Management

MGT-331

FOR DAE 3rd Year

Computer Information Technology

Technical Education & Vocational

Training Authority Punjab

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PREFACE

The text book has been written to cover the syllabus of Management
3rd year D.A.E Computer Information Technology according to the new
scheme of studies. The book has been written in order to cater the needs of
latest concepts and needs of the course i.e. Management and to be able to
attempt D.A.E Examination of PBTE Lahore.

The aim of bringing out this book is to enable the students to have
sound knowledge of the subject. Every aspect has been discussed to present
the subject matter in the most concise, compact lucid & simple manner to
help the subject without any difficulty. Frequent use of illustrative figures has
been made for clarity. Short Questions and multiple-choice questions have
also been included at the end of each chapter which will serve as a quick
learning tool for students.

The Convener and Member would like to thank the reviewers whose valuable
recommendations have made the book more readable and understandable.
Constructive criticisms and suggestions for the improvements in future are
welcome.

Reviewer and Compiler

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 MANUAL DEVELOPMENT COMMITTEE

DR. KASHIF SAEED (Convener/Reviewer)

Assistant Professor
Govt. College of Technology
Bahawalpur

MUHAMMAD IMRAN ABBASI (Member/Compiler)

Lecturer
Govt. College of Technology
Bahawalpur

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 SYLLABUS

Course Code: MGT -331

Course Title: Management
Total Contact Hours: 32 T P C
Theory: 32 1 0 1
Practical: 0

Aim: Introductory course on business management. It aims to prepare

students to work effectively in business and industry. It discusses basic
economics principles and organization management as well as skills in
becoming an entrepreneur. It is pure class discussion.

Course Objectives
At the end of the course the students are expected to be able to

 Understand the basic concepts and principles of economics, business

management and organization.

 Apply management concepts in business organization

 Use economic principles and business management to organize own

business

 Recognize the importance of economics and management in daily

life

COURSE OUTLINE Hours

1. Economics: (2 Hours)
1.1 Definition: Adam Smith, Alfred Marshall, Prof.
Robbins
1.2 Nature and scope
1.3 Importance for technicians

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 1.4 Micro and Macro Economics
2. Basic Concepts of Economics: (1 Hour)
2.1 Utility
2.2 Income
2.3 Wealth
2.4 Saving
2.5 Investment
2.6 Value
3. Demand and Supply (2 Hours)
3.1 Definition of demand
3.2 Law of demand
3.3 Definition of supply
3.4 Law of supply
4. Factors of production: (2 Hour)
4.1 Land
4.2 Labour
4.3 Capital
4.4 Organization
5. Business Organization: (3 Hour)
5.1 Sole proprietorship
5.2 Partnership
5.3 Joint stock company
6. Entrepreneurial Skill: (4 Hours)
6.1 Preparing, planning, establishing, managing, operating
and evaluating relevant resources in small business.
6.2 Business opportunities, goal setting.
6.3 Organizing; evaluating and analyzing opportunity and
risk task
7. Scale of Production (2 Hours)
7.1 Meaning and its determination
7.2 Large scale production
7.3 Small scale production
8. Economic System (3 Hours)
8.1 Free economic system
8.2 Centrally planned economy
8.3 Mixed economic system

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9. Money (1 Hour)
9.1 Barter system and its inconveniences
9.2 Definition of money and its function
10. Bank (1 Hour)
10.1 Definition
10.2 Functions of commercial bank
10.3 Central bank and its function
11. Cheque (1 Hour)
11.1 Definition
11.2 Characteristics and types of cheques
11.3 Dishonor of cheque
12. Financial institutions (2 Hours)
12.1 IMF
12.2 IDBP
12.3 PIDC
13. Trade Union (2 Hours)
13.1 Introduction and brief history
13.2 Objectives, merits and demerits
13.3 Problems of industrial labour
14. International Trade (2 Hours)
14.1 Introduction
14.2 Advantages and disadvantages
15. Management: (1 Hour)
15.1 Meaning
15.2 Functions
16. Advertisement: (2 Hours)
16.1 The concept, benefits and drawbacks
16.2 Principal media used in business world
17. Economy of Pakistan (1 Hour)
17.1 Introduction
17.2 Economic problems and remedies

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Recommended Books & Reference:

1. Business Organization, Nisar-ud-Din, Aziz Publisher, Lahore

2. Introduction to Business, M. Saeed Nasir, Ilmi Kitab Khana, Lahore.
3. An Introduction to Modern Economics, S.M. Akhtar, United Limited,
Lahore.
4. Muhammad Irshad, Economics, Naveed Publications Lahore.
5. Sheikh Manzoor Ali, Economics, Ilmi Kutab Khana, Urdu Bazar,
Lahore.
6. Small Business and Entrepreneurship, Paul Burns & Jim Dewhurst,
Red Globe Press London. https://doi.org/10.1007/978-1-349-24911-4
7. Innovation and Entrepreneurship by Peter F. Drucker, Harper & Row
Publishers, 1985 - Business & Economics - 293 pages. ISBN:
0060154284, 9780060154288
8. The 4 Rooutes to Entrepreneurial Success by John B. Miner, Berrett-
Koehler Publishers, 1996 - Business & Economics - 216 pages. ISBN:
1881052826, 9781881052821
9. Lioyd G Reynolds Irwin, Micro Economics — Analysis & Policy, Irwin
Homwood Illinois.
10. Saeed Nasir M A, Text book of Economics, Ilmi Kutab Khana, Lahore.
11. Salman Rizavi, Economics, Syed Mobin Mahmud & Co., Lahore.
12. K. K. Dewitt, Modern Economic Theory, S. Chand Publisher, New
Delhi India -2006. ISBN 10: 8121924634 / ISBN 13: 9788121924634
13. Nancy Smith Barrett, The Theory of Macro Economics Policy, Prentice
Hall.
14. A History Of Economics The Past As The Present. by: Galbraith, John
Kenneth. Published by David & Charles – 1987, pages 336: ISBN-10.
0241123887.
15. Blaug, M. (1997). Economic Theory in Retrospect (5th ed.).
Cambridge: Cambridge University Press.
doi:10.1017/CBO9780511805639
16. Mankiw, “Principles of Economics” 7th Edition, (2008), Southwest
Publishers
17. Miller, R. L –EconomicsToday-14th Edition (2005) Addison Wesley
18. McConnell and Bruce-Principles of Economics -17th Edition, (2006),
McGraw-Hill.
19. Weil, David N. (2012). Economic Growth. Third Edition, Pearson.

