BUSINESS ECONOMICS

AND
FINANCIAL ANALYSIS

UNIT –I
Introduction to Business and Economics

Business: Structure of Business Firm, theory of firm, types of Business

Entities, Limited Liability Companies, Sources of Capital for a
company, Non-Conventional Sources of Finance.
Economics: Significance of Economics, Micro and Macro Economic
Concepts, Concepts and importance of National income, Inflation ,
Money Supply & Inflation, Business Cycle, Features & Phases of
Business Cycle, Nature and Scope of Business Economics, Roles of
Business Economist, Multidisciplinary nature of Business Economic.
INTRODUCTION TO BUSINESS:
Human life is built around work. People are engaged in some kind of work in order to earn their livelihood and to
acquire wealth. Some activities are inspired by social, culture, religious or sentimental requirements of human beings.
All human activities may be classified into Economic and Non- Economic activities. Economic activities include
production, exchange and distribution of products rendering of services such Transport, banking, Insurance, supply,
religious, psychological motives.

BUSINESS DEFINITION:
Business is an institution organized and operated to provide goods and services to society under the incentive of private
gain B.O.WHEELER

Economic activities performed for earning profits are termed as Business JAMES STEPHENSON

Business is an economic Activity which is related with continuous and regular Production and distribution of goods
and services for satisfying human wants.

Human Activities:

Economic Activity: those activities which are associated with the production, exchange, distribution and
consumption of merchandise, at every level of the society.
Ex: business, Profession, employment

Non-economic activity: those activities refers to human activity undertaken sheerly (absolute) out of love,
affection, sympathy or patriotism. These activities conducted voluntarily with an aim of rendering services to other
for free i.e., it cannot be measured in terms of money
Ex: Parental (love), Religion, Social

CHARACTERSTICIS OF BUSINESS
Business is a activity of making one’s living or making money by Producing or buying and selling products such as
goods and services.

Economic Activity: Business is an economic activity, as it is conducted with the primary objective of earnings
money.ie. For economic motive.

Production/purchase of goods and Services: Goods and services are produced by business entities, so as to add
value and sell them to the consumer. Goods and services manufactured by the company or procured from the
supplier, with the aim of selling it further to the consumer, for profit.

Selling of Goods and Services: Business must involve the transfer of goods to the customer for value, through selling,
meaning that if the goods are acquired for personal consumption then the transaction will not amount to business
activity.

Continuity in Dealing: Every business requires regularity in transition, i.e.an isolated transaction of exchange of
goods or services will not be considered as business, so to constitute business dealings must be carried out on a regular
basis.

Profit Earning: The basic Purpose of business is to make the profit from its activities. It is the spine of business,
which keeps the business going, in the long term.

Element of risk: Risk is the key element of every business, concerned with exposure to loss. Efforts are made to
forecast future events and plan the business strategies accordingly. However, the factors that affect business are
uncertain and so does the business opportunities, which can be a shift in demand, floods, fall in prices, strikes,
lockout, money market fluctuation etc.,

Uncertain Return: In business, the return is never predictable and guaranteed, i.e., the amount of money which the
business is going to reap is not certain. It may be possible that the business earns a huge profits or suffer heavy
losses.

Legal and Lawful: No matter, in which type of business the company is engaged, it should be legal in the eyes
of the law, or else it will not be considered as business.

Consumer satisfaction: The aim of business is to supply goods and services to consumers, so as to satisfy their
wants, will purchase the goods or services. But, if they are not, there are chance that they will look for substitute

Exchange of goods and services: Every business activity includes an exchange or transfer of services and goods to
earn value. Producing goods for the goal of personal consumption is not included in business activity. So, there
should be the process of sale or exchange of goods or services exits among the seller and the buyer.

Deal in Monetary Transactions: A financial transaction is an agreement, or communication, carried out between a
buyer and a seller to exchange to asset for payment.

Features of business
Profit is the main objective: 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. In fact a business will flourish only
when it is able to serve its customers to their satisfaction. 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.

Business skills for economic success: Business skills are skills that help people understand consumer and
organizational behavior and use this information to promote the success of the company. Business skills are often
considered soft skills and may include team management, leadership and communication skills.

Risk and uncertainties: Risk is said to be the possibility of incurring loss. Risks are of two types—one whose
probability can be calculated and insured. E.g.—fire, theft etc. and the other whose probability cannot be calculated
and which cannot be insured. e.g.—fall in demand, changing fashions etc.

Marketing and distribution of goods: Distribution is the process of making a product or service available for the
consumer or business user who needs it.

Connected with Production: Business is carried out only when goods and services are produced and exchanged for
money. If goods are produced for self-consumption, such an activity is not treated as business. Buyer and seller are
the two parties involved in a business activity.

Buyers and sellers: Making the seller fulfill all your demands and getting the maximum number of buyers is the
toughest job both of them have to encounter. There are various dimensions in understanding the relationship of
buyer and seller.

Consumer goods and Producer Goods: Consumer goods are those goods that are consumed directly by the
consumers and they are there to server the emerging wants and needs of a consumer, while producer goods are those
that goods that may be used to produce other goods, the example of the producer goods may be the technological
machines which are used in production of other goods.

To satisfy human wants: Human wants can be referred to as the desires that human beings strive to satisfy by
using goods and services. The satisfaction of these wants refers to the process of acquiring and using the required
goods and services.
Social obligation: Social responsibility of business implies the obligations of the management of
a business enterprise to protect the interests of the society. However, in our view, it will be too idealistic to expect
that business enterprises will be purely guided by the benefits they confer on the society by their activities.

Factors affecting the choice of form of business organization

Before we choose a particular form of business organization, let us study what factors affect such a choice?

Easy to start and easy to close: the form of business organization should be such that it should be easy to start and
easy to close. There should not be hassles or long procedures in the process of setting up business or closing the
same

Division of work: There should be possibility to divide the work among the available owners. The idea is to pool
the enterprise of all the people in business and run the business most efficiently.

Large amount of resources: Large volume of business requires large volume of resources. Some forms of business
organizations do not permit to raise large resources.

Liability: The liability of the owners should be limited to the extent of money invested in business. It is better if
their personal properties are not brought into business to make up the losses of business.

Secrecy: the form of business organization you select should be such that it should permit to take care of the
business secret. We know that century old business units are still surviving only because they could successfully
guard their business secrets.

Transfer of ownership: there should be simple procedure to transfer the ownership to the next legal heir.

Ownership, Management and Control: If ownership, management and control are in the hands of one or more
small group of person, communication will be effective and co-ordination will be easier. Where ownership,
management and control are widely distributed, it calls for a high degree of professional skills to monitor the
performance of the business.

Continuity: the business should continue forever and ever irrespective of the uncertainties in future.

Quick decision making: select such a form of business organization which permits you to take decision quickly and
promptly. Delay in decisions may invalidate the relevance of the decisions.

Personal contact with customer: Most of the times, customers give us clues to improve business. So choose such a
form which keeps you close to the customers.

Flexibility: In time of rough weather, there should be enough flexibility to shift from on business to the other. The
lessor the funds committed in a particular business.

Taxation: More profit means more tax. Choose such a form which permits to pay low tax.

Geographical Mobility: Another important consideration influencing an entrepreneur’s choice of business

organization is geographical Mobility. Usually an entrepreneur likes to select a form of organization that provides
freedom and right to conduct business is different regions of the country without much legal complications.
Structure of Firm:
One of the decisions that a business owner has to make is what type of organizational structure their business is
going to use.

There are five main types of business Structures:

i) Sole proprietorship, ii) partnership, iii) limited liability and iv) Corporation. v) Co-operative society

Each structure has different tax, income and liability implications for businesses owners and their companies.

Sole Proprietorship:
Sole Trader implies that there is only one trade who is the owner of the business.

Sole proprietorship allows the owner(s) to have total control over company operations.

Businesses that typically form sole proprietorships are home-based businesses, shop or retail businesses and one-
person consulting firms.

Owners of sole proprietor businesses are responsible for their own record keeping and paying the IRS in the form of
self-employment taxes.

However, this type of business provides no protection for business owners, as they can be held personally
responsible for their company's debt and financial obligations.

Partnership
A partnership is formed when two or more people join, or partner, together to run a business. Each partner has equal
share in the net profits and losses of their business.

Like a sole proprietor, each partner reports their income on their personal tax return and pays self-employment taxes
to the government.

They are also personally liable for financial debt and obligations of their company and also the actions of other
partners.

Although partnerships can be formed through oral agreements and handshakes, written agreements can be the best
option in the event of disputes or lawsuits between partners.

