BUSINESS

INTRODUCTION

Human beings are continuously engaged in some activity or other in order to satisfy their
unlimited wants. Every day we come across the word 'business' or 'businessman' directly or
indirectly. Business has become essential part of modern world.

Business is aneconomicactivity, which is related with continuous and regular production and
distribution of goods and services for satisfying human wants.

All of us need food, clothing and shelter. We also have many other household requirements to
be satisfied in our daily lives. We met these requirements from the shopkeeper. The shopkeeper
gets from wholesaler. The wholesaler gets from manufacturers. The shopkeeper, the wholesaler,
the manufacturer are doing business and therefore they are called as Businessman.

DEFINITIONS

Stephenson defines business as, "The regular production or purchase and sale of goods
undertaken with an objective of earning profit and acquiring wealth through the satisfaction of
human wants."

Dicksee defines business as "a form of activity conducted with an objective of earning profits
for the benefit of those on whose behalf the activity is conducted."

Lewis Henry defines business as, "Human activity directed towards producing or acquiring
wealth through buying and selling of goods."

Thus, the term business means continuous production and distribution of goods and services
with the aim of earning profits under uncertain market conditions.

CHARACTERISTICS

1. Exchange of goods and services

All business activities are directly or indirectly concerned with the exchange of goods or
services for money or money's worth.
2. Deals in numerous transactions

In business, the exchange of goods and services is a regular feature. A businessman regularly
deals in a number of transactions and not just one or two transactions.

3. Profit is the main Objective

The business is carried on with the intention of earning a profit. The profit is a reward for the
services of a businessman.

4. Business skills for economic success

Anyone cannot run a business. To be a good businessman, one needs to have good business
qualities and skills. A businessman needs experience and skill to run a business.

5. Risks and Uncertainties

Business is subject to risks and uncertainties. Some risks, such as risks of loss due to fire and
theft can be insured. There are also uncertainties, such as loss due to change in demand or fall in
price cannot be insured and must be borne by the businessman.

6. Buyer and Seller

Every business transaction has minimum two parties that is a buyer and a seller.
Business is nothing but a contract or an agreement between buyer and seller.

7. Connected with production

Business activity may be connected with production of goods or services. In this case, it is
called as industrial activity. The industry may be primary or secondary.

8. Marketing and Distribution of goods

Business activity may be concerned with marketing or distribution of goods in which case it is
called as commercial activity.
9. Deals in goods and services

In business there has to be dealings in goods and service.

Goods may be divided into following two categories :-

1. Consumer goods : Goods which are used by final consumer for consumption are called
consumer goods e.g. T.V., Soaps, etc.

2. Producer goods : Goods used by producer for further production are called producers
goods e.g. Machinery, equipments, etc. Services are intangible but can be exchanged for
value like providing transport, warehousing and insurance services, etc.

10. To Satisfy human wants

The businessman also desires to satisfy human wants through conduct of business. By producing
and supplying various commodities, businessmen try to promote consumer's satisfaction.

11. Social obligations

Modern business is service oriented. Modern businessmen are conscious of their social
responsibility. Today's business is service-oriented rather than profitoriented.

STRUCTURE OF BUSINESS FIRM

A business firm is an organization that uses resources to produce goods and services that are
sold to consumers, other firms, or the government. Most businesses exist because a group of
people working together can be more effective than a group of people working individually.

Firms are grouped into three types: sole proprietorships, partnerships, and companies.

A sole proprietorship is a business that is owned by one individual. This owner makes all the
business decisions, receives all the profits or losses of the firm, and is legally responsible for the
debts of the firm.

A type of business organization in which two or more individuals pool money, skills, and other
resources, and share profit and loss in accordance with terms of the partnership agreement. In
absence of such agreement, a partnership is assumed to exit where the participants in an
enterprise agree to share the associated risks and rewards proportionately.

A company is a legal entity, allowed by legislation, which permits a group of people, as

shareholders, to apply to the government for an independent organization to be created, which
can then focus on pursuing set objectives, and empowered with legal rights which are usually
only reserved for individuals, such as to sue and be sued, own property, hire employees or loan
and borrow money.

THEORY OF FIRM

The following are the various theories of the firm.

1.Profit Maximization Theory

Profit maximization is one of the most common and widely accepted objectives of a firm.
According to the profit maximization theory, the main aim of the firm is to produce large
amount of profits. Profit is considered as the internal source of funds and the market value of the
firm also rely mainly on the profits earned by the firm. in order to survive in the market, it is
very essential for the firms to earn profits. Profits are obtained by deducting total revenue from
the total cost i.e.,

Profit = Total revenue – total cost

2.Baumol‟s Theory of Sales Revenue Maximization

According to Baumol, maximization of sales revenue is the main objective of the firms in the
competitive markets. It's based on the theory that, once a company has reached an acceptable
level of profit for a good or service, the aim should shift away from increasing profit to focus on
increasing revenue from sales. According to the theory, companies should do so by producing
more, keeping prices low, and investing in advertising to increase product demand. The idea is
that applying this sales revenue maximization model will improve the overall reputation of the
company and, in turn, lead to higher long-term profits.

He found that sales volumes helps in finding out the market leadership in competition.
According to him, in large organization, the salary and other benefits of the managers are
connected with the sales volumes instead of profits. Banks give loans to firms with more sales.
So, managers try to maximize the total revenue of the firms. The volume of sales represents the
position of the firm in the market. The managers‘ performance is measured on the basis of the
attainment of sales and maintain minimum profit. Thus, the main aim of the firm is to maximize
sales revenue and maintain minimum profits for satisfying shareholders.

3.Marris theory of Growth Maximization

According to Marris, owners/shareholders strive for attaining profits and market share and
mangers strive for better salary, job security and growth. These two objectives can be attained
by maximizing 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.

Marris found that the firms faces two difficulties while attaining the objectives of maximization
of balanced growth which are managerial difficulties and financial difficulties. For maximizing
the growth of the firm the managers should have skills, expertise, efficiency and sincerity in
them. The prudent financial policy of the firm depends on at least three financial ratios which
restricts the growth of the firm. 1. Debt-Equity Ratio 2. Liquidity Ratio, 3. Retention Ratio.

4.Williamson‟s Model of Managerial Utility Functions

Williamson‘s model combined profits maximization and growth maximization objectives.

According to the model of managerial utility functions, managers makes use of their
discretionary powers for maximizing their own utility function and maintains minimum profits
for satisfying shareholders.
  Minimum profits for minimum investment and growth of the firm.
 Managers want to maximize their own utility (satisfaction).
 Satisfaction or utility of managers depends on three variables.
1. Staff salaries, S: Includes management salaries, administration expenses, selling
expenditure. More the staff exp. more sales. Power and prestige of managers
increases with S.
2. Management emoluments, M: i.e., luxury offices, fancy cars. Perks.
3. Discretionary investments, D: Amount spent at his own discretion, e.g. on latest
equipment, furniture, decoration material etc. to satisfy ego and give them a sense of
pride. These give a boost to the manager‘s esteem and status in the organization.
 Managers use that combination of above variables that maximizes their own satisfaction.

The Williamson‘s model is written as,

UM = f(S,M,D)
Where, UM = Utility of Manager, S = Salaries, M = Managerial emoluments, D
= Discretionary power for investments.

The utility function of the managers rely on salary of the mangers, job security, power, status,
professional satisfaction and power to affect the objectives of the firm.

5.Behavioral Theories

According to the behavioral theories, the firm tries to attain a satisfactory behaviour instead of
maximization. There are two important behavioral models, 1. Simon‘s satisfying model and 2.
model developed by Cyest and March.

The Simon‘s satisfying model states that firms carry out their operations under ‗bounded
rationality‘ and can only attain a satisfactory level of profit, sales and growth. Simon carried out
a research and found that modern business does not have adequate information and is uncertain
about future due to which it is very difficult to attain profit, sales and growth objectives.

The model developed by Cyest and March states that firms should be oriented towards multi-
goal and multi-decisions making. Instead of dealing with uncertainty and inadequate
information, the firms should fulfil the conflicting goals of various stakeholders (such as
shareholders, employees, customers, financiers, government and other social interest groups).
 TYPES OF BUSINESS ENTITIES

I. Sole Proprietorship

The sole trader is the simplest, oldest and natural form of business organization. It is also called
sole proprietorship. ‗Sole‘ means one. ‗Sole trader‘ implies that there is only one trader who is
the owner of the business.