Page | viii
20. Williamson, Stephen D. (2010). Macroeconomics. Fourth Edition,
Prentice Hall.
21. Gujrati, D. J. - Basic Econometrics – 4th Edition (2003) McGraw-Hill
Company.
22. Paul R. Krugman and Maurice Obstfeld, International Economics:
Theory and Policy, Addison Wesley, 7th edition (2016).
23. David N. Weil, Economic Growth, 3rd edition (2012). Pearson
Addison- Wesley. http://www.aw-bc.com/weil/.
24. Charles I. Jones and Dietrich Vollrath, Introduction to Economic
Growth, 3rd edition (2013). W. W. Norton & Company.
25. Zaidi Akbar (2006), Issues in Pakistan’s Economy, Oxford University
Press, Karachi
26. Ishrat Hussain, (2009) “Pakistan’s Economy-1999/2000-2007/2008:
An Objective Appraisal”, Business Review, Vol 4 (1): p. 7-48; IBA,
Karachi
27. “New Venture Creation: Entrepreneurship for the 21st century”, by
Jeffry Timmons, Stephen Spinelli, Jr. 8th edition
28. Parker, Simon C., “The economics of Entrepreneurship” latest Edition,
Cambridge University Press, USA, New York.
29. “Entrepreneurship” latest Edition, McGraw-Hill Companies, Inc. USA,
New York.
30. Naqi, S. M., “Entrepreneurship: A Recipe for Economic Development”
Latest Edition, New fine Printing Press, Lahore.
31. Fredric S. Mishkin, (1995), Financial Markets and Money, Harper &
Row Publishers.
32. Laider, David E.W (1996), The Demand for Money: Theories, Evidence
and Problems (Fourth edition), Harper & Row, Publishers, New York.
33. Miller, R. L. and David Van Hose, (2001), Money, Banking & Financial
Markets. South Western, Singapore.
34. Patinkin Don, Money, Interest and Prices, Harper and Row Publishers,
(Latest Edition)
35. Burki, Shahid Javed. State & Society in Pakistan, The Macmillan Press
Ltd 2017.

Page | ix
Table of Contents

Chapter No. Chapter Name Page No.

1 Economics 01-16
2 Basic Concepts of Economics 17-33
3 Demand and Supply 34-44
4 Factors of Production 45-53
5 Business Organization 54-74
6 Entrepreneurial Skills 75-96
7 Scale of Production 97-110
8 Economic System 111-132
9 Money 133-141
10 Bank 142-156
11 Cheque 157-167
12 Financial Institutions 168-177
13 Trade Union 178-190
14 International Trade 191-199
15 Management 200-208
16 Advertisement 209-222
17 Economy of Pakistan 223-231

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Ch-1 Economics MGT-331

Chapter 1

Economics

Chapter Objectives
After completion of this chapter students will be able to:

 Understand the importance of economics.

 State definition of economics given by Adam Smith, Alfard Marshall
and Professor Robins.
 Explain nature and scope of economics.
 Describe importance of study economics for technicians.
 Define basic terms, utility, income, wealth, saving, investment and
value.
 Explain the basic terms with examples.

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Ch-1 Economics MGT-331

1.1 Definition of Economics:

Making decisions is fundamental to economics. Every day, we make a
wide variety of decisions. What should my petrol budget be? Which route to
work / college is best? What restaurant should we eat at? When people hear
the word "Economics," many people assume that it is all about money.
Money is only one aspect of economics. It involves weighing several options
or alternatives. Some of those crucial decisions include money, but not all of
them. Even if most of your daily, monthly, and life decisions have nothing to
do with money, economics nevertheless applies to them.

Economics is a discipline which combines History, Sociology,

Psychology, and politics. Economics is about the study of scarcity and choice.
It’s the study of limited resources, the study of resource use and incentive
response, or the study of decision-making.

The word economics derived from two Greek words, i.e. “Oiko” which
means home or family and “Nomos” which means how to arrange or
manage. By combining the both it means, the art or science of managing a
house or a family.

Economics was
formally introduced in the
18th century when Adam
Smith, a Scottish
Philosopher and
Economist wrote his book
in 1776, with the name
“An enquiry into the
nature and causes of
wealth of nations” which
usually named “The
wealth of nations”.

A school of thought is a term that is used to categorize a group of

people who share similar ideas regarding a certain topic. One group of
experts in a field may believe that their specialty works one way while the
next group believes in another. While this does not necessarily mean that

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Ch-1 Economics MGT-331

schools of thought are diametrically opposed to each other, one school of

thought may contrast with another.

This concept also applies to schools of economic thought as well.

Economic schools of thought are important because they take a look at how
local, national, and global economies function and work to explain their
behavior in order to provide solutions to problems.

In the history of economic thought, a school of economic thought is a

group of economic thinkers who share or shared a common perspective on
the way economies work. While economists do not always fit into particular
schools, particularly in modern times, classifying economists into schools of
thought is common. There are three views or school of thoughts in
Economics which were presented by Adam Smith, Alfred Marshall and
Professor Robins respectively.

Following are three different views or school of thoughts in Economics.

(A) Classical school of thought
(B) Neo- classical school of thought
(C) Modern school of thought

1.1.1 Definition of Economics by Adam Smith-1776 /

Classical School of thought:
The Enlightenment era (mid-1700s) in Europe brought a new spirit of
scientific inquiry. Thinkers began looking to apply scientific principles not
only to the physical world, but also to human society. Enlightenment thinkers
began trying to discover the "laws" of human interaction, to explain how
human society operates. The economy - exchange, prices, markets - are one
area of human interaction that seemed amenable to scientific inquiry, where
there might be 'laws' to be discovered in how markets operate. The first
serious attempt to systematically study and looks for "laws" in the
marketplace was the Scottish philosopher Adam Smith in his Wealth of
Nations (1776). He didn't get everything right, but at least he opened the
door to a new field of study. It is for this reason Adam Smith is commonly
regarded as the "Father of Economics".

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Ch-1 Economics MGT-331

Adam Smith who was a Scottish

philosopher, gave the classical view of
economics. He wrote the book “Wealth
of Nations” in 1776 and gave the
concept of Economics by defining the
“Economics” first time. Due to this
contribution, he is also known as “father
of Economics” and his followers are
called “classical economists”.
Adam Smith simply defined
Economics as “the study of wealth” and
highlighted four different aspects of wealth
in his book, which are given below:

(i) Production of wealth

(ii) Consumption of wealth
(iii) Exchange of wealth
(iv) Distribution of wealth

1.1.2 Definition of Economics by Alfred Marshall -1890/

Neo Classical School of thought:
At the end of 19th century, Alfred Marshall, who was basically from
England wrote a book “Principles of Economics (1890)” in which he gave a
different view of Economics.

