Business Meaning:

A business is an organization where people work together. In a business, people work to make
and sell products or services. Other people buy the products and services. The business owner is
the person who hires people for work. A business can earn a profit for the products and services
it offers.

What Is the Theory of the Firm

The theory of the firm is the microeconomic concept founded in neoclassical economics that states
that a firm exists and make decisions to maximize profits. The theory holds that the overall nature
of companies is to maximize profits meaning to create as much of a gap between revenue and
costs. The firm's goal is to determine pricing and demand within the market and allocate resources
to maximize net profits.

TYPES OF BUSINESS ENTITIES

SOLE TRADER

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. 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

The following are the advantages of the sole trader from of business organization:

1. Easy to start and easy to close: Formation of a sole trader from 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

The following are the disadvantages of sole trader form:

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.

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. Agent for other partners and principal for himself. All the partners are agents and
the ‘partnership’ is their principal.
The following are the other features:

(a) 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.
(b) 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
(c) Division of labour: Because there are more than two persons, the work can be divided
among the partners based on their aptitude.
(d) Personal contact with customers: The partners can continuously be in touch with the
customers to monitor their requirements.
(e) 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

The following are the different kinds 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.

Right of partners

Every partner has right

(a) To take part in the management of business

(b) To express his opinion
(c) Of access to and inspect and copy and book of accounts of the firm
(d) To share equally the profits of the firm in the absence of any specific agreement to the
contrary
(e) To receive interest on capital at an agreed rate of interest from the profits of the firm
(f) To receive interest on loans, if any, extended to the firm.
(g) To be indemnified for any loss incurred by him in the conduct of the business
(h) To receive any money spent by him in the ordinary and proper conduct of the business of
the firm.

Advantages

The following are the advantages of the partnership from:

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:

The following are the disadvantages of partnership:

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, an attitude of suspicion and
crisis of confidence. 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.

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.

The word ‘ company’ has a Latin origin, com means ‘ come together’, pany means ‘ bread’, joint
stock company means, people come together to earn their livelihood by investing in the stock of
company jointly.

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

This definition brings out the following features of the company:

1. Artificial person: The Company has no form or shape. It is an artificial person created by
law. It is intangible, invisible and existing only, in the eyes of law.
2. Separate legal existence: it has an 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. A shareholder is not liable for the acts of the company. Similarly, the
shareholders cannot bind the company by their acts.
3. Voluntary association of persons: The Company is an association of voluntary
association of persons who want to carry on business for profit. To carry on business, they
need capital. So they invest in the share capital of the company.
4. Limited Liability: The shareholders have limited liability i.e., liability limited to the face
value of the shares held by him. In other words, the liability of a shareholder is restricted
to the extent of his contribution to the share capital of the company. The shareholder need
not pay anything, even in times of loss for the company, other than his contribution to the
share capital.
5. Capital is divided into shares: The total capital is divided into a certain number of units.
Each unit is called a share. The price of each share is priced so low that every investor
would like to invest in the company. The companies promoted by promoters of good
standing (i.e., known for their reputation in terms of reliability character and dynamism)
are likely to attract huge resources.
6. Transferability of shares: In the company form of organization, the shares can be
transferred from one person to the other. A shareholder of a public company can cell sell
his holding of shares at his will. However, the shares of a private company cannot be
transferred. A private company restricts the transferability of the shares.
7. Common Seal: As the company is an artificial person created by law has no physical form,
it cannot sign its name on a paper; so, it has a common seal on which its name is engraved.
The common seal should affix every document or contract; otherwise the company is not
bound by such a document or contract.
8. Perpetual succession: ‘Members may comes and members 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.
9. Ownership and Management separated: The shareholders are spread over the length and
breadth of the country, and sometimes, they are from different parts of the world. To
facilitate administration, the shareholders elect some among themselves or the promoters
of the company as directors to a Board, which looks after the management of the business.
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 in special circumstances such as representation from
creditors of financial institutions, or shareholders against the company that their interests
are not safeguarded. The company is not affected by the death or insolvency of any of its
members.
11. The name of the company ends with ‘limited’: it is necessary that the name of the
company ends with limited (Ltd.) to give an indication to the outsiders that they are dealing
with the company with limited liability and they should be careful about the liability aspect
of their transactions with the company.

Formation of Joint Stock company

There are two stages in the formation of a joint stock company. They are:
 (a) To obtain Certificates of Incorporation
(b) 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 and such a name is born on a particular day.

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.

The persons who conceive the idea of starting a company and who organize the necessary initial
resources are called promoters. The vision of the promoters forms the backbone for the company
in the future to reckon with.

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: The Memorandum of Association is also called the charter
of the company. It outlines the relations of the company with the outsiders. If furnishes all
its details in six clause such as (ii) Name clause (II) situation clause (iii) objects clause
(iv) Capital clause and (vi) subscription clause duly executed by its subscribers.
(b) Articles of association: Articles of Association furnishes the byelaws or internal rules
government the internal conduct of the company.
(c) The list of names and address of the proposed directors and their willingness, in writing
to act as such, in case of registration of a public company.
(d) A statutory declaration that all the legal requirements have been fulfilled. The declaration
has to be duly signed by any one of the following: Company secretary in whole practice,
the proposed director, legal solicitor, chartered accountant in whole time practice or
advocate of High court.

The registrar of joint stock companies peruses and 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.