It is a one-man form of organization wherein the trader assumes all the risk of ownership
carrying out the business with his own capital, skill and intelligence. He is the boss for himself.
He has total operational freedom. He is the owner, Manager and controller. He has total freedom
and flexibility. Full control lies with him. He can take his own decisions. He can choose or drop
a particular product or business based on its merits. He need not discuss this with anybody. He
is responsible for himself. This form of organization is popular all over the world.
Ex: Restaurants, Supermarkets, pan shops, medical shops, hosiery shops etc. Features

• It is easy to start a business under this form and also easy to close. He introduces his

own capital. Sometimes, he may borrow, if necessary He enjoys all the profits and in

case of loss, he lone suffers.

• He has unlimited liability which implies that his liability extends to his personal
properties in case of loss.

• He has a high degree of flexibility to shift from one business to the other.

• Business secretes can be guarded well

• There is no continuity. The business comes to a close with the death, illness or insanity
of the sole trader. Unless, the legal heirs show interest to continue the business, the
business cannot be restored.

• He has total operational freedom. He is the owner, manager and controller.

• He can be directly in touch with the customers.

 • He can take decisions very fast and implement them promptly.

• Rates of tax, for example, income tax and so on are comparatively very low.

Advantages

1. Easy to start and easy to close: Formation of a sole trader form of organization is
relatively easy even closing the business is easy.

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

3. Prompt decision-making:To improve the quality of services to the customers, he can

take any decision and implement the same promptly. He is the boss and he is responsible
for his business Decisions relating to growth or expansion can be made promptly.

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

5. Secrecy: Business secrets can well be maintained because there is only one trader.

6. Low rate of taxation: The rate of income tax for sole traders is relatively very low.

7. Direct motivation: If there are profits, all the profits belong to the trader himself. In
other words. If he works more hard, he will get more profits. This is the direct
motivating factor. At the same time, if he does not take active interest, he may stand to
lose badly also.

8. Total Control:The ownership, management and control are in the hands of the sole
trader and hence it is easy to maintain the hold on business.

9. Minimum interference from government: Except in matters relating to public interest,

government does not interfere in the business matters of the sole trader. The sole trader
is free to fix price for his products/services if he enjoys monopoly market.
 10.Transferability: The legal heirs of the sole trader may take the possession of the
business.

Disadvantages

1. Unlimited liability: The liability of the sole trader is unlimited. It means that the sole
trader has to bring his personal property to clear off the loans of his business. From the
legal point of view, he is not different from his business.

2. Limited amounts of capital: The resources a sole trader can mobilize cannot be very
large and hence this naturally sets a limit for the scale of operations.

3. No division of labour:All the work related to different functions such as marketing,

production, finance, labour and so on has to be taken care of by the sole trader himself.
There is nobody else to take his burden. Family members and relatives cannot show as
much interest as the trader takes.

4. Uncertainty: There is no continuity in the duration of the business. On the death,

insanity of insolvency the business may be come to an end.

5. Inadequate for growth and expansion: This from is suitable for only small size, one-
man-show type of organizations. This may not really work out for growing and
expanding organizations.

6. Lack of specialization: The services of specialists such as accountants, market

researchers, consultants and so on, are not within the reach of most of the sole traders.

7. More competition: Because it is easy to set up a small business, there is a high degree
of competition among the small businessmen and a few who are good in taking care of
customer requirements along can service.

8. Low bargaining power: The sole trader is the in the receiving end in terms of loans or
supply of raw materials. He may have to compromise many times regarding the terms
and conditions of purchase of materials or borrowing loans from the finance houses or
banks.
II. Partnership

Partnership is an improved from of sole trader in certain respects. Where there are like-minded
persons with resources, they can come together to do the business and share the profits/losses of
the business in an agreed ratio. Persons who have entered into such an agreement are
individually called ‗partners‘ and collectively called ‗firm‘. The relationship among partners is
called a partnership.

Indian Partnership Act, 1932 defines partnership as the relationship between two or more
persons who agree to share the profits of the business carried on by all or any one of them acting
for all.

Features

1. Relationship: Partnership is a relationship among persons. It is relationship resulting

out of an agreement.

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

3. There should be a business: Business should be conducted.

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:The business can be carried on by
all or any one of the persons 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.

6. Unlimited liability: The liability of the partners is unlimited. The partnership and
partners, in the eye of law, and not different but one and the same. Hence, the partners
have to bring their personal assets to clear the losses of the firm, if any.

7. Number of partners: According to the Indian Partnership Act, the minimum number of
partners should be two and the maximum number if restricted, as given below:

• 10 partners is case of banking business

 • 20 in case of non-banking business

8. Division of labour: Because there are more than two persons, the work can be divided
among the partners based on their aptitude.

9. Personal contact with customers: The partners can continuously be in touch with the
customers to monitor their requirements.

10.Flexibility:All the partners are likeminded persons and hence they can take any decision
relating to business.

Partnership Deed

The written agreement among the partners is called ‗the partnership deed‘. It contains the terms
and conditions governing the working of partnership. The following are contents of the
partnership deed.

1. Names and addresses of the firm and partners

2. Nature of the business proposed

3. Duration

4. Amount of capital of the partnership and the ratio for contribution by each of the
partners.

5. Their profit sharing ration (this is used for sharing losses also)

6. Rate of interest charged on capital contributed, loans taken from the partnership and the
amounts drawn, if any, by the partners from their respective capital balances.

7. The amount of salary or commission payable to any partner

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

9. Allocation of responsibilities of the partners in the firm

 10.Procedure for dissolution of the firm

11.Name of the arbitrator to whom the disputes, if any, can be referred to for settlement.

12.Special rights, obligations and liabilities of partners(s), if any.

Kind Of Partners:

1. Active Partner: Active partner takes active part in the affairs of the partnership. He is
also called working partner.

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

3. 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 partners are
those who have good business connections, and are well places in the society.

4. Partner by Estoppels: Estoppels means behavior or conduct. Partner by estoppels gives

an impression to outsiders that he is the partner in the firm. In fact be neither contributes
to capital, nor takes any role in the affairs of the partnership.

5. 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. However, the third parties should prove they entered into contract with the firm
in the belief that he is the partner of the firm. Such a person is called partner by holding
out.

6. Minor Partner: Minor has a special status in the partnership. A minor can be admitted
for the benefits of the firm. A minor is entitled to his share of profits of the firm. The
liability of a minor partner is limited to the extent of his contribution of the capital of the
firm.
Advantages

1. Easy to form: Once there is a group of like-minded persons and good business proposal,
it is easy to start and register a partnership.

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

3. Division of labour: The different partners come with varied backgrounds and skills.
This facilities division of labour.

4. Flexibility: The partners are free to change their decisions, add or drop a particular
product or start a new business or close the present one and so on.

5. Personal contact with customers: There is scope to keep close monitoring with
customers requirements by keeping one of the partners in charge of sales and marketing.
Necessary changes can be initiated based on the merits of the proposals from the
customers.

6. Quick decisions and prompt action: If there is consensus among partners, it is enough
to implement any decision and initiate prompt action. Sometimes, it may more time for
the partners on strategic issues to reach consensus.

7. 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.

Disadvantages:

1. Formation of partnership is difficult: Only like-minded persons 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 partners can be attached. Even when all but one
partner become insolvent, the solvent partner has to bear the entire burden of business
loss.

3. Lack of harmony or cohesiveness: It is likely that partners may not, most often work
as a group with cohesiveness. This result in mutual conflicts. Lack of harmony results in
delay in decisions and paralyses the entire operations.

4. Limited growth: The resources when compared to sole trader, a partnership may raise
little more. But when compare 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.

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

6. Lack of Public confidence: Public and even the financial institutions look at the
unregistered firm with a suspicious eye. Though registration of the firm under the Indian
Partnership Act is a solution of such problem, this cannot revive public confidence into
this form of organization overnight. The partnership can create confidence in other only
with their performance.

III. Joint Stock Company

The joint stock company emerges from the limitations of partnership such as joint and several
liability, unlimited liability, limited resources and uncertain duration and so on. Normally, to
take part in a business, it may need large money and we cannot foretell the fate of business. It is
not literally possible to get into business with little money. Against this background, it is
interesting to study the functioning of a joint stock company. The main principle of the joint
stock company from is to provide opportunity to take part in business with a low investment as
possible say Rs.1000. Joint Stock Company has been a boon for investors with moderate funds
to invest.
Company Defined

Lord justice Lindley explained the concept of the joint stock company from of organization as
„an association of many persons who contribute money or money‟s worth to a common
stock and employ it for a common purpose‟.

