayment is stipulated on each share.
5. Non-redeemable preference shares These shares continue as long as the company continues. They are
repaid only at the end of the lifetime of the company.
2. Equity Share Capital
Capital raised through issue of equity share is called equity share capital. An equity share is also called
ordinary share. An equity shareholder does not enjoy any priorities such as those enjoyed by a preference
shareholder. But an equity shareholder is entitled to voting rights as many as the number of shares he holds.
The profits after paying all the claims belong to the equity shareholders. In case of loss they are the first to
suffer the losses. Equity shareholders are the real risk bearers of the company.
Types of equity capital
a. Authorized share capital: It is the maximum amount of capital which a company can issue. The
companies can increase it from time to time. For that we need to comply with some formalities also have to
pay some fees to the legal bodies.
b. Issued share capital: It is that part of authorized capital which the company offers to the investors.
c. Subscribed share capital: It is that part of issued capital which an investor accepts and agrees upon or
subscribed.
d. Paid up capital: It is the part of the subscribed capital, which the investors pay. Normally, all companies
accept complete money in one shot and therefore issued, subscribed and paid capital becomes one and the
same. Conceptually, paid-up capital is the amount of money which a company actually invests in the
business.
c. Retained Profits
The retained profits are the profits remaining after all the claims. They form a very significant source of
finance. Retained profits form good source of working capital. Particularly in times of growth and
expansion, retained profits can be advantageously utilized.
d. Long-term Loans
There are specialised financial institutions offering long-term loans, provided the business proposal is
feasible. The promoters should be able to offer assets of the business as security to avail of this source.
e. Debentures
Debentures are the loans taken by the company. It is a certificate or letter issued by the company under its
common seal acknowledging the receipt of loan. A debenture holder is the creditor of the company. A
debenture holder is entitled to a fixed rate of interest on the debenture amount. Payment of interest on
debenture is the first charge against profits. Apart from the loans from financial institutions, a company may

raise loans through debentures. This is an additional source of long-term finance. The payment of interest
and principal amounts on these debentures is subject to the terms and conditions of issue of debentures.
Common types of debentures
1. Convertible Debentures These debentures are converted into equity shares after the period mentioned in
the terms and conditions of issue. These are converted into equity shares on the specified date. Then
onwards, these shareholders will be entitled to dividend, which will be normally higher than the rate of
interest on debentures.
2. Partly Convertible Debentures A portion of debentures is to be converted into equity shares and the
balance portion continues as loan.
3. Non-convertible Debentures These debentures will not be converted into equity shares. They continue as
loan till the date of payment.
4. Secured Debentures These debentures are safe because the assets of the company are offered as security
towards the payment of the debentures. Newly promoted companies issue secured debentures to create
confidence among the investors.
5. Partly Secured Debentures These debentures are partly covered by the security.
6 Unsecured Debentures There is no security for these debentures. Normally, the companies having a good
financial record issue unsecured debentures.
7. Redeemable Debentures These debentures are repaid on a specified date.
8. Non-redeemable Debentures These are repaid only at the end of the lifetime of the company.
II. MEDIUM-TERM FINANCE
Medium-term finance refers to such sources of finance where the repayment is normally over one year and
less than three or five years. This is normally utilised to buy or lease motor-vehicles, computer equipment,
or machinery whose life is less than five years. The sources of medium-term finance are as given below:
a. Bank Loans
Bank loans are extended at a fixed rate of interest. Repayment of the loan and interest are scheduled at the
beginning and are usually directly debited to the current account of the borrower. These are secured loans.
b. Hire-purchase
The possession of the asset can be taken by making a down payment of a part of the price and the balance
will be repaid with a fixed rate of interest in agreed number of installments. The buyer becomes the owner of
the asset only on payment of the last installment. The seller is the owner of the asset till the last installment
is paid. In case there is any default in payment, the seller can reserve the right of collecting back the asset.
Today, most of the consumer durables such as cars, refrigerators, TVs and so on, are sold on hire purchase
basis.
c. Leasing or Renting
Where there is a need for fixed assets, the asset need not be purchased. It can be taken on lease or rent for
specified number of years. The company who owns the asset is called lessor and the company which takes
the asset on lease is called lessee. The agreement between the lessor and lessee is called a lease agreement.

On the expiry of the lease agreement, the owner takes the asset back into his custody. Under lease
agreement, ownership to the asset never passes. Only possession of the asset passes from lessor to the lessee.
d. Venture Capital
This form of finance is available only for limited companies. Venture capital is normally provided in such
projects where there is relatively a higher degree of risk. For such projects, finance through the conventional
sources may not be available. Many banks offer such finance through their merchant banking divisions, or
specialist banks which offer advice and financial assistance.
e. Special type of loans from industrial financial institutes: These are providing special loans for the
industries when required. The following are some of the financial institutions:
a. Industrial Finance Corporation of India (IFCI)
b. State Financial Corporations (SFCs)
c. Industrial Credit and Investment Corporation of India (ICICI)
d. Industrial Development Bank of India (IDBI)
e. State Industrial Development Corporations (SIDC) and etc.,
III. SHORT-TERM FINANCE
Short-term finance is that finance which is available for a period of less than one year. The following are the
sources of short-term finance:
a. Commercial Paper (CP)
It is a new money market instrument introduced in India in recent times. CPs are issued usually in large
denominations by the leading, nationally reputed, highly rated and credit worthy, large manufacturing and
finance companies in the public and private sector. The proceeds of the issue of commercial paper are used
to finance current transactions and seasonal and interim needs for funds. Ex: Reliance Industries is one of
the early companies which issued Commercial Paper.
b. Bank Overdraft
This is a special arrangement with the banker where the customer can draw more than what he has in his
savings/current account subject to a maximum limit. Interest is charged on a day-to-day basis on the actual
amount overdrawn. This source is utilised to meet the temporary shortage of funds.
c. Trade Credit
This is a short-term credit facility extended by the creditors to the debtors. Normally, it is common for the
traders to buy the materials and other supplies from the suppliers on credit basis. After selling the stocks, the
traders pay the cash and buy fresh stocks again on credit. Sometimes, the suppliers may insist on the buyer
to sign a bill (bill of exchange). This bill is called bills payable.
d. Advance from Customers
It is customary to collect full or part of the order amount from the customers in advance. Such advances are
useful to meet the working capital needs.