Advantages
The following are the advantages of a joint Stock Company

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. The shareholders are free to make any proposals, question the
practice of the management, suggest the possible remedial measures, as they perceive, The
directors respond to the issue raised by the shareholders and have to justify their actions.
8. Economics of large scale production: Since the production is in the scale with large funds
at
9. Continued existence: The Company has perpetual succession. It has no natural end. It
continues forever and ever unless law put an end to it.
10. Institutional confidence: Financial Institutions prefer to deal with companies in view of
their professionalism and financial strengths.
11. Professional management: With the larger funds at its disposal, the Board of Directors
recruits competent and professional managers to handle the affairs of the company in a
professional manner.
12. 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.

All that shines is not gold. The company from of organization is not without any disadvantages.
The following are the disadvantages of joint stock companies.

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. Sometimes, so-called professionals do
not respond to the urgencies as required. It promotes delay in administration, which is
referred to ‘red tape and bureaucracy’.
4. Lack 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.
6. Lack of responsibility and commitment: In some cases, the managers at different levels
are afraid to take risk and more worried about their jobs rather than the huge funds invested
in the capital of the company. Where managers do not show up willingness to take
responsibility, they cannot be considered as committed. They will not be able to handle the
business risks.

PUBLIC ENTERPRISES

Public enterprises occupy an important position in the Indian economy. Today, public enterprises
provide the substance and heart of the economy. Its investment of over Rs.10,000 crore is in heavy
and basic industry, and infrastructure like power, transport and communications. The concept of
public enterprise in Indian dates back to the era of pre-independence.

Genesis of Public Enterprises

In consequence to declaration of its goal as socialistic pattern of society in 1954, the Government
of India realized that it is through progressive extension of public enterprises only, the following
aims of our five years plans can be fulfilled.
 • Higher production
• Greater employment
• Economic equality, and
• Dispersal of economic power

The government found it necessary to revise its industrial policy in 1956 to give it a socialistic
bent.

Need for Public Enterprises

The Industrial Policy Resolution 1956 states the need for promoting public enterprises as follows:

• To accelerate the rate of economic growth by planned development

• To speed up industrialization, particularly development of heavy industries and to expand
public sector and to build up a large and growing cooperative sector.
• To increase infrastructure facilities
• To disperse the industries over different geographical areas for balanced regional
development
• To increase the opportunities of gainful employment
• To help in raising the standards of living
• To reducing disparities in income and wealth (By preventing private monopolies and
curbing concentration of economic power and vast industries in the hands of a small
number of individuals)

Achievements of public Enterprises

The achievements of public enterprise are vast and varied. They are:

1. Setting up a number of public enterprises in basic and key industries

2. Generating considerably large employment opportunities in skilled, unskilled, supervisory
and managerial cadres.
3. Creating internal resources and contributing towards national exchequer for funds for
development and welfare.
4. Bringing about development activities in backward regions, through locations in different
areas of the country.
5. Assisting in the field of export promotion and conservation of foreign exchange.
6. Creating viable infrastructure and bringing about rapid industrialization (ancillary
industries developed around the public sector as its nucleus).
 7. Restricting the growth of private monopolies
8. Stimulating diversified growth in private sector
9. Taking over sick industrial units and putting them, in most of the vases, in order,
10. Creating financial systems, through a powerful networking of financial institutions,
development and promotional institutions, which has resulted in social control and social
orientation of investment, credit and capital management systems.
11. Benefiting the rural areas, priority sectors, small business in the fields of industry, finance,
credit, services, trade, transport, consultancy and so on.

Let us see the different forms of public enterprise and their features now.

Forms of public enterprises

Public enterprises can be classified into three forms:

(a) Departmental undertaking

(b) Public corporation
(c) Government company

These are explained below

Departmental Undertaking

This is the earliest from of public enterprise. Under this form, the affairs of the public enterprise
are carried out under the overall control of one of the departments of the government. The
government department appoints a managing director (normally a civil servant) for the
departmental undertaking. He will be given the executive authority to take necessary decisions.
The departmental undertaking does not have a budget of its own. As and when it wants, it draws
money from the government exchequer and when it has surplus money, it deposits it in the
government exchequer. However, it is subject to budget, accounting and audit controls.

Examples for departmental undertakings are Railways, Department of Posts, All India Radio,
Doordarshan, Defence undertakings like DRDL, DLRL, ordinance factories, and such.

Features
 1. Under the control of a government department: The departmental undertaking is not an
independent organization. It has no separate existence. It is designed to work under close
control of a government department. It is subject to direct ministerial control.
2. More financial freedom: The departmental undertaking can draw funds from government
account as per the needs and deposit back when convenient.
3. Like any other government department: The departmental undertaking is almost similar
to any other government department
4. Budget, accounting and audit controls: The departmental undertaking has to follow
guidelines (as applicable to the other government departments) underlying the budget
preparation, maintenance of accounts, and getting the accounts audited internally and by
external auditors.
5. More a government organization, less a business organization . The set up of a
departmental undertaking is more rigid, less flexible, slow in responding to market needs.

Advantages

1. Effective control: Control is likely to be effective because it is directly under the Ministry.
2. Responsible Executives: Normally the administration is entrusted to a senior civil servant.
The administration will be organized and effective.
3. Less scope for mystification of funds: Departmental undertaking does not draw any
money more than is needed, that too subject to ministerial sanction and other controls. So
chances for mis-utilisation are low.
4. Adds to Government revenue: The revenue of the government is on the rise when the
revenue of the departmental undertaking is deposited in the government account.

