KESHAV MEMORIAL

COLLEGE OF ENGINEERING

Business Economics
&
Financial Analysis

Study Material:
Complied & Prepared by
SANDEEP S KALE
(Asst. Professor – Dept. of MBA)
R22 B.Tech. CSE Syllabus JNTU Hyderabad
BUSINESS ECONOMICS AND FINANCIAL ANALYSIS
B.Tech. III Year I Sem. L T P C3 0 0 3

Unit – I: Introduction to Business and Economics

Business: Structure of Business Firm, Theory of Firm, Types of Business Entities, Limited
Liability Companies, Sources of Capital for a Company, Non-Conventional Sources of Finance.
Economics: Significance of Economics, Micro and Macro Economic Concepts, Concepts and
Importance of National Income, Inflation, Money Supply and Inflation, Business Cycle, Features
and Phases of Business Cycle. Nature and Scope of Business Economics, Role of Business
Economist, Multidisciplinary nature of Business Economics.
**************************************************************************************

Business

What is Business?
Business is a regularly performed economic activity to satisfy the societal needs. It
involves the exchange, purchase, sale, or creation of goods and services with the goal of
selling them for earning profit and customer satisfaction.
A business can be described as an organization or enterprising entity that
engages in professional, commercial or industrial activities. There can be different types
of businesses depending on various factors. Some are for-profit, while some are non-
profit. Similarly, their ownership also makes them different from each other. For
instance, there are Sole Proprietorships, Partnerships, Corporations and more.
Businesses form the backbone of any economy.

Characteristics of Business - Following are the characteristics or features of

business:

(1) An Economic Activity: A business is an economic activity that includes the

purchase & sale of goods or rendering of services to earn money. It is not concerned
with the achievement of social and emotional objectives.
Example: Wholesaler sells goods to the retailers and retailers sell goods to the
customers.

(2) Manufacturing or Procurement of Services and Goods: Before offering

goods to the consumer for consumption, they should be either manufactured or
procured by the Business Concerns. Manufacturing Business enterprise converts the
raw material into finished goods.
Non-manufacturing Organisations procure the finished goods & services from the
producers to meet the needs of the customers in the market. Goods can be Consumer
goods like sugar, pen, ghee, etc. or Capital goods like machinery, furniture, services like
transportation, banking, etc.

(3) Exchange or Sale of Goods and Services for the Satisfaction of Human
Needs: Every business activity includes an exchange or transfer of goods and services
to earn value. Producing goods for the goal of personal consumption is not included in
business activity. Therefore, there should be the process of sale or exchange of goods or
services exits between the seller and the buyer.
Example: A person who bakes pastries and cakes at home and sells it to the pastry
shop is a business activity.

(4) Dealing with Goods and Services on a Regular basis: Every business,
rendering either services or goods, should deal on a daily basis. A one-time sale is not
considered a business activity.
Example: If a person sells, his old car through OLX even at a profit will not be
considered as a business activity. However, if he engages in regularly trading of cars
at his showroom will be considered as business activity.

(5) Profit Earning: No business can last for long, without making a profit. The
purpose of conducting the business is to earn profits and minimise the cost.
Example: A manufacturer tries to reduce the cost of production and the cost of raw
material to earn high profits.

(6) Uncertainty of Return (Risk): The possibility of earning profit or loss is very
uncertain and cannot be anticipated by the entrepreneur. Hence, no business can totally
do away with risks.

Objectives of Business: The objectives of Business are its driving force. These
factors keep the business running. The objectives of a business can be classified into two
main categories, which are:

1. Economic objectives

2. Social objectives

Economic Objectives of Business:

1] Profit Earning: Business is a set of activities undertaken with the prospect of sale
for the purpose of earning a profit. Profit is the extra income over the expenses. The
main objective of any business is to earn a profit. Just as a plant cannot survive
without water, similarly a business cannot sustain without profit.
Profit is necessary for growing and expanding business activities. Profit guarantee a
consistent stream of capital for the modernization and augmentation of business activities
in the future. Profits likewise show the scale of stability, efficiency, and advancement of
the business organization.

2] Market Share / Creation of Customers

In the words of Drucker, “There is only one valid definition of business purpose; to create a
customer. “ Profits are not generated out of thin air. They are the result of the hard work of
the business man to satisfy the needs of the customers.

In the long run, the survival of the business completely depends upon the market share
captured by the business. The creation of good (product) and satisfaction of the needs of
the customer is a crucial purpose of the business. Therefore, to generate profit and
demand, the business must supply premium quality and give value for money products.

3] Innovation & Utilization of Resources

Innovation normally means to change processes or creating more effective processes,
products and ideas. Nowadays, business is ever-changing and dynamic. To keep up with
the growing competition a business man has to introduce efficient design, latest trends,
upgraded machinery, new techniques, etc.

Large corporations invest a huge amount of capital in their Research & Development
department to boost innovation. Whereas, on the parallel lines, utilization of resources is a
proper use of workforce, raw material, capital and technology used in the business. A
business has limited resources and that is why its main objective is to put
these resources to correct divisions.

4] Increasing Productivity
Productivity is a scale to measure the efficiency of the business activity. It is usually the last
objective but just as important because productivity is measured by the output given by the
activities. It is the result of any business activity. Each business must aim at achieving
productivity that is more prominent. It will in turn guarantee its survival and development.
This goal can be accomplished by decreasing wastages and making proficient utilization of
Machines and Supplies, HR, Cash and so forth.