e. Short-term Deposits from the Customers, Sister Companies and Outsiders

It is normal to find the supermarkets and other trading organisations inviting deposits of six months to one
year duration. As an incentive, such deposit holders may be given 5-10 per cent discount on the purchases.
f. Internal Funds
Internal funds are generated by the firm itself by way of secret reserves, depreciation provisions, taxation
provisions, retained profits and so on and these can be utilised to meet the urgencies.
Place point of view:
Indigenous capital: Capital procures from local market or investors by business.
Foreign capital: The term 'foreign capital' is a comprehensive term and includes any inflow of capital in
home country from abroad. It may be in the form of foreign aid or loans and grants from the host country or
an institution at the government level as well as foreign investment and commercial borrowings at the
enterprise level or both. Foreign capital may flow in any country with technological collaboration as well.
Non-Conventional Sources of Finance
Non-conventional finance is use of modified loan terms or eligibility requirements that allow lending to
borrowers with limited financial resources. 'Non conventional' refers to the financial mechanisms employed,
and not necessarily to the financial institutions who employ them.
1. Venture Capital: It is a form of private equity and a type of financing that investors provide
to startup companies and small businesses that are believed to have long-term growth potential. Venture
capital generally comes from well-off investors, investment banks and any other financial institutions.
However, it does not always take a monetary form; it can also be provided in the form of technical or
managerial expertise. It is typically allocated to small companies with exceptional growth potential, or to
companies that have grown quickly and appear poised to continue to expand.
2. Angel Funding: An angel investor (also known as a business angel, informal investor, angel funder,
private investor, or seed investor) is an affluent individual who provides capital for a business start-up,
usually in exchange for convertible debt or ownership equity. Angel investors are experienced and well-
established investors who have an insight of the industry. In general course of business, normal venture
equity funds or equity funds are not interested in committing their funds to start-ups and businesses in their

formative stages.
3. Selling assets: Some entrepreneurs choose to sell some of their personal or business assets in order to
finance the opening or continued existence of their enterprises. Generally, business owners who have
already established the viability of their firms and are looking to expand their operations do not have to take
this sometimes dramatic course of action, since their records will often allow them to secure capital from
other sources, either private or public. Whether selling personal or business assets, the small business owner
should take a rational approach. Some entrepreneurs, desperate to secure money, end up selling business
assets that are important to basic business operations.
4. Borrowing against the cash value of your life insurance: Entrepreneurs who have a whole life policy
have the option of borrowing against the policy (this is not an option for holders of term insurance). This can
be an effective means of securing capital provided that the owner has held the policy for several years, thus
giving it some cash value. Insurers may let policyholders borrow as much as 90 percent of the value of the
policy. As long as the policyholder continues to meet his or her premium payment obligations, the policy
will remain intact. Interest rates on such loans are generally not outrageous, but if the policyholder dies
during the period in which he or she has a loan on the policy, benefits are usually dramatically reduced.
5. Second mortgage: Some entrepreneurs secure financing by taking out a second mortgage on their home.
This risky alternative does provide the homeowner with a couple of advantages: interest on the mortgage is
tax deductible and is usually lower than what he or she would pay with a credit card or an unsecured loan.
But if the business ultimately fails, this method of financing could result in the loss of your home. Using a
second mortgage as a vehicle for financing a company is very risky and is best for people who want to
borrow all the money they need at one time and secure fixed, equal payments.
6. Other possible sources of financing: Some entrepreneurs obtain financing for growth and expansion
through franchising or licensing. Basically, they get money by selling the rights to a unique business or
product to other companies. Other small business owners are able to form alliances or partnerships with
other firms that have a vested interest in their success, such as customers, suppliers, or distributors. These
business owners may obtain funds from their partners through cooperative work agreements, barter
arrangements, or trade credit.

ECONOMICS
Definition of Economics
Economics is a study of human activity both at individual and national level. The economists of early
age treated economics merely as the science of wealth. The reason for this is clear. Every one of us in
involved in efforts aimed at earning money and spending this money to satisfy our wants such as food,
Clothing, shelter, and others. Such activities of earning and spending money are called “Economic
activities”.
Definitions:
It was only during the eighteenth century that Adam Smith, the Father of Economics, defined
economics as the study of nature and uses of national wealth’.
Dr. Alfred Marshall, one of the greatest economists of the nineteenth century, writes “Economics is a
study of man’s actions in the ordinary business of life.
Prof. Lionel Robbins defined Economics as “the science, which studies human behaviour as a
relationship between ends and scarce means which have alternative uses”. With this, the focus of economics
shifted from ‘wealth’ to human behaviour’.
Significance of Business Economics:
1. Business economics is concerned with those aspects of traditional economics which are relevant for
business decision making in real life. Business economic accomplishes the objective of building a suitable
tool kit from traditional economics.
2. It also incorporates useful ideas from other disciplines such as psychology, sociology, etc. If they are
found relevant to decision making.
3. Business economics helps in reaching a variety of business decisions in a complicated environment.
Certain examples are (Importance of Economics):
 What products and services should be produced?
 What input and production technique should be used?
 How much output should be produced and at what prices it should be sold?
 What are the best sizes and locations of new plants?
 When should equipment be replaced?
 How should the available capital be allocated?
4. Business economics makes a manager a more competent model builder. It helps him appreciate the
essential relationship characterising a given situation.
5. At the level of the firm. Where its operations are conducted though known focus functional areas, such as
finance, marketing, personnel and production, business economics serves as an integrating agent by
coordinating the activities in these different areas.
Features of Economics:
(1) Unlimited wants: Whenever one want is satisfied, then automatically several wants grow up. It is
endless. Hence, wants are ‘ever growing and never ending’.