According to him, Economics is “a study of mankind in the ordinary

business of life, it examines that part of individual and social action which is
most closely connected with the attainment, and with the use of the material
requisites”.

He argued that although it is the study of wealth

but there are some other elements which we have to
consider while defining the Economics. Important parts
of his definition are as below:

(i) Study of wealth

(ii) Study of daily life

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Ch-1 Economics MGT-331

(iii) Importance of human aspect

(iv) Study of social human
(v) Material essentials

1.1.3 Definition of Economics by Prof. Robbins -1934 /

Modern School of thought:
Professor Robbins, a British economist gave another view about the
Economics which is known as modern school of thought. He was basically a
prominent member of economics department at the London School of
Economics.

According to Prof.
Robbins, “Economics is the science
which studies human behavior as a
relationship between multiple ends
and scare resources with
alternative uses”. In other words,
human desires/wants are unlimited
and the resources to fulfill these
wants/desires are limited. Due to
scarcity of resources, human go for
alternatives.

Following are the important point of definition:

(i) Unlimited desires

(ii) Difference in the importance of these desires
(iii) Lack of resources
(iv) Alternative use

1.2 Nature and scope of economics:

Economic studies have become one of the most important fields of
study in modern times. Economics plays an important role in the effective
and smoothly running of both a small business and a country. Theories and
laws of economics are based on experiments, like, mixed economy to is
an experimental outcome between capitalist and socialist economies.

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Ch-1 Economics MGT-331

Without the use of economic principles, no business can be profitable. The

field of economics is vast and diverse.

1.2.1 What is the nature of economics?

The nature & scope of economics, depend upon the interaction of economic
agents and how economies work. The nature of economics and whether it
should be regarded as a science or an art are major topics of debate among
economists. Several economists have argued in support of science, while
others have argument in the favor of arts.

(a) Economics as a Science:

To accept something as a science, we must first understand what science
demands. Science is concerned with scientific research that demonstrate a
cause-and-effect link. In science, facts and numbers are gathered and studied
in a systematic manner in order to arrive at a specific conclusion. Here are
following characteristics of any science subject, such as:

1) It is based on systematic study of knowledge or facts;

2) It develops correlation-ship between cause and effect;
3) All the laws are universally accepted
4) All the laws are tested and based on experiments;
5) It has a scale of measurement.

Prof. Robbins, Prof. Robertson and few other economists suggested that
economics is a branch of science like physics and chemistry based on all
these qualities. All of these economists agree that "economics" has many
characteristics with other areas of science.

From a small organization to a multinational firm, economic laws come into

play. All the laws in economics are also universally accepted, like, law of
demand, law of supply and law of utility etc. Economic theories are used to
solve a variety of societal economic issues. As a result, economics can be
considered both a social science.

(b) Economics as an Art:

According to Т.К. Mehta, ‘Knowledge is science, action is art.’ According
to Pigou, Marshall etc., economics is also considered as an art. In other

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Ch-1 Economics MGT-331

way, art is the practical application of knowledge for achieving particular

goals. Science gives us principles of any discipline however; art turns all
these principles into reality. Therefore, considering the activities in
economics, it can claim as an art also, because it gives guidance to the
solutions of all the economic problems.

Therefore, from all the above discussions we can conclude that

economics is neither a science nor an art only. However, it is a golden
combination of both. According to Cossa, science and art are
complementary to each other. Hence, economics is considered as both a
science as well as an art. Economists’ role is not only to study & highlight
the economic issues but they have also to give their solutions as well root
causes so that people can know that how those issues can be fixed.

1.2.2 What is the scope of economics?

The scope of economics refers to the extent in which it deals with the social
life of people. Economics has theoretical as well as practical implications. The
goal of economics is to describe economic activity. The "what" of description
is addressed in economics. In terms of resources and desires, it describes the
world. It involves all the goods and services produced by a country. Also,
when you hear "the oil market," this is a way for economists to describe all
the vendors, buyers, and transactions involving oil. It does not necessarily
mean a specific place where oil is being sold!

After describing the economic activity, economics analyzes such activity.

Analysis helps economists understand how and why things are the way they
are. After analyzing economic activity, the acquired understanding has to be
explained to the rest of society in a way they can also understand.

Economics analyses how economic agents satisfy their unlimited wants by

carefully using their relatively limited resources. The scope of economics is
that it helps society satisfy its needs in the best way possible. For example: A
coffee shop uses the same machine to make coffee and tea. A cup of coffee
sells for RS 100, whereas a cup of tea sells for Rs 60. The coffee shop wants
to make as much money as possible and can only make 1 cup of either coffee
or tea at a time. People visit the shop frequently for both coffee and tea. As
an economist, what do you suggest the shop does? Answer is so simple; the

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Ch-1 Economics MGT-331

shop should just sell coffee since it uses the same machine and sells for a
higher price.

1.3 Importance of Economics for Technician &

Students:
In today's world, economics plays an important role in our daily lives.
Understanding previous, future, and current economic models allows us to
apply them to society, governments, businesses, and individuals as well. All
of them wants things that cannot be completely satisfied given the resources
available. This problem is being addressed through economics.

A society can never have enough of anything, including food, water,

clothing, roads, homes, video games, phones, and computers etc. This list is
endless, but there are only so many resources that can be used to fulfil all of
these needs. This implies that while we may occasionally be able to buy some
of the things we like, we will have to prioritize those items and purchase
them at the expense of others. This is the area of study covered by
economics; it examines how rational use of scarce resources enables
economic agents to satiate their desires.

The goal of economics is to find a solution to the shortage issue.

Resources cannot suddenly become abundant due to the efforts of
economists. Nonetheless, they can assist us in determining how to most
effectively use our limited resources in order to maximize our level of
enjoyment.

Typically for a technician or a student, the study of economics is very

essential. The study of economics enables technicians/students that how
they have to utilize their available resources in the industry for getting
maximum output and how to solve their problems facing in the industry by
the available resources (for example, how labor, machinery, raw material and
capital can be utilized properly).

Following are some important points, which further clarify the

importance of studying economics for a technician.

(i) Planning

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Ch-1 Economics MGT-331

Planning is the main factor in the success of any organization. The study
of economics guides the technicians that how to make future plans and
how to achieve set targets.