Social Objectives of Business

According to Dayton Hudson, “The motto of business is serving society, not just making
money.” Business is one of the pillars on which the society stands. Therefore, it is a part of
the society. In fact, it cannot thrive without the resources from the society. The business
earns its income from the sale of products and services to the society. It is mandatory on
the part of the business to take care of the social factors. The necessary social objectives of
a business are as follows:

1] Providing Goods & Services at reasonable Prices

Business exists in the first place to satisfy the needs of the society. It is the first and major
social objective of the business. Products and services ought to be of better quality and
these ought to be provided at sensible costs. It is additionally the social commitment of
business to keep away from misbehaviours like boarding, Black promoting and
manipulative advertising.

2] Employment Generation
One of the major problem today’s generation facing is unemployment. Business generates
employment. Therefore, it is the social objective of a business to give chances to beneficial
employment to individuals of the society. In a nation like India, unemployment has turned
into a critical issue.

3] Fair Remuneration to Employees

The business does not run on its own but the people are responsible for the success and
failure of the business. The people on the inside of the business are more valuable i.e.
employees. They are an asset of the business and make a ground-breaking contribution to
the business. They must be given reasonable pay for their work. Notwithstanding
wages and salary, a significant piece of profits ought to be distributed among them in
acknowledgment of their commitments. Such sharing of benefits will expand the
inspiration and proficiency of employees.

4] Community Service
Business must give back something to the society. As a result, the Library, dispensary,
educational foundations and so on that a business can make and help in the advancement
of society are created. Business enterprises can build schools, colleges, libraries, hospitals,
sports bodies and research institutions.

Structure of a Business Firm

Business structure refers to the legal structure of an organization that is recognized in a
given jurisdiction. It defines who owns the concern and how the business distributes its
profits.
An organization’s legal structure is a key determinant of the activities that it can
undertake, such as raising capital, responsibility for obligations of the business, as well
as the amount of taxes that the organization owes to tax agencies.
In simple words, a ‘business firm’ is an organization that uses resources to produce
goods and services that are sold to consumers, other firms, or the government. The
following are most common types of Businesses that form a part of the Business
Structure:
1. Sole Proprietorship: A sole proprietorship is the simplest business structure in
India. It allows an individual to have full control over the operations, including all
responsibilities for debts and liabilities. This type of business structure in India has
minimal legal formalities and there is no legal distinction between the owner and the
business entity.
Features:

Liability under sole proprietorship is unlimited with regard to all

Liability
debts.

It has no separate legal entity as it is owned and managed by a

Legal Entity
single person.

Risk As there is no separation between personal and business assets the

Responsibility proprietor bears all the risks associated with the business.

Under this type of business structure, the owner has the freedom to
Flexibility make quick decisions and adapt to market changes, without the
need for extensive consultations or approvals.

Business registration and an appropriate licence are beneficial but

Regulatory
not mandatory under MSME or Shops and Establishment Act
Compliance
depending upon the nature of the business.

2. One Person Company: A One Person Company (OPC), as defined under section
2(62) of the Companies Act 2013, is a hybrid between a sole proprietorship and a private
limited company, offering single ownership with the benefit of limited liability. OPCs
are ideal for entrepreneurs wanting the credibility of a registered company and limited
liability protection while maintaining sole ownership.
Features

OPC’s provide peace of mind to the entrepreneurs by limiting

Liability
their liability to the contributions to the business.

Legal Entity It has a separate legal entity.

Risk The risk is less under OPC in comparison to sole

responsibility proprietorship

Due to less burden of compliance of One Person Company, it

Flexibility
is easy to manage by single hand.
 It is required to conduct a statutory audit, submit annual and
Regulatory
IT returns and comply with the various requirements of the
Compliance
MCA.

According to section 18 of the Companies Act, 2013, OPCs

Conversion of
can be easily converted into private limited company as the
OPC
business grows and expands.

An OPC is owned and controlled by a single individual thus

Single
allowing quick decision-making and has full freedom over the
Ownership
company’s operations and management.

3. Partnership: A partnership involves two or more individuals, known as partners,

jointly establishing a business. They share profits, losses and responsibilities. A
partnership deed is drafted that details the partnership’s terms, including profit
distribution, decision-making, dispute resolution and other operational aspects.

Features

Partners have unlimited liability, meaning their personal assets

Liability
can be used to settle business debts and obligations.

Unlike corporations, a partnership is not a separate legal entity

Legal Entity from its owners. The business and the partners are legally the
same.

Risk In a partnership, partners share the risks and responsibilities

responsibility of the business.

Partnerships offer flexibility in terms of organisation and

management. Partnerships can be formed with minimal
Flexibility
formalities and can adapt quickly to changing business needs
or market conditions.

Regulatory
A partnership firm is regulated by the Partnership Act, 1932.
Compliance
 Profit and Loss Partners share the profits and losses of the business according
Sharing to pre-agreed ratios, typically outlined in the partnership deed.

4. Limited Liability Partnership: In India, a Limited Liability Partnership (LLP)

combines the benefits of limited liability and partnership, shielding the partner’s
personal assets from business debts and liabilities. This flexible structure simplifies
compliance, making it easier for startups to navigate legal requirements and focus on
business growth while minimizing financial risks.

Features

One of the key features of an LLP is that it provides limited

Liability
liability protection to its partners.

An LLP is considered a separate legal entity distinct from its

Legal Entity
partners.

Risk LLP partners collectively manage and mitigate risks, by sharing

responsibility profits and losses based on ownership percentages.

LLPs offer flexibility in management, allowing partners to

Flexibility
structure the LLP as per their mutual agreement.

As LLP is governed under the LLP Act 2008 and includes filing of
Regulatory
annual returns, maintaining proper accounting records and
Compliance
adherence to tax regulations is necessary.