Features

1. Artificial person: The Company has no form or shape. It is an artificial person created
by law. It is intangible, invisible and existing only, in the eyes of law.

2. Separate legal existence: it has an independence existence, it separate from its

members. It can acquire the assets. It can borrow for the company. It can sue other if
they are in default in payment of dues, breach of contract with it, if any. Similarly,
outsiders for any claim can sue it.

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

association of persons who want to carry on business for profit. To carry on business,
they need capital. So they invest in the share capital of the company.

4. Limited Liability: The shareholders have limited liability i.e., liability limited to the
face value of the shares held by him.

5. Capital is divided into shares: The total capital is divided into a certain number of
units. Each unit is called a share.

6. Transferability of shares: In the company form of organization, 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.

7. Common Seal: As the company is an artificial person created by law has no physical
form, it cannot sign its name on a paper; so, it has a common seal on which its name is
engraved. The common seal should affix every document or contract.
 8. Perpetual succession: ‗Members may comes and members may go, but the company
continues for ever.

9. Ownership and Management separated: The shareholders are spread over the length
and breadth of the country, and sometimes, they are from different parts of the world. To
facilitate administration, the shareholders elect some among themselves directors to a
Board, which looks after the management of the business. The Board recruits the
managers and employees at different levels in the management. Thus the management is
separated from the owners.

10.Winding up: Winding up refers to the putting an end to the company. Because law
creates it, only law can put an end to it. The company is not affected by the death or
insolvency of any of its members.

11.The name of the company ends with „limited‟: it is necessary that the name of the
company ends with limited (Ltd.) to give an indication to the outsiders that they are
dealing with the company with limited liability and they should be careful about the
liability aspect of their transactions with the company.

Advantages

1. Mobilization of larger resources: A joint stock company provides opportunity for the
investors to invest, even small sums, in the capital of large companies. The facilities
rising of larger resources.

2. Separate legal entity: The Company has separate legal entity. It is registered under
Indian Companies Act, 1956.

3. Limited liability:The shareholder has limited liability in respect of the shares held by
him. In no case, does his liability exceed more than the face value of the shares allotted
to him.

4. Transferability of shares: The shares can be transferred to others. However, the private
company shares cannot be transferred.
 5. Liquidity of investments: By providing the transferability of shares, shares can be
converted into cash.

6. Inculcates the habit of savings and investments: Because the share face value is very
low, this promotes the habit of saving among the common man and mobilizes the same
towards investments in the company.

7. Democracy in management: the shareholders elect the directors in a democratic way in

the general body meetings.

8. Continued existence: The Company has perpetual succession. It has no natural end. It
continues forever and ever unless law put an end to it.

9. Growth and Expansion: With large resources and professional management, the
company can earn good returns on its operations, build good amount of reserves and
further consider the proposals for growth and expansion.

Disadvantages

1. Formation of company is a long drawn procedure: Promoting a joint stock company

involves a long drawn procedure. It is expensive and involves large number of legal
formalities.

2. High degree of government interference: The government brings out a number of

rules and regulations governing the internal conduct of the operations of a company such
as meetings, voting, audit and so on, and any violation of these rules results into
statutory lapses, punishable under the companies act.

3. Inordinate delays in decision-making: As the size of the organization grows, the

number of levels in organization also increases in the name of specialization. The more
the number of levels, the more is the delay in decision-making.

4. Lack or initiative: In most of the cases, the employees of the company at different
levels show slack in their personal initiative with the result, the opportunities once
missed do not recur and the company loses the revenue.
 5. Lack of responsibility and commitment: In some cases, the managers at different
levels are afraid to take risk and more worried about their jobs rather than the huge funds
invested in the capital of the company lose the revenue.

IV. Limited Liability Company (LLC)

Limited Liability Company is another category of company registered under the Indian New
Companies Act, 2013. There are number of companies available in India including private
limited and public limited ones but Limited Liability Company is a brand new one in the line.
It's often called as a Limited Liability Corporation and its nature of business is quite similar with
partnership firm and sole trade business. Company is an association of persons or an artificial
person formed under the Indian Companies act in order to carry out a certain business. Under
the Limited Liability Company Act, liability is limited among members or partners.

New Companies Act, 2013 has defined all rules and regulations regarding incorporating and
registering all limited liability companies. One should apply to the Registrar of Companies
(ROC) by giving all the details regarding company including name of the company, name and
address of board of directors, location of the company as per the company registration services.

A private company whose owners are legally responsible for its debts only to the extent of the
amount of capital they invested. A Limited Liability Company, also known as an LLC, is a type
of business structure that combines traits of both asole-proprietorshipand acompany. An LLC is
eligible for the pass-through taxation feature of apartnershipor sole proprietorship, while at the
same time limiting the liability of the owners, similar to a company. As the LLC is not
considered a separate entity, the company does not pay taxes or take on losses. Instead, this is
done by the owners as they have to report the business profits, or losses, on their personal
income tax returns. However, just like company, members of an LLC are protected from
personal liabilities, thus the name Limited
Liability.

A limitedliabilitycompany is an U.S. form of privately owned company that combines the

limited liability of acompanywith the simplified taxation of asoleproprietorshipor partnership.
Owners of a limited liability company, referred to as an ―LLC,‖ report the company‘s profits
and losses on their personal income tax returns, rather than preparing separate corporate tax
returns. This is known as ―pass-through taxation.‖ LLC owners are referred to as ―members,‖
and the company may be owned by a single individual, two or more individuals, or by a
company or another LLC.

Features

1. Limited liability:As the name implies, members‘ liabilities for the debts and obligations
of the LLC are limited to their own investment.

2. Pass-through taxation: For taxation purposes, income from your business can be
treated as your own personal income, and is therefore not subject to certain corporate
taxes for which companies are liable.

3. Separate Legal Entity:A LLP is a legal entity and a juristic person established under
the Act. Therefore, a LLP has wide legal capacity and can own property and also incur
debts. However, the Partners of a LLP have no liability to the creditors of a LLP for the
debts of the LLP.

4. Uninterrupted Existence:A LLP has 'perpetual succession', that is continued or

uninterrupted existence until it is legally dissolved. A LLP being a separate legal person,
is unaffected by the death or other departure of any Partner. Hence, a LLP continues to
be in existence irrespective of the changes in ownership.

5. Audit not Required:A LLP does not require audit if it has less than Rs. 40 lakhs of
turnover and less than Rs.25 lakhs of capital contribution. Therefore, LLPs are ideal for
startups and small businesses that are just starting their operations and want to have
minimal regulatory compliance related formalities.

6. Easy Transferability: The ownership of a LLP can be easily transferred to another

person by inducting them as a Partner of the LLP. LLP is a separate legal entity separate
from its Partners, so by changing the Partners, the ownership of the LLP can be changed.
 7. Owning Property: A LLP being an artificial judicial person, can acquire, own, enjoy
and sell, property in its name. No Partner can make any claim upon the property of the
LLP - so long as the LLP is a going concern.

Advantages

1. Limited liability: As the name implies, members‘ liabilities for the debts and
obligations of the LLC are limited to their own investment.

2. Pass-through taxation:For taxation purposes, income from your business can be treated
as your own personal income, and is therefore not subject to certain corporate taxes for
which companies are liable.

3. Limitless ownership: Some legal structures limit the number of people allowed to file
as owners. With an LLC, there is no limit to the number of owners. An LLC can have
one member or hundreds of members.

4. Allocation flexibility: In an LLC, the amount of money that owners invest into the
business doesn‘t need to equal their percentage of ownership. When an LLC is formed,
members create an operating agreement, in which different percentages of company
profits and losses can be assigned to owners regardless of the amounts of their initial
investments.

5. Freedom in management: Unlike standard companies, LLCs are not required to have a
board of directors, annual meetings, or strict book requirements. This can free up a lot of
time and stress to let you run your business on your own terms. As you can imagine, this
can be an important advantage of a limited liability company as well.

Disadvantages

1. Building capital:Unlike companies, which can issue stock in order to increase funds for
their companies, LLCs have to work a little harder to find investors and sources of
capital due to the greater legal obligations to add a new member to an LLC. If you have
 a fast growth internet company that needs venture capital to scale, this limitation is one
of the major disadvantages of a limited liability company.