(ii) Utilization of limited resources

By studying economics, technicians make an organization profitable by

maximum utilization of limited resources.

(iii) Analysis of performance

Economics help technicians in evaluation of the firm’s performance. They

can compare organization’s current performance with the previous year
and easily analyze the efficiency or deficiency of their organization.

(iv) Business Management

It enhances the administration ability of the technicians and they can

manage any business or business organization in a well-organized
manner which in result make the organization profitable.

(v) Economic Trends

For a good technician, along with technical education, the knowledge of

economics is also important so that they have insights to judge different
causes of up and downs in economic trends of the country.

(vi) Guidance in the choice of profession

The study of economics guide technicians in understanding and adopting

of different professions. After conducting different analysis, technicians
can select best suitable profession.

(vii) Relationship between employee & employer

Good relationship between employee and employer is the main factor of

success in any organization. Knowledge of economics strengthen their
relationship with one another.

(viii) To solve daily problems

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Ch-1 Economics MGT-331

By studying economics, technicians are well aware with the general

issues like inflation, balance of payments, un-employment etc.

1.4 Micro and Macroeconomics:

Economics is divided into two main categories which are:
microeconomics and macroeconomics. Microeconomics is the study at micro
level like the study of individuals and business decisions,
while macroeconomics on the other hand is the study at big level like taking
decisions at countries & government level.

Microeconomics focuses on supply and demand, and other forces that

determine price levels, making it a bottom-up approach. Macroeconomics
takes a top-down approach and looks at the economy as a whole, trying to
determine its course and nature. Investors can use microeconomics in their
investment decisions, while macroeconomics is an analytical tool mainly used
to craft economic and fiscal policy.

1.4.1 Micro-Economics:
Microeconomics studies individuals and business decisions.
Microeconomics focuses on supply and demand, & other forces that
determine price levels, making
it a bottom-up approach.
Investors or entrepreneurs use
microeconomics in their
investment decisions.

Micro Economics plays an

important role in the
determination of economic
policies. Under this
government policies are
studied with a view on how
they affect working of
individual or particular units. For
example: we can analyses the effect of government policies on the prices of
particular commodities and labour cost and the effect of government policies

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Ch-1 Economics MGT-331

on distribution of resources. Microeconomics does not try to answer or

explain what forces should take place in a market. Rather, it tries to explain
what happens when there are changes in certain conditions.

For example, microeconomics examines how a company could

maximize its production and capacity so that it could lower prices and better
compete. A lot of microeconomic information can be gleaned from company
financial statements.

1.4.2 Macro-Economics:

The nature of macroeconomics is completely different from micro

economics. The problems of the whole economy are studied under
macroeconomics like National income, total production, employment, total
supply. Macroeconomics analyzes the decisions made by countries and

governments. Macroeconomics takes a top-down approach and looks at the

economy as a whole, trying to determine its course and nature.
Macroeconomics is an analytical tool mainly used to craft economic and
fiscal policy. National and International problems are solved with its
assistance. Macro Economics stresses on the importance of dynamic
economy while Micro analysis on the static economy.

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Ch-1 Economics MGT-331

Macro approach is quite useful in framing economic policies aimed at

removing unemployment, favoring foreign trade and putting a check on
inflation. With the use of macroeconomics, the government plans for
economic development. Where in increase in national income, production
and employment target for saving and investment are determined.

EXERCISE No. 1
Long Questions
Q.1. How many schools of thoughts in economics? Define economics in
the perspective of each view.
Q.2. Explain nature and scope of economics in detail.
Q.3. Why the study of economics is important for a technician? Discuss in
detail.

Short Questions
Q.1. What are different school of thoughts in economics?
Q.2. Narrate Adam Smith’s definition of economics.
Q.3. Who is the father of economics?
Q.4. When and which book was written by Adam Smith?
Q.5. Write four important pillars of economics, stated by Adam Smith.
Q.6. When and which book was written by Alfred Marshall?
Q.7. Write three merits of Alfred Marshall definition of economics.
Q.8. Write definition of “economics” by Professor Robbins.
Q.9. What is meant by scope of economic?
Q.10. Whether economics an art or science, explain?
Q.11. Write three importance of study of economics.
Q.12. What is the difference between “consumption of wealth” and
“production of wealth”?
Q.13. When and which book was written by Professor Robbins?
Q.14. From which country, Robbins belongs?

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Ch-1 Economics MGT-331

Q.15. Differentiate between “macro & micro economics”.

Multiple Choice Questions (MCQs)

Choose the correct answer from the given possible answers and circle it.

Q.1. Which economist is known as the father of economics?

(a) Prof. Cannon (b) Prof. Robbins
(c) Adam Smith (d) Alfred Marshall
Q.2. The book “wealth of nations” was written in …………...?
(a) 1770 (b) 1776
(c) 1890 (d) 1990
Q.3. How many schools of thoughts in the economics?
(a) 3 (b) 4
(c) 5 (d) 6
Q.4. There are …………...aspects of Adam Smith’s book:
(a) Two (b) Three
(c) Four (d) Five
Q.5. Who is the pioneer of classical school of thought?
(a) Adam Smith (b) Alfred Marshall
(c) Prof. Robbins (d) All of these
Q.6. Who is the pioneer of neo-classical school of thought?
(a) Adam Smith (b) Alfred Marshall
(c) Prof. Robbins (d) None of these
Q.7. When Alfred Marshall wrote his book “principles of economics”?
(a) 1776 (b) 1876
(c) 1880 (d) 1890
Q.8. Who criticized Marshall’s definition of economics?
(a) Adam Smith (b) Prof. Robbins
(c) Malthus (d) Prof. Cannon
Q.9. Robbin’s institute was:
(a) Cambridge University (b) Oxford University
(c) London School of Economics (d) Punjab University
Q.10. Professor Robbin belongs to:

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Ch-1 Economics MGT-331

(a) America (b) Japan

(c) London (d) New Zealand
Q.11. Whether Economics is science or/and art?
(a) Science (b) Art
(c) Both (d) None
Q.12. Macro Economics analyzes the decisions made by………?
(a) Individual (b) Government
(c) Both (d) None
Q.13. Micro Economics studies the decisions made by………?
(a) Individual (b) Business
(c) Both (d) None
Q.14. Importance of studying economics is/are?
(a) Utilization of resources (b) Analysis of performance
(c) Knowledge of economic trends (d) All
Q.15. It is essential for technicians that along with technical skills, they also
have the knowledge of……………for their success in industry?
(a) Psychology (b) Biology
(c) Entomology (d) Economics