(2) Scarce resources: It means goods and services which we use to satisfy our wants. They are material and
non-material goods like time, money, services, resources etc. These resources are scarce.
(3) Alternative uses: All the scarce resources can be used for more than one purpose.
(4) Choice: Since wants are numerous and resources are scarce, we have to choose the most urgent wants
from these unlimited wants. Hence, the consumers will select few wants according to their preference
pattern.
BRANCHES OF ECONOMICS
Microeconomics:
Focuses on the actions of individual agents within the economy, like households, workers, and
businesses.
The study of an individual consumer or a firm is called microeconomics (also called the Theory of
Firm). Micro means ‘one millionth’. Microeconomics deals with behavior and problems of single individual
and of micro organization. Managerial economics has its roots in microeconomics and it deals with the
micro or individual enterprises. It is concerned with the application of the concepts such as price theory,
Law of Demand and theories of market structure and so on.
Features of Micro Economics:
1. Study individual behaviour 6. Determines factors pricing
2. Analyse and allocate the resources available 7. Partial equilibrium model
3. Focus on market behaviour 8. Uses slicing method
4. Economic welfare 9. Helps in government policies
5. Study on products pricing 10. Others
Significance of Microeconomics
a) Optimum utilization of resources: The study of microeconomics helps the decision makers to analyze
and determine how the productive resources are allocated for various goods and services. It also helps in
solving the producers’ dilemma of what to produce, how much to produce and for whom to produce.
b) Demand analysis: With the help of microeconomic analysis, business firms can forecast their level of
demand within the certain time interval. The demand for a commodity fluctuates depending upon various
factors affecting it. Thus, business firms and decision makers can determine the level of demand for the
commodity.
c) Cost analysis: Microeconomic theories explain various conditions of cost like fixed cost, variable cost,
average cost, and marginal cost. Along with this, it also provides an analysis of the short run and long run
costs that help the business decision makers determine the cost of production and other related costs, so they
can implement policies to cut down cost and increase their level of profit.

d) Production decision: Microeconomics deals with different production techniques that help to find out
the optimal production decision which helps the decision makers to determine the factors needed in order to
produce a certain product or a range of products.
e) Pricing policy: Microeconomic analysis provides business managers with a thorough knowledge of
theories of production and pricing in order to ensure optimum profit for the firm in the long run.
f) Determination of Relative Prices of Products & Factors of production: Microeconomics helps in
analyzing market mechanisms i.e. determinants of demand and supply which are responsible for the
determining prices of commodities in the market. Along with this, it provides an insight on theories relating
to prices of a factor of rent, wage, interest, and profit.
g) Basis of Managerial Economics: Microeconomics used for the study of a business unit, but not the
economy as a whole is known as managerial economics. The various tools used in microeconomics like cost
and price determination, at an individual level becomes the foundation of managerial economics.
h) Helpful in Foreign Trade: Microeconomics is useful in explaining and determining the rate of foreign
exchange between currencies, fixing international trade and tariff rules, defining the cause of disequilibrium
in the balance of payment (BOP), and formulating policies to minimize it.
Limitations of Microeconomics
1) Individual analysis: Microeconomics explains only small individual units of economic activity. This is a
partial and incomplete analysis. For the national economic analysis, aggregate income and output, aggregate
production and expenditure show the economic level of country. All those subjects are not considered by
microeconomics. So it is regarded as the incomplete matter.
2) Impractical assumption: Most of theories and models of microeconomics are derived based upon some
assumption for examples: other things remaining same, full employment, concept of rationality etc. In real
life it’s near impossible to be fulfilled those assumptions. In our daily activities, there are many variable
factors along with time. Those changes in variables bring the change in individual behavior that affects
microeconomic activity. Same way, it is impossible to be full employment in economy.
3) Wrong concept of laissez faire economy: Microeconomics belief upon the concept of laissez faire
economy that means there should be no interfering in market economy by government. It has been
explained in market life that government should interfere for its smooth activities. An event of great
depression- 1930 had made failure to the concept of laissez faire.
4) Micro economics ignores the macro level activity: Real economic mirror of a country are employment,
income, output, foreign trade, price level, impact of policy (monetary and fiscal) implementation etc. But
microeconomics does not analysis all those subjects.
Macroeconomics:
Macroeconomics is the branch of economics that studies the behavior and performance of an
economy as a whole. It focuses on the aggregate changes in the economy such as unemployment, growth
rate, gross domestic product and inflation.
It looks at the economy as a whole. It focuses on broad issues such as growth of production, the

number of unemployed people, the inflationary increase in prices, government deficits, and levels of exports
and imports.
It studies the flow of economics resources or factors of production (such as land, labour, capital,
organisation and technology) from the resource owner to the business firms and then from the business firms
to the households. It discusses aggregate consumption, aggregate investment, price level, and payment,
theories of employment, and so on.
Features and importance of Macro Economics:
1. Study aggregates 6. General equilibrium model

2. Focus on hole market behaviour 7. Helps in government policies
3. Uses lumping method 8. Use to study the micro economic theory
4. Income theory 9. Overall study of economic status
5. Employment theory 10. Study the inflation
Significance of Macro economics

a. Functioning of an Economy: Macroeconomic analysis is of paramount importance in getting us an idea
of the functioning of an economic system.
b. Formulation of Economic Policies: Macroeconomics is of great help in the formulation of economic
policies. Governments deal not with individuals but with groups and masses of individuals, thereby
establishing the importance of macroeconomic studies.
c. Understanding Microeconomics: The study of macroeconomics is essential for the proper
understanding of microeconomics. No Microeconomic law could be framed without a prior study of the
aggregates; for example, the theory of individual firm could not have been formulated with reference to the
behaviour pattern of one single firm.
d. Understanding and Controlling Economic Fluctuations: Economic fluctuations are a characteristic
feature of the capitalist form of society. The theory of economic fluctuations can be understood and built up
only with the help of macroeconomics, for here we have to take into consideration aggregate consumption,
aggregate saving and investment in the economy.
e. Inflation and Deflation: Macroeconomic approach is of utmost importance to analyse and understand
the effects of inflation and deflation. Different sections of society are affected differently as a result of
changes in the value of money. Macroeconomic analysis enables us to take certain steps to counteract the
adverse influences of inflation and deflation.
f. Study of National Income: It is the study of macroeconomics which has brought forward the immense
importance of the study of national income and social accounts. In micro-economy such a study was
relegated to the background. Without a study of national income, as a result of the development in
macroeconomics, it is not possible to formulate correct economic policies.
g. Performance of an Economy: Macroeconomics helps us to understand and analyse the performance of
an economy. Gross National Product (GNP) or National Income (NI) estimates are used to measure the
performance of an economy over time by comparing the production of goods and services in one period with

that of the other periods the composition of GNP gives information about the quantum of contribution of
each sector of the economy to GNP.
h. Study of Economic Development: Study of macroeconomics has revealed not only the glaring
inequalities of wealth within an economy but has also shown the vast differences in the standards of living
of the people in various countries necessitating the adoption of important steps to promote their economic
welfare.
Limitations of Macroeconomics
a. Considers Aggregates as Homogenous: The individual data may not be similar in structure or
composition. Thus, when such single figures are compiled to get an aggregate value, it may not seem to
be that useful.
b. Misleading: The extensive application of the macroeconomics measures seems to be irrelevant when
aimed at 100% results.
c. Fallacy of Deductive Inferences: Macroeconomics function on aggregate values. But, the interpretation
of the individual activities may not be the same as compared to the conclusion drawn on a mass level.
d. Conceptual and Statistical Complexities: When the individual data have different units, its aggregation
becomes arduous and holds no significance.
e. Unnecessary Aggregate Variables: When the individual elements need to be examined separately, the
aggregate values cannot be used for the purpose.
f. Neglects Individual Consumers: The concept of macroeconomics overlooks the importance of the
individual unit or consumer since the fundamental is to make use of the aggregates.
g. Too Much Generalization: The conclusion derived from the aggregation of the data, is generally taken
to be true for all the individuals.
Difference between Micro and Macro Economics