2. Higher fees: LLCs must typically pay more fees to file as LLCs compared to some other
business entities or sole proprietorships.

3. Government regulation: Because of the protections afforded to LLCs, some types of

businesses are ineligible to file as LLCs. Banks, insurance companies, and medical
service companies are examples of businesses that may be barred from filing.

4. Lack of case law: The LLC business form is a relatively new concept. As a result, not a
lot of cases have been decided surrounding LLCs. Case law is important because of
predictability. If you know a court has ruled a certain way, you can act accordingly to
protect yourself.

5. Confusion About Roles: Whereas corporations have specific roles (like directors,
managers, and employees), LLCs generally do not. This can make it difficult for the
company and especially investors to know who‘s in charge, who can sign certain
contracts, etc. Some of this confusion can be avoided by creating an LLC Operating
Agreement.

6. Limited Life:In many jurisdictions, if a member departs the LLC, the LLC ceases to
exist. This is unlike a corporation whose identity is unaffected by the comings and
goings of shareholders. Members of LLCs can combat this weakness in the Operating
Agreement.

SOURCES OF RAISING CAPITAL

Sources of raising long-term capital:

1) Issue of Shares: The amount of capital decided to be raised from members of the public
is divided into units of equal value. These units are known as share and the aggregate
values of shares are known as share capital of the company. Those who subscribe to the
 share capital become members of the company and are called shareholders. They are the
owners of the company.

a) Issue of Preference Shares: Preference share have three distinct characteristics.

Preference shareholders have the right to claim dividend at a fixed rate, which is
decided according to the terms of issue of shares. Moreover, the preference dividend
is to be paid first out of the net profit. The balance, it any, can be distributed among
other shareholders that is, equity shareholders. However, payment of dividend is not
legally compulsory. Only when dividend is declared, preference shareholders have a
prior claim over equity shareholders.

Preference shareholders also have the preferential right of claiming repayment of

capital in the event of winding up of the company. Preference capital has to be
repaid out of assets after meeting the loan obligations and claims of creditors but
before any amount is repaid to equity shareholders.

b) Issue of Equity Shares: The most important source of raising longterm capital for a
company is the issue of equity shares. In the case of equity shares there is no promise
to shareholders a fixed dividend. But if the company is successful and the level
profits are high, equity shareholders enjoy very high returns on their investment.
This feature is very attractive to many investors even though they run the risk of
having no return if the profits are inadequate or there is loss. They have the right of
control over the management of the company and their liability is limited to the
value of shares held by them.

2) Issue of Debentures: When a company decides to raise loans from the public, the
amount of loan is divided into units of equal. These units are known as debentures. A
debenture is the instrument or certificate issued by a company to acknowledge its debt.
Those who invest money in debentures are known as ‗debenture holders‘. They are
creditors of the company. Debentures carry a fixed rate of interest, and generally are
repayable after a certain period.
 3) Loans from financial Institutions: Government with the main object of promoting
industrial development has set up a number of financial institutions. These institutions
play an important role as sources of company finance. These institutions provide
medium and long-term finance to industrial enterprises at a reason able rate of interest.
Thus companies may obtain direct loan from the financial institutions for expansion or
modernization of existing manufacturing units or for starting a new unit.

4) Retained Profits: Successful companies do not distribute the whole of their profits as
dividend to shareholders but reinvest a part of the profits. The amount of profit
reinvested in the business of a company is known as retained profit.

5) Public Deposits: An important source of medium – term finance which companies make
use of is public deposits. This requires advertisement to be issued inviting the general
public of deposits. Against the deposit, the company mentioning the amount, rate of
interest, time of repayment and such other information issues a receipt.

Sources of raising short-term capital:

1) Trade credit: Trade credit is a common source of short-term finance available to all
companies. It refers to the amount payable to the suppliers of raw materials, goods etc.
after an agreed period, which is generally less than a year. It is customary for all
business firms to allow credit facility to their customers in trade business. Thus, it is an
automatic source of finance.

2) Bank loans and advances: Money advanced or granted as loan by commercial banks is
known as bank credit. Companies generally secure bank credit to meet their current
operating expenses. The most common forms are cash credit and overdraft facilities.
Under the cash credit arrangement, the maximum limit of credit is fixed in advance on
the security of goods and materials in stock.

3) Overdraft: In the case of overdraft, the company is allowed to overdraw its current
account up to the sanctioned limit. This facility is also allowed either against personal
security or the security of assets. Interest is charged on the amount actually overdrawn,
not on the sanctioned limit.
 4) Discounting of Bills: Commercial banks also advance money by discounting bills of
exchange. A company having sold goods on credit may draw bills of exchange on the
customers for their acceptance. A bill is an order in writing requiring the customer to pay
the specified amount after a certain period (say 60 days or 90 days). After acceptance of
the bill, the company can drawn the amount as an advance from many commercial banks
on payment of a discount. The amount of discount, which is equal to the interest for the
period of the bill, and the balance, is available to the company. Bill discounting is thus
another source of short-term finance available from the commercial banks.

5) Short term loans from finance companies: Short-term funds may be available from
finance companies on the security of assets. Some finance companies also provide funds
according to the value of bills receivable or amount due from the customers of the
borrowing company, which they take over.

NON-CONVENTIONAL SOURCES OF FINANCE

1.Venture capital

Venture capital is financing that investors provide tostart-upcompanies and small businesses that
are believed to havelong-term growthpotential. Venture capital generally comes from venture
capital firms, which comprise of professionally well-off investors,investment banksand any
other financial institutions. However, it does not always take just a monetary form; it can be
provided in the form of technical or managerial expertise.

Though it can be risky for theinvestorswho put up the funds, the potential for above-
averagereturnsis an attractive payoff. For new companies or ventures that have a limited
operating history (under two years), venture capital funding is increasingly becoming a popular
– even essential – source for raising capital, especially if they lack access tocapital markets,
bankloansor other debt instruments. The maindownsideis that the investors usually getequityin
the company, and thus a say in company decisions.

In a venture capital deal, large ownership chunks of a company are created and sold to a few
investors through independentlimited partnershipsthat are established by venture capital firms.
Sometimes these partnerships consist of a pool of several similar enterprises. One important
difference between venture capital and otherprivate equitydeals, however, is that venture capital
tends to focus on emerging companies seeking substantial funds for the first time , while private
equity tends to fund larger, more established companies that are seeking anequityinfusion or a
chance for company founders to transfer some of their ownership stake.

2.Angel Investors

An angel investor is a person who invests in a business venture, providing capital forstart-upor
expansion. Angel investors are typically individuals who have spare cash available and are
looking for a higher rate of return than would be given by more traditional investments. An
angel investment is a form ofequity financing- the investor supplies funding in exchange for
taking an equity position in the company.

3.Private Equity

Private equity is capital that is not noted on a public exchange. Private equity is composed of
funds and investors that directly invest inprivate companies, or that engage inbuyoutsof public
companies, resulting in thedelistingof public equity. Institutional and retail investors provide the
capital for private equity, and the capital can be utilizedto fundnew technology,
makeacquisitions, expand working capital, and to bolster and solidify a balance sheet.

Private equity comes primarily frominstitutional investorsandaccredited investors, who can

dedicate substantial sums of money for extended time periods. In most cases, considerably
longholding periodsare often required for private equity investments, in order to ensure
aturnaroundfor distressed companies or to enable liquidity events such as an initial public
offering (IPO) or a sale to a public company.

4.IPO

An initial public offering, orIPO, is the very first sale of stock issued by a company to the
public. Prior to an IPO the company is consideredprivate, with a relatively small number of
shareholders made up primarily of early investors (such as the founders, their families and
friends) and professional investors (such asventure capitalistsorangel investors). The public, on
the other hand, consists of everybody else – any individual or institutional investor who wasn‘t
involved in the early days of the company and who is interested in buying shares of the
company. Until a company‘s stock is offered for sale to the public, the public is unable to invest
in it. You can potentially approach the owners of a private company about investing, but they're
not obligated to sell you anything. Public companies, on the other hand, have sold at least a
portion of their shares to the public to be traded on a stock exchange. This is why an IPO is also
referred to as "going public."