Q. No. Answer Q. No. Answer Q. No. Answer

1 c 6 b 11 c
2 b 7 d 12 b
3 a 8 b 13 c
4 c 9 c 14 d
5 a 10 c 15 d

Answer Key

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Ch-1 Economics MGT-331

Reference:
1. An Introduction to Modern Economics, S.M. Akhtar, United Limited,
Lahore.
2. Economics by Muhammad Irshad, Naveed Publications Lahore.
3. Economics by Sheikh Manzoor Ali, ILLMI Kutab Khana, Urdu Bazar,
Lahore.
4. Lioyd G Reynolds Irwin, Micro Economics — Analysis & Policy, Irwin
Homwood Illinois.
5. Saeed Nasir M A, Text book of Economics, ILLMI Kutab Khana,
Lahore.
6. Salman Rizavi, Economics, Syed Mobin Mahmud & Co., Lahore.
7. K. K. Dewitt, Modern Economic Theory, S. Chand Publisher, New Delhi
India -2006. ISBN 10: 8121924634 / ISBN 13: 9788121924634
8. Nancy Smith Barrett, The Theory of Macro Economics Policy, Prentice
Hall.
9. A History of Economics “The Past as The Present” by: Galbraith, John
Kenneth. Published by David & Charles – 1987, pages 336: ISBN-10.
0241123887.
10. Mankiw, “Principles of Economics” 7th Edition, (2008), Southwest
Publishers
11. Miller, R. L –Economics Today-14th Edition (2005) Addison Wesley
12. McConnell and Bruce-Principles of Economics -17th Edition, (2006),
McGraw-Hill.
13. Williamson, Stephen D. (2010). Macroeconomics. Fourth Edition,
Prentice Hall.
14. Dougherty, Christopher – Introduction to Econometrics – 2nd
edition (2002), Oxford University Press.
15. Gujrati, D. J. - Basic Econometrics – 4th Edition (2003) McGraw-Hill
Company.
16. Fredric S. Mishkin, (1995), Financial Markets and Money, Harper &
Row Publishers.
17. Perloff, J.M. (2013). Microeconomics: Theory & Applications with
Calculus, 3rd Edition Pearson.
18. Nicholson, W. & Snyder, C. (2009). Intermediate Microeconomics
and Its Application, 11th Edition. Cengage Learning.

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Ch-2 Basic Concepts of Economics MGT-331

Chapter 2

Basic Concepts of Economics

Chapter Objectives
After completion of this chapter students will be able to know the
concepts of:

(i) Utility (ii) Income

(iii) Wealth (iv) Saving
(v) Investment (vi) Value

BASIC CONCEPTS OF ECONOMICS:

Every subject has its own some basic terminologies. Without knowing
these terminologies, we are not able to complete understanding of the
subject. There are some basic terminologies of economics which helps in
understanding and elaborating the concepts. These terms/concepts are
appended below:

(i) Utility (ii) Income

(iii) Wealth (iv) Saving
(v) Investment (vi) Value

The basic terms of economics are utility, income, wealth, saving, investment
and value. The detail of these concepts is as under:

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Ch-2 Basic Concepts of Economics MGT-331

2.1 Utility:
Let's say you visited a restaurant and placed an order for your favorite
dish. What will you go through? Your taste buds will either be satisfied or not
by the dish. You placed the same order at a different restaurant the next day.
The experience is it the same? Maybe, maybe not, reason behind is “utility”.
Utility is usefulness of any product or service.

Utility is a term in economics that refers to the “total satisfaction

received from consuming a good or service”. According to utility theory,
people make purchasing decisions based on how satisfied they are with a
product or service. As a result, goods with higher utility are given greater
importance in a person's budget.

In economics utility is the capacity of a commodity to satisfy human

wants. Simply speaking, utility refers to the level of satisfaction that
consumers get from purchasing and using a product or service. Utility is the
quality in goods to satisfy human wants. Thus, it is said that wants satisfying
capacity of goods or services is called utility. For better understanding of the
term utility, we have to understand the difference between following two
terminologies:

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Ch-2 Basic Concepts of Economics MGT-331

2.1.1 Utility & Benefit

Mostly utility and benefit are considered same in meaning but in
economics both are different. Usually, it has been observed that there are
many things which have utility but no benefit in it. For example: drinking
alcohol or smoking, there is utility in these as both are satisfying the human
wants but both are injurious to health (no benefit). So, we can say that
anything which has benefit in it will also have utility in it but anything which
have utility does not necessarily benefit in it.

2.1.2 Utility & Satisfaction

There is a little difference between utility and satisfaction. Utility is
basically the core characteristics of the product or service while satisfaction
is achieved after the utility of that product or service. Example: we drink
water when we feel thirst. Water has utility to fulfill our thirst and after
drinking water, we feel satisfaction.

2.2 Income:
The amount of money received by a person, group, or company during a
period of time is defined as income. In other words, income is the reward
received by a person who provide his/her services to any company for a
specific period of time.

For example: receiving of salary after one month or amount received by

the labor after finishing his daily work. But pocket money received by a child
from his parents or scholarship offered to the student by the college will not
be considered as an income of that child or student because they are not
providing any kind of service or good to them.

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Ch-2 Basic Concepts of Economics MGT-331

Income may be:

(i) Gross income

(ii) Net income
(iii) Personal income
(iv) National income
(v) Net-National income

2.2.1 Gross income

Individuals' gross income is their total earnings before taxes or other
deductions. This includes all sources of income, not just employment, and is
not limited to cash income; it also includes property or services received.

Individuals' gross income consists of wages and salaries, as well as

other forms of income such as pensions, interest, dividends, and rental
income. A company's gross income is the total of its revenues less the cost of
goods sold.

2.2.2 Net Income

Net income is the amount earned by an individual or business after
deducting all costs, allowances, and taxes. Gross income less any deductions
made by your company or the government from your pay is your net income.

2.2.3 Personal Income

The sum of a person's earnings from wages, investment interest, and
other sources is known as personal income. Personal income can be earned
from an array of sources, such as wages from a job, dividends and
distributions from investments, rentals from owning property, and profit-
sharing from enterprises.

2.2.4 National Income

National income means the value of goods and services produced by
a country during a financial year. It represents the sum of all economic
activity carried out in a nation over the course of a year and is measured in
monetary terms. The progress of a country can be determined by
the growth of the national income of the country.