5. Private Limited Company: A Private Limited Company (PLC) is defined under

section 2(68) of the Companies Act, 2013. It is one of the most popular forms of
business entities in India, especially among small to medium-sized enterprises (SMEs)
and startups. This entity is recognized as a separate legal entity, offering limited liability
protection to its shareholders.

Features

The liability under the Pvt.LC of its members (shareholders) is

Liability
limited.
 A Pvt.LC has a separate legal identity distinct from its
Legal Entity
shareholders.

Shares of Pvt.LC can be transferred from one shareholder to

Flexibility another, according to the provisions of the company’s Articles of
Association and the Companies Act, 2013.

The Pvt.LC needs to meet the demands of the Ministry of

Regulatory Corporate Affairs (MCA) including the filing of statutory audits,
Compliance annual filings with the Registrar of Companies (RoC) and annual
submission of IT returns.

Pvt.LC ensures the continuity of business operations even if any

Perpetual
changes arise in ownership such as; the death or resignation of
Succession
any member.

Paid-up
A Pvt.LC is not required to have a minimum paid-up capital.
Capital

6. Public Limited Company: A Public Limited Company (Public Company) in India

is a corporate entity that offers its shares to the public. It offers significant access to
capital through the stock market but has stricter compliance and reporting obligations.
This business structure requires a minimum of seven (7) members with a minimum
paid-up capital for its formation.

Features

Similar to Private Limited Companies, shareholders of a Public

Liability
Company enjoy limited liability.

Legal Entity Public Company is a separate legal entity.

Public Companies offer flexibility in management, similar to

Flexibility
Private Limited Companies.

Regulatory
Public Companies are governed under the Companies Act 2013
Compliance
 Perpetual The continuity of a Public Company is not affected by the death
Succession of any member or shareholder.

Public Companies can raise capital from the general public by

Access to Capital initiating issuing of shares through an initial public offering
(IPO).

7. Joint Venture: A Joint Venture (JV) is a business structure formed through a

partnership between two or more entities, often companies, to undertake a specific
project, venture or business activity. A JV can be formed by creating a separate legal
entity or by entering into a partnership or consortium agreement. In case of a separate
legal entity, it will have the same characteristics as mentioned above of PLC or public
limited company, whereas in case of partnership or consortium agreement, it is
considered as an unincorporated joint venture. Joint ventures are established to
combine the strengths, resources and expertise of the entities to achieve common
business goals and objectives. The entities involved are known as Joint Venture Partners
who contribute capital, technology, management skills or other resources to the joint
venture.

Features

Liability depends on the structure of the JV and the agreement

Liability
between the parties involved.

A JV is considered a legal entity if it is formed as a separate

Legal Entity company (e.g., private limited or public limited), but not if it
operates as a partnership or a consortium agreement.

In case of partnership or consortium agreement, risk is

Risk typically shared among the partners according to their
responsibility agreement, which outlines each party’s contribution, liability
and profit sharing.

JVs offer flexibility in structuring the partnership arrangement

Flexibility
to suit the specific needs and objectives of the parties involved.

JVs include adherence to corporate laws, sector-specific

Regulatory
regulations, tax compliances, and registration with relevant
Compliance
authorities.
8. Section 8 Company or Non-Profit Company: Section 8 Company, also known
as a non-profit company, is a distinct form of business structure established under
Section 8 of the Companies Act, 2013. This business structure is particularly suitable for
organisations and individuals seeking to establish entities dedicated to charitable or
social causes while enjoying the advantages of corporate status and limited liability
protection.

Features

The limited liability protection is afforded to members of Section 8

Liability
Companies.

Section 8 company is a legal entity, recognized as such under the

Legal Entity
Companies Act, 2013.

Section 8 companies are exempted from income tax subject to

Taxation
certain compliances.

Risk is limited to the extent of the members’ contributions or

Risk guarantees provided in the memorandum of association. Members
responsibility are not personally liable for the company’s debts beyond their
agreed contributions.

A Section 8 company operates with decision-making flexibility

within its non-profit goals and legal compliance, guided by its
Flexibility charter documents and the applicable law. Decisions are mainly
made by the board, with member and stakeholder input enhancing
its mission-focused governance.

This includes adherence to the Companies Act, 2013, obtaining

necessary approvals from the Ministry of Corporate Affairs,
Regulatory
fulfilling annual filing requirements, maintaining proper accounts
Compliance
and complying with tax exemption conditions under the Income
Tax Act, 1961.

9. Joint Hindu Family Business: In India, other than the above-mentioned forms of
Business, one more business form known as the Joint Hindu Family Business is found.
It is a type of organisation that is found only in India. The operation of the law results in
the formation of a Joint Hindu Family Firm. It does not exist as a separate and distinct
legal entity from the members who make up the organisation.
Hindu Law governs the business of a Joint Hindu Family. It is only through birth or
marriage to a male person who is already a member of the Joint Hindu Family that one
can become a member of this type of business organisation.
A unique aspect of HUF is that it follows the Hindu Laws and not the partnership act.
Therefore, while the entire family contributes to the business’ operations, they are not
considered partners.

The eldest family member, known as “Karta”, runs HUFs with assistance of all the
family members. The final decisions are in Karta’s hand. All the other members are
known as coparceners. All family members for up to three generations are a coparcener
in the business.

Theory of the firm

The theory of the firm is a concept that states that a firm exists and make decisions to
maximize profits. This theory consists of a number of economic theories that explain
and predict the nature of the Concern, Firm, Company, or a Corporation, including its
existence, behaviour, structure, and relationship to the market.

According to the theory of the firm, every business organization is driven by the
motive of maximizing profits. This theory influences decisions for allocating resources,
methods of production, adjustments in prices, and manufacturing in huge quantum.
The following are the various theories of the firm.