ECONOMICS

INTRODUCTION

The English word economics is derived from the ancient Greek word oikonomikos—meaning
the management of a family or a household. Economics is the study of how individuals and
societies make decisions about way to use scarce resources to fulfil wants and needs. Economics
deals with individual choice, money and borrowing, production and consumption, trade and
markets, employment and occupations, asset pricing, taxes and much more.
As an individual, for example, you constantly face the problem of having limited resources with
which to fulfil your wants and needs. As a result, you must make certain choices with your
money – what to spend it on, what not to spend it on, and how much to save for the future.
You'll probably spend part of your money on relative necessities such as rent, electricity,
clothing and food. Then you might use the rest to go to the movies, dine out or buy a smart
phone. Economists are interested in the choices you make, and investigate why, for instance,
you might choose to spend your money on a new mobile phone instead of replacing your old
pair of shoes. The underlying essence of economics is trying to understand how individuals,
companies, and nations as a whole behave in response to certain material constraints.

DEFINITIONS

1. Adam Smith‟s Definition:- Adam Smith, considered to be the founding father of modern
Economics, defines Economics as “the study of the nature and causes of nations‟ wealth
or simply as the study of wealth”. The central point in Smith‘s definition is wealth
creation. He assumed that, the wealthier a nation becomes the happier are its citizens. Thus,
it is important to find out, how a nation can be wealthy. Economics is the subject that tells us
 how to make a nation wealthy. Adam Smith‘s definition is a wealth-centred definition of
Economics.

2. Alfred Marshall‟s Definition:- Alfred Marshall also stressed the importance of wealth. But
he also emphasised the role of the individual in the creation and the use of wealth. He
defines: “Economics is a study of man in the ordinary business of life. It enquires how
he gets his income and how

he uses it. Thus, it is on the one side, the study of wealth and on the other and more
important side, a part of the study of man”.

3. Lionel Robbins‟ Definition:- In his book „Essays on the Nature and Significance of the
Economic Science‟, published in 1932, Robbins gave a definition which has become one
of the most popular definitions of Economics. According to Robbins, “Economics is a
science which studies human behaviour as a relationship between ends and scarce
means which have alternative uses”.

SIGNIFICANCE OF ECONOMICS

1. Allows to know the basics of human needs, production, distribution, reuse and better use
of resources.

2. It provides the basis for exchange of goods and services between individuals,
organizations and even countries.

3. Generates systems, techniques and public policies to improve social welfare.

4. Help to set target prices of goods and services.

5. Adjust political, financial and even social imbalances.

6. Provides knowledge and techniques that prevent crises and help them out.
 7. It uses econometric techniques to predict future economic conditions that could harm or
benefit certain situations in ascertain place, and how to maximize the benefits and
problems mystify.

8. As you can see, economics is a science that encompasses us completely.

9. To be an expert in this field you can study a university degree in economics, in this
course the student will learn how the economy moves and how to generate the best
social conditions.

MICRO AND MACRO ECONOMICS

The whole economic theory is broadly divided into two parts – Micro economics

and Macro economics.

These two terms were at first used by Ragner Frisch in 1933. But these two words became
popular worldwide and most of the economist using nowadays. The term ‗micro‘ and ‗macro‘
were derived from Greek words ‗Mikros‘ and ‗Makros‘ meaning ‗small‘ and ‗large‘
respectively. So micro economics deals with the analysis of an individual unit and macro
economics with economy as a whole. For example, in micro economics we study how price of
goods or factors of production are determined. In macro economics we study what are the
causes of high or low level of employment.

So, according to Edwin Mansfield – ―Micro economics deals with the economic behaviour of
individual units such as consumers, firms, and resource owners; while macro economics deals
with behaviour of economic aggregates such as gross national product and the level of
employment.
Meaning of Micro – economics

The term micro was originated from Greek word ‗Mikros‘ which means small. Hence,
microeconomics is concerned on small economic units like as individual consumer, households,
firms, industry etc.

Microeconomics may be defined as the branch of economic analysis which studies about the
economic behaviour of individual economic unit may be a person, a particular households, a
particular firm and an industry. The main objective of micro – economics is to explain the
principles, problems and policies related to the optimum allocation of resources. According to
K. E. Boulding, ―Microeconomics is the study of particular firm, particular households,
individual price, wage, income of the industry and particular commodity‖.

It is the study of individual tree not a whole forest. Hence, microeconomics tries to explain how
an individual allocates his money income among various needs as well as how an individual
maximize satisfaction level from the consumption of available limited resources.
Microeconomics also explains about the process of determination of individual price with
interaction of demand and supply. It helps to determine the price of the product and factor
inputs. Therefore, it is also called as price theory or demand and supply theory. Simply
microeconomics is microscopic study of the economy.

Meaning of Macro - economics

The term macro- economics is derived from Greek word ― Makros‖, which means ― big‖.
Hence, macro- economics studies not individual units but all the units combined together or the
economy as a whole. Since it studies the economy in aggregate. It studies national income,
national output, general price level, total employment, total savings, total investment and so on.
It is also called ―aggregate economics‖ or the ―income theory‖.

According to K.E. Boulding –‖ Macro- economics deals not with individual quantities but with
aggregate of these quantities, not with individual incomes, but with national income, not with
individual prices but with price level, not with individual output but with national output.‖
J.M. Keynes made and outstanding contribution in the development of macro- economics. It is
also known as Keynesian Phenomenon.

NATIONAL INCOME

In every country goods and services are produced in agriculture sector, industrial sector and
service sector.The total value of final goods and services produced in a country in a year is
called national income. National income was first calculated in India by Dadabai Noaroji in
1876. In our country national income is calculated every year by Central Statistical Organization
(CSO).It includes payments made to all resources in the form of wages, interest, rent and
profits.

According to Marshall: ―The 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. This is the true net annual income or revenue of the country or national
dividend.‖ In this definition, the word ‗net‘ refers to deductions from the gross national income
in respect of depreciation and wearing out of machines. And to this, must be added income from
abroad.

Land, Labour, Capital, Organization

Rent, Wages, Interest, Profits

HOUSEHOLDS BUSINESS
FIRMS
Goods and Services

Payment for goods and services

Circular Flow of National Income :-

National income is a flow of money payments resulting from the productive resources of a
country during a year. It has the concept of circular flow in this sense that the economic
transactions which are made in a country during a particular year appears in different ways. The
expenditure of one person is the income of another person, and his expenditure is also equal to
value of goods and services. To explain this idea we assume that there is economy where are
only two sectors in the economy.
1. Firms.
2. Households.
Firms are required to produce goods. Households own the various factors of production. Firms
require the services of households to produce goods. The firms hire the services of households
to produce goods. These goods are again supplied to the households. Whenhouseholdssector
purchases the goods it makes the payments. Similarly firms make the payment in the shape of
rent, wages, and interest to the households against their services.
In this way the sum of prices of the goods and services must be equal to the sum of the reward
for the services of factors of production.
So income flows from firms to households in exchange for these services and again the
expenditure flows from households to firms. The goods which are produced by the firms these
are purchased by the household. The flow of income flows from firms to household and flow of
expenditure from household to firms will be equal. This is called circular flow of national
income.

National income can be calculated on the basis of:

1. Flow of goods and services

2. Flow of income
3. Flow of expenditure on goods and services

CONCEPTS OF NATIONAL INCOME

There are various concepts of National Income. The main concepts of NI are: GDP, GNP, NNP,
NI, PI, DI, and PCI. These different concepts explain about the phenomenon of economic
activities of the various sectors of the economy.

1.Gross Domestic Product (GDP)

Gross domestic product- the market value of all final goods and services produced in a country
during a specific period of time which is usually one year.
GDP is measured using market values, and not quantities. Production is measured in quantities,
but then those quantities have to be changed to account for their value. In economics we use
prices to place values on the final goods, so total production times price will give us the total
value.

Final goods and services vs intermediate goods or services. A product is a final good or service
when it is purchased by the final user. Intermediate products are used as an input to produce
another good or service such as sugar being purchased to make soda. Sugar is an intermediate
good, while soda is a final good.

GDP only includes the value of final goods, intermediate goods are not included. GDP only
includes current production, and ignores the sale of used goods. If you purchase a bike in 2011,
then that purchase is included in 2011 GDP measure, not 2010 or 2012. Also, if you sell that
bike at any time in the future, the sale of that bike is not included in GDP.