Limited Liability Company:

One of the newest organizational structures for businesses is limited liability company (LLC).

The limited liability structure is considered a hybrid as limited liability companies can be formed as corporations or
partnerships. LLCs can provide owners, who are commonly referred to members under this structure, the protection
from liability and other obligations similar to a corporation.

Limited liability companies can also be set up and managed like partnerships. The taxation of LLCs also depends on
its structure.

Due to its limited protection, some companies such as banks and insurance companies are restricted from being
LLCs.
Corporations:
The most complex organizational structure for businesses is the corporation. This type of business structure
separates the liabilities and obligations incurred by company operations from being the responsibility of the owners.

Corporations are regulated by the laws of the state they are set up in. Unlike sole proprietor and partnership
businesses, corporations are taxed as separate entities at corporate tax rates.

A cooperative society is a voluntary association that started with the aim of the service of its
members. It is a form of business where individuals belonging to the same class join their hands for the promotion of
their common goals.

Theory of Firm:
The following are the various theories of the firm:

1. Profit Maximization theory 2. Baumol’s theory of sales & Revenue Maximization

3. Marri’s Hypothesis of Maximization of Growth Rate 4. Williamson Model of Managerial Utility Function

5. Behavioral Theory

1. Profit Maximization theory:

Profit: It the making of gain in business activity for the benefit of the owner of the business. Generally profits are
the Primary measures of the success of any business.

Profit Maximization: it is the short run or long run process by which a firm determines the determines the price and
output level that returns the greatest profit.

Profit Maximization refers to the sales level where profits are highest. You might assume that the higher the sales
level, the higher the profits but that is not always true.

A process that companies undergo to determine the best output and price levels in order to maximize its returns the
company will usually adjust influential factors such as production cost, sales prices & output levels as a way of
reaching its profit goal.

Profit = Total revenue – Total Cost

Total Revenue: Simply means the total amount of money that the firm receives from sales of its product or other
sources or total amount of money the firm collects in sales.

Total Cost: The cost of all factors of production.

Williams Baumol’s theory of Sales Revenue Maximization (1962):

Prof. Baumol in his Article on the theory of Oligopoly presented a managerial theory of for based on sale
maximization.

Sales maximization is achieved when; TC=TR

In other words, a business is selling as much as they can without making a loss. At the sales maximization output,
these are normal profits only and on supernormal profit/loss.

Sales maximization typically involves business charging lower prices for their products contrasted with profit
maximization. This will be possible in short – term period.
The validity of profit maximization as an objective of firm was questioned by Baumol. According to Baumol.”
maximization of sales revenue is the main objective of the firms in the competitive markets”.

According to him, in large organization, the salaries and other benefits of the managers are connected with the sales
volumes instead of profits. So, managers try to maximize the total revenue of the firms. The volumes of sales
represent the position of the firm in the market.

The mangers of firm performs the operations of the firm and their performance is measured on the basis of the
attainment of the sales target so the management will try is to maximize sales and maintain minimum profit.

3. Marri’s hypothesis the maximization of growth rate:

Two set of Goals:
1. Owners aim act Profit and Market share

2. Managers aim at better salary, Job Security and Growth.

Both achieved by maximizing balanced growth of the firm (G) dependent on:

a) Growth rate of demand for the firm’s Products (Gd)

b) Growth rate of Capital supply to the firm

According to Marri’s (1964), owners/shareholders strives for attaining profits and market share where as the
managers strive for better salary, job security and growth. These two objectives can be attained by maximization the
balanced growth of the firm.

The balanced growth of the firm relies mainly on the growth rate of demand for the firm’s products and growth rate
of Capital supplied to the firm. If the demand for the firm’s product and the capital supplied to the firm grows at the
same rate, then the growth rate of the firm will be considered as balanced.

For maximizing the growth of the firm, the manager should have skills, expertise, efficiency and sincerity. The
prudent financial policy of the firm depends on at least three financial rations which restrict the growth of the firm.

4. Williamson Model of Managerial Utility Function (1963):

Williamson’s model combined profit maximization and growth maximization objectives. According to the
model of managerial Utility functions, managers make us of their discretionary power for maximizing their own
utility function and maintain minimum profit for satisfying shareholders.

Xn =f (R,N,Ya)

Where,

Xn = Manager’s utility function

R = Salary

N = Managerial emoluments

Ya = Power of discretionary investments

The Utility function of the manager relies on salary of the managers, job security, Power, Professional
satisfaction and power to affect the objectives of the firm.
5. Behavioural theories:
According to the behavioral theories, the firm tries to attain a satisfactory behavior instead for maximization. There
are two important behavioral models i.e.

a) Simon’s satisfying model and b) model developed by Cyest and March.

a) The Simon’s satisfying model states that firm scarcy out their operations under “bounded Rationality” and can
only attain a satisfactory level of profit, sales and growth. Simon’s carried out.

Bounded rationality is the idea that we make decisions that are rational, but within the limits of the information
available to us and our mental capabilities.

b) The model develop by Cyest and March:

Shareholders have different and of conflicting goals.

“Satisfying behavior” aiming at satisfy all share holder

Aspiration level on basis of past experience, past performance of the firm, performance of other similar firms and
future expectation.

Forms of business organizations or Types of Business Entities:

The following are forms of business organizations Based on ownership:

1) Sole trader or proprietorship 2) Partnership

3) Joint stock company:

a) Charted company

b) Statutory companies

c) Registered companies:

i) Government Companies (Public)

ii) Private companies

iii) Limited companies

iv) Company Limited by Guarantee

4. Co-operative society: is a voluntary association that started with the aim of the service of its members. It is a form
of business where individuals belonging to the same class join their hands for the promotion of their common goals.
1) Sole Trader or Proprietorship:
“ 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 the organizer and manager, takes all profits or responsible for all losses”.
James Stephenson

In other words sole Trader implies that there is only one trade who is the owner of the business.

Ex: Grocery shop

Features of Sole Trader:

Easy to start & Easy to close: The form of business organization should be such that it should be easy to start an easy
to close. There should not be hassles or long procedures in the process of setting up business or closing the same.

Introduces his own capital (liability chances is high): He introduces his own capital. Sometimes, he may borrow,
if necessary

He enjoys all profits and he suffers with loss: he enjoys all the profits and in cast of loss, he alone suffers.

High degree of flexibility: he has unlimited liability which implies that his liability extend to his personal properties
in case of loss

Very little legal hassles (problems): There are very little legal hassles to be observed by a sole trade. Expert in such
business where license is required for instance, hotels and so on, the sole trader is free to take up any business

Total operational freedom: he has total operation freedom. He is the owner, manager and controller.

In touch with customer: Most of the times, customers give us clues to improve business.

Fast decision making: He can take decisions very fast and implement the promptly/

Low rate of tax rates of tax, for example income tax and so on are comparatively very low.

Secrecy: The form of business organization you select should be such that it should permit to take care of the business
secrets. We know that century old business units are still surviving only because they could successfully guard their
business secrets.

Advantages of Sole trader form of business:

Easy to start and easy to close: Formation of a sole trader from of organization is relatively easy. Even closing the
business is easy.

Personal contact with customers directly: Based on the tastes and preferences of the customers, the stocks can be
maintained.

Prompt decision-making: To improve the quality of services to the customers, he can take any decisions and
implement the same promptly. He is the boss and he is responsible for his business.

High degree of flexibility: Based on the profitability, the trader can decide to continue or change the business, if need
be

Secrecy: Business secrets can well be maintained because there is only one trader
Low rate of taxation: The rate of income tax for sole traders is relatively very low.

Minimum interference from government: Except in matters relating to public interest, government does not
interfere in the business matters of the sole trade. The sole trader is free to fix price for his products/services if the
enjoys monopoly market.

Transferability: The legal heirs of the sole trader may take the possession of the business.

Suitability of Sole Trader

Despite the above disadvantages, the sole trader is a suitable form of Organization where,

1. Business is of Small size and requires low volume of Capital.

2. Business can be managed by one person

3. Risk is low

4. Personal attention is necessary to take care of the customers.

5. Products / services need to be provided as per the customer specification.

Partnership
• 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 Profit / losses of the business in an agreed
ratio.

According to Indian partnership act 1932 Section 4:

• “The relation between two or more persons, who have agreed to share profits of the business carried on by
all or any one of them acting for all”.

Features of partnership
1. Relationship: Partnership is a relationship among person. It is a relationship resulting out of an agreement.