Disadvantages

1. Decisions delayed: Control is centralized. This results in lower degree of flexibility.

Officials in the lower levels cannot take initiative. Decisions cannot be fast and actions
cannot be prompt.
2. No incentive to maximize earnings: The departmental undertaking does not retain any
surplus with it. So there is no inventive for maximizing the efficiency or earnings.
3. Slow response to market conditions: Since there is no competition, there is no profit
motive; there is no incentive to move swiftly to market needs.
4. Redtapism and bureaucracy: The departmental undertakings are in the control of a civil
servant and under the immediate supervision of a government department. Administration
gets delayed substantially.
5. Incidence of more taxes: At times, in case of losses, these are made up by the government
funds only. To make up these, there may be a need for fresh taxes, which is undesirable.
Any business organization to be more successful needs to be more dynamic, flexible, and
responsive to market conditions, fast in decision marking and prompt in actions. None of these
qualities figure in the features of a departmental undertaking. It is true that departmental
undertaking operates as a extension to the government. With the result, the government may miss
certain business opportunities. So as not to miss business opportunities, the government has
thought of another form of public enterprise, that is, Public corporation.

PUBLIC CORPORATION

Having released that the routing government administration would not be able to cope up with the
demand of its business enterprises, the Government of India, in 1948, decided to organize some of
its enterprises as statutory corporations. In pursuance of this, Industrial Finance Corporation,
Employees’ State Insurance Corporation was set up in 1948.

Public corporation is a ‘right mix of public ownership, public accountability and business
management for public ends’. The public corporation provides machinery, which is flexible, while
at the same time retaining public control.

Definition

A public corporation is defined as a ‘body corporate create 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 a public corporation are Life Insurance Corporation of India, Unit Trust of India,
Industrial Finance Corporation of India, Damodar Valley Corporation and others.

Features

1. A body corporate: It has a separate legal existence. It is a separate company by itself. If

can raise resources, buy and sell properties, by name sue and be sued.
2. More freedom and day-to-day affairs: It is relatively free from any type of political
interference. It enjoys administrative autonomy.
 3. Freedom regarding personnel: The employees of public corporation are not government
civil servants. The corporation has absolute freedom to formulate its own personnel
policies and procedures, and these are applicable to all the employees including directors.
4. Perpetual succession: A statute in parliament or state legislature creates it. It continues
forever and till a statue is passed to wind it up.
5. Financial autonomy: Through the public corporation is fully owned government
organization, and the initial finance are provided by the Government, it enjoys total
financial autonomy, Its income and expenditure are not shown in the annual budget of the
government, it enjoys total financial autonomy. Its income and expenditure are not shown
in the annual budget of the government. However, for its freedom it is restricted regarding
capital expenditure beyond the laid down limits, and raising the capital through capital
market.
6. Commercial audit: Except in the case of banks and other financial institutions where
chartered accountants are auditors, in all corporations, the audit is entrusted to the
comptroller and auditor general of India.
7. Run on commercial principles: As far as the discharge of functions, the corporation shall
act as far as possible on sound business principles.

Advantages

1. Independence, initiative and flexibility: The corporation has an autonomous set up. So it
is independent, take necessary initiative to realize its goals, and it can be flexible in its
decisions as required.
2. Scope for Redtapism and bureaucracy minimized: The Corporation has its own policies
and procedures. If necessary they can be simplified to eliminate redtapism and
bureaucracy, if any.
3. Public interest protected: The corporation can protect the public interest by making its
policies more public friendly, Public interests are protected because every policy of the
corporation is subject to ministerial directives and board parliamentary control.
4. Employee friendly work environment: Corporation can design its own work culture and
train its employees accordingly. It can provide better amenities and better terms of service
to the employees and thereby secure greater productivity.
5. Competitive prices: the corporation is a government organization and hence can afford
with minimum margins of profit, It can offer its products and services at competitive prices.
6. Economics of scale: By increasing the size of its operations, it can achieve economics of
large-scale production.
7. Public accountability: It is accountable to the Parliament or legislature; it has to submit
its annual report on its working results.

Disadvantages

1. Continued political interference: the autonomy is on paper only and in reality, the
continued.
 2. Misuse of Power: In some cases, the greater autonomy leads to misuse of power. It takes
time to unearth the impact of such misuse on the resources of the corporation. Cases of
misuse of power defeat the very purpose of the public corporation.
3. Burden for the government: Where the public corporation ignores the commercial
principles and suffers losses, it is burdensome for the government to provide subsidies to
make up the losses.

Government Company

Section 617 of the Indian Companies Act defines a government company as “any company in
which not less than 51 percent of the paid up share capital” is held by the Central Government or
by any State Government or Governments or partly by Central Government and partly by one or
more of the state Governments and includes and company which is subsidiary of government
company as thus defined”.

A government company is the right combination of operating flexibility of privately organized

companies with the advantages of state regulation and control in public interest.

Government companies differ in the degree of control and their motive also.