An equation for GDP and some actual values:

GDP = C + I + G + NX

The GDP equation shows us that GDP is equal to consumption expenditure (C) plus investment
expenditure (I) plus government expenditure (G) plus net exports (NX = Exports - Imports).

2.Gross National Product (GNP)

Gross National Product is the total market value of all final goods and services produced
annually in a country plus net factor income from abroad. Thus, GNP is the total measure of the
flow of goods and services at market value resulting from current production during a year in a
country including net factor income from abroad. The GNP can be expressed as the following
equation:

GNP=GDP+NFIA (Net Factor Income from Abroad)

NFIA = Income earned by Indians in abroad through jobs or businesses – Income

earned by foreigners in India by jobs or businesses.
3.Net National Product (NNP)

Net National Product is the market value of all final goods and services after allowing for
depreciation. It is also called National Income at market price. When charges for depreciation
are deducted from the gross national product, we get it. Thus,

NNP=GNP-Depreciation

4.National Income (NI)

National Income is also known as National Income at factor cost. National income at factor cost
means the sum of all incomes earned by resources suppliers for their contribution of land, labor,
capital and organizational ability which go into the years net production. Hence, the sum of the
income received by factors of production in the form of rent, wages, interest and profit is called
National Income. Symbolically,

NI=NNP + Subsidies given by Govt. - Indirect Taxes

5.Personal Income (PI)

Personal Income is the total money income received by individuals and households of a country
from all possible sources before direct taxes. Therefore, personal income can be expressed as
follows:

PI=NI-Corporate Income Taxes-Undistributed Corporate Profits-Social Security

Contribution + Transfer Payments

6.Disposable Income (DI)

The income left after the payment of direct taxes from personal income is called Disposable
Income. Disposable income means actual income which can be spent on consumption by
individuals and families. Thus, it can be expressed as:

DI=PI-Direct Taxes
7.Per Capita Income (PCI)

Per Capita Income (average income) of a country is derived by dividing the national income of
the country by the total population of a country. Thus,

PCI=Total National Income/Total National Population

IMPORTANCE OF NATIONAL INCOME

The following points highlight the top eleven reasons for growing importance of national
income studies in recent years.

1. Economic Policy:

Economic policy refers to the actions which Govt. Takes in the economic feild such as Tax
policy, Money supply policy, Interest rate policy etc. National income figures are an important
tool of macroeconomic analysis and policy.

National income estimates are the most comprehensive measures of aggregate economic activity
in an economy. It is through such estimates that we know the aggregate yield of the economy
and can lay down future economic policy for development.

2. Economic Planning:

National income statistics are the most important tools for long-term and shortterm economic
planning. A country cannot possibly frame a plan without having a prior knowledge of the
trends in national income. The Planning Commission in India also kept in view the national
income estimates before formulating the five-year plans.

3. Economy‟s Structure:

National income statistics enable us to have clear idea about the structure of the economy. It
enables us to know the relative importance of the various sectors of the economy and their
contribution towards national income. From these studies we learn how income is produced,
how it is distributed, how much is spent, saved or taxed.
4. Inflationary and Deflationary Gaps:

Inflationary gap means the amount by which the total demand is higher than the total supply.
Deflationary gap means the amount by which the total demand is less than the total supply.
National income and national product figures enable us to have an idea of the inflationary and
deflationary gaps. For accurate and timely anti- inflationary and deflationary policies, we need
regular estimates of national income.

5. Budgetary Policies:

Modern governments try to prepare their budgets within the framework of national income data
and try to formulate anti-cyclical policies according to the facts revealed by the national income
estimates. Even the taxation and borrowing policies are so framed as to avoid fluctuations in
national income.

6. National Expenditure:

National income studies show how national expenditure is divided between consumption
expenditure and investment expenditure. It enables us to provide for reasonable depreciation to
maintain the capital stock of a community. Too liberal allowance of depreciation may prove
harmful as it may unnecessarily lead to a reduction in consumption.

7. Distribution of Grants-in-aid:

National income estimates help a fair distribution of grants-in-aid by the federal governments to
the state governments and other constituent units.

8. Standard of Living Comparison:

National income studies help us to compare the standards of living of people in different
countries and of people living in the same country at different times.

9. International Sphere:

National income studies are important even in the international sphere as these estimates not
only help us to fix the burden of international payments equitably amongst different nations but
also enable us to determine the subscriptions and quotas of different countries to international
organisations like the UNO, IMF, IBRD. etc.

10. Defense and Development:

National income estimates help us to divide the national product between defence and
development purposes. From such figures we can easily know how much can be spared for war
by the civilian population.

11. Public Sector:

National income figures enable us to know the relative roles of public and private sectors in the
economy. If most of the activities are performed by the state, we can easily conclude that public
sector is playing a dominant role.

INFLATION

Inflationis defined as a sustained increase in the general level of prices for goods and services in
a county, and is measured as an annual percentage change. Under conditions of inflation, the
prices of things rise over time. Put differently, as inflation rises, every rupee you own buys a
smaller percentage of a good or service. When prices rise, and alternatively when the value of
money falls you have inflation.

The value of a rupee (or any unit of money) is expressed in terms of itspurchasing power, which
is the amount of real, tangible goods or actual services that money can buy at a moment in time.
When inflation goes up, there is a decline in the purchasing power of money. For example, if the
inflation rate is 2% annually, then theoretically a Rs.1 chocolate will cost Rs.1.02 in a year.
After inflation, your rupee does not go as far as it did in the past.

FEATURES OF INFLATION

Following are the main features of inflation:

1. Inflation is always accompanied by a rise in the price level. It is a process of

uninterrupted increase in prices.
 2. Inflation is a monetary phenomenon and it is generally caused by excessive money
supply.

3. Inflation is essentially an economic phenomenon as it originates in the economic system

and is the result of action and interaction of economic forces.

4. Inflation is a dynamic process as observed over the long period.

5. A cyclical movement of prices is not inflation.

6. Pure inflation starts after full employment.

7. Inflation may be demand-pull or cost-push.

TYPES OF INFLATION

1. Creeping Inflation: This is also known as mild inflation or moderate inflation. This type of
inflation occurs when the price level persistently rises over a period of time at a mild rate.
When the rate of inflation is less than 10 per cent annually, or it is a single digit inflation
rate, it is considered to be a moderate inflation.

2. Galloping Inflation: If mild inflation is not checked and if it is uncontrollable, it may

assume the character of galloping inflation. Inflation in the double or triple digit range of 20,
100 or 200 percent a year is called galloping inflation . Many Latin American countries such
as Argentina, Brazil had inflation rates of 50 to 700 percent per year in the 1970s and 1980s.

3. Hyperinflation: It is a stage of very high rate of inflation. While economies seem to survive
under galloping inflation, a third and deadly strain takes hold when the cancer of
hyperinflation strikes. Nothing good can be said about a market economy in which prices are
rising a million or even a trillion percent per year . Hyperinflation occurs when the prices go
out of control and the monetary authorities are unable to impose any check on it. Germany
had witnessed hyperinflation in 1920‘s.

4. Stagflation: It is an economic situation in which unemployment increases along with rising

inflation causing demand to remain stagnant in a given period. In fact, it is an indication of
 an inefficient market, as traditionally, there is an inverse relationship between
unemployment rates and inflationary pressures. Stagflation was witnessed by developed
countries in 1970s, when world oil prices rose dramatically.

5. Deflation: Deflation is the reverse of inflation. It refers to a sustained decline in the price
level of goods and services. It occurs when the annual inflation rate falls below zero percent
(a negative inflation rate), resulting in an increase in the real value of money. Japan suffered
from deflation for almost a decade in 1990s.

MONEYSUPPLY AND INFLATION

Inflation refers to a sustained rise in the prices of goods and services. When inflation occurs, the
buying value of a currency unit erodes, meaning that a person needs more money to buy the
same product. Most economists suggest there is a direct relationship between the amount of
money in an economy, known as themoney supply, and inflation levels. Understanding the
relationship between money supply and inflation is far from easy or predictable, since inflation
can easily be influenced by other factors as well.