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Ch-2 Basic Concepts of Economics MGT-331

Following are the Modern National Income definition

1. Gross Domestic Product (GDP)
2. Gross National Product (GNP)
(a) Gross Domestic Product
The total value of goods produced and services rendered within a
country during a year is its Gross Domestic Product.
(b) Gross National Product
For the purpose of calculating the Gross National Product (GNP), we
must gather and evaluate data from all productive activities, including
agricultural products, wood, minerals, and commodities, as well as the
production contributions made by transportation, communications,
insurance companies, and professions like those of lawyers, doctors, and
teachers at market prices.
2.2.5 Net national Income (NNI):
The government, corporations, and families' total income are referred
to as the net national income. Net national income is calculated by
subtracting the depreciation of fixed capital assets (such as homes, buildings,
machinery, transportation equipment, and physical infrastructure) from the
gross domestic product and from net receipts of earnings, salaries, and
property income from abroad.

Net National Income NNI is frequently assessed annually as a tool to

gauge how well a country is maintaining basic production standards. As it
considers all of its residents, regardless of how they earn their living, and
emphasizes the need for capital investment to maintain high production
standards, it can be a valuable technique for monitoring an economy.

2.3 Wealth:
Commonly, wealth considered in the means of money or some other
precious items like gold, silver etc. but in economics, wealth concept is little
bit different. Wealth refers to all those goods and services which have utility
and value to exchange is known as wealth. Three characteristics of wealth
are:
a) Utility,
b) Scarcity and

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Ch-2 Basic Concepts of Economics MGT-331

c) Transferability.
Where utility refers to the total satisfaction received from consuming
a good or service.
Scarcity refers to demand for a good or service is greater than the
availability of the good or service.
Transferability refers to transferable (means which can be passed
from one person to another). But transferability does not merely mean the
physical movement but it can be transfer of rights from one person to
another, for example transferability of land or a building.

There are different kinds of wealth which are appended below:

i- Individual wealth
ii- Personal wealth
iii- National wealth
iv- Global / International wealth
v- Social wealth

2.3.1 Individual Wealth:

The "worth of all the resources" that a person, business, or nation
possesses is known as wealth. The combined value of everything a person or

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Ch-2 Basic Concepts of Economics MGT-331

business owns that is exchangeable for money, products, or services

determines their wealth.

Wealth not only enables people or organizations to live the lifestyle

they choose, but also gives them a sense of financial security in the face of
unforeseeable economic calamities like recessions. It can also be applied to
any kind of transaction, such as the purchase or sale of real estate or a
business. Its capacity to compare and categorize two people or things
according to their level of wealth is another advantage.

2.3.2 Personal Wealth:

Personal wealth is the overall value of a person's assets and
possessions, and it is commonly calculated to get a sense of how well-off
someone is financially, to aid in money management, or to calculate the size
of an inheritance.

2.3.3 National Wealth:

The term "national wealth" describes the entire amount of wealth
and goods produced by all forms of economic activity inside a country.
Planning for economic development and conducting economic analysis are
both significantly aided by national wealth. The entire value of assets,
including tangible assets and net foreign assets, held by all economic
departments (i.e., all citizens) of a country at a given point in time is what is
meant by this figure, which is called gross national wealth.

2.3.4 Global Wealth:

All the money and other assets that exist across the globe when taken
as a whole are referred to as global wealth.

2.3.5 Social Wealth:

Social wealth is the total value of the resources that you have to meet your
social or emotional needs. Humans are social and emotional beings, so
building social wealth is essential. Someone who is socially wealthy can lean
on others and satisfy their emotional needs.
Your relationships with others, such as family, friends, and
community, determine this. The people you surround yourself with will affect

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Ch-2 Basic Concepts of Economics MGT-331

your social wealth. To increase your social wealth, you should surround
yourself with good people with honest intentions.

2.4 Saving:

This term comes from the Arabic word "Hurr” and means "of free
condition". It refers to a slave or prisoner who made savings to recover his
freedom. Saving is a good practice, not only for families, businesses and
entrepreneurships, but also for the economy as a whole. The income not
spent on consumption is defined as Saving.

In economics, savings refers to “the money that a person has left over
after they subtract out their consumer spending from their disposable
income over a given time period”. The amount of money earned that is not
used for immediate expenses is saved. In other words, it refers to money that
is stored away for later use rather than being immediately spent. For
example, a person is earning Rs. 150,000 in a month and spent 125,000 on
purchasing of basic necessities, paying rent, utilities and fee of children etc.
The remaining 25,000 is his saving of that month.

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Ch-2 Basic Concepts of Economics MGT-331

Why do we need to save money? Savings can be utilized to achieve

goals in the short term, like purchasing a cell phone, laptop or in the long
term, like completing your education or purchasing a home or car or to
invest in business. Saving money can also help us cover unexpected
expenses, such as an illness, replace an appliance that cannot be repaired or
make an emergency trip.

Symbolically, saving is expressed as

For Business
Savings = Revenue – Expenditures
For Individuals
Savings = Income – Expenditures
Note that savings depends upon following two elements:
(a) Power to save
(b) Intention or willingness to save

The level of savings in the economy depends upon the ability of the
people to fulfill their consumption needs using a part of their income and the
willingness to save, which is driven by the returns on savings and investment.

2.4.1 Kinds of savings

(i) Personal / Individual savings
(ii) Corporate savings
(iii) Public savings
(iv) Compulsory savings
(v) Forced savings

2.4.2 Variables that affect Saving

An overview of the variables that affect saving levels

a) Interest rates: Saving money is more appealing when interest rates are
higher.
b) High Income: More savings are possible with rising income. Low-
income individuals cannot afford the luxury of saving.

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Ch-2 Basic Concepts of Economics MGT-331

c) Economic Growth: High consumer confidence and economic growth

promote relatively higher expenditure and a decline in the savings
ratio.
d) The age of Individual: Those in their 40s and 50s are more likely to
start saving for retirement. Seniors deplete their savings.
e) Cultural trends: certain cultures value saving more, while others
prioritize more borrowing and consumption.
f) Wealth: Household wealth is increased by rising home values, which
also reduces the need for other types of savings.
g) High inflation: High inflation may make it difficult to save money, but it
promotes the acquisition of fixed assets.