National Income
Definition of National Income:
“The labour and capital of country acting on its natural resources produce annually a certain net
aggregate of commodities, material and immaterial including services of all kinds. This is the true net annual
income or revenue of the country or national dividend.”
National income is an outstanding example of macroeconomic analysis. It deals with “aggregate” or
the “economy as a whole”. National income presents the picture of the overall performance of the economy
as a whole in the course of time i.e. a year.
The Importance of National Income
Measuring national income is crucial for various purposes:
1. The measurement of the size of the economy and level of country’s economic performance
2. To trace the trend or the speed of the economic growth in relation to previous year(s) also in other
countries
3. To know the composition and structure of the national income in terms of various sectors and the
periodical variations in them
4. To make projections about the future development trend of the economy
5. To help government formulate suitable development plans and policies to increase growth rates
6. To fix various development targets for different sectors of the economy on the basis of the earlier
performance
7. To help businesses to forecast future demand for their products
8. To make international comparison of people’s living standards
Concepts of National Income:
(1) Gross Domestic Product (GDP): GDP is the total value of goods and services produced within the
country during a year. This is calculated at market prices and is known as GDP at market prices. Dernberg
defines GDP at market price as “the market value of the output of final goods and services produced in the
domestic territory of a country during an accounting year.”
GDP = (P*Q)
Where, GDP = Gross Domestic Product, P = Price of goods and services,Q= Quantity of goods and
services
GDP is made up of 4 Components
GDP = C+I+G+(X-M)
Where, C=Consumption, I=Investment, G=Government expenditure, (X-M) =Export minus import
(2) Net Domestic Product (NDP): NDP is the value of net output of the economy during the year. Some of
the country’s capital equipment wears out or becomes obsolete each year during the production process. The
value of this capital consumption is some percentage of gross investment which is deducted from GDP.
Net Domestic Product = GDP at Factor Cost – Depreciation

(3) Gross National Product (GNP): GNP is the total measure of the flow of goods and services at market
value resulting from current production during a year in a country, including net income from abroad.
GNP includes four types of final goods and services:
i. Consumers’ goods and services to satisfy the immediate wants of the people;
ii. Gross private domestic investment in capital goods consisting of fixed capital formation, residential
construction and inventories of finished and unfinished goods;
iii. Goods and services produced by the government;
GNP=GDP+NFIA (or) GNP=C+I+G+(X-M) +NFIA
Where, C=Consumption, I=Investment, G=Government expenditure, (X-M) =Export minus import,
NFIA= Net factor income from abroad
(4) Net National Product (NNP): NNP includes the value of total output of consumption goods and
investment goods. But the process of production uses up a certain amount of fixed capital. Some fixed
equipment wears out, its other components are damaged or destroyed, and still others are rendered obsolete
through technological changes.
NNP = GNP—Depreciation (Or) NNP=C+I+G+(X-M) +NFIA- IT-Depreciation
(5) National Income: Is also known as National Income at factor cost which means total income earned by
resources for their contribution of land, labour, capital and organisational ability.
NI=NNP +Subsidies-Interest Taxes (or) GNP-Depreciation + Subsidies - Indirect Taxes (or)
NI=C+G+I+(X-M) +NFIA – Depreciation - Indirect Taxes + Subsidies
(6) Personal Income (PI): Personal income is the total income received by the individuals of a country
from all sources before payment of direct taxes in one year. Personal income is never equal to the national
income, because the former includes the transfer payments whereas they are not included in national
income.
Personal Income = Private Income – Undistributed Corporate Profits – Profit Taxes.
(7) Disposable Income: Disposable income or personal disposable income means the actual income which
can be spent on consumption by individuals and families. Therefore, in order to obtain disposable income,
direct taxes are deducted from personal income.
Disposable Income=Personal Income – Direct Taxes.
Disposable income is divided into consumption expenditure and savings. Thus Disposable Income =
Consumption Expenditure + Savings.
Disposable Income = National Income – Business Savings – Indirect Taxes + Subsidies – Direct Taxes
on Persons – Direct Taxes on Business – Social Security Payments + Transfer Payments + Net Income
from abroad.
(8) Real Income: Real income is national income expressed in terms of a general level of prices of a
particular year taken as base. National income is the value of goods and services produced as expressed in
terms of money at current prices. But it does not indicate the real state of the economy.
Real NNP = NNP for the Current Year x Base Year Index (=100) / Current Year Index

(9) Per Capita Income: The average income of the people of a country in a particular year is called Per
Capita Income for that year.
PCE= Total Income / Total population
Importance of National Income
1. Economic policy: National income figures are an important tool of macro-economic analysis and policy,
national income estimates are the most comprehensive measures of aggregate economic activity in an
economy. It is through such estimates that we know the aggregate yield of the economy and lay down future
economic policy for development.
2. Economy’s structure: National income statistics enable us to have a correct idea about the structure of
the economy. It enables us to know the relative importance of the various sectors of the economy and their
contribution towards national income. From these studies we learn how income is produced and how it is
distributed, how much is spent, solved or taxed.
3. Economic planning: National income statistics are the most important tools for long-term and short- term
economic planning. A country cannot possibly frame a plan without having a prior knowledge of the trends
in national income. The Planning Commission in India also kept in view the national income. The national
income estimate before formulating the five year plans.
4. Inflationary and deflationary gaps: National income and national product figures enable us to have an
idea of the inflationary and deflationary gaps. For accurate and timely anti-inflationary and deflationary
policies, we need regular estimates of national income.
5. National expenditure: National income studies show as to how national expenditure is dividend between
consumption expenditure and investment expenditure. It enables us to provide for reasonable depreciation to
maintain the capital stock of a community. Too liberal allowance of depreciation may prove harmful as it
may unnecessarily lead to a reduction in consumption.
6. Distribution of grants-in aid: National income estimates help a fair distribution of grants-in-aid by the
federal governments to the state governments and other constituent units.
7. Standard of living: National income studies help us to compare the standards of living of people in
different countries and of people living in the same country at different times.
8. Budgetary policies: Modern governments try to prepare their budgets within the framework of national
income data and try to formulate anti- cyclical policies according to the facts revealed by the nation income
estimates. Even the taxation and borrowing policies are so framed as to avoid fluctuations in national
income.
9. Public sector: National income figures enable us to know the relative roles of public and private sectors
in the economy. If most of the activities are performed by the state, we can easily conclude that public sector
is playing a dominant role.
10. Defense and development: National income estimates help us to divide the national product between
defense and development purposes. From such figures, we can easily know how much can be spread for war
by the civilian population.