The relationship between money supply and inflation is explained differently depending on the
type ofeconomic theoryused. In the quantity of money theory, also called monetarism, the
relationship is expressed as MV=PT, or Money Supply (the amount of money in circulation) x
Velocity of circulation (the speed with which money flows round the economy)=Price Level x
Transactions or output. The Velocity and Transactions are considered to be constants, so
according to this explanation, supply and prices have a direct relationship. MV represents
supply of money and PT represents demand for money. Assuming V and T are constant, price
level varies in direct proportion to the quantity of money. If supply of money increases, there is
inflation or rise in prices. InKeynesian theory, while there is still a relationship between money
supply and inflation, it is not the only large factor that can affect inflation and prices. Generally,
the Keynesian theory stresses the relationship between total or aggregate demand and
inflationary changes.

For example, assume a very smalleconomythat has amoneysupply of Rs.50 and only two people
i.e., Farmer and Mechanic. Farmer goes to Mechanic for getting his tractor repaired and paid
Rs. 50. In turn, Mechanic purchases rise worth of Rs. 40 from Farmer. After few months, again
Mechanic purchases maize worth of Rs. 10. These are the transactions taken place in our
imaginary economy in a year.

MV = PT

M = Money supplied, V = Velocity ( The rate at which money is exchanged from one
transaction to another), P = Average general price, T = No. of transactions.

MV = Total money supply; PT = Value of all the transactions (Value of goods and services
produced, i.e., GDP)

M = 50 V = ? P = (50+40+10)/3 transactions = 33.33 T = 3

V = PT/M

50 x V = 33.33 x 3

V = 100/50 = 2

If money supplied is increased by 100%, then price level also increases by 100% when V and T
are constant.

MV = PT

100 x 2 = P x 3

P = 200/3 = 66.67

Changes in money supply are often used to try and control inflationary conditions. Central bank
will generally lower lending rates and increase interest. When inflation drops below a target
level, these standards are generally relaxed in an attempt to stimulate the economy.

BUSINESS CYCLE

Business cycles, also called trade cycles or economic cycles, refer to perpetual features of the
economic environment of a country. In simple words, business cycles can be defined as
fluctuations in the economic activities of a country. The economic activities of a country include
total output, income level, prices of products and services, employment, and rate of
consumption. All these activities are interrelated; if one activity changes, rest of them would
also show changes.

These changes in the economic activities together produce a bigger change in the overall
economy of a nation. This overall change in an economy is termed as a business cycle. Business
cycles are generally regular and periodical in nature.

Definition: Lord Keynes defines business cycle as ― a business cycle is composed of periods
of good trade characterized by rising prices and low unemployment percentage, altering with
periods of bad trade characterized by falling prices and high unemployment percentage‖.

CHARACTERISTICS OF A BUSINESS CYCLE

1. Cyclical movements: When excess movement in one direction, say depression tends to
bring into operations not only in its remedy but also a stimulus to an excess movement in
the other direction, say boom, the movement is said to be cyclical. It is like the
movement of a pendulum. The movement in one direction tends to automatically
generate a movement in the opposite direction of prosperity in the economy sow the
seeds of depression also.
2. International in nature: it is very likely that boom in the economy of one country
boom in another country. Different countries are linked with one another through
international trade and foreign exchange. This implies that prosperity in one country
contributes to prosperity in other countries also.
3. Varying degree of impact: Since periods of business cycles are more likely to be
different, they tend to vary in the degree of their impact on an economy. Business cycles
may affect different industries in an economy in varying degrees.
4. Irregular patterns: No two business cycles are similar in rhythm. There is no fixed
pattern governing each business cycle.
5. Wave like movement: Business cycles reflect a wavelike movement that implies a
composite photograph of all the recorded cycles. One complete round from boom to
depression and depression to boom is called business cycle.
6. Fluctuation in productive capacities: Production capacities undergo wild fluctuations
are measured in terms of unemployment.
7. Fluctuations in price levels: The upward phase of cycle is identified with expansion of
production capacities, diminishing unemployment and rise in prices. On the other hand,
the downward phase of cycle is identified with contraction of production capacities,
increasing unemployment and fall in prices.
8. Every cycle has four distinct phases: (a) depression, (b) revival, (c) prosperity or boom,
and (d) recession.

PHASES OF A BUSINESS CYCLE

(a) Prosperity/Expansion/Boom : In this stage increase production, high capital investment

in basic industries, expansion of the bank credit, high prices, high profit, full employment.

(b) Recession : This stage is characterized by liquidation in the stock market, strain in the
banking system and some liquidation of bank loan, small fall in price, sharp reduction in
demand for capital equipment and abandoning of relatively new projects. Unemployment leads
to full income expenditure, price & profits. It is cumulative effect once a recession starts it goes
on gathering momentum and finally assumes the shape of depression.

(c) Depression/Slump :It is a protective period in which Business activities in the country is
far below the normal. It is characterized by a sharp deduction of production, mass
unemployment, low employment, falling prices, falling profits, low wages, and contraction of
credit, high rate of business failures and an atmosphere of all round pessimism and despair all
construction activities come to a more or less complete stand still during depression. The
consumer goods industries and however, not much affected.

(d) Recovery : It implies increase in business activity after the lowest point of depression has
been reached. The entrepreneur began to feel that the economic situation was after all not so
bad. This leads to new innovation in business activities. The industrial production picks up
slowly and gradually. The volume of employment also straightly increases. There is a slow rise
in prices accompanied by a small rise in profit. Wages also raise new investment takes place in
capital goods industries. The bank also expands credit. Pessimism is gradually replaced by an
atmosphere of all round cautious hope.
 BUSINESSECONOMICS

INTRODUCTION

Business Economics, also called Managerial Economics, is the application of economic theory
and methodology to business. Business involves decisionmaking. Decision making means the
process of selecting one out of two or more alternative courses of action. The question of choice
arises because the basic resources such as capital, land, labor and management are limited and
can be employed in alternative uses. The decision-making function thus becomes one of making
choice and taking decisions that will provide the most efficient means of attaining a desired end,
say, profit maximization. Different aspects of business need attention of the chief executive. He
may be called upon to choose a single option among the many that may be available to him. It
would be in the interest of the business to reach an optimal decision- the one that promotes the
goal of the business firm. A scientific formulation of the business problem and finding its
optimal solution requires that the business firm is he equipped with a rational methodology and
appropriate tools.

Economic theory underscores the fact that each firm in the industry operates under competitive
conditions and hence tries to operate more efficiently to withstand the competition. The
indicator of efficiency is profits. The assumption here is that each firm has one man as the
owner and entrepreneur, and that his sole aim is to maximize profits. As time passed, one man
firms were replaced by partnerships and giant companies and the structure of the firm changed
to include the owner/entrepreneur/shareholders on the one hand and that managers on the other.
The responsibility of the owners/entrepreneur/shareholders got bifurcated. The day to day
affairs of the firm were looked after by the managers and owners/entrepreneur/shareholders took
organizational decisions aimed at maximizing profits. The goals of the
owners/entrepreneurs/shareholders are called organizational goals while the goals of the
managers are referred to as Business goals also known as operational goals.

DEFINITIONS

According to E. F. Brigham and J. L. Pappas, "Managerial Economics is the application of

Economic theory and methodology to business administration practise."

According to McNair and Meriam, "Managerial Economics consists of the use of Economic
modes of thought to analyse business situations."

According to M. H. Spencer and L. Siegelman, "Managerial Economics is the integration of

economic theory with business practise for the purpose of facilitating decision making and
forward planning."

According to Hauge, "Managerial Economics is concerned with using logic of economics,

mathematics & statistics to provide effective ways of thinking about business decision
problems."

According to Joel Dean, "The purpose of Managerial Economics is to show how economic
analysis can be used in formulating business policies."

NATURE OF BUSINESS ECONOMICS

Business economics is, perhaps, the youngest of all the social sciences. Since it originates from
Economics, it has the basis features of economics, such as assuming that other things remaining
the same. This assumption is made to simplify the complexity of the Business phenomenon
under study in a dynamic business environment so many things are changing simultaneously.
This set a limitation that we cannot really hold other things remaining the same. In such a case,
the observations made out of such a study will have a limited purpose or value. Managerial
economics also has inherited this problem from economics.
The other features of managerial economics are explained as below:

(a)Microeconomics in nature: Business economics is concerned with finding the solutions for
different managerial problems of a particular firm. Thus, it is more close to microeconomics.

(b)Operates against the backdrop of macroeconomics: The macroeconomics conditions of

the economy are also seen as limiting factors for the firm to operate. In other words, the
managerial economist has to be aware of the limits set by the macroeconomics conditions such
as government industrial policy, inflation and so on.