1. Profit Maximization Theory: Profit maximization is one of the most common

and widely accepted objective 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.

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 is based on the theory that, once a company has reached an acceptable level
of profit for a good or service, the aim shifts away from increasing profit to focus on
increasing revenue from sales.

According to this theory, companies should achieve higher Sales by producing more,
keeping prices low, and investing more in advertising to increase product demand. The
idea is that this 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. Therefore, managers try to maximize the total revenue of the firms through
more Sales. The volume of sales represents the position of the firm in the market. The
managers’ performance is measured based on the attainment of maximum sales and
maintain minimum cost. Thus, the main aim of the firm is to maximize sales revenue
and at minimum costs for satisfying stakeholders.
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 i. Managerial difficulties, and ii. Financial
difficulties. For maximizing the growth of the firm, the managers should have skills,
expertise, efficiency and sincerity in them.
4. 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.
Advantages

 Easy to start and easy to close: Formation of a sole trader form of

organization is relatively easy even closing the business is easy.
 Personal contact with customers directly: Based on the tastes and
preferences of the customers the stocks can be maintained.
 Prompt decision-making: To improve the quality of services to the
customers, he can take any 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.
 High degree of flexibility: Based on the profitability, the trader can decide to
continue or change the business, if need be.
 Secrecy: Business secrets can well be maintained because there is only one
trader.
 Low rate of taxation: The rate of income tax for sole traders is relativelyvery
low.
 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.
 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.
 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/servicesif he enjoys
monopoly market.
Disadvantages

 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 theloans of his
business. From the legal point of view, he is not different fromhis business.
 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.
 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. Familymembers and
relatives cannot show as much interest as the trader takes.
 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.
 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.
 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.
 More competition: Because it is easy to set up a small business, there isa high
degree of competition among the small business men and a few who are good
in taking care of customer requirements along can service.
 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: Following are the few features of a partnership:
1. Agreement between Partners: It is an association of two or more individuals, and
a partnership arises from an agreement or a contract. The agreement (accord) becomes
the basis of the association between the partners. Such an agreement is in the written
form. An oral agreement is even headedly legitimate. In order to avoid controversies, it
is always good, if the partners have a copy of the written agreement.
2. Two or More Persons: In order to manifest a partnership, there should be at least
two (2) persons possessing a common goal. To put it in other words, the minimal
number of partners in an enterprise can be two (2). However, the maximum number of
partners in any business can be 20 and in the case of banking maximum of 10.
3. Sharing of Profit: Another significant component of the partnership is, the accord
between partners has to share gains and losses of a trading concern. However, the
definition held in the Partnership Act elucidates – partnership as an association
between people who have consented to share the gains of a business, the sharing of loss
is implicit. Hence, sharing of gains and losses is vital.
4. Business Motive: It is important for a firm to carry some kind of legal business and
should have a profit-gaining motive.
5. Mutual Business: The partners are the owners as well as the agent of their
firm. Any act performed by one partner can affect other partners and the firm. It can be
concluded that this point acts as a test of partnership for all the partners.
6. Unlimited Liability: Every partner in a partnership has unlimited liability.

Advantages of Partnership Firm

 Simple formation: In the event of a partnership firm, registration is not
required. It can be founded without the need for any legal formalities or
expenditures. As a result, they are easy and cost-effective to construct and run.
 More resources: When compared to a sole proprietorship, a partnership firm
has more resources for business operations because of the greater number of
members.
 Operational flexibility: Because of the restricted number of partners, there is
greater flexibility in the operations of the firm, as the partners can alter any aims
or change any operations at any moment with the approval of the other partners.
 Improved Management: The business of a partnership firm is extremely well
managed by all of the partners, who are actively involved in the day-to-day
operations of the company as a result of their ownership, profit, and control.
  Risk-sharing: In a partnership, each member is responsible for his or her own
risks because it is less complicated than operating as a sole proprietorship.
 Safeguarded Interests: In a partnership, the interests of each partner are
safeguarded against any fraud that may occur.
Disadvantages of Partnership Firm
A partnership firm does not exist for an endless period of time due to the fact
that it is inherently unstable. The death, insolvency, or insanity of one of the partners
may result in the dissolution of the partnership.
 Every partner in a partnership firm is subject to unlimited liability, as any
of the partners may be required to pay all of the debts incurred by the
partnership firm, including those incurred through the use of personal property.
A single poor judgement made by one partner might result in significant losses
and obligations for the other partners.
 A lack of harmony: According to the partnership agreement, each partner has
the same rights as the other. When one or both partners do not agree on
something, it is possible that mistrust and disharmony will develop between
them.
 Limited Capital: In addition, because of the restriction on the maximum
number of members, a restricted amount of capital can be raised.
 Transferring ownership: In a partnership firm is a complicated process.
Transferring ownership of a business requires the consent of all of the partners.
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 the capital but does not take part
in the management of affairs of the partnership business.
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 behaviour 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 extentof his contribution of
the capital of the firm.

Joint Stock Company

The simplest way to describe a joint stock company is that it is a business organisation that
is owned jointly by all its shareholders. All the shareholders own a certain amount of stock
in the company, which is represented by their shares.
Professor Haney defines it as “a voluntary association of persons for profit, having
the capital divided into some transferable shares, and the ownership of such shares is the
condition of membership of the company.”

Features of a Joint Stock Company

1] Artificial Legal Person: A company is a legal entity that has been created by the
statues of law. Like a natural person, it can do certain things, like own property in its
name, enter into a contract, borrow and lend money, sue or be sued, etc.