INFLATION
The term "inflation" originally referred to a rise in the general price level caused by an imbalance
between the quantity of money and trade needs.
Inflation is defined as a rise in the general price level. Inflation is a quantitative measure of the rate
at which the average price level of a basket of selected goods and services in an economy increases over a
period of time. Often expressed as a percentage.
Inflation indicates a decrease in the purchasing power of a nation's currency.
Causes of Inflation
Primary Causes: In an economy, when the demand for a commodity exceeds its supply, then the excess
demand pushes the price up. On the other hand, when the factor prices increase, the cost of production rises too.
This leads to an increase in the price level as well.
Increase in Public Spending: In any modern economy, Government spending is an important element of the
total spending. It is also an important determinant of aggregate demand. Usually, in lesser developed
economies, the Govt. spending increases which invariably creates inflationary pressure on the economy.
Deficit Financing of Government Spending: There are times when the spending of Government increases
beyond what taxation can finance. Therefore, in order to incur the extra expenditure, the Government resorts to
deficit financing. For example, it prints more money and spends it. This, in turn, adds to inflationary pressure.
Increased Velocity of Circulation: In an economy, the total use of money = the money supply by the
Government x the velocity of circulation of money. When an economy is going through a booming phase,
people tend to spend money at a faster rate increasing the velocity of circulation of money.
Population Growth: As the population grows, it increases the total demand in the market. Further, excessive
demand creates inflation.
Genuine Shortage: It is possible that at certain times, the factors of production are short in supply. This affects
production. Therefore, supply is less than the demand, leading to an increase in prices and inflation.
Exports: In an economy, the total production must fulfill the domestic as well as foreign demand. If it fails to
meet these demands, then exports create inflation in the domestic economy.
Types of Inflation
1. Demand-pull inflation: It occurs when aggregate demand for goods and services in an economy rises
more rapidly than an economy's productive capacity. The increase in money in the economy will increase
demand for goods and services. In the short run, businesses cannot significantly increase production and
supply remains constant.
2. Cost-push inflation: It occurs when prices of production process inputs increase. Rapid wage increases
or rising raw material prices are common causes of this type of inflation. The sharp rise in the price of
imported oil during the 1970s provides a typical example of cost-push inflation. Rising energy prices caused
the cost of producing and transporting goods to rise. Higher production costs led to a decrease in aggregate
supply and an increase in the overall price level because the equilibrium point.

3. Creeping or mild inflation is when prices rise 3% a year or less. According to the Federal Reserve,
when prices increase 2% or less, it benefits economic growth. This kind of mild inflation makes consumers
expect that prices will keep going up. That boosts demand. Consumers buy now to beat higher future prices.
4. Walking Inflation This is strong and inflation is between 3-10% a year. It is harmful to the economy
because it heats-up economic growth too fast. People start to buy more than they need to avoid tomorrow's
much higher prices. This increased buying drives demand even further so that suppliers can't keep up.
5. Hyper Inflation is when prices skyrocket more than 50% a month. It is very rare. In fact, most examples
of hyperinflation occur when governments print money to pay for wars. Examples of hyperinflation include
Germany in the 1920s, Zimbabwe in the 2000s, and Venezuela in the 2010s. The last time America
experienced hyperinflation was during its civil war.
6. Stagflation is when economic growth is stagnant, but there still is price inflation. This combination
seems contradictory, if not impossible. It happened in the 1970s when the United States abandoned the gold
standard. Once the dollar's value was no longer tied to gold, it plummeted. At the same time, the price of
gold skyrocketed.
7. Deflation is the opposite of inflation. It's when prices fall. It's caused when an asset bubble bursts.
Deflation in housing prices trapped those who bought their homes in 2005. In fact, the Fed was worried
about the overall deflation during the recession.
8. Asset Inflation An asset bubble, or asset inflation, occurs in one asset class. Good examples are housing,
oil, and gold. It is often overlooked by the Federal Reserve and other inflation-watchers when the overall
rate of inflation is low. But the subprime mortgage crisis and subsequent global financial crisis demonstrated
how damaging unchecked asset inflation could be.
Money Supply in Inflation (Quantity theory of Money):
Functions of money:
 First: Money is a store of value. If I work today and earn 25 dollars, I can hold on to the money before I
spend it because it will hold its value until tomorrow, next week, or even next year. In fact, holding
money is a more effective way of storing value than holding other items of value such as corn, which
might rot. Although it is an efficient store of value, money is not a perfect store of value. Inflation slowly
erodes the purchasing power of money over time.
 Second: Money is a unit of account. You can think of money as a yardstick-the device we use to measure
value in economic transactions. If you are shopping for a new computer, the price could be quoted in
terms of t-shirts, bicycles, or corn. So, for instance, your new computer might cost you 100 to 150
bushels of corn at today's prices, but you would find it most helpful if the price were set in terms of
money because it is a common measure of value across the economy.
 Third: Money is a medium of exchange. This means that money is widely accepted as a method of
payment. When I go to the grocery store, I am confident that the cashier will accept my payment of
money. In fact, U.S. paper money carries this statement: "This note is legal tender for all debts, public
and private." This means that the U.S. government protects my right to pay with U.S. dollars.