(c)Normative economics: Economics can be classified into two broad categories normally.
Positive Economics and Normative Economics. Positive economics describes ― what is‖ i.e.,
observed economic phenomenon. The statement ― Poverty in India is very high‖ is an example
of positive economics. Normative economics describes ―what ought to be‖ i.e., it differentiates
the ideals form the actual. Ex: People who earn high incomes ought to pay more income tax
than those who earn low incomes. A normative statement usually includes or implies the words
‗ought‘ or ‗should‘. They reflect people‘s moral attitudes and are expressions of what a team of
people ought to do.

(d)Prescriptive actions: Prescriptive action is goal oriented. Given a problem and the
objectives of the firm, it suggests the course of action from the available alternatives for optimal
solution. It does not merely mention the concept, it also explains whether the concept can be
applied in a given context on not. For instance, the fact that variable costs as marginal costs can
be used to judge the feasibility of an export order.

(e)Applied in nature: ‗Models‘ are built to reflect the real life complex business situations and
these models are of immense help to managers for decision-making. The different areas where
models are extensively used include inventory control, optimization, project management etc. In
Business economics, we also employ case study methods to conceptualize the problem, identify
that alternative and determine the best course of action.

(f)Offers scope to evaluate each alternative: Business economics provides an opportunity to

evaluate each alternative in terms of its costs and revenue. The Business economist can decide
which is the better alternative to maximize the profits for the firm.
(g)Interdisciplinary: The contents, tools and techniques of Business economics are drawn from
different subjects such as economics, management, mathematics, statistics, accountancy,
psychology, organizational behavior, sociology and etc.

(h)Assumptions and limitations: Every concept and theory of Business economics is based on
certain assumption and as such their validity is not universal. Where there is change in
assumptions, the theory may not hold good at all.

SCOPE OF BUSINESS ECONOMICS

The main focus of Business economics is to find the solution to Business problems for which
the Business economist makes use of the concepts, tools and techniques of economics and other
related disciplines.

1. Demand Analyses and Forecasting:

A firm can survive only if it is able to the demand for its product at the right time, within the
right quantity. Understanding the basic concepts of demand is essential for demand forecasting.
Demand analysis should be a basic activity of the firm because many of the other activities of
the firms depend upon the outcome of the demand forecast. Demand analysis provides:

a) The basis for analyzing market influences on the firms; products and thus helps in the
adaptation to those influences.
b) Demand analysis also highlights for factors, which influence the demand for a product.
This helps to manipulate demand. Thus demand analysis studies not only the price
elasticity but also income elasticity, cross elasticity as well as the influence of
 advertising expenditure. With the advent of computers, demand forecasting has become
an increasingly important function of Business economics.

2. Price determination:

Pricing decisions have been always within the preview of Business economics. Pricing policies
are merely a subset of broader class of Business economic problems. Price theory helps to
explain how prices are determined under different types of market conditions. Competition
analysis includes the anticipation of the response of competing firms‘ pricing, advertising and
marketing strategies. Product line pricing and price forecasting occupy an important place here.

3. Production and cost analysis:

Production analysis is in physical terms. While the cost analysis is in monetary terms. Cost
concepts and classifications, cost-out-put relationships, economies and diseconomies of scale
and production functions are some of the points constituting cost and production analysis.

4. Resource Allocation:

Business Economics is the traditional economic theory that is concerned with the problem of
optimum allocation of scarce resources. Marginal analysis is applied to the problem of
determining the level of output, which maximizes profit. In this respect, linear programming
techniques are used to solve optimization problems. In fact, linear programming is one of the
most practical and powerful managerial decision making tools currently available.

5. Profit analysis:

Profit making is the major goal of firms. There are several constraints here on account of
competition from other products, changing input prices and changing business environment
hence in spite of careful planning, there is always certain risk involved. Business economics
deals with techniques of averting of minimizing risks. Profit theory guides in the measurement
and management of profit, in calculating the pure return on capital, besides future profit
planning.

6. Investment decisions:
Capital is the foundation of business. Lack of capital may result in small size of operations.
Availability of capital from various sources like equity capital, institutional finance etc. may
help to undertake large-scale operations. Hence efficient allocation and management of capital
is one of the most important tasks of the managers. The major issues related to capital analysis
are:

1. The choice of investment project

2. Evaluation of the efficiency of capital

3. Most efficient allocation of capital

Knowledge of capital theory can help very much in taking investment decisions.
This involves, capital budgeting, feasibility studies, analysis of cost of capital etc.

7. Forward planning:

Strategic planning provides management with a framework on which long-term decisions can be
made which has an impact on the behavior of the firm. The firm sets certain long-term goals and
objectives and selects the strategies to achieve the same. Strategic planning is now a new
addition to the scope of Business economics with the emergence of multinational corporations.
The perspective of strategic planning is global.

THE ROLE OF BUSINESS ECONOMIST

The role of businesseconomist can be summarized as follows:

1. He studies the economic patterns at macro-level and analysis it‘s significance to the
specific firm he is working in.

2. He has to consistently examine the probabilities of transforming an everchanging

economic environment into profitable business avenues.

3. He assists the business planning process of a firm.

4. He also carries cost-benefit analysis.

 5. He assists the management in the decisions pertaining to internal functioning of a firm.

6. In addition, a business economist has to analyze changes in macro- economic indicators

such as national income, population, business cycles, and their possible effect on the
firm‘s functioning.

7. He is also involved in advising the management on public relations, foreign exchange,

and trade.

8. He guides the firm on the likely impact of changes in monetary and fiscal policy on the
firm‘s functioning.

9. The most significant function of a business economist is to conduct a detailed research

on industrial market.

10.He must be vigilant and must have ability to cope up with the pressures.

11.He also provides management with economic information such as tax rates, competitor‘s
price and product, etc.

MULTI-DISCIPLINARY NATURE OF BUSINESS ECONOMICS

Many new subjects have evolved in recent years due to the interaction among basic disciplines.
While there are many such new subjects in natural and social sciences, Business economics can
be taken as the best example of such a phenomenon among social sciences. Hence it is
necessary to trace its roots and relationship with other disciplines.

1. Relationship with economics:

The relationship between Business economics and economics theory may be viewed from the
point of view of the two approaches to the subject Viz. Micro Economics and Marco
Economics. Microeconomics is the study of the economic behavior of individuals, firms and
other such micro organizations. Business economics is rooted in Micro Economic theory.
Business Economics makes use to several Micro Economic concepts such as marginal cost,
marginal revenue, elasticity of demand as well as price theory and theories of market structure
to name only a few. Macro theory on the other hand is the study of the economy as a whole. It
deals with the analysis of national income, the level of employment, general price level,
consumption and investment in the economy and even matters related to international trade,
Money, public finance, etc.

2. Relationship with accounting:

Business economics has been influenced by the developments in management theory and
accounting techniques. A proper knowledge of accounting techniques is very essential for the
success of the firm because profit maximization is the major objective of the firm. Business
Economist requires a proper knowledge of cost and revenue information and their classification.

3. Relationship with mathematics:

The use of mathematics is significant for Business economics in view of its profit maximization
goal long with optional use of resources. The major problem of the firm is how to minimize
cost, how to maximize profit or how to optimize sales. Mathematical concepts and techniques
are widely used in economic logic to solve these problems. Geometry, Algebra and calculus are
the major branches of mathematics which are of use in Business economics.

4. Relationship with Statistics:

A successful businessman must correctly estimate the demand for his product. Statistical
methods provide and sure base for decision-making. Thus statistical tools are used in collecting
data and analyzing them to help in the decision making process. Statistical tools like the theory
of probability and forecasting techniques help the firm to predict the future course of events.
Business Economics also make use of correlation and multiple regressions in related variables
like price and demand to estimate the extent of dependence of one variable on the other.

5. Relationship with Operations Research:

The development of techniques and concepts such as linear programming, inventory models and
game theory is due to the development of this new subject of operations research in the post-war
years. Operations research is concerned with the complex problems arising out of the
management of men, machines, materials and money.
Operation research provides a scientific model of the system and it helps Business economists in
the field of product development, material management, and inventory control, quality control,
marketing and demand analysis.

7.Relationship with Computer Science:

Computers are used in data and accounts maintenance, inventory and stock controls and supply
and demand predictions. What used to take days and months is done in a few minutes or hours
by the computers. In fact computerization of business activities on a large scale has reduced the
workload of Business personnel.