Some government companies are promoted as

• industrial undertakings (such as Hindustan Machine Tools, Indian Telephone Industries,

and so on)
• Promotional agencies (such as National Industrial Development Corporation, National
Small Industries Corporation, and so on) to prepare feasibility reports for promoters who
want to set up public or private companies.
• Agency to promote trade or commerce. For example, state trading corporation, Export
Credit Guarantee Corporation and so such like.
• A company to take over the existing sick companies under private management (E.g.
Hindustan Shipyard)
• A company established as a totally state enterprise to safeguard national interests such as
Hindustan Aeronautics Ltd. And so on.
• Mixed ownership company in collaboration with a private consult to obtain technical know
how and guidance for the management of its enterprises, e.g. Hindustan Cables)

Features

The following are the features of a government company:

 1. Like any other registered company: It is incorporated as a registered company under the
Indian companies Act. 1956. Like any other company, the government company has
separate legal existence. Common seal, perpetual succession, limited liability, and so on.
The provisions of the Indian Companies Act apply for all matters relating to formation,
administration and winding up. However, the government has a right to exempt the
application of any provisions of the government companies.
2. Shareholding: The majority of the share are held by the Government, Central or State,
partly by the Central and State Government(s), in the name of the President of India, It is
also common that the collaborators and allotted some shares for providing the transfer of
technology.
3. Directors are nominated: As the government is the owner of the entire or majority of the
share capital of the company, it has freedom to nominate the directors to the Board.
Government may consider the requirements of the company in terms of necessary
specialization and appoints the directors accordingly.
4. Administrative autonomy and financial freedom: A government company functions
independently with full discretion and in the normal administration of affairs of the
undertaking.
5. Subject to ministerial control: Concerned minister may act as the immediate boss. It is
because it is the government that nominates the directors, the minister issue directions for
a company and he can call for information related to the progress and affairs of the
company any time.

Advantages

1. Formation is easy: There is no need for an Act in legislature or parliament to promote a

government company. A Government company can be promoted as per the provisions of
the companies Act. Which is relatively easier?
2. Separate legal entity: It retains the advantages of public corporation such as autonomy,
legal entity.
3. Ability to compete: It is free from the rigid rules and regulations. It can smoothly function
with all the necessary initiative and drive necessary to complete with any other private
organization. It retains its independence in respect of large financial resources, recruitment
of personnel, management of its affairs, and so on.
4. Flexibility: A Government company is more flexible than a departmental undertaking or
public corporation. Necessary changes can be initiated, which the framework of the
company law. Government can, if necessary, change the provisions of the Companies Act.
If found restricting the freedom of the government company. The form of Government
Company is so flexible that it can be used for taking over sick units promoting strategic
industries in the context of national security and interest.
5. Quick decision and prompt actions: In view of the autonomy, the government company
take decision quickly and ensure that the actions and initiated promptly.
6. Private participation facilitated: Government company is the only from providing scope
for private participation in the ownership. The facilities to take the best, necessary to
conduct the affairs of business, from the private sector and also from the public sector.
Disadvantages

1. Continued political and government interference: Government seldom leaves the

government company to function on its own. Government is the major shareholder and it
dictates its decisions to the Board. The Board of Directors gets these approved in the
general body. There were a number of cases where the operational polices were influenced
by the whims and fancies of the civil servants and the ministers.
2. Higher degree of government control: The degree of government control is so high that
the government company is reduced to mere adjuncts to the ministry and is, in majority of
the cases, not treated better than the subordinate organization or offices of the government.
3. Evades constitutional responsibility: A government company is creating by executive
action of the government without the specific approval of the parliament or Legislature.
4. Poor sense of attachment or commitment: The members of the Board of Management
of government companies and from the ministerial departments in their ex-officio capacity.
The lack the sense of attachment and do not reflect any degree of commitment to lead the
company in a competitive environment.
5. Divided loyalties: The employees are mostly drawn from the regular government
departments for a defined period. After this period, they go back to their government
departments and hence their divided loyalty dilutes their interest towards their job in the
government company.
6. Flexibility on paper: The powers of the directors are to be approved by the concerned
Ministry, particularly the power relating to borrowing, increase in the capital, appointment
of top officials, entering into contracts for large orders and restrictions on capital
expenditure. The government companies are rarely allowed to exercise their flexibility and
independence.

SOURCES OF CAPITAL FOR A COMPANY

Based upon the time, the financial resources may be classified into (1) sources of long term (2)
sources of short – term finance. Some of these sources also serve the purpose of medium – term
finance.

I. The source of long – term finance are:

1. Issue of shares
2. Issue debentures
3. Loan from financial institutions
4. Retained profits and
5. Public deposits

II. Sources of Short-term Finance are:

 1. Trade credit
2. Bank loans and advances and
3. Short-term loans from finance companies.

Sources of Long Term Finance

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. Hence shares are also described as ownership securities.
2. 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.

Holders of preference shares enjoy certain privileges, which cannot be claimed by the
equity shareholders. That is why; they cannot directly take part in matters, which may be
discussed at the general meeting of shareholders, or in the election of directors.

Depending upon the terms of conditions of issue, different types of preference shares may
be issued by a company to raises funds. Preference shares may be issued as:

1. Cumulative or Non-cumulative
2. Participating or Non-participating
3. Redeemable or Non-redeemable, or as
4. Convertible or non-convertible preference shares.