Characteristics of Money:
General Acceptability: An important quality of money is its acceptance. Good money requires acceptance
to all without any hesitation. Since the law declares Money as the legal tender, it has an inherent quality of
general acceptability.
Portability: Apart from its acceptance, good money also requires portability. If people can carry or transfer
money from one place to another, then it is good money.
Durability: Acceptance and portability aside, the material used to make money must last for a long time
without losing its value. For example, ice and fruits are not good money since they lose their value quickly
with the passage of time. After all, ice melts and fruits perish. Therefore, durability is an essential quality of
good money.
Divisibility: Talking about the qualities of good money, it is important to remember the divisibility of
money. If someone wants to buy a smaller unit of a commodity, then divisibility of money can make it
possible. For example, cows cannot function as good money. This is because you cannot divide a cow
without making it lose its value.
Homogeneity: Look at two 100 rupee notes. They look and feel identical, right? They also have the same
value. In fact, nobody can distinguish between two currency notes right out of the mint.
This is an important quality of good money – homogeneity. If money is not homogeneous, then transactions
will become uncertain as people would be unsure of what they are receiving.
Cognizability: The ability to recognize money is critically important. Today, we can look at a currency note
and tell its value. If money is not cognizable, then people can find it difficult to determine if they are dealing
with money or some inferior asset.
Stability: Of all the qualities of good money, stability is probably the most essential one. The value of money
cannot change for a long period of time and hence remain stable. If the value of money keeps changing, then
it will fail to function as a measure of value and as a standard of deferred payment.
Money Supply
The money supply is all the currency and other liquid instruments in a country's economy on the date
measured. The money supply roughly includes both cash and deposits that can be used almost as easily as
cash.
Governments issue paper currency and coin through some combination of their central banks and treasuries.
Bank regulators influence money supply available to the public through the requirements placed on banks to
hold reserves, how to extend credit and other regulation.
Effect of Money Supply on the Economy
An increase in the supply of money typically lowers interest rates, which in turn, generates
more investment and puts more money in the hands of consumers, thereby stimulating spending. Businesses
respond by ordering more raw materials and increasing production. The increased business activity raises
the demand for labor. The opposite can occur if the money supply falls or when its growth rate declines.

Change in the money supply has long been considered to be a key factor in driving macroeconomic
performance and business cycles. Macroeconomic schools of thought that focus heavily on the role of
money supply include Irving Fisher's Quantity Theory of Money, Monetarism, and Austrian Business Cycle
Theory.
The value of money is determined by the supply and demand for money. If we ignore the banking
system, the RBI controls the money supply. Money demand reflects how much wealth people want to hold
in liquid form. While money demand has many determinants, in the long run one is dominant - the price
level. People hold money because it is a medium of exchange. If prices are higher, more money is needed
for the same transaction, and the quantity of money demanded is higher.
Thus, the conclusions of the quantity theory of money are:
1. The quantity of money in the economy determines the price level (and the value of money)
2. An increase in the money supply increases the price level, which means that growth in the money supply
causes inflation.
BUSINESS CYCLE
The business cycle or economic cycle and or trade cycle is the downward and upward movement of Gross
Domestic Product (GDP) around its long-term growth trend. The length of a business cycle is the period of
time containing a single boom and contraction in sequence.
The business cycle is the natural expansion and contraction of the production and output of goods and
services that happens over a period of time. It can be said to be the economic rise and fall of a firm in
the economy.
Phases of business cycle:

1. Expansion: The line of cycle that moves above the steady growth line represents the expansion phase of a
business cycle. In the expansion phase, there is an increase in various economic factors, such as production,
employment, output, wages, profits, demand and supply of products, and sales.
In expansion phase, due to increase in investment opportunities, idle funds of organizations or individuals
are utilized for various investment purposes. Therefore, in such a case, the cash inflow and outflow of
businesses are equal. This expansion continues till the economic conditions are favorable.
2. Peak: The growth in the expansion phase eventually slows down and reaches to its peak. This phase is
known as peak phase. In other words, peak phase refers to the phase in which the increase in growth rate of
business cycle achieves its maximum limit. In peak phase, the economic factors, such as production, profit,
sales, and employment, are higher, but do not increase further. In peak phase, there is a gradual decrease in
the demand of various products due to increase in the prices of input.
The increase in the prices of input leads to an increase in the prices of final products, while the income of
individuals remains constant. This also leads consumers to restructure their monthly budget. As a result, the
demand for products, such as jewellery, homes, automobiles, refrigerators and other durables, starts falling.
3. Recession: As discussed earlier, in peak phase, there is a gradual decrease in the demand of various
products due to increase in the prices of input. When the decline in the demand of products becomes rapid
and steady, the recession phase takes place.
In recession phase, all the economic factors, such as production, prices, saving and investment, starts
decreasing. Generally, producers are unaware of decrease in the demand of products and they continue to
produce goods and services. In such a case, the supply of products exceeds the demand.
4. Trough: During the trough phase, the economic activities of a country decline below the normal level. In
this phase, the growth rate of an economy becomes negative. In addition, in trough phase, there is a rapid
decline in national income and expenditure.
Apart from this, the level of economic output of a country becomes low and unemployment becomes high.
In addition, in trough phase, investors do not invest in stock markets. In trough phase, many weak
organizations leave industries or rather dissolve. At this point, an economy reaches to the lowest level of
shrinking.
5. Recovery: As discussed above, in trough phase, an economy reaches to the lowest level. This lowest level
is the limit to which an economy shrinks. Once the economy touches the lowest level, it happens to be the
end of negativism and beginning of positivism.
This leads to reversal of the process of business cycle. As a result, individuals and organizations start
developing a positive attitude toward the various economic factors, such as investment, employment, and
production. This process of reversal starts from the labor market.
In recovery phase, consumers increase their rate of consumption, as they assume that there would be no
further reduction in the prices of products. As a result, the demand for consumer products increases.