2.4.3 Steps to take to increase savings

a) To create peace in the country
b) To maintain political stability
c) To increase / raise income of people
d) To reduce rate of taxes
e) To control the inflation
f) To encourage investment

2.5 Investment:

Saving and investing are related, despite the fact that they are
independent economic concepts. Savings are any earnings that are not spent,

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Ch-2 Basic Concepts of Economics MGT-331

whereas investments are similar to savings that provide a higher rate of

return. Investment can grow into more than what it was initially worth.
Investment options include the stock market, precious metals, land, and real
estate.

The activity or practice of investing money in order to make a profit. If

you are investing money to buy something new that will grow your assets,
you are making a true investment.

Assets are instruments that provide revenue or profit; they are

termed assets because they accrue benefits over time, unless investments
result in losses. For example, purchasing of a new factory, new machinery or
new building.

2.5.1 Kinds of investment

Following are the different kinds of investment:

(i) Individual investment

(ii) Corporate investment
(iii) National investment
(iv) International investment

2.5.2 Determinants of Investment

This section examines different determinants of investment

a) The expected return on the investment

Investment is a sacrifice, which involves taking risks. This means that
businesses, entrepreneurs, and capital owners will require a return on their
investment in order to cover this risk, and earn a reward. In terms of the
whole economy, the amount of business profits is a good indication of the
potential reward for investment.

b) Interest rates
Investment is inversely related to interest rates, which are the cost of
borrowing and the reward to lending. Investment is inversely related to
interest rates for two main reasons.

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Ch-2 Basic Concepts of Economics MGT-331

(1) Firstly, if interest rates rise, the opportunity cost of

investment rises. This means that a rise in interest rates increases the
return on funds deposited in an interest-bearing account, or from
making a loan, which reduces the attractiveness of investment
relative to lending.
(2) Secondly, if interest rates rise, firms may anticipate that
consumers will reduce their spending, and the benefit of investing will
be lost. Investing to expand requires that consumers at least maintain
their current spending.

c) Amount of savings
Savings from households and businesses move into the financial sector,
making money available for investment. Saving more money could lower
interest rates and encourage business borrowing and investment.

2.5.3 Elements of Investment

Following are the elements of investment:
a) Tax System:
Investors are discouraged if tax rates are higher, so they will
avoid to make investment. But if tax rates are lower, then investor
are encouraged and make investment.

b) Expectation of Profit:
People prefer to invest when they expect a larger profit.
c) Economic Condition:
If purchasing power of the individuals is higher than they will
purchase consumer goods in high quality and expand their business.
Thus, investment will also increase.
d) Interest Rate
If rate of interest is more than the profit in business, then
people will lend the amount on interest basis, this will reduce
investment.
e) Political Stability

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Ch-2 Basic Concepts of Economics MGT-331

If in a country there is a political stability, people prefer to

invest.

2.6 Value:

In common language, the terms ‘value’ and ‘price’ are used as

synonym (the same). But in economics, the meaning of price is different
from that of value. Price is value expressed in terms of money. Value is
expressed in terms of other goods.

In economics, Value can be described as the benefit derived by the

customer from the product or service. In clearer terms, value is what a
customer perceives the product or service is worth to them. Value also
means the power to exchange a commodity with another.

Value of a product or service is the utility or worth of the product or

service for an individual. The value is decided by the marketplace on the
basis of the benefits received from the combination of features, or
specifications, present in a particular product. The combination of
features covers material or functional characteristics, product reliabili ty,
user-friendliness, appearance, customer support and technical
assistance, etc.

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Ch-2 Basic Concepts of Economics MGT-331

Example 01: If one pen is equal to two pencils and one pen can be had for
Rs.20. Then the price of one pen is Rs.20 and the price of one pencil is Rs.10.

Example 02: In the exchange of one-kilogram rice, you may get two kilograms
wheat. So, you can say that the value of 1 Kg rice is equal to 2 Kgs wheat. The
value of any commodity depends upon four factors which are scarcity,
transferability, utility and demand.

2.6.1 Factors which produce value

a) Scarcity: The availability is abundant or scarce?
b) Transferability: Whether ownership can be changed (Can it be sold)?
c) Utility: Whether it is useful and can be used?
d) Demand: Whether someone really need/want?

2.6.2 Characteristics / Specifications of Value

a) Immeasurable in nature since everyone's perception of a product's
value differs.
For Example: If a person has perfect eyesight, he would have
no need for glasses, whereas someone with different way of looking
would find them beneficial. We can therefore conclude from this
example that value depends on necessity and usefulness to the
person at a certain time.
b) Value can change over time.
For Example: A student's value of a book before tests is higher
than their value of the same book after passing the exam.
c) The availability of a good or service and consumer demand both play
a significant role in determining its value.
For Example: Suppose there is a shop for sale in a market
area. It has hundreds of buyers, which clearly describes its
demand. As the supply is less, and demand is more, the value
would be high.
d) Differs from one place to another.
For Example: The value of woolen clothes will be higher in
cold areas, as compared to a desert area.

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Ch-2 Basic Concepts of Economics MGT-331

EXERCISE No. 2
Long Questions
Q.1. Define income, also discuss the types of income with examples.
Q.2. Define savings, also describe its features and different types.
Q.3. Define investment. Explain the types of investment with examples.
Q.4. Define value, also discuss different factors which produce value in a
commodity or a service.

Short Questions
Q.1. Define utility with example.
Q.2. What is difference between utility and benefit?
Q.3. What is meant by income?
Q.4. Differentiate between national income and net-national income?
Q.5. Write three features of wealth.
Q.6. What is meant by international wealth, also give an example.
Q.7. Define saving with an example.
Q.8. What is meant by corporate investment?
Q.9. Define value, also give an example of value.
Q.10. Write any two features of “value”.

Multiple Choice Questions (MCQs)

Choose the correct answer from the given possible answers and circle it.