2. Two or More persons: there should be two or more number of persons.

According to the Indian Partnership Act, 1932, the minimum number of partners should be two and the
maximum number is,

a) 10 partners in case of banking business

b) 20 in case of non-banking business

3. There should be a business: Business should be conducted and the work is divided, because they are more than
two persons, based on their aptitude

4. Agreement: Persons should agree to share the profits/Losses of the business.

5. Carried on by all or any one of them acting for all: This means that the business can be carried on by one person
who is the agent for all other persons. Every partner is both an agent and a principal. Agent for other partners and
principal for himself.

6. Personal Contact with Customers: The partners can continuously be in touch with the customers to monitor their
requirements.
7. Implied authority: The partner looking after the affairs of the partnership her certain implied authority.

Ex: Such a partner is empowered to take decisions o not more than a value of 5000/-

8. Transferability of shares: The partners cannot transfer their share/interest in partnership in the firm to others
without the consent of the other partners.

9. Taxation: In the partnership form of organization, profits of partnership and individual incomes of partner are taxed
separately. The share of profits from the partnership is included in the individual partners’ income 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, or insane, the partnership is to be dissolved. This means that the duration of the partnership is not certain. The
remaining partners can, if they are interested, restart their business with a new name.

Partnership Deed
• The written agreement among the partners is called partnership deed.

• Partnership deed contains terms & conditions governing the working of partnership

Contents of Partnership Deed:

• Names and addresses of the firm and partners

• Nature of the business proposed

• Duration

• Profit sharing ration of partners

• The amount of salary or commission payable to the partners

• Procedure to value good will of the firm at the time of admission of a new partner, retirement of death of a
partner

• Allocation of responsibilities of the partners in the firm

• Procedure for dissolution of the firm

• Rights, Obligations and Liabilities of partners.

Kinds of partners
Active partner: Active partner takes part in the affairs of the partnership. He is also called Working partner.

Sleeping partner: Sleeping partner contributes to capital but does not take part in the affairs of the partnership.

Nominal partner: Nominal partner is partner just for namesake. He neither contributes to capital nor takes part
in the affairs of business. Normally, the nominal partner are those who have good business connections, and are
well placed in the society.

Partner by estoppels: Estoppel means behavior or conduct. Partner by Estoppel give an impression to outsiders
that he is the partner in the firm. In fact the neither contributes to capital, nor takes any roles in the affairs of the
partnership.

Partner by holding out: If partners declare a particular person (having social status) as partner and this person
does not contradict even after he comes to know such declaration, he is called a partner by holding out and he is
liable for the claims of third parties.
 Minor partner: Minor has a special status in the partnership. A minor can be admitted for the benefits of the
firm. The Liability of a minor partner is limited to the extent of his contribution of the capital of the firm.

Right of partners
❑ To take part in the management of business

❑ To express his opinion

❑ Of access to and inspect books of accounts of the firm

❑ To share equally the profits as per agreement

❑ To receive interest on capital at an agreed rate of interest from the profits of the firm

❑ To receive interest on loans, if any, extended to the firm.

❑ To be indemnified for any loss incurred by him in the conduct of the business

❑ To receive any money spent by him in the ordinary and proper conduct of the business of the firm.

Advantages of Partnership
Easy to form: Once there is group of likeminded persons and goods business proposal, it is easy to start and
register a partnership.

Availability of large amount of capital: More amount of capital can be raised from more number of partners.

Division of Labor: The different partners came with varies backgrounds and skills. The facilitates division of
labor.

Quick decisions and Prompt actions: If there is consensus among partners, it is enough to implement any
decision and initiate prompt action.

The Positive impact of unlimited liability: Every partner is always alert about his impending danger of unlimited
liability. Hence he tries to do his best to bring profits for the partnership firm by making good use of all his
contacts.

Tax Rate: When compared to company form, the tax rate is low.

Disadvantages of Partnership
1. Formation of partnership is difficult: Only like, minded person can start a partnership. It is sarcastically
said, it is easy to find a life partner, but not a business partner.

2. Liability: The partners have joint and several liabilities beside unlimited liability. Joint and several liability
puts additional burden on the partners, which means that even the personal properties of the partner or partner
can be attached.

3. Limited growth: The resources when compared to sole trader, a partnership may raise little more. But when
compared to the other forms such as a company, resources raised in this form of organization are limited. Added
to this, there is a restriction on the maximum number of partners.

4. Instability: The partnership form is known for its instability. The firm may be dissolved on death, insolvency
or insanity of any of the partners.

5. Implied authority misused: Where there is no periodic monitoring, there is a possibility that the active partner
may misuse his implied authority. One of the solutions for his problems is that the partners should eet once every
month and review the progress from time-to-time.
 6. High rate of Tax: When compared to the sole trader the tax is higher.

Duties of the partners

• To act honest and be faithful to other partners.

• To give correct information and true accounts to fellow partners

• Not to engage in any activity which competes the firms business

• Not to transfer share with consent of all other partners.

Obligations and Liabilities of Partners:

a) Carry on the business to the maximum advantage of the firm and all the partners.
b) Be just and faithful to one another and the firm.
c) Give full and correct information and true accounts of the firm to one another.
d) Indemnify the firm or any partner against any loss, if any.
e) Share the losses equally, unless differently agreed.
f) Not to engage in any activity which competes with the firm’s business.
g) Not to make any benefits or income while dealing with the firm.
h) Not to assign or transfer his interest in the firm to any other person without the consent of all the other
partners.

The Partners have obligations and liabilities to third parties also. These obligations, results from the agency
relationship between the partners and the firm when the deal with the outsiders.

1. The partners are jointly and severally liable for the claims of the third parties. The partners have unlimited
liability I this regard.
2. They are liable for any type of loss caused to the third parties by a wrongful act of any partner in the normal
course of business.

Joint stock company

• Company: It is a Latin Word.

• Com-Come together

• Pany-Bread (to make livelihood possible)

According to Indian Companies Act 1956, section 3 (1) “a company means formed and registered
under this act.”

• It is like a artificial person created by the law with perpetual succession and common seal.

• According to Indian Companies Act 1956, Amendment of 2013 “a business entity which acts an artificial
legal person, formed by a legal person or a group of legal persons to engaged in or carry on a business or
industrial enterprise.

Joint stock company

• The Main Principle of 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
is divided into certain units. Each unit is called Share.
 The price of each share is kept so low that even a common man can find it comfortable to pick it up.

Features of Joint Stock Company

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.

Separate legal existence: It has an independence existence, it separate from its members. It can sue other if they
are in default in payment of dues, breach of contract with it, if any. Similarly for the acts of the company.
Similarly, the shareholders cannot bind the company by their acts.

Voluntary association of persons: The Company is an association of voluntary association of person 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.

Limited Liability: The Liability of a shareholder is restricted to the extent of his contribution to the share capital
of 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.

Capital is divided into shares: The total capital is divided into a certain number of units. Each unit is called
Share. The price of each share is priced so low that every investor would like to invest in the company. The
companies promoted by promotors of good standing (i.e. known for their reputation in terms of reliability
character and dynamism) are likely to attract huge resources.

Transferability of shares: 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.

Common Seal: As the company is an artificial person create by law has no physical form, it cannot sign its name
on a paper so, and it has a common seal on which its name is engraved. The common seal should affix every
document or contract; otherwise the company is not bound by such a document.

Perpetual succession: Members may come and member may go, but the company continues for ever and ever A
company has uninterrupted existence because of the right given to the shareholders to transfer the shares.

Ownership and Management separated: The shareholders are spread over the length and bread the 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.

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 is special circumstance such as representation from creditors of financial institutions, or shareholders
against the company that their interests are not safeguarded.

The name of the company ends with ‘limited’: It is necessary that the name of the company ends with limited
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 transaction with the company.

Formation of Joint Stock company

There are two stages in the formation of a joint stock company. They are:

1. To obtain Certificates of Incorporation

2. To obtain certificate of commencement of Business

Certificate of Incorporation: The certificate of Incorporation is just like a ‘date of birth’ certificate.
It certifies that a company with such a name is born on a particular day.

The promoters have to file the following documents, along with necessary fee, with a registrar of joint stock companies
to obtain certificate of incorporation:

a) Memorandum of Association
b) Articles of association
c) Prospectus

Memorandum of Association: The Memorandum of Association is also called the charter or constitution of
the company. It outlines the relations of the company with the outsiders.

If furnishes all its details in six clause such as

(i) Name clause

(ii) Situation clause

(iii) Objects clause

(iv) Capital clause and

(v) Liability clause

(vi) Subscription clause.