Features of a Business Cycle:
There are several features of a Business Cycle. Let us take a look at five features of a Business Cycle.
1. Occurs Periodically: The different phases of a Business Cycle occur from time to time. Although, at
certain times, these periods will vary according to the Economic conditions of the industry. This duration
may last as long as 10-12 years. The intensity of the phases will also change depending on the Economy.
2. Synchronous: The features of a Business Cycle are not restricted to a single firm or industry. They
originate in a free Economy and are prevalent. If there is any kind of disturbance in one industry, it will
affect the other firms too. Since different kinds of industries are interrelated, the Business in one firm
disturbs that in another firm.
3. Major Sectors are Affected: It’s been noticed that fluctuations occur not only at the level of production
but also in other variables such as employment, consumption, investment, rate of interest, and price level.
The investment and consumption of durable consumer goods like houses and cars are continually affected
by the periodical fluctuations. As the process of consumption is deferred the courses of the Business Cycle
are also affected widely.
4. Profit Variation: This makes any kind of Business a tricky and uncertain profession for many. It is
difficult to predict Economic conditions. In situations of depression, profits may even become harmful. That
is why many Businesses go bankrupt.
5. Worldwide Impact: Business Cycles are international in nature. If depression occurs in one country, then
it is bound to spread to other nations too. This happens mainly because the countries depend on each other
for import and export trades. The 1930 depression in the USA and Great Britain shook the entire world and
resulted in a recession.
BUSINESS ECONOMICS OR MANAGERIAL ECONOMICS
Definitions:
According to Mansfield, “Managerial economics is concerned with the application of economic
concepts and economics to the problems of formulating rational decision making”
In the words of Spencer and Seigelman, “Managerial Economics is the integration of economic
theory with business practice for the purpose of facilitating decision making and forward planning by
management.”
Business economics involves the application of various economic tools, theories, and methodologies
for analyzing and solving different business problems. These business problems can be related to demand
and supply prospects of an organisation, level of production, pricing, market structure, and degree of
competition.
Scope of Managerial or Business economics
The following are the some of the managerial decision areas
1. Demand analysis and forecasting 2. Cost and benefit analysis (CBA)
3. Pricing decisions, policies, and practices 4. Profit maximization and Wealth maximisation
5. Capital management 6. Investment decisions or capital budgeting decisions
7. Budget preparations 8. Decisions on sources of finance

9. Marketing decisions 10. Production decisions
11. Make or buy decisions 12. Inventory management
13. Others
1. Demand analysis and forecasting: Demand refers to the willingness or capability of individuals to buy a
product at a specific price. Demand analysis is a process of identifying potential consumers, the amount of
goods they want to purchase, and the price they are willing to pay for it. This process is important for an
organisation to analyse the demand for its products and produce accordingly.
In business economics, demand forecasting occupies an important place by helping organisations in
business planning and deciding on strategic issues.
2. Cost and benefit analysis (CBA): By analysing costs, management can estimate costs required for
running the organisation successfully. Cost analysis helps firms in determining hidden and uncontrollable
costs and taking measures for effective cost control.
It further enables the organisation to determine the return on investment (ROI). In a nutshell, CBA is
a process of comparing the costs and benefits of a particular project or activity. Business economics involves
various aspects of cost and benefit analysis, such as cost-output relationships and cost control.
3. Pricing decisions, policies, and practices: Pricing is one of the key areas of business economics. It is a
process of finding the value of a product or service that an organisation receives in exchange for its
product/service. The profit of an organisation depends a great deal on its pricing strategies and policies.
Business economics includes various pricing-related concepts, such as pricing methods, product-line pricing,
and price forecasting.
4. Profit maximisation: Profit generation and maximisation is the main aim of every organisation (except
for non-profit organisations). In order to maximise profit, organisations need to have complete knowledge
about various economic concepts, such as profit policies and techniques, and break-even analysis.
5. Capital management: Organisations often find it difficult to make decisions related to capital
investment. These decisions require sound knowledge and expertise on various economic aspects. To make

sound capital investment decisions; an organisation needs to determine various aspects, such as cost of
capital and rate of return.
Significance of Business Economics
Business economics plays an important role in decision making in an organisation. Decision making is a
process of selecting the best course of action from the available alternatives. In order to make sound
decisions; managers must have in-depth knowledge of economic concepts, theories, and tools.
Following points explain the importance or significance of Business Economics:
1. Business economics covers various important concepts, such as demand and supply analysis; short and
long-run costs; and marginal utility. These concepts support managers in identifying and analysing problems
and finding solutions.
2. It helps managers to identify and analyse various internal and external business factors and their impact
on the functioning of the organisation.
3. Business economics helps managers in framing various policies, such as pricing policies and cost policies,
on the basis of economic study and findings. By studying various economic variables, such as cost
production and business capital, organisations can predict the future.
4. Business economics helps in establishing relationships between different economic factors, such as
income, profits, losses, and market structure. This helps in guiding managers in effective decision making
and running the organisation.
Distinction between Economics and Business Economics
Economics and business economics are different from each other in various aspects. As discussed earlier,
economics is a study of human behaviour in making decisions related to the allocation of resources.
Business economics, on the other hand, deals with managerial decision making in organisations. The
following points distinguish between economics and business economics:
Economics Business Economics
It is a traditional subject that has prevailed from a It is a modern concept and is still developing.
long time.
It mainly covers theoretical aspects. It covers practical aspects.
The problems of individuals and societies are The main area of study is the problems of an
studied. organisation.
Only economic factors are considered. Both economic and no-economic factors are
considered.
Both micro and macroeconomics fall under the Only microeconomics falls under the scope of
scope of economics. business economics.
Economics has a wider scope and covers the Business economics is a part of economics and is
economic issues of nations limited to the economic problems of
organisations.
Thus, it can be stated that economics is a wide concept that can be applied to various fields, whereas
business economics is a narrow approach that can be applied in selected areas.

Role of Business Economist:
1. Demand estimation and forecasting
2. Preparation of business/sales forecast
3. Analysis of the market survey
4. Analysing the issues and problems of the concerned industry
5. Assisting the business plans process of the firm
6. Advising on pricing, investment and capital budgeting.
7. Building micro and macro models.
8. Directing economic research activity
9. Briefing the management on current domestic & global economic issues and emerging challenges
10. Others
Multidisciplinary nature of Business Economics:
Managerial economics is close linked with many other disciplines such as economics, accountancy,
mathematics, statistics, operations research, psychology and organisational behaviour. Let us see these
linkages in detail:
1) Economics: Managerial economics is the offshoot of economics and hence the concepts of managerial
economics are basically economic concepts. If economics deals with theoretical concepts, managerial
economics is the application of these in the real life. Economics and managerial economics, both are
concerned with the problems of scarcity and resource allocation. If the economist is concerned with study of
‘markets’, the managerial economist is interested in studying the impact of such markets on the performance
of a given firm.
2) Operations Research: Decision making is the main focus in operations research and managerial
economics. If managerial economics focuses on ‘problems of decision making’, operations research focuses
on solving the managerial problems. In other words, operations research is the tool for finding the solutions
for many a managerial problem. The Operations Research Models such as linear programming. Queuing,
transportation, optimization techniques and so on, are extensively used in solving the managerial problems.
3) Mathematics: Managerial economist is concerned with estimating and predicting the relevant economic
factors for decision making and forward planning. In this process, he extensively makes use of the tools and
techniques of mathematics such as algebra, calculus, exponentials, vectors, input-out tables and such other.
Mathematics facilitates derivation and exposition of economic analysis.
4) Statistics: Statistics deals with different techniques useful to analyse the cause and effect relationships in
a given variable or phenomenon. It also empowers the manager to deal with the situations of risk and
uncertainty through its techniques such as probability.
Ex: Averages, measures of dispersion, correlation, regression, time series, interpolation, probability, and so
on. These techniques enhance the relevance of the conceptual base in managerial economics.
5) Accountancy: The accountant provides accounting information relating to costs, revenues, receivables,
payables, profits/losses etc. and this forms the basis for the managerial economist to act upon. This forms
authentic source of data about the performance of the firm. The main objective of accounting function is to