2] Separate Legal Entity: Unlike a proprietorship or partnership, the legal identity of

a company and its members are separate. As soon as the joint stock company is registered,
it gets its own distinct legal identity. Therefore, a member of the company is not liable for
the company. Similarly, the company will not depend on any of its members for any
business activities.

3] Incorporation: For a company to be recognized as a separate legal entity and for it to

come into existence, it has to be incorporated. Not registering a joint stock company is not
an option. Without incorporation/registration, a company simply does not exist.

4] Perpetual Succession: The joint stock company is born out of the law, so the only
way for the company to end is by the functioning of law. Therefore, the life of a company is
in no way related to the life of its members. Members or shareholders of a company keep
changing, but this does not affect the company’s life.

5] Limited Liability: This is one of the major points of difference between a company
and a sole proprietorship/partnership. The liability of the shareholders of a company is
limited. The personal assets of a member cannot be liquidated to repay the debts of a
company.
A shareholders liability is limited to the amount of unpaid share capital. If his shares are
fully paid then he has no liability. The amount of debt has no bearing on this. Only the
company’s assets can be sold off to repay its own debt. The members cannot be compelled
to pay up.

6] Common Seal: A company is an artificial person. Hence, its day-to-day functions are
conducted by the board of directors. So when a company enters any contract or signs
an agreement, the approval is indicated via a common seal. A common seal is engraved
seal with the company’s name on it.
Therefore, no document is legally binding on the company until and unless it has a
common seal along with the signatures of the directors.
7] Transferability of Shares: In a joint stock company, the ownership is divided into
transferable units known as shares. In case of a public company the shares can be
transferred freely, there are almost no restrictions. In a private company, there are some
restrictions, but the transfer cannot be prohibited.

Advantages of a Joint Stock Company

 One of the biggest drawing factors of a joint stock company is the limited liability of
its members. Their liability is only limited up to the unpaid amount on their shares.
Since their personal wealth is safe, they are encouraged to invest in joint stock
companies

 The shares of a company are transferable. In the case of a listed public company, the
shares can be sold in the market and be converted to cash. This ease of ownership is
an added benefit.

 Perpetual succession is another advantage of a joint stock company. The

death/retirement/insanity/etc. does affect the life of a company. The only
liquidation under the Companies Act will shut down a company.

 A company hires a board of directors to run all the activities. Very proficient,
talented people are elected to the board and this result in effective and efficient
management. Also, a company usually has large resources and this allows them to
hire the best talent and professionals.

Disadvantages of a Joint Stock Company

 One disadvantage of a joint stock company is the complex and lengthy

procedure for its formation. This can take up to several weeks and is a costly affair
as well.

 According to the Companies Act, 2013 all public companies have to provide
their financial records and other related documents to the registrar. These
documents are then public documents, which any member of the public can access.
This leads to a complete lack of secrecy for the company.

 Even during its day to day functioning a company has to follow a numerous number
of laws, regulations, notifications, etc. It not only takes up time but also reduces
the freedom of a company

 A company has many stakeholders like the shareholders, the promoters, the board of
directors, the employees, the debenture holders etc. All these stakeholders look out
for their benefit and it often leads to a conflict of interest.

Limited Liability Company

Limited Liability Company is a new category of company registered under the new
Indian Companies Act, 2013. A limited liability company is an U.S. form of privately
owned company that combines the limited liability of a company with the simplified
taxation of a sole proprietorship or partnership. Under the Limited Liability Company
Act, liability is limited among members or partners.
 A Limited Liability Company, also known as an LLC, is a type of business
structure that combines traits of both partnership and a company. An LLC is eligible
for the pass-through taxation feature of a partnership or sole
proprietorship, while at the same time limiting the liability of the owners, similar to a
company. As the LLC is 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
LimitedLiability.
Like a Private Company, an LLC cannot issue shares (stock) to public. Since no
stock is issued, the entity is taxed as a pass-through entity. Each member of the
LLC reports his share of the entity's profits on his personal income statement in the
form of income, but the corporate entity itself incurs no taxes.

Features:

 Limited liability: As the name implies, members‘ liabilities for the debtsand
obligations of the LLC are limited to their own investment.
 Pass-through taxation: For taxation purposes, income from your business can be
treated as your own personal income, and is therefore notsubject to certain corporate
taxes for which companies are liable.
 Separate Legal Entity: A LLC is a legal entity and a juristic person established
under the Act. Therefore, a LLC has wide legal capacity and can own property and
incur debts.
 Uninterrupted Existence: A LLC has 'perpetual succession', that is continued or
uninterrupted existence until it is legally dissolved. A LLC being a separate legal
person, is unaffected by the death or other departure of any Partner. Hence, a LLC
continues to be in existence irrespective of the changes in ownership.
 No Audit required: An LLC does not require audit if it has less than Rs. 40 lakhs
of turnover and less than Rs.25 lakhs of capital contribution. Therefore,
LLCs are ideal for start-ups and small businesses that are just starting their
operations and want to have minimal regulatory compliance related formalities.
Advantages:
1. Limited liability: As the name implies, member’s liabilities for the debtsand
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 notsubject to certain corporate
taxes for which companies are liable.
3. 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
initialinvestments.
4. Freedom in management: Unlike standard companies, LLCs are not required to
have a board of directors, annual meetings, or strict books 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 toadd a new member to an LLC. If
you have a fast growth internet companythat 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. Asa result,
not a lot of cases have been decided surrounding LLCs. Case lawis important because of
predictability. If you know a court has ruled a certain way, you can act accordingly to
protect yourself.