Articles of association: Articles of Association furnishes internal rules procedures governing the internal conduct
of the company.

The registrar of joint stock companies verifies whether all these documents are in order or not. If he is satisfied with
the information furnished, he will register the documents and then issue a certificate of incorporation, if it is private
company, it can start its business operation immediately after obtaining certificate of incorporation.

Prospectus:
❑ Publish/explain about our company, what are the benefits we are going, should give full information as an
advertisement/ Pamphlets

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.

A public limited company can start its operations only when the certificate of commencement of Business is
obtained

The following formalities have to be full filled to obtain

Certificate of commencement of Business

Seek permission from Securities Exchange Board of India (to issue prospectus): The promotors have to make
an application furnishing the details of certificate of incorporation to SEBI, seeking permission to issue
prospectus. Prospectus is a notice, letter or circular inviting the general public to subscribe to the share capital of
the company
 File the prospectus with the registrar: After seeking permission from SEBI, file the prospectus with the register
of the joint stock companies. If the company does not issue prospectus, it has to file “statement in Lieu of
Prospectus” together with declaration in form 20 duly executed by one of its director with the Registrar before
raising capital and allocated the shares to its members. The registrar after verifying the document certificate of
commencement of business.

Collecting the minimum subscription: Minimum subscription refers to the minimum amount of capital required
to start the business operations such as acquiring fixed assets, working capital, payment of share issue expenses
such as brokerage, underwriting commission. SEBI decides the amount of minimum subscription necessary to
case to case. It is necessary that the amount of minimum subscription is raised within 70 days from the date of
issue of prospectus.

Allotting shares: Normally shares are allotted as applied for. In case of oversubscription the basis of allotment
is finalized in consultation with the stock exchange under which it is proposed to be listed and the allotment is
made on lottery basis.

Apply to the Registrar for the certificate of Commencement of Business:

After raising Minimum Subscription, the Company has to make an application gain with the following declaration
that:

1. Minimum subscription as stated in the prospectus has been collected.

2. Directions have paid, as much as called up on the share held by them.

3. All the legal formalities have been fulfilled and to the effect, it should be duly signed by anyone of the directors,
legal solicitor or chartered Accountant.

The Registrar will once again verify the exactness of the details of the above declarations. If he is satisfied,
he will then issue Certificate of Commencement of business.

1. CHARTERED COMPANY: Those Companies, which are incorporated under a special charter by the King or
Queen.

Ex: East India Company

2. STATUTORY COMPANY: These companies are formed by a special Act of Parliament.

Ex: Reserve Bank of India

3. REGISTERED COMPANIES: Those companies should follow Rules and Regulations of Companies Act, 1956.

a) Limited Companies: In case of such companies, the Liabilities, the Liability of each member
(shareholders) is limited to the extent of Face Value of share held by Organization.

Limited companies may be limited by shares

b) Unlimited Companies: Unlimited Company in India as per section 2 (92) of the Act, can be incorporated
with or without a share capital. It brings the members and partners or directors even use their personnel property
while meeting the debts (condition of owing something to another) of the company.

c) Company by Guarantee: Company limited by guarantee is also termed as Guarantee Company. In a

simpler term, it's a company without any shareholders but it is owned by members called guarantors who agrees
to pay a nominal amount in the event of company's being wound up. It's a specific form used for non-profit
organization.
4. Public Limited Companies: those companies which has 51% more shares from Government side is called a Public
Limited Company.

• It is a form of organization where government participates in the business.

• When the government takes part in the business public enterprise is set up.

• There are certain areas such as defense, infrastructure, and heavy industries and so on where private
participation is not possible, and hence government had to enter in the business.

Objectives of Public enterprise

• To accelerate the rate of economy growth

• To speed up industrialization

• To increase infrastructural facilities

• To promote balanced regional development

• To increase employment opportunities

To promote economic welfare.

A) Departmental Undertaken: Formed by an executive order of the government.

The Undertaking is under the control of a minister who is responsible to the Parliament.

• 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

Ex: Railways, Department of Posts, All India Radio

• 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.

• Examples for departmental undertakings are Indian Railways

• Department of Posts

• All India Radio

• Doordarshan

• Defense undertakings like DRDL, DLRL, ordinance factories, and such.

Features of Departmental undertaking

Under the control of a government department: It is subject to direct ministerial control.

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 other
government department
 Budget, accounting and audit controls: The departmental undertaking has to follow guidelines underlying the
budget preparation, maintenance of accounts, and getting the accounts audited internally and by external auditors.

B) Public Corporations: A public corporation is that form of public enterprise which is created as an
autonomous unit, by a special Act of the parliament or the State Legislature.

A public corporation is defined as a

‘body corporate created by an Act of Parliament or Legislature and notified by the name in the official gazette of
the central or state government. It is a corporate entity having perpetual succession, and common seal with power to
acquire, hold, dispose off property, sue and be sued by its name”.

• Examples of public corporation are

1. Life Insurance Corporation of India,

2. Unit Trust of India

3. Industrial Finance Corporation of India,

Objectives public corporation

It is also called as statutory corporation

It can formulate its own budget

It can recruit staff at different levels based on the necessary specialization

It has total freedom in planning, management, & control of its operations

Government Company: A Government company is one in which not less than 51% of the paid –up share capital
is held by the Central Government or a State Government or jointly by both.

Ex: NTPC, SAIL, BHEL etc.,

Section 617 of the Indian Companies Act 1956 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”.

Features of Government Company

Like any other registered company: the government company has separate legal existence. Common seal,
perpetual succession, limited liability, and so on. The provisions of the Indian Companies Act apply for all matters
relating to formation, administration and winding up.

Shareholding: The majority of the shares are held by the Government, Central or State, partly by the Central and
State Governments, in the name of the President of India.

Directors are nominated by the government.

Subject to ministerial control: Concerned minister may act as the immediate boss. the minister issue directions
for a company and he can call for information related to the progress and affairs of the company any time.

5. PRIVATE LIMITED COMPANY: 51% shares should be private persons 49% shares should be from
Government or Public.
6. Cooperative Society: A cooperative society is a voluntary association that started with the aim of the
service of its members. It is a form of business where individuals belonging to the same class join their hands for the
promotion of their common goals.

These are generally formed by poor people or weaker sections of people in society. It reflects the desire of the poor
people to stand on their legs or own merit.

Philosophy of the formation of a cooperative society is

“All for each and each for all”.

Cooperation work with the feeling of helping others.

The first Cooperative Law

India the Cooperative Credit Societies Act, 1904 was passed on 25th March 1904. Agricultural Credit Cooperative
Society, of Kanaginahal village of Gadag District in Karnataka was the first cooperative Society formed under First
Cooperative law of India.

Features of cooperative societies:

1. It is a voluntary association

2. Separate legal existence

3. Compulsory registration

4. Open membership irrespective of caste, religion etc.

5. Service motive, the objective is not to make profits.

Advantages of Joint Stock Company

Mobilization of larger resources

Separate legal entity

Limited liability

Transferability of shares

Economics of large scale production Continued existence

Institutional confidence

Professional management

Disadvantages of Joint Stock Company

Ownership and management are separated

Very difficult in formation of a company

High degree of government interference

Delay in decision making

Higher taxes
A Limited Liability Partnership (LLP):
Limited liability companies (“LLC’s”) are a hybrid form of business entity that draws from a combination of principles
from partnership and corporate law. LLC’s may be owned and managed by one or more individuals, corporations, or
businesses that are referred to as “members” of the LLC. Unlike a corporation, LLC’s do not have shareholder
investors nor do they issue stock.

Features of LLC
• It has a separate legal entity just like companies

• The liability of each partner is limited to the contribution made by partner

• The cost of forming an LLP is low

• Less compliance and regulations

• No requirement of minimum capital contribution

• The minimum number of partners to incorporate an LLP is 2. There is no upper limit on the maximum number
of partners of LLP. Among the partners, there should be minimum two designated partners who shall be
individuals, and at least one of them should be resident in India. The rights and duties of designated partners
are governed by the LLP agreement. They are directly responsible for the compliance of all the provisions of
LLP Act 2008 and provisions specified in LLP agreement.

• If you want to start your business with Limited Liability Partnership, then you must get it registered under
Limited liability Partnership Act, 2008.

2. Protection:
• Limited liability companies additionally benefit from the advantages of corporations. The largest benefit is
the company’s limited liability status. The company exists as its own legal entity. This protects members and
owners from being held personally liable for the operations and debts of the business.