record, classify and interpret the given accounting data. The managerial economist profusely depends upon
accounts g data {0 daemon making and forward planning.
6) Psychology: Consumer psychology is the basis on which managerial economist acts upon. How the
customer reacts to a given change in price or supply and its consequential effect on demand/profits- is the
main focus of study in managerial economics. Psychology contributes towards understanding the behavioral
implications, attitudes and motivations of each of the microeconomic variables such as consumer, supplier
seller, investor, worker or an employee.
7) Organisational Behaviour Organisational behaviour enables the managerial economist to study and
develop behavioral models of the firm integrating the manager’s behaviour with that of the owner.
*************

PART – A
Short Answer Questions:
1. Difference between Partnership and Sole trade

2. Business cycle
3. Private Ltd Company.
4. Features of Sole Trader.
5. Net National Product (NNP)
6. Micro and Macro economics
7. Inflation
8. Deflation
9. stagflation
10. Write about a) Trade credit b) Lease financing
11. National income
12. Define company
13. Joint Stock Company
14. Money supply affects in inflation
15. Disadvantages of limited liability company
16. Features of Joint Hindu family business.
17. Public and Private company.
18. Capital
19. Non Conventional sources of finance
20. Investment
PART - B
Essay answer questions:
1. Explain the structure of the business firm.

2. What is inflation? Explain the concept and types of inflation in detail.
3. Capital is life blood of business. Explain or Explain various sources of capital
4. Illustrate the different phases in Business Cycles
5. How business economics is related to other disciplines?
6. What is money supply in inflation? Explain the concept in detail.
7. Define economics. Differentiate Micro and Macro economics.
8. What is National Income? Write about the concepts Gross Domestic Product Per capita Income in
National Income.
9. What is Demand pull inflation and Cost push inflation? Explain in detail.
10. Define Business Economics and discuss its nature and scope.
11. What is the role played by the business economist in the economy? Explain.

12. What is partnership? Explain different types of partnership in detail.
13. What are the sources of long term and short term sources of finance? Explain in detail.
14. Explain the differences between public limited and private limited company.
15. Explain in detail about features, advantages and disadvantages of sole proprietorship.
16. Write a detailed description about types of companies.
Objective Questions.
1. Macroeconomics is a study of economics that deals with which 4 major factors:
a) households, firms, government, and demand-supply
b) households, firms, government and external sector
c) firms, government, free-market, and regulations
d) none of the above
2. What are consumption goods?
a) Goods used for consumption in the production process
b) Goods such as tools, machinery, etc which are used to create final consumption goods
c) Goods and services that are consumed fully when purchased by the consumers
d) None of the above
3. What are Capital goods?
a) Goods used for consumption in the production process
b) Goods such as tools, machinery, etc which are used to create final consumer goods
c) Goods and services that are consumed fully when purchased by the consumers
d) None of the above
4. What is the sum total of gross value added of all the firms in the country?
a) Gross Domestic Product b) Gross National Product
c) Net Domestic Product d) Net National product
5.What is the sum total of gross value added of all the firms in the country minus the depreciation?
6.What is the Gross National Product minus the depreciation?
7.Which among the following is considered to be the most liquid asset?
a) Gold b) Money c) Land d) Treasury bonds
8.In the terminology of economics and money demand, the terms M1 and M2 are also known as :
a) Short money b) Long money c) Broad money d) Narrow money
9. The financial year in India is
a). April 1 to March 31 b). January 1 to December 31
c). March 1 to April 30 d). March 16 to March 15

10.The low point in the business cycle is referred to as the
a). Expansion b). Boom c). Trough d). Peak
11. When aggregate economic activity is increasing, the economy is said to be in
a). an expansion b). a contraction c).a peak d). a turning point
12. Peaks and troughs of the business cycle are known collectively as
a). Volatility b). Turning points c).Equilibrium points d).Real business cycle events
13. Consumer surplus is highest in the case of
a).Necessities b).Comforts c). Luxuries d).All the above
14.Utitlity means
a). Power to satisfy a want b).Usefulness c).Willingness of a person d).Harmfulness
15.Scarcity means
a).Non availability of goods b).High price of goods
c).Less supply than demand d).High profit of the firms
Fill in the Blanks:
16. Adam Smith is the father of economics?
17.A firm's profit that is distributed to shareholders is called dividends
18. A consumer consuming two goods will be in equilibrium, when the marginal utilities from both goods
are equal
19. Elasticity of demand is not a determinant of demand.
20. Collective opinion method is not the method of forecasting demand
21. Price is one the determinant of Demand.
22. Ease of starting a business is one of the advantages of a sole proprietorship.
23. “Any activity aimed at earning or spending money is called economic activity”.
24. Managerial Economics is close to Micro Economics.
25. When the company closes it may need a "death certificate"
26. Business deals with goods and services.
27. Earning profit is the primary motive of business.
28. Theory of the firm is also called as microeconomics.
29. The Indian Partnership Act, 1932.
30. The Co-operative Societies Act, 1912.

Befa Unit - I

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Business Economics and Financial Analysis Unit I

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Advantages of Sole Trader:

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Advantages Joint Stock Company

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

MAIN DOCUMENTS IN COMPANY FORMATION

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

(B) Articles of Association

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Advantages of Joint Hindu family business:

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

The features of a cooperative society can be described as follows:

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

PUBLIC ENTERPRISES OR SECTOR

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Advantages of public corporation

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Advantages of Government company

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

LIMITED LIABILITY COMPANIES

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Time Period Point of View

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

e. Short-term Deposits from the Customers, Sister Companies and Outsiders

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

1. Study aggregates 6. General equilibrium model

Significance of Macro economics

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies

Dr. M.Kondala Rao, Associate Professor Department of Management Studies