In the case of cumulative preference shares, the dividend unpaid if any in previous years
gets accumulated until that is paid. No cumulative preference shares have any such
provision.
 Participatory shareholders are entitled to a further share in the surplus profits after a
reasonable divided has been paid to equity shareholders. Non-participating preference
shares do not enjoy such right. Redeemable preference shares are those, which are repaid
after a specified period, where as the irredeemable preference shares are not repaid.
However, the company can also redeem these shares after a specified period by giving
notice as per the terms of issue. Convertible preference shows are those, which are entitled
to be converted into equity shares after a specified period.

Merits:

Many companies due to the following reasons prefer issue of preference shares as a source
of finance.

1. It helps to enlarge the sources of funds.

2. Some financial institutions and individuals prefer to invest in preference shares due to
the assurance of a fixed return.
3. Dividend is payable only when there are profits.
4. If does not affect the equity shareholders’ control over management

Limitations:

The limitations of preference shares relates to some of its main features:

1. Dividend paid cannot be charged to the company’s income as an expense; hence there is
no tax saving as in the case of interest on loans.
2. Even through payment of dividend is not legally compulsory, if it is not paid or arrears
accumulate there is an adverse effect on the company’s credit.
3. Issue of preference share does not attract many investors, as the return is generally limited
and not exceed the rates of interest on loan. On the other than, there is a risk of no dividend
being paid in the event of falling income.

1. Issue of Equity Shares: The most important source of raising long-term 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 through
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.

From the above it can be said that equity shares have three distinct characteristics:

1. The holders of equity shares are the primary risk bearers. It is the issue of equity shares
that mainly provides ‘risk capital’, unlike borrowed capital. Even compared with
preference capital, equity shareholders are to bear ultimate risk.
2. Equity shares enable much higher return sot be earned by shareholders during prosperity
because after meeting the preference dividend and interest on borrowed capital at a fixed
rate, the entire surplus of profit goes to equity shareholders only.
3. Holders of equity shares have the right of control over the company. Directors are elected
on the vote of equity shareholders.

Merits:

From the company’ point of view; there are several merits of issuing equity shares to raise
long-term finance.

1. It is a source of permanent capital without any commitment of a fixed return to the

shareholders. The return on capital depends ultimately on the profitability of business.
2. It facilities a higher rate of return to be earned with the help borrowed funds. This is
possible due to two reasons. Loans carry a relatively lower rate of interest than the average
rate of return on total capital. Secondly, there is tax saving as interest paid can be charged
to income as a expense before tax calculation.
3. Assets are not required to give as security for raising equity capital. Thus additional funds
can be raised as loan against the security of assets.

Limitations:

Although there are several advantages of issuing equity shares to raise long-term capital.

1. The risks of fluctuating returns due to changes in the level of earnings of the company do
not attract many people to subscribe to equity capital.
2. The value of shares in the market also fluctuate with changes in business conditions, this
is another risk, which many investors want to avoid.
2. Issue of Debentures:

When a company decides to raise loans from the public, the amount of loan is dividend 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 are therefore called ‘creditor
ship’ securities. The value of each debentures is generally fixed in multiplies of 10 like Rs. 100 or
Rs. 500, or Rs. 1000.

Debentures carry a fixed rate of interest, and generally are repayable after a certain period, which
is specified at the time of issue. Depending upon the terms and conditions of issue there are
different types of debentures. There are:

a. Secured or unsecured Debentures and

b. Convertible of Non convertible Debentures.

It debentures are issued on the security of all or some specific assets of the company, they are
known as secured debentures. The assets are mortgaged in favor of the debenture holders.
Debentures, which are not secured by a charge or mortgage of any assets, are called unsecured
debentures. The holders of these debentures are treated as ordinary creditors.

Sometimes under the terms of issue debenture holders are given an option to covert their
debentures into equity shares after a specified period. Or the terms of issue may lay down that the
whole or part of the debentures will be automatically converted into equity shares of a specified
price after a certain period. Such debentures are known as convertible debentures. If there is no
mention of conversion at the time of issue, the debentures are regarded as non-convertible
debentures.

Merits:

Debentures issue is a widely used method of raising long-term finance by companies, due to the
following reasons.
 1. Interest payable on Debentures can be fixed at low rates than rate of return on equity shares.
Thus Debentures issue is a cheaper source of finance.
2. Interest paid can be deducted from income tax purpose; there by the amount of tax payable
is reduced.
3. Funds raised for the issue of debentures may be used in business to earn a much higher rate
of return then the rate of interest. As a result the equity shareholders earn more.
4. Another advantage of debenture issue is that funds are available from investors who are
not entitled to have any control over the management of the company.
5. Companies often find it convenient to raise debenture capital from financial institutions,
which prefer to invest in debentures rather than in shares. This is due to the assurance of a
fixed return and repayment after a specified period.

Limitations:

Debenture issue as a source of finance has certain limitations too.

1. It involves a fixed commitment to pay interest regularly even when the company has low
earnings or incurring losses.
2. Debentures issue may not be possible beyond a certain limit due to the inadequacy of assets
to be offered as security.

Methods of Issuing Securities: The firm after deciding the amount to be raised and the type of
securities to be issued, must adopt suitable methods to offer the securities to potential investors.
There are for common methods followed by companies for the purpose.

When securities are offered to the general public a document known as Prospectus, or a notice,
circular or advertisement is issued inviting the public to subscribe to the securities offered thereby
all particulars about the company and the securities offered are made to the public. Brokers are
appointed and one or more banks are authorized to collect subscription.