• A simple example would be if an employee of the company is found conducting illegal environmental
activities. Legal action can be threatened against the company to pay for damages. The court can go after the
assets of the firm, but not the owners, to pay for the damages. The exception would be if the owner was aware
of the illegal activities and continually allowed them to happen.

Forming an LLC:
Although the requirements for LLCs may vary by state, there are generally some commonalities across the board.
The very first thing owners or members must do is to choose a name. 8

Once that's done, the articles of organization must be documented and filed with the state. These articles
establish the rights, powers, duties, liabilities, and other obligations of each member of the LLC. Other
information included on the documents includes the name and addresses of the LLC's members, the name of the
LLC's registered agent, and the business' statement of purpose. 6

The articles of organization must be accompanied by a fee paid directly to the state. Paperwork and additional
fees must also be submitted at the federal level to obtain an employer identification number (EIN).
Meaning and Concept of Capital
Capital is the life-blood of a business enterprise. It is a universal lubricant which keeps enterprise dynamic.
Capital designates physical sources when applied to production and (it means) money when applied to finance.

Its meaning, covers all the elements (e.g., money, land, building, machinery, materials, etc.) a businessman
needs to start an enterprise.

Capital is the measure of the amount of resources of an enterprise. Capital develops products, keeps workers
and machines at work, encourages management to make progress and create value.

Capital may be classified as:

(i) Physical capital, like immovable property, seeds, fertilizers, business capital like goodwill of the firm
etc.

(ii) Financial capital like bonds, shares, etc.

Capital may be of the following two types:

(1) Fixed or block capital — it is required to purchase building, machinery, tools etc.

(2) Working or current capital — it is required to meet day-to-day needs and expenditures such as purchase
of raw material, payment of employee wages etc.

The characteristics or features of capital are:

Man-made Factor: Capital is not a gift of nature. So it is not a primary or natural factor, it is made by man in
capital goods industry. It is secondary as well as an artificial factor of production.

Productive Factor: Capital helps in increasing level of productivity and speed of production.

Elastic Supply: Supply of capital depends upon capital formation process. Capital formation depends upon
savings and investment. By accelerating capital formation, capital supply can be increased. But it is a long term
process.

Durable: Capital is not perishable like labour. It has a long life subject to periodical depreciation.

Easy Mobility: Movement of capital from one place to another is easily possible.

Is a Wealth: Since capital has all features of wealth viz. utility, scarcity, transferability and externality, capital is
a wealth but wealth doesn't necessarily become capital.

Derived demand: As a factor of production, capital has a derived demand to produce finished goods which have
a direct demand. e.g. demand for raw cotton is derived from demand for cotton cloth.

Round about production: Capital goods doesn't satisfy our wants directly. But resources should be diverted
towards production of capital goods first. And thereafter such produced mean can be used to produce consumer
goods having direct demand.

Social Cost: Resources have alternative uses. Either they can be put to production of capital goods or consumer
goods. When resources are used for producing capital goods, it means society has sacrificed enjoyment of
consumer goods. This is called social cost.
Importance of Capital:
1. To Conduct Business operations Smoothly

2. To Expand the Business

3. To Promote the Business

4. To meet contingencies

5. To Pay tax

6. To Pay Dividends & Interest

7. To Replace the Assets

8. To Support welfare Programs

9. To Wind-Up the business

Sources of Capital

Long Term Sources Middle Term Sources Short Term Sources

Own Capital Bank Loans Commercial Paper

Shares Lease/Rent Bills Exchange

Hire Purchase
Debentures Advance From Customer

Long term Loans Factoring Services

Bank Over Draft

Govt. grants and loans Venture Capital Trade Credit

I) Long Term Source:
a) Own Capital: Irrespective of the form of Organization the owners of the business have to invest their own finance.

b) Shares: The capital of a company is divided into different units called shares.
i) Equity Shares: Equity shares are also known as ordinary shares. They are the form of fractional or
part ownership in which the shareholder, as a fractional owner, takes the maximum business risk. The holders of
Equity shares are members of the company and have voting rights. Equity shares are the vital source for raising long-
term capital.

ii) Preference Shares: - Preference shareholders holds a preferential right over the equity shares with respect to the
dividend. This right is also applicable at the time of payment of capital, repayment of capital or winding up.

3) Debentures: a Debenture is a document under the company seal which provides for the payment of principle sum
and interest there on at regular interval which is usually secured by a fixed or floating charges on the company’s
property or undertaking and which acknowledges a loan to the company’s property or undertaking and which
acknowledges a loan to the company.

4. Long term loans: Raising long-term working Capital in the form of loans from Financial Institutions such as
IDBI,IFCI, SFC, LIC and Commercial Banks etc.,

5. Government Grants and loans: As the name suggests, Term loan is a monetary instrument that is required to be
repaid within defined tenure by the lender. Term loans enable the businessmen to buy plant & machinery, raw material,
property or fixed assets and for paying of salaried or hiring new staff, etc. It is basically a type of funding provided by
banks and NBFCs to individual entrepreneurs, business owners, MSMEs or large enterprises to make them meet their
business requirements or working capital needs.

II) MEDIUM TERM FINANCE:

1) 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.

2) Hire Purchase: It is a facility to buy a fixed asset while paying the price over a medium period of time. a system
by which one pays for a thing in regular instalments while having the use of it.

3) Leasing/ Renting : The lease is a contract whereby one party, the lessor, grants the right to use a particular good
for a period of time to the other party, the lessee (or tenant), which will pay for the transfer of the right to use a fixed
amount regularly .

4) Factoring services: an arrangement between a factor and his client which includes at least two of the following
services to be provided by the factor i.e. Finance, maintenance of accounts, collection of debts & protection against
credit risk.

5) Venture Capital: Venture capital is normally provided in such projects where there is relatively a higher degree
of risk. For such projects, finance through the conventional source may not be available

III) SHORT TERM SOURCES:

1) Commercial Paper: Commercial paper is an unsecured promissory note issued by firm on discount and redeemable
face value in future data. Its maturity period is between 91 to 80 days.

2. Bill of Exchange / credit: According to the Negotiable Instruments Act 1881, ‘a bill of exchange is defined as an
instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain
sum of money only to, or to the order of a certain person or to the bearer of the instrument.’
iii) Advance From Customer: Many a times the suppliers or manufactures of goods insist on advance by customers
along with orders. Such advances represent part of the price and carry no interest. A manufacturer can meet his short-
term needs at least partly, through customer advances. The period of such credit depends upon the time taken to deliver
the goods.

The availability of this credit depends on degree of competition in the market, customs of the trade and usage and
reputation of the supplier.

iv) Bank Over Draft: This is special arrangement with the banker where the customer can draw more than what he
has in his saving/current account subject to a maximum limited. Interest is charged on a day to day basis on the actual
amount overdraft.

v) Trade Credit: Any time you take delivery of materials, equipment or other valuables without paying cash on the
spot, you're using trade credit.

Non-Conventional Source of Capital:

Entrepreneurs can turn to a variety of sources to finance the establishment or expansion of their businesses. ... Some
of the more common nontraditional financing sources include selling assets, borrowing against the cash value of a
life insurance policy, and taking out a second mortgage on a home or other property.

Regardless of the stage it is in, every business needs capital to survive. Businesses need capital to launch, grow or
simply operate. When launching a new business, statistics show that most entrepreneurs rely on bootstrapping to
secure the startup or seed capital they need.

Typical examples of bootstrapping include using capital from personal savings, retirement accounts, bank loans, credit
cards or friends and family. While venture capital and angel investors get a lot of media attention, in reality, only a
small percentage of new businesses are launched with this type of outside investment.

In looking at traditional business funding sources such as bank loans, lines of credit or outside investors, many
entrepreneurs find them too rigid. In other words, if the entrepreneur or the business don’t fit a particular mold, then
securing funding from these sources is not likely to be successful.

Below is an overview of some of the new trends in business funding that could gain traction in 2019 and beyond.

Crowdfunding: It is the use of small amounts of capital from a large number of individuals to finance a new business
venture.

Peer-to-Peer (P2P) Lending: Through this relatively new business funding model, business financing is funded by
investors, rather than a single, direct lender.

Peer-to-peer lending, also abbreviated as P2P lending, is the practice of lending money to individuals
or businesses through online services that match lenders with borrowers. The lender's investment in the loan is not
normally protected by any government guarantee.

Micro Finance: Microfinance, also called microcredit, is a type of banking service provided to unemployed or low-
income individuals or groups who otherwise would have no other access to financial services.

Microfinance allows people to take on reasonable small business loans safely, and in a manner that is consistent with
ethical ending practices.