SOURCES OF CAPITAL FOR A COMPANY

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 Shares 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, if 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 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 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 value. 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 n 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 startinga 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 maydraw 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 financeavailable from the
commercial banks.
5) Commercial paper is an unsecured form of promissory note that pays a fixed rate
of interest. Large banks or corporations to cover short-term receivable and meet short-
term financial obligations, such as funding for a new project, typically issue it. A money
market instrument generally comes with a maturity between 1 to 270 days.

NON-CONVENTIONAL SOURCES OF FINANCE

1) Venture capital: Venture capital is financing that investors provide to start-up
companies and small businesses that are believed to have long-term growth potential.
Venture capital generally comes from venture capital firms, which comprise of
professionally well-off investors, investment banks and 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 the investors who put up the funds, the potential for
above-average returns is an attractive payoff. For new companies or ventures that have
a limited operating history (under two years), venture capital fundingis increasingly
becoming a popular – even essential – source for raising capital, especially if they lack
access to capital markets, bank loans or other debt instruments. The main downside is
that the investors usually get equity in 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 independent limited partnerships that are established by
venture capital firms. Sometimes these partnerships consist of a pool of several similar
enterprises. One important difference between venture capital and other private equity
deals, 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 seekingan equity infusion 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 for start-up or 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 investments that are traditional. An angel investment is a form of equity
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 in private
companies, or that engage in buyouts of public companies, resulting in the delisting of
public equity. Institutional and retail investors provide the capital for private equity,
and the capital can be utilized to fund new technology, make acquisitions, expand
working capital, and to bolster and solidify a balance sheet.
Private equity comes primarily from institutional investors and accredited
investors, who can dedicate substantial sums of money for extended time periods. In
most cases, considerably long holding periods are often required for private equity
investments, in order to ensure a turnaround for 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, or IPO, is the very first sale of stock issued by a
company to the public. Prior to an IPO the company is considered private, 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 as venture
capitalists or angel 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 sharesof 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 are not obligated to
sell you anything. Public companies, on the other hand, have to sell 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. Thus, Economics means
‘House Management’. The head of a family faces the problem of managing the
unlimited wants of the family members within the limited income of the family.
Similarly, considering the whole society as a ‘family’, then the society also faces
the problem of tackling unlimited wants of the members of the society with the limited
resources available in that society.
Economics is thus, 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.

DEFINITIONS
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.
Alfred Marshall‟s Definition:- Alfred Marshall also stressed the importance of
Wealth. However, 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 theother and more important side, a
part of the study of man”.
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

 It allows us to know the basics of human needs, production, distribution, re-use

and better use of resources.
 It provides the basis for exchange of goods and services between individuals,
organizations and even countries.
 Generates systems, techniques and public policies to improve social welfare.
 Helps to set target prices of goods and services.
 Adjust political, financial and even social imbalances.
 Provides knowledge and techniques that prevent crises and help them out.
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.

Economics as Positive Science and Economics as Normative

Science

(i) Positive Science: As stated above, Economics is a science. However, the question
arises, whether it is a positive science or a normative science. A positive or pure science
analyses cause and effect relationship between variables but it does not pass value
judgment. In other words, it states what is and not what ought to be.
Professor Robbins emphasised the positive aspects of science but Marshall and
Pigou have considered the ethical aspects of science that obviously are normative.
According to Robbins, economics is concerned only with the study of the economic
decisions of individuals and the society as positive facts but not with the ethics of these
decisions.
Economics should be neutral between ends. It is not for economists to pass value
judgments and make pronouncements on the goodness or otherwise of human
decisions. An individual with a limited amount of money may use it for buying liquor
and not milk, but that is entirely his business. A community may use its limited
resources for making guns rather than butter, but it is no concern of the economists to
condemn or appreciate this policy. Economics only studies facts and generalizes from
them. It is a pure and positive science, which excludes from its scope the normative
aspect of human behaviour.
Complete neutrality between ends is, however, neither feasible nor desirable. It is
because in many matters the economist has to suggest measures for achieving certain
socially desirable ends. For example, when he suggests the adoption of certain policies
for increasing employment and raising the rates of wages, he is making value
judgments; or that the exploitation of labour and the state of unemployment are bad
and steps should be taken to remove them. Similarly, when he states that the limited
resources of the economy should not be used in the way they are being used and should
be used in a different way; that the choice between ends is wrong and should be altered,
etc. he is making value judgments.

(ii) Normative Science: As normative science, economics involves value judgments.

It is prescriptive in nature and described ‘what ought to be’ or ‘what should be the
things’. For example, the questions like what should be the level of national income,
what should be the wage rate, how much of national product be distributed among
people - all fall within the scope of normative science. Thus, normative economics is
concerned with welfare propositions. Thus, it is unnecessary to debate the question as to
whether economics is a science or an art; whether it is positive or normative science. It
is both. Therefore, we should acknowledge the usefulness of both.
 MICRO AND MACRO ECONOMICS
The complete economic theory is broadly divided into two parts –Microeconomics and
Macroeconomics.
These two terms were at first used by Ragner Frisch in 1933. However, 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. Therefore, microeconomics deals with the analysis of an individual
unit and macroeconomics with economy as a whole. For example, in microeconomics
we study how price of goods or factors of production are determined. In
macroeconomics, we study what are the causes of high or low level of employment.
Therefore, according to Edwin Mansfield – ―Micro economics deals with the economic
behaviour of individual units such as consumers, firms, and resource owners; while
Macroeconomics 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 that 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 policiesrelated to the optimum
allocation of resources. According to K. E. Boulding,
Microeconomics is the study of particular firm, particular households, individualprice,
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 aswell 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- economic studies not individual units but all the units combined 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, and
total investment and so on. It is also called aggregate economics‖ or the ―income
theory.
According to K.E. Boulding, Macroeconomics not only deals 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.
 NATIONAL INCOME
In every country, goods and services are produced in agriculture sector, industrial
sector and service sector. The total money value of final goods and services
produced in a country in a year is called National Income. Dadabai Noaroji first
calculated national income in India in 1876. It includes payments made to all resources
in the form of wages, interest, rent and profits.
In simple words, National Income defines a country’s wealth. The aggregate
economic performance of a nation is calculated with the help of National income data.
The basic purpose of national income is to throw light on aggregate output and income
and provide a basis for the government to formulate its policy, programs, to maximize
the national welfare of the people. Central Statistical Organization calculates the
national income in India.
Definition of National Income-
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.”