Some times the entire issue is subscribed by an organization known as Issue House, which in turn
sells the securities to the public at a suitable time.

The company may negotiate with large investors of financial institutions who agree to take over
the securities. This is known as ‘Private Placement’ of securities.

When an exiting company decides to raise funds by issue of equity shares, it is required under law
to offer the new shares to the existing shareholders. This is described as right issue of equity shares.
But if the existing shareholders decline, the new shares can be offered to the public.
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.
Besides they also assist companies to raise funds from other sources.

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.

Often, the financial institutions subscribe to the industrial debenture issue of companies some of
the institutions (ICICI) and (IDBI) also subscribe to the share issued by companies.

All such institutions also underwrite the public issue of shares and debentures by companies.
Underwriting is an agreement to take over the securities to the extent there is no public response
to the issue. They may guarantee loans, which may be raised by companies from other sources.

Loans in foreign currency may also be granted for the import of machinery and equipment
wherever necessary from these institutions, which stand guarantee for re-payments. Apart from
the national level institutions mentioned above, there are a number of similar institutions set up in
different states of India. The state-level financial institutions are known as State Financial
Corporation, State Industrial Development Corporations, State Industrial Investment Corporation
and the like. The objectives of these institutions are similar to those of the national-level
institutions. But they are mainly concerned with the development of medium and small-scale
industrial units. Thus, smaller companies depend on state level institutions as a source of medium
and long-term finance for the expansion and modernization of their enterprise.

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. It is shown as reserve in the accounts. The surplus profits retained and reinvested
may be regarded as an internal source of finance. Hence, this method of financing is known as
self-financing. It is also called sloughing back of profits.
Since profits belong to the shareholders, the amount of retained profit is treated as ownership fund.
It serves the purpose of medium and long-term finance. The total amount of ownership capital of
a company can be determined by adding the share capital and accumulated reserves.

Merits:

This source of finance is considered to be better than other sources for the following reasons.

1. As an internal source, it is more dependable than external sources. It is not necessary to

consider investor’s preference.
2. Use of retained profit does not involve any cost to be incurred for raising the funds.
Expenses on prospectus, advertising, etc, can be avoided.
3. There is no fixed commitment to pay dividend on the profits reinvested. It is a part of risk
capital like equity share capital.
4. Control over the management of the company remains unaffected, as there is no addition
to the number of shareholder.
5. It does not require the security of assets, which can be used for raising additional funds in
the form of loan.

Limitations:

However, there are certain limitations on the part of retained profit.

1. Only well established companies can be avail of this sources of finance. Even for such
companies retained profits cannot be used to an unlimited extent.
2. Accumulation of reserves often attract competition in the market,
3. With the increased earnings, shareholders expect a high rate of dividend to be paid.
4. Growth of companies through internal financing may attract government restrictions as it
leads to concentration of economic power.

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. This requires
advertisement to be issued inviting the general public to deposit their savings with the company.
The period of deposit may extend up to three yeas. The rate of interest offered is generally higher
than the interest on bank deposits. Against the deposit, the company mentioning the amount, rate
of interest, time of repayment and such other information issues a receipt.

Since the public deposits are unsecured loans, profitable companies enjoying public confidence
only can be able to attract public deposits. Even for such companies there are rules prescribed by
government limited its use.

Sources of Short Term Finance

The major sources of short-term finance are discussed below:

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. With the increase in production and corresponding purchases, the
amount due to the creditors also increases. Thereby part of the funds required for increased
production is financed by the creditors. The more important advantages of trade credit as a
source of short-term finance are the following:

It is readily available according to the prevailing customs. There are no special efforts to be

made to avail of it. Trade credit is a flexible source of finance. It can be easily adjusted to the

changing needs for purchases.

Where there is an open account for any creditor failure to pay the amounts on time due to
temporary difficulties does not involve any serious consequence Creditors often adjust the
time of payment in view of continued dealings. It is an economical source of finance.

However, the liability on account of trade credit cannot be neglected. Payment has to be
made regularly. If the company is required to accept a bill of exchange or to issue a
promissory note against the credit, payment must be made on the maturity of the bill or
note. It is a legal commitment and must be honored; otherwise legal action will follow to
recover the dues.

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 or against the personal security of directors. The total
amount drawn is not to exceed the limit fixed. Interest is charged on the amount actually
drawn and outstanding. During the period of credit, the company can draw, repay and again
draw amounts with in the maximum limit. 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.

The advantage of bank credit as a source of short-term finance is that the amount can be
adjusted according to the changing needs of finance. The rate of interest on bank credit is
fairly high. But the burden is no excessive because it is used for short periods and is
compensated by profitable use of the funds.

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.

3. 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

Selling Assets
Some entrepreneurs choose to sell some of their personal or business assets in order to finance the

opening or continued existence of their enterprises. Generally, business owners who have already

established the viability of their firms and are looking to expand their operations do not have to

take this sometimes dramatic course of action, since their records will often allow them to secure

capital from other sources, either private or public. Whether selling personal or business assets,

the small business owner should take a rational approach. Some entrepreneurs, desperate to secure

money, end up selling business assets that are important to basic business operations. In such
instances, the entrepreneur may end up accelerating rather than halting the demise of his or her

business. Only nonessential equipment and inventory should be sold. Similarly, care should be

taken in the selling of personal assets. Items like boats, antiques, etc. can fetch a decent price. But

before embarking on this course of action, the entrepreneur should objectively study whether the

resulting income will be sufficient, or whether the enterprise's financial straits are an indication of

fundamental flaws.