Revenue-Based Financing: A growing number of firms are offering expansion capital through flexible business
loans that are paid back based on a portion of monthly revenue. Revenue-based funding is suitable for existing firms-
-primarily those with recurring monthly revenue--rather than startups.
Marketing-Focused Funding: Clear banc is the pioneer in this innovative approach to growth funding. To fund
business growth, the company provides capital to fund digital ad spends so growing companies can acquire more
customers and drive revenue growth.

Accelerator-Based Funding: Many seed accelerators offer small investments in exchange for a portion of equity,
and some now offer follow-on investments for portfolio companies that raise larger seed rounds during or following
the accelerator program. These innovative approaches allow founders to focus more on growth and traction, and
somewhat less on raising funds.

These are just a few of the newer ways in which founders and entrepreneurs are accessing funding to launch their
startups or grow their existing businesses. If you’re an entrepreneur in need of startup or growth capital, be sure to
explore these emerging business funding models to find the approach that best suits your needs.
 ECONOMICS
Introduction to 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
In 18th century 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 Economist of the 19th Century, Writes “Economics is a study of
man’s actions in the ordinary business of life; it enquires how he gets his income and how he use it”

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’.

Economics is studied under 5 major divisions:

Consumption: Satisfaction of human wants through the use of goods and services.

Production: Production is the process of making, harvesting or creating something or the amount of
something that was made or harvested.

An example of production is the creation of furniture. An example of production is harvesting corn to eat.

Exchange: the act of giving or taking one thing in return for another

Distribution: Distribution means to spread the product throughout the marketplace such that a large number
of people can buy it.

Public Finance: In simple layman terms, public finance is the study of finance related to government entities.
It revolves around the role of government income and expenditure in the economy.

Significance of economics:
MICRO ECONOMICS:

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.
MACRO ECONOMICS:

The study of ‘aggregate’ or total level of economics activity in a country is called macroeconomics.

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 deals with total aggregates, for instance, total national income total employment, output and total
investment.

It studies the interrelations among various aggregates and examines their nature and behaviour, their
determination and causes of fluctuations in the

Management:
Management is the art of getting things done through people in formally organized groups. It is necessary that every
Organization is well managed to enable it to achieve its desired goals.

Management includes a number of functions:

a) Planning b) Organizing c) Staffing d)Directing

e) Coordinating and f) Controlling

Manager: The Manager, while directing the efforts of staff communicates to them the goals, objectives, policies and
procedure coordinates their efforts, motivates them to sustain their enthusiasm; and leads them to achieve the corporate
goals. He directs the resources such as men, money, material, machinery and technology. The manager’s main task is
to minimizing costs maximizing revenues.

BUSINESS ECONOMICS
Business Economics refers to the firm’s decision making process.

It could be also interpreted as “Economics of Management”. Business Economics is also called as “Industrial
Economics” or “Managerial Economics”.

Economics is “the applications of economics theory and methodology to business administration practice”.

According to Spencer & Siegelman Business Economics or Managerial Economics is “the integration of
economic theory with business practice for the purpose of facilitating decision-making and forward
planning by Management”

Nature of Business Economics:

Close to microeconomics: The study of an individual consumer or a firm is called Micro Economics also
called “theory of Firm”. It is concerned with the application of the concepts such as price theory, Law of
Demand and theories of market structure.

Operates against the backdrop of macroeconomics: The study of “aggregate” or total level of economic
activity in a country is called macroeconomics. It studies the flow of economic resources or factors of
production such as land, labour, capital organization and technology. It deals with total national income,
total employment, output and total investment.

Normative statements: A Normative statement usually includes or implies the words “ought” or “should”.
They reflect people’s moral attitudes and are expression what a team of people ought to do. One problem
with normative statements is that they cannot be verified by looking at the facts, because they mostly deal
with the future.
Prescriptive actions: Prescriptive action is goal oriented. Given a problem and the objectives of the firm, it suggests
the course of action from available alternatives for optimal solution.

Applied in nature: ‘Models’ are built to reflect the real life complex business situations and these models are immense
help to managers for decision making. We also employ case study method to conceptualize the problem, identify the
alternative to maximize the profits for the firm.

Offers scope to evaluate each alternative: Managerial economics/Business economics provides an opportunity the
evaluate each alternative in terms of its cost and revenues. The Business economist can decide which is the better
alternative to maximise the profits for the firm.

Interdisciplinary: The tools and techniques of Business economics are drawn from different subjects such as
economics, management mathematics, statistics, accounting, psychology, organizational behavior, Sociology etc.,

Assumptions of Business/Managerial Economics

The theory of firm which is a fundamental to managerial economics is based upon certain Assumptions.

1. The decision maker has perfect knowledge

2. Rational in approach (able to think in an attempt to gain)

Most of the economic theory also based on those assumptions and also firm has single goal of profit maximizations.

Limitations of Managerial /Business Economics:

Firm do not continuously seek maximum profits

Different group working in a firm, each group has different objectives to pursue

Economic theory state the Equilibrium Point

(Marginal Cost) MC=MR (marginal Revenue)

In real world firm cannot reach this point

Economic theory is unable to provide satisfactory answer for output, price, cost and revenue policies when the firm
produces many products simultaneously.

Scope of Managerial / Business Economics:

The main focus in managerial/Business Economics is to find an optimum solution to a give managerial problem. The
problem may related to production, reduction or cost or control, Determination of price of a given product or services,
make or buy decision, Inventory management, capital management, profit planning and management, investment
decisions or human resource management.

While all these are the problems, the managerial economist makes use of the concepts, tools and techniques of
economics and other related disciplines to find an optimal solution to a given managerial problem.
 Managerial Decision Areas

Production
Concepts & Reduction or control or cost
Techniques Determination of price of a
Applied to For Optimum
of given product/service Solution
Managerial / Make or Buy Decisions
Business Capital Management
Economics Profit Planning and
Management
Investment Decisions

Role of Business Economist:

Identifying various business problems: Various companies face many problems such as labour problems, pricing
problems, and other problems related to Government controls and restrictions. The basic job of business economist is to
identify various problems that are uplifting a company, find out various reasons behind these problems, analyze their
effects on the functioning of the company and finally suggest rational alternative and corrective measures to be taken by
the management. Also, it’s his duty to design various course of action to maintain & improve the existing systems.

Providing a quantitative base for decision making & forward planning: The business economics with his vast
experience has to provide a quantitative base for decision making, policy making & forward planning in a business.
Business economist helps to study the in-depth knowledge of the various factors, controllable & non-controllable which
influence the working of a business unit.
Business economist helps in planning, production & marketing planning, employing the latest organizational model
& develop management techniques to maximize output & minimize operating cost of the firm.
Advisory to the company: The business economist advises the businessman on all economic and non-economic
matters. By virtue of business economist experience it helps to analyze various problems related with volume of
investment, sales promotion, competitive conditions, financial positions, labour relation, and Government policies so that
he it will help to secured the business while doing every activity.
Business economist must be in touch with fast changing technological development and suggest the most suitable
information technology to be adopted by the company.
Knowledge about the environment factors which affects the business: In order to make the business more viable and
profitable the business economist should have a detailed knowledge and information about the environment of a
company. Broadly speaking the environmental factors are divided in two parts:

1. Business Environment (External Factors)

2. Business Operations (Internal Factors)
Business Environment helps to study the all factors and forces and beyond the control of individual business
enterprises and its management which will help to maintained the business as stable. Business operation helps to study
those factors and forces, which operate, well within the company and influence its operations which can minimize the
cost of the business.
Now, after discussing above aspects every business organization needs to appoint a Business Economist who have all
the knowledge and fundamentals of the economics to run a business smoothly.

Managerial / Business Economics relationship with other

disciplines:
Business/ Managerial Economics is multidisciplinary in nature as it is linked with different disciplines discussed as
follows”

Relationship with Economics: Managerial/ Business Economics is a part of economics as the concepts of business
economics and basically economic concepts. In the process of administering various business problems, several
functions such as demand function, cost function, revenue function etc., are extensively used. Both economics and
managerial economics are concerned with problem of scarcity and resources allocation.

Management theory and Accounting: It provides accounting information relating Costs, Revenue, Receivables,
Payables, Profits or Losses.

Managerial Economics and Mathematics: Managerial/Business Economics concerned with estimating and
predicting the relevant economic factors of decision making and forward planning. The tool and techniques of math
such as Algebra, Calculations, Exponentials, and input-output tables are used.