Land, Labour, Capital, Organization

Rent, Wages, Interest, Profits

HOUSEHOLDS Goods and Services BUSINESS

FIRMS
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 the sense that the
economic transactions that 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.
i) Firms. ii) Households.
Firms are required to produce goods. Households own the various factors of production.
Firms require the services of households to produce goods. The firmshire the services of
households to produce goods. These goods are again supplied to the households. When
households sector 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 household purchases the goods that
are produced by the firms. The 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:
 Flow of goods and services,
 Flow of income,
 Flow of expenditure on goods and services

CONCEPTS OF NATIONAL INCOME

There are various concepts of National Income. The main concepts 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.
Gross Domestic Product (GDP): Gross domestic product is 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.
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.
Only final goods are included in the GDP. Intermediate goods are not included.
GDP only includes current year production.
An equation for GDP and some actual values:
GDP = P x Q
GDP = P x Q Where P is the price of goods and services, Q is the Quantity.

Gross National Product (GNP): Gross National Product is the total market
value of all final goods and services produced annually in a country + 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
NFIA = Income earned by Indians in abroad through jobs or businesses.
 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. Thus,
NNP=GNP - Depreciation
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
resourcessuppliers 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
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.
Disposable Income (DI): The income left after the payment of direct taxes from
personal income is called Disposable Income. Disposable income means actual
income that can be spent on consumption by individuals and families. Thus, it can be
expressed as:
DI = PI - Direct Taxes
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 0r SIGNIFICANCE OF NATIONAL INCOME

The following points highlight the top eleven reasons for growing importance of
national income studies in recent years:
 Economic Policy: Economic policy refers to the actions which Govt., takes in the
economic field such as Tax policy, Money supply policy, Interest rate policy etc.
National Income figures are an important tool for Macro Economic analysis.
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.
 Economic Planning: National income statistics are the most important tools for
long-term and short- term economic planning. A country cannot possibly frame a
plan without having a prior knowledge of the trends in national income. The
Planning Commission in India also kept in view the national income estimates
before formulating the five-year plans.
 Structure of the Economy: 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 the study of National Income it can be learnt how income is produced, how it
is distributed, how much is spent, saved or taxed.
 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.
 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.
 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.
 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.
 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.
 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.
 Defence 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.
 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
Inflation is 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. In other words, 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 its
purchasing 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 20% annually, then
theoretically a Rs.1 chocolate will cost Rs.1.20 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:

 Inflation is always ac companied by a rise in the price level. It is a process of

uninterrupted increase in prices.
 Inflation is a monetary phenomenon and it is generally caused by excessive money
supply.
 Inflation is essentially an economic phenomenon as it originates in the economic
system and is the result of action and interaction of economic forces.
 Inflation is a dynamic process as observed over the long period.
 A cyclical movement of prices is not inflation.
 Pure inflation starts after full employment.
 Inflation may be demand-pull or cost-push.
TYPES OF INFLATION
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
at a mild rate. When the rate of inflation is less than 10% annually, or it is a single
digit inflation rate, it is considered as a Creeping inflation.

Walking Inflation: This type of inflation occurs when the price level persistently
increases and touches the double-digit range. The rise in the prices is a bit faster
than the creeping inflation but largely remains between 3% to 10% range.

Running Inflation: If the walking inflationary trends are not checked and
controlled, it may lead to faster rise in the price levels across an Economy. It goes
beyond 10% and assumes the character of Running Inflation. Its range is between
10% to 20%.

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% a year is called galloping inflation. Many Latin
American countries such as Argentina, Brazil had inflation rates of 50 to 700%
per year in the 1970s and 1980s.

Hyperinflation: It is a stage of very high rate of inflation. While economies

seem to survive under galloping inflation. Nothing good can be said about a market
economy in which prices are rising a 1000% or more. Hyperinflation occurs when
the prices go out of control and the monetary authorities are unable to impose
any check on it. Paper money becomes worthless and people start trading in Gold
and Silver to buy their essentials. Some even resort to barter system for acquiring the
essentials. Germany had witnessed hyperinflation in 1920‘s, Hungary in1946 and
Zimbabwe in 2004.

MONEY SUPPLY 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 or goes down, 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 the money
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.
Money Supply: The total amount of money in an economy at any given time is
referred to as the money supply. Currency in circulation and Demand Deposits
are two common measurements used to define money.
The country’s Central Bank maintains a record of the total money supply. The price level
of securities, inflation, exchange rates, and company practices can all be affected by
changes in the amount of money in an economy
Relation between money supply and inflation:
According to Quantity Theory: Inflation is caused when the rate of increase in the
money supply is faster than the growth of real output. Because of high money supply,
there is more money pursuing the same quantity of commodities. As a result, as
monetary demand rises, enterprises raise their prices. There is an assumption that
prices will always remain constant if the growth of the money supply is the same as the
rate of real output.
Money supply vs Inflation (No dependence on each other): Keynes and other
non-monetarist economists reject conventional interpretations of the quantity theory.
Their definitions of inflation places a greater emphasis on actual price increases,
whether or not the money supply is taken into account.
Inflation can be divided into two types, according to Keynesian economists: Demand-
pull and Cost-push. Demand-pull inflation occurs when customers demand things at
a higher rate than production, maybe due to a bigger money supply. Cost-push inflation
occurs when input prices for items rise faster than consumer tastes change, sometimes
as a result of a higher money supply. Monetary policy can be used to control the money
supply but it has limitations.