Borrowing Against the Cash Value of Your Life Insurance

Entrepreneurs who have a whole life policy have the option of borrowing against the policy (this

is not an option for holders of term insurance). This can be an effective means of securing capital

provided that the owner has held the policy for several years, thus giving it some cash value.

Insurers may let policyholders borrow as much as 90 percent of the value of the policy. As long as

the policyholder continues to meet his or her premium payment obligations, the policy will remain

intact. Interest rates on such loans are generally not outrageous, but if the policyholder dies during

the period in which he or she has a loan on the policy, benefits are usually dramatically reduced.

Second Mortgage
Some entrepreneurs secure financing by taking out a second mortgage on their home. This risky

alternative does provide the homeowner with a couple of advantages: interest on the mortgage is

tax deductible and is usually lower than what he or she would pay with a credit card or an unsecured

loan. But if the business ultimately fails, this method of financing could result in the loss of your

home. Using a second mortgage as a vehicle for financing a company is very risky and is best for

people who want to borrow all the money they need at one time and secure fixed, equal payments.

Other Possible Sources of Financing

Some entrepreneurs obtain financing for growth and expansion through franchising or licensing.

Basically, they get money by selling the rights to a unique business or product to other companies.

Other small business owners are able to form alliances or partnerships with other firms that have

a vested interest in their success, such as customers, suppliers, or distributors. These business

owners may obtain funds from their partners through cooperative work agreements, barter

arrangements, or trade credit.

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”. It was only during the eighteenth century that Adam Smith, the Father of
Economics, defined economics as the study of nature and uses of national wealth’.

Dr. Alfred Marshall, one of the greatest economists of the nineteenth century, writes “Economics
is a study of man’s actions in the ordinary business of life: it enquires how he gets his income and
how he uses it”. Thus, it is one side, a study of wealth; and on the other, and more important side;
it is the study of man. As Marshall observed, the chief aim of economics is to promote ‘human
welfare’, but not wealth. The definition given by AC Pigou endorses the opinion of Marshall.
Pigou defines Economics as “the study of economic welfare that can be brought directly and
indirectly, into relationship with the measuring rod of money”.

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’.

MICROECONOMICS

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.

MACROECONOMICS

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,
organization 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. It deals with the price level in general, instead of studying the prices of individual
commodities. It is concerned with the level of employment in the economy. It discusses aggregate
consumption, aggregate investment, price level, and payment, theories of employment, and so on.

Though macroeconomics provides the necessary framework in term of government policies etc.,
for the firm to act upon dealing with analysis of business conditions, it has less direct relevance in
the study of theory of firm.

IMPORTANCE OF NATIONAL INCOME

1. For the Economy:

National income data are of great importance for the economy of a country. These days the national
income data are regarded as accounts of the economy, which are known as social accounts.

These refer to net national income and net national expenditure, which ultimately equal each other
Social accounts tell us how the aggregates of a nation’s income, output and product result from
the income of different individuals, products of industries and transactions of international trade.

2. National Policies:
National income data form the basis of national policies such as employment policy because these
figures enable us to know the direction in which the industrial output, investment and savings’ etc.
change, and proper measures can be adopted to bring the economy to the right path.

3. Economic Planning:
In the present age of planning, the national data are of great importance. For economic planning,
it is essential that the data pertaining to a country’s gross income, output, saving and consumption
from different sources should be available.

Without these, planning is not possible. Similarly, the economists propound short-run as well long-
run economic models or long-run investment models in which the national income data are very
widely used.

4. Economic Models:
Economists build short-run and long-run economic models in which the national income data are
widely used.

5. For Research:
The national income data are also made use of by the research scholars of economics, they make
use of the various data of the country’s input, output, income, saving, consumption, investment
employment, etc., which are obtained from social accounts.
6. Per-Capita Income:
National income data are significant for a country’s per capita income which reflects the economic
welfare of the country. The higher the per capita income, the higher the economic welfare and vice
versa.

7. Distribution of Income:
National income statistics enable us to know about the distribution of income in the country. From
the data pertaining to wages, rent, interest and profits we learn of the disparities in the incomes of
different sections of the society.

INFLATION MEANING

Inflation is a quantitative measure of the rate at which the average price level of a basket of
selected goods and services in an economy increases over some period of time. ... Often expressed
as a percentage, inflation thus indicates a decrease in the purchasing power of a nation's currency.

MONEY SUPPLY IN INFLATION

The link between Money Supply and Inflation. ... Increasing the money supply faster than the
growth in real output will cause inflation. The reason is that there is more money chasing the same
number of goods. Therefore, the increase in monetary demand causes firms to put up prices.

What Is a Business Cycle?

The business cycle describes the rise and fall in output of goods and services in an economy. A
measure often used to represent this is the rise and fall in the Gross Domestic Product (GDP), often
the real (adjusted for price level change) per person (capita) measure. The term “cycles” might
also refer to the rise and fall in debt levels or financial markets.

The business cycle, however, should not be confused with market cycles, which are measured
using broad stock market indices. The business cycle is also different from the debt cycle, which
refers to the rise and fall in household and government debt.