Managerial Economics and Statistics: Statistics deals with different techniques useful to analyses the cause and
effect relationship. The statistical techniques such as Averages, correlation, regression, time series, probability are
used.
 Managerial Economics and Operations Research: Decision Making is the main focus in operation Research It
managerial / Business Economics focus on “problems of decision making”. Operation research focus on solving
business problems. The Operations Research models such as linear Programming, Queuing theory, Transportation
problems, and optimisation techniques are used. (Optimisation means both minimization of cost and maximization
of Revenue)

Managerial Economics and Organization Behaviour: Organization Behaviour enables the business economist to
study and develop behaviour models of the firm integrating the managers’ behaviour with that of owner.

NATIONAL INCOME:
National Income is total amount of goods and services produced within the nation during the given period say, 1
year. It is the total of factor income i.e. wages, interest, rent, profit, received by factors of production i.e.
labour, capital, land and entrepreneurship of a nation.

According to Alfred Marshall, Labour and Capital of a country acting on its natural resources produce annually a
certain ‘net’ aggregate of commodities, material and immaterial, including services of all kinds. The Word ‘net’
means that from the gross value of the output, depreciation of capital must be deducted.”

Simon Kuznets defines national income as “the net output of commodities and services flowing during the year
from the country’s productive system in the hands of the ultimate consumers.”

Concepts of National Income:

Gross National Product (GNP)
Gross National product is the total value of all final goods and services produced during one year. In India one year
means from 1st April to 31st March of the next year.
The Various components in GNP are:

1. The total amount of goods and services purchased by consumer.

2. Aggregate investment, that is total public investment and private investment.
3. The consumption of government i.e., expenditure on Administration, Defence and Social Functions.
4. Net Income received from Foreign Trade.

GNP OR GNI = C+I+G+(X-M)

Where,

GNI = Gross national Income,

C = Consumption ,
I = Gross National Investment
G =Government Expenditure
X = Exports
M=Imports

Gross Domestic Product (GDP): The market value of the total goods and services produced in a country in
one particular period usually in a year is the Gross Domestic Product or GDP.

GDP = C+I+G
 If net foreign income (X-M) is deducted from GNP we get GDP. Usually GNP is higher than the GDP.

Net National Product (NNP):

Firms use continuously machines and tools for the production of goods and service. The results in a loss of
value due to wear and tear of fixed capital. This loss suffered by fixed Capital is called depreciation. Net
National Product (NNP) in an economy is the GNP after deducting the loss due to depreciation. When we
subtract depreciation from GNP we obtain NNP.

NNP = GNP – Depreciation

NNP includes net private investment while GNP includes gross private domestic investment.

Net Domestic Product (NDP):

If we Subtract depreciation from GDP, we Obtain Net Domestic Product (NDP).

NDP = GDP-Depreciation

National Income at factor Cost: National income at factor cost is the sum of Wages, Rent, Interest and
Profits paid to factors for their contribution to the production.

National Income at Factor Cost = NNP + Subsidies – Indirect Tax

Personal Income

Personal income is calculated by subtracting from national income those types of incomes which are earned but
not received and adding those types which are received but not currently earned.
Personal Income = NNP at Factor Cost − Undistributed Profits − Corporate Taxes + Transfer Payments

Disposable Income

Disposable income is the total income that actually remains with individuals to dispose of as they wish. It differs
from personal income by the amount of direct taxes paid by individuals.
Disposable Income = Personal Income − Personal taxes

Percapita Income: National income when divided by nation’s Population, percapital income is obtained
𝑵𝒂𝒕𝒊𝒐𝒏𝒂𝒍 𝑰𝒏𝒄𝒐𝒎𝒆
Percapita income = 𝑻𝒐𝒕𝒂𝒍 𝑷𝒐𝒑𝒖𝒍𝒂𝒕𝒊𝒐𝒏

The average standard of living of a country is indicated by per capital income.

Value Added

The concept of value added is a useful device to find out the exact amount that is added at each stage of production
to the value of the final product. Value added can be defined as the difference between the value of output
produced by that firm and the total expenditure incurred by it on the materials and intermediate products
purchased from other business firms.

Methods of Measuring National Income

Let’s have a look at the following ways of measuring national income −

Product Approach

In product approach, national income is measured as a flow of goods and services. Value of money for all final
goods and services is produced in an economy during a year. Final goods are those goods which are directly
consumed and not used in further production process. In our economy product approach benefits various sectors
like forestry, agriculture, mining etc to estimate gross and net value.

Income Approach
In income approach, national income is measured as a flow of factor incomes. Income received by basic factors
like labor, capital, land and entrepreneurship are summed up. This approach is also called as income distributed
approach.

Expenditure Approach

This method is known as the final product method. In this method, national income is measured as a flow of
expenditure incurred by the society in a particular year. The expenditures are classified as personal consumption
expenditure, net domestic investment, government expenditure on goods and services and net foreign investment.
These three approaches to the measurement of national income yield identical results. They provide three
alternative methods of measuring essentially the same magnitude.
Money:
Money is the medium of exchange for people to trade for the things they want. It is most appropriate medium of
exchange.

Key Functions of Money:

1. Medium of Exchange: Money allows goods and services to be traded without the need for a barter system.
Barter systems rely on there being a double coincidence of wants between the two people involved in an
exchange.

2. Store of Value: This can refer to any asset whose ‘value’ can be used now or used in the future i.e. its value
can be retrieved at the later date. This means that people can save now to fund spending at a later date.

3. Unit of account: This refers to anything that allows the value of something to be expressed in an
understandable way, and in a way that allows the value of items to be compared.

4. Standard of deferred Payment: This refers to the expressing of the value of a debt i.e., if people borrow
today, then they can payback their loan in the future in a way that is acceptable to the person who made the
loan.

Characteristics of Money
The characteristics of what serves as money depend somewhat on the degree of complexity in the society. A
relatively simple economy, with relatively few goods and services, few producers and consumers, and few
transactions, may be able to function with a form of money that would not work in a more complex society. There
are some general characteristics that are usually important for whatever serves as money in a modern economy.

1. First, to serve as an effective medium of exchange and store of value, money must be durable. Durability
is when an item is able to withstand all the hardships and is still able to maintain to be undamaged and
usable after a long term of usage. (SubraMoney, 2011) Durability is crucial for money to be able to perform
the following functions of medium of exchange and store of value. Coins and paper bills are made to
perform and to act as the currency. Nowadays, Money is manufactured with the materials such as paper,
metal and plastics, which results to a long lasting medium. (SubraMoney, 2011)

2. Portability, which also serves as a medium of exchange, (Money Characteristics, 2011) means that money
can be movable from place to place to be used as monetary transaction to be exchanged for goods and
services. Portability also means that consumers are now able to carry money along with them to be used as
transactions for goods and services. In modern days, money is carried from one location to another without
needing much effort as all types of money such as cash notes, coins and cards are carried easily in a wallet.
(SubraMoney, 2011)

3. Furthermore, divisibility is a characteristic which means the money can be divided into small units and that
it can be used in exchange for goods and services. As to function as the medium of exchange, as it is
divisible, it can be used to purchase all kinds of goods with different values. As money functions as the
medium of exchange it must have denominations to be traded for all goods and services, and everything in
between. (Money Characteristics, 2011)

4. Moreover, uniformity means that all types of the same denomination of money must consist of purchasing
power. It is a characteristic to perform the function of standard of deferred payments. (SubraMoney, 2011)
 5. Limited supply is a characteristic which helps in storing the value of money, meaning that constraints on
the amount of money in the monetary circulation ensure that values remain constant for the currency.
Currently most of the respective country’s government has the responsibility to control an adequate money
supply based on market with their monetary policies, such as expansionary monetary policy and
contractionary monetary policy. (SubraMoney, 2011)

7. Acceptability supports the function of medium of exchange. The essential quality of money is that it must
act as an item being acceptable to all, without having any hesitation in the exchange for goods and services.
Acceptability means that everyone must be able to accept the money for transactions. Money is universally
accepted around the world as a universal mean for transaction. (SubraMoney, 2011).

8. Lastly, the characteristic of non-counter friability which functions as the store of value means that money
cannot be easily duplicated. As money cannot be easily duplicated, it prevents the unrestricted and illegal
creating of duplication of money. Besides, preventing the duplication of money to happen is one of the
main reasons of government existence. (Money Characteristics, 2011)

Functions of Money:
1. Primary Function:

a) Medium of Exchange: It means that money can be used to make payments for all transactions of goods and
services. A buyer can buy goods through money, and a seller can sell goods for money. It is an essential
function of money.

b) Measure of Value: Money serves as a measure of value. Value of all goods and services is expressed in
terms of money
2. Secondary Function:

a) Standard of deferred payments: It means that money acts as a ‘standard’ for making future payments. It
has made deferred payments much easier than before.