Causes of Inflation
• Demand Pull Inflation: When aggregate demand increases due to any reason, and
supply of output is unable to match this increased demand, then the demand pulls
prices up. Increase in money supply, Increase in disposable income, Increase in
aggregate spending and Increase in population of the country can cause Demand-pull
Inflation.
• Cost Push Inflation: An increase in price of any of the inputs will increase the cost
of production; so the selling prices are pushed up by cost. Low Supply, Obsolete
technology/Deficient machinery, Scarcity of resources, Natural calamities/ Industrial
disputes etc., cause Cost-push Inflation.
• Built in Inflation: Built in inflation is a type of inflation that has resulted from past
events and persists in the present. – It is also known as hangover inflation.
 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 activitiesare interrelated; if one activity
changes, rest of them would also show changes.
These changes in the economic activities together produce a bigger change inthe
overall economy of a nation. This overall change in an economy is termed asa 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
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.
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.
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 aneconomy. Business
cycles may affect different industries in an economy invarying degrees.
Irregular patterns: No two business cycles are similar in rhythm. There is no
fixed pattern governing each business cycle.
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 as Business Cycle.
Fluctuation in productive capacities: Production capacities undergo wild
fluctuations are measured in terms of unemployment.
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.
PHASES OF A BUSINESS CYCLE
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.
Recession: This stage is characterized by liquidation in the market, strain in the
banking system and some liquidation of bank loan, small fall inprice, sharp
reduction in demand for capital equipment and abandoning ofrelatively 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.
Depression/Slump: It is a protective period in which Business activities inthe
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 cometo a more or less
complete stand still during depression. The consumer goods industries and however,
not much affected.
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 ofemployment
also 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. An atmosphere of all round cautious hope gradually replaces
pessimism.

BUSINESS ECONOMICS
Business Economics, also called Managerial Economics, is the application of
economic theory and methodology to business for administrative Decision- Business
involves decision- making. Decision-making means the process of selecting one out of
two or more alternative courses of action for an activity. The question of choice arises
because the basic resources such as capital, land, labour 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 equipped with a
rational methodology and appropriate tools.
DEFINITIONS
According to E. F. Brigham and J. L. Pappas, "Managerial Economics is the
application of Economic theory and methodology to business administration practice."
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 practice 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:

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.
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 awareof the limits set by the
macroeconomics conditions such as government industrial policy, inflation and so on.
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.
Prescriptive actions: Prescriptive action is goal oriented. Given a problem and the
objectives of the firm, it suggests the course of action from the availablealternatives 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.
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.
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.
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.
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 andtechniques of
economics and other related disciplines.
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:
The basis for analyzing market influences on the firms; products and thus helps in the
adaptation to those influences.
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, crosselasticity as well as the influence of advertising
expenditure. With the advent of computers, demand forecasting has become an
increasingly important function of Business economics.
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.
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.
Resource Allocation: Business Economics is the traditional economic theory that is
concerned with theproblem of optimum allocation of scarce resources. Marginal
analysis is applied to the problem of determining the level of output, which maximizes
profit. In thisrespect, 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.
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.
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 tasksof the
managers. The major issues related to capital analysis are:

 The choice of investment project

 Evaluation of the efficiency of capital
 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.
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 firmsets 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 business economist can be summarized as follows:

 He studies the economic patterns at macro-level and analysis its significance to

the specific firm he is working in.
 He has to consistently examine the probabilities of transforming an ever-
changing economic environment into profitable business avenues.
 He assists the business planning process of a firm.
 He also carries cost-benefit analysis.
 He assists the management in the decisions pertaining to internal functioning of
a firm.
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.
 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.
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. Businesseconomics is rooted in Micro Economic theory. Business
Economics makes use ofseveral 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 asa whole. It deals with the analysis of national income, the level of
employment, general price level, consumption and investment in the economy and
evenmatters related to international trade, Money, public finance, etc.
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.
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 thefirm 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 solvethese problems. Geometry, Algebra and calculus are
the major branches of mathematics which are of use in Business economics.
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.
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.

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 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.
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 andmonths 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.

LONG QUESTIONS
UNIT I
1. Explain about features, advantages and disadvantages of limited liability company.
2. Explain the features, advantages and disadvantage of partnership.
3. Explain different sources of raising capital for a company
4. Explain inflation and its types.
5. Explain business cycle, its characteristics and phases.
6. Explain the role of business economist.
7. What is national income? Explain its concepts.
8. What is company? Explain its features, advantages and disadvantages.
9. Define business economics and explain its nature and scope of business economics.
10. Explain the multi-disciplinary nature of business economics.

SHORT QUESTIONS
UNIT I
1. Define business and its characteristics.
2. Sole Proprietorship
3. Partnership firm
4. Partnership deed
5. Limited Liability Company
6. Partner by estoppel
7. Partner by holding out
8. Non-Conventional source of Finance (any two)
9. Debentures
10. Short term loans
11. Venture capital
12. National income
13. Gross Domestic Product (GDP)
14. Inflation, its types.
15. Features of Inflation
16. Business Cycles, its features.
17. Define business economics and state its objectives
18. Normative economics

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