FEATURES OF BUSINESS CYCLE

1] Expansion or Boom
This phase is characterized by an increase in output and employment. There is also an increase in the
demand in the market, capital expenditure, sales and subsequently an increase in income and profits.
This cycle will continue till there is hundred percent utilization of available resources.

2] Peak
As the name suggests this is the highest point of all the phases of business cycles. At this point the
output is maximum, and the involuntary unemployment is basically zero. As the economy goes
through expansion, inputs become rarer. Their demands increase and so does their prices.

This leads to an increase in the price of consumer goods as well. Income does not see a proportional
increase. So consumers have to review their expenses and cut back on their consumption.
3] Contraction
At the peak of an economy, demand is stagnant. Then very soon, demand starts falling in certain
sections of the economy. This is the start of the contraction phase of the trade cycle, which is the
opposite of the expansion phase.

Even the investment levels and employment levels decrease along with the demand. Now there is a
mismatch between demand and supply in the market. Once producers become aware of the shift in
the economy they start disinvesting, scaling back operations, canceling orders for goods and labor
etc.

4] Depression
Depression is the lowest of the phases of business cycles. It is a severe form of recession. In this
phase, we will see a negative growth rate in the economy. There is a continuous decrease in demand.

The companies that cannot dispose of their stocks keep reducing the prices. Some companies will be
forced to shut down due to mounting losses. This will adversely affect employment rates.

The capital and money market also suffer greatly. The interest rate is at its lowest. After this phase,
the economy will recover by additional investments, and the business cycle will continue.

Nature of Business Economics :

Traditional economic theory has developed along two lines; viz., normative and positive.
Normative focuses on prescriptive statements, and help establish rules aimed at attaining the
specified goals of business. Positive, on the other hand, focuses on description it aims at describing
the manner in which the economic system operates without staffing how they should operate. The
emphasis in business economics is on normative theory. Business economic seeks to establish
rules which help business firms attain their goals, which indeed is also the essence of the word
normative. However, if the firms are to establish valid decision rules, they must thoroughly
understand their environment. This requires the study of positive or descriptive theory. Thus,
Business economics combines the essentials of the normative and positive economic theory, the
emphasis being more on the former than the latter.

Scope of Business Economics : As regards the scope of business economics, no uniformity of

views exists among various authors. However, the following aspects are said to generally fall under
business economics.

1. Demand Analysis and Forecasting

2. Cost and production Analysis.

3. Pricing Decisions, policies and practices.

4. Profit Management.

5. Capital Management.
These various aspects are also considered to be comprising the subject matter of business
economic.

1. Demand Analysis and Forecasting : A business firm is an economic organisation which

transform productive resources into goods to be sold in the market. A major part of business
decision making depends on accurate estimates of demand. A demand forecast can serve as a guide
to management for maintaining and strengthening market position and enlarging profits. Demands
analysis helps identify the various factors influencing the product demand and thus provides
guidelines for manipulating demand. Demand analysis and forecasting provided the essential basis
for business planning and occupies a strategic place in managerial economic. The main topics
covered are: Demand Determinants, Demand Distinctions and Demand Forecastmg.

2. Cost and Production Analysis : A study of economic costs, combined with the data drawn
from the firm’s accounting records, can yield significant cost estimates which are useful for
management decisions. An element of cost uncertainty exists because all the factors determining
costs are not known and controllable. Discovering economic costs and the ability to measure them
are the necessary steps for more effective profit planning, cost control and sound pricing practices.
Production analysis is narrower, in scope than cost analysis. Production analysis frequently
proceeds in physical terms while cost analysis proceeds in monetary terms. The main topics
covered under cost and production analysis are: Cost concepts and classification, Cost-output
Relationships, Economics and Diseconomics of scale, Production function and Cost control.

3. Pricing Decisions, Policies and Practices : Pricing is an important area of business economic.
In fact, price is the genesis of a firms revenue and as such its success largely depends on how
correctly the pricing decisions are taken. The important aspects dealt with under pricing include.
Price Determination in Various Market Forms, Pricing Method, Differential Pricing, Product-line
Pricing and Price Forecasting.

4. Profit Management : Business firms are generally organised for purpose of making profits
and in the long run profits earned are taken as an important measure of the firms success. If
knowledge about the future were perfect, profit analysis would have been a very easy task.
However, in a world of uncertainty, expectations are not always realised so that profit planning
and measurement constitute a difficult area of business economic. The important aspects covered
under this area are : Nature and Measurement of profit, Profit policies and Technique of Profit
Planning like Break-Even Analysis.

5. Capital Management : Among the various types business problems, the most complex and
troublesome for the business manager are those relating to a firm’s capital investments. Relatively
large sums are involved and the problems are so complex that their solution requires considerable
time and labour. Often the decision involving capital management are taken by the top
management. Briefly Capital management implies planning and control of capital expenditure.
The main topics dealt with are: Cost of capital Rate of Return and Selection of Projects.

ROLE OF BUSINESS ECONOMIST

The business economist is expected to play a positive & Constructive role in modern business set
up. A business is essentially involved in the process of decision making as well as forward
planning. Business decision is an integral part of management. Management and decision making
 are to be considered as inseparable. Business decision is the selection of a particular course of
action, based on some criteria, from two or more possible alternatives.

• 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.