Example: When we borrow money from somebody, we have to return both the principal as well as interest
amount in the future.

Money is a convenient mode of calculation & payment of interest amount to be paid in the future. This function
has facilitated borrowing and lending. It has also led to the creation of financial institutions.

b) Store of value: Store of value implies a store of wealth. Money can be easily stored for future use. It is the
most convenient and economical means of storing earnings and wealth.

c) Transfer of value: Money also serves for transfer of value. It facilitates buying and selling of goods not
only in the domestic country but also in other parts of the world.
INFLATION
Inflation is a rise in the general level of prices of goods and services in an economy over a period of time.
When the general price level rises, each unit of currency buys fewer goods and services. Therefore,
inflation also reflects an erosion of purchasing power of money.

“Too much money chasing after too few goods and services. “

Causes of Inflation
Inflation is the inflation caused by persistent rises in aggregate demand with an increase in consumption, an
expansionary monetary and fiscal policies from the government, and inflow of capital from abroad.

Demand-Pull Inflation
In addition to aggregate demand, aggregate supply also generates inflationary process. As inflation is caused by a
leftward shift of the aggregate supply, we call it CPI. CPI is usually associated with non-monetary factors. CPI
arises due to the increase in cost of production. Cost of production may rise due to a rise in cost of raw materials or
increase in wages.

Demand Pull Inflation: Demand-pull inflation arises when there is an excess of demand for goods over their
supply. When there is persistent increase in demand and supply does not increase proportionately then prices tend to
rise.

Causes of demand pull Inflation are

a. Increase in public expenditure
b. Increase in investment.
c. Increase in money supply
d. Growth in black money
e. Increase in population
f. Erratic Agricultural growth
g. Deficit Financing
h. Credit Expansion

Cost-push inflation: Cost-push inflation occurs when rise in price is due to rise in the cost of production. In
this type of inflation, demand factor plays a minor and supply factor plays an important role. Once, this type of
inflation sets in one industry, it spreads to all other industries of an economy.

Main causes of cost-push inflation are

a. Higher wage rate
b. Higher profit margin
c. Higher taxes
d. Fall in the availability of basic inputs
e. Administered higher prices of inputs.
f. Agriculture price Policy of Govt.
h. Increase in the rates of Indirect taxes.
EFFECTS OF INFLATION
Effect on distribution of income and wealth

Creditors and debtors

Bond and debenture-holders

Investors

Salaried people and wage-earners

Profit-earners, speculators and black marketers

Effect on Production and Economic Growth

The multiplier effect of investment will come into operation resulting in a higher national output

However, such a favourable effect of inflation will be temporary if wages and production costs rise very
rapidly.

BUSINESS CYCLE:
The business cycle, also known as the Economic Cycle or Trade Cycle, is the downward and upward
movement of gross domestic product 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.

According to Keynes, “A business cycle is composed of period of good trade characterized by rising prices
and low unemployment percentages alternating with periods of bad trade characterized by falling prices and high
unemployment percentages”.

Business Cycle Phases:

Expansion: the line of cycle that moves above the steady growth line represents the expansion. In this stage, there
is an increase in various economic factors, such as production, employment, output, wages, profits, demand and
supply of products and sales. In addition, in the expansion phase, the prices of factors of production and output
increased simultaneously. In this phase debtors are generally in good financial position to repay their debts;
therefore creditors end their money @ higher interest. This is leads to an increase in the flow of money.

Peak: the phase in which the increase in growth rate of bus, ness cycle achieve its maximum limits. The Economic
factors are higher but does not increase further. In this stage there will be a gradual decrease in the demand of
various products due to increase in the price of input.

The increase in the prices of inputs leads to increase in prices of final products, while income of individual remains
constant. This also leads consumers to restructure their monthly budget. As a results, the demand for products such
as jewelers, homes, automobiles, refrigerator.

Recessions: At this stage all the economic factors such as production, price, and savings are unware of decrease in
demand of products and continue to produce goods & services. In such a case the supply of products exceeds the
demand.

Over the time, producers realize the surplus of supply when the cost of manufacturing of a product is more than
profit generated. This condition firstly experienced by few industries and slowly spreads to all industries.
Trough: During the Trough (is a low turning Point) the growth rate of the economy becomes negative. There is a
rapid decline in National income and negative. In this phase, it becomes difficult for debtors to pay off their debts.

In Trough phase, many weak organizations will leave the industry or rather dissolve. At this point, an economy
reaches to the lowest level of shrinking.

Recovery: Slow increase in output, employment, income & price. Increase in demand, investment, bank loan,
advances. This leads to recovery, revival of prosperity.

Features / Nature of Business Cycle:

One sector effect- spread to other sector: Business cycle is an economy – wide phenomenon, if one sector go
through depression it quickly spread to other sector of economy.

Business cycle have wave like variation in economic activity: Business cycle have wave-like variations in
economic activity. In business, expansion is always followed by a depression and so on. The economy is similar to
pendulum as it move from one extreme to another’s.

The fluctuations in business are repetitive in nature: They takes place again and again but the time gap between
them and factors of them are not same.
Trade cycle are self-reinforcing or cumulative in nature: When cyclical movement begins in one direction it
reinforce on itself. The influence of economic crisis increases and go beyond the control of policy maker in
prosperity phases.

CAUSES OF BUSINESS CYCLE:

1. Internal Factors
a) Consumption: When consumer spending increases, businesses will increase production-causing them to hire
more workers & purchase more materials & capital goods. When consumer spending decreases, the opposite will
occur.

b) Business Investment: The Purchasing of capital goods increase the number of jobs in the economy because
people have to make those goods. If investments increases, the economy will grow, if investment decreases, the
economy will decrease.

c) Government activity: The government can influence the business cycle through fiscal policy (its tax & spend
policies) & monetary policies (its control of the money supply, largely through the Federal Reserve)

2. External Factors:
a) Inventions & innovation: Major changes in technology can influence the business cycle. Usually technology
changes more the economy in a positive direction, but this is not always.

b) Wars & Political event: The impact of such events on the economy are very fact specific in other words,
difficult to generalize about.

Consequences / Effects of Business Cycle:

1. Effects during Expansion: The expansion phases involves high growth along with increase in many factors like
investments, employment, income and expenditure but it also gives rise to inflation and competition,

a) Inflation: As inflation is a by- product of growth and expansion, government in engaged in controlling inflation
during expansion phase. As, it creates unpleasant environment in the country.

b) Severe Competition: In growth process, firms compete for their share and spend huge amount on non-productive
expenses like Advertisement and publicity. Through firms spend huge amount of funds but GNP increases only in
money terms and not in real terms. Competition among firms is also an effect of expansion

2. Effects during Recession:

a) Excess inventory: Where there is fall in demand, it leads to recession. Firm which have excess inventory face
many problems like maintenance of unsold items, maintenance cost, decrease in investment and unemployment for
suppliers of these goods.

b) Retrenchment: When production increases, firms, recruit many people but any fall in investment, workers are
the first who are effected. Recession phase in highlighted by large scale retrenchment.
Remedial Measures of Business cycle:
1) Preventive measures: Preventive measures are not used for controlling the trade cycle but for reducing the
probability of occurrence of the trade cycle. Few of such preventive measures are as follows,

a) Rain-fall alone should not be considered as his main source for agriculture. The country must develop sufficient
irrigation facilities.

b) Income and wealth inequalities must be brought to the least level

c) Inspection of the speculative trend.

d) Nationalization of Industries in case when it is essential or required.

e) Attempts must be made in order to maintain balance between demand and supply.

f) There should be proper control and regulation on the monetary and fiscal policies.

g) All business and industrial activities must be monitored carefully.

2. FORMAL MEASURES:

Monetary Policy: to motivate the entrepreneurs to go for greater number of loans and to raise their investment
levels, as this would further raise the production, employment and income levels too.

Fiscal policy: fiscal policy consist Budget policy, taxation policy, public expenditure and public debt.

Physical Controls: consist price support policy, price control rationing and so on.

A thought on the Business Cycle:

To business cycle tends to be self-sustaining. In other words, when in a period of growth, the economy
will continue to grow (jobs, leading to jobs) until some event (internal and external) intercedes.

Conclusion:
Business cycle refers to the fluctuations in economic activity occurring regularly in capitalist societies
these changes occur in the form of change in volume of employment, output & income. The sequence of changes in
business cycle occurs frequently and in a similar Pattern.