Q.1. The power of a good or service by which it can satisfy human want is
called……...?
(a) Wealth (b) Value
(c) Usefulness (d) Utility
Q.2. It is the income of a person during a specified period of time:
(a) Net income (b) National income

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Ch-2 Basic Concepts of Economics MGT-331

(c) Personal income (d) Net-national income

Q.3. Savings depend upon………...?
(a) Power to save (b) Willingness to save
(c) Both a & b (d) None of these
Q.4. If in results is an increase of national assets:
(a) Wealth (b) Saving
(c) Investment (d) Value
Q.5. To get profit by investing in a business is called………?
(a) Corporate investment (b) Personal investment
(c) National investment (d) International investment
Q.6. If a government invests to increase the assets of a country is
called….?
(a) Corporate investment (b) National investment
(c) International investment (d) Assets investment
Q.7. Investment means:
(a) To purchase a running business (b) To spend for a welfare
(c) To start a new business (d) All
Q.8. A mobile phone or a car are the examples of ……………. wealth?
(a) National (b) International
(c) Individual (d) Social
Q.9. Elements/Factors of value include:
(a) Scarcity (b) Utility
(c) Transferability (d) All
Q.10. The power of a commodity in exchange of which other commodities
can be obtained is called:
(a) Prestige (b) Utility
(c) Price (d) Value

Q. No. Answer Q. No. Answer

1 d 6 b
2 c 7 c
3 c 8 c

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Ch-2 Basic Concepts of Economics MGT-331

4 c 9 d
5 a 10 d

Answer Key

Reference:
1. Business Organization, Nisar-ud-Din, Aziz Publisher, Lahore
2. Introduction to Business, M. Saeed Nasir, Ilmi Kitab Khana, Lahore.
3. An Introduction to Modern Economics, S.M. Akhtar, United Limited,
Lahore.
4. Muhammad Irshad, Economics, Naveed Publications Lahore.
5. Sheikh Manzoor Ali, Economics, Ilmi Kutab Khana, Urdu Bazar,
Lahore.
6. Lioyd G Reynolds Irwin, Micro Economics — Analysis & Policy, Irwin
Homwood Illinois.
7. Saeed Nasir M A, Text book of Economics, Ilmi Kutab Khana, Lahore.
8. Salman Rizavi, Economics, Syed Mobin Mahmud & Co., Lahore.
9. K. K. Dewitt, Modern Economic Theory, S. Chand Publisher, New Delhi
India -2006. ISBN 10: 8121924634 / ISBN 13: 9788121924634
10. Nancy Smith Barrett, The Theory of Macro Economics Policy, Prentice
Hall.
11. Edward Shapiro, Macro Economic Analysis, Harcourt Brace.
12. Mankiw, “Principles of Economics” 7th Edition, (2008), Southwest
Publishers
13. A History of Economics “The Past as The Present” by: Galbraith, John
Kenneth. Published by David & Charles – 1987, pages 336: ISBN-10.
0241123887.
14. Miller, R. L –EconomicsToday-14th Edition (2005) Addison Wesley
15. McConnell and Bruce-Principles of Economics -17th Edition, (2006),
McGraw-Hill.
16. Weil, David N. (2012). Economic Growth. Third Edition, Pearson.
17. Williamson, Stephen D. (2010). Macroeconomics. Fourth Edition,
Prentice Hall.
18. Perloff, J.M. (2013). Microeconomics: Theory & Applications with
Calculus, 3rd Edition Pearson.

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Ch-2 Basic Concepts of Economics MGT-331

19. Nicholson, W. & Snyder, C. (2009). Intermediate Microeconomics

and Its Application, 11th Edition. Cengage Learning
20. Dougherty, Christopher – Introduction to Econometrics – 2nd
edition (2002), Oxford University Press.
21. Gujrati, D. J. - Basic Econometrics – 4th Edition (2003) McGraw-Hill
Company.

Chapter 3

Demand & Supply

Chapter Objectives
After completion of this chapter students will be able to:

 Understand law of demand and law of supply.

 Define demand
 Explain law of demand with the help of schedule and diagram.
 State assumptions and limitation of law of demand.
 Define supply
 Explain law of supply with the help of schedule and diagram
 State assumptions and limitation of law of supply.

3.1 Definition of demand:

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Ch-3 Demand & Supply MGT-331

Demand may be defined as “the amount of some product or service that a

consumer is willing and able to purchase at some specific price”. In simple
words, demand means a desire or want. But in economics demand means
such desire or want, for which you may fulfill following two conditions:
(i) Willingness to purchase
(ii) Power to purchase

Until unless these two conditions will not be fulfilled, your desire will not
become a demand.
For example, you want to eat a burger but you don’t have sufficient money
to purchase it. In this particular example, to have a burger is your desire but
it may not be your demand as second condition “power to purchase” is not
being fulfilled. On the other hand, you don’t want to eat burger even that
you have ability to purchase it. Still that burger is not your demand as first
condition “willingness to purchase” is not being fulfilled.

3.2 Law of demand:

Marshall defined law of demand as “other things being equal, the amount
demanded of a product increases with fall in price and diminishes with the
rise in the price”.
In simple words, law of demand states that “if all other factors remain
constant, when the price of a good or service increases its demand decreases
and when the price of a good or service decreases its demand increases”.

3.2.1 Explanation of law of demand with the help of

diagram & schedule:
If we have a look on law of demand, there is inverse relationship between
price and demand. Law will be applicable with the assumption that all other
factors will remain constant. Let’s study the law of demand with the help of
schedule and diagram.

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Ch-3 Demand & Supply MGT-331

Demand Schedule
Price per unit Quantity Demanded (units)
10 50
8 60
6 70
4 80
2 90

As shown in the above schedule of law of demand, it consists of two

columns: on left side price per unit in $ and at right side quantity demanded
in Kgs. on specific price.

Figure 3.1 Demand Curve

According to the above schedule & diagram, when the price of a commodity
(for example: wheat) is $ 10, let’s say the quantity demanded is 50 Kgs. When
its price will decrease from $ 10 to $ 8, its demand will increase and become
60 Kgs. Same like when price will be at $ 6, demand will be 70 Kgs and when
price will further decrease to $ 4 and $ 2, the quantity demanded will be 80
Kgs and 90 Kgs respectively.
Note that, price will always be taken at left side i.e. at vertical axis (Y-axis)
and quantity demanded at right side i.e. horizontal axis (X-axis) while making
the diagram of “law of demand”.
In the above diagram, DD is a demand curve which become into existence by
joining the all points where price and demand are being met and it is from
upward to downward in direction which shows negative relationship of price
and quantity demanded (inverse relationship)

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Ch-3 Demand & Supply MGT-331

3.2.2 Assumptions and limitations of law of demand:

The law of demand is based on the assumption that “remaining all other
factors constant” and if these assumptions are not fulfilled the law is no
more applicable in true spirit. These assumption or limitations are as below:

(a) No change in fashion, customs and habits

There should not any change in fashion, customs and habits of consumers.
These must be constant. If there is any variation or change in habits of
people, fashion or their customs the law will not be applicable.

(b) No change in buying power

Consumer’s buying behavior should not be changed. Buying power usually
change with the increase or decrease of income. So, consumer’s income
must be same. If their income or purchasing behavior will be change, the law
will not be applicable.

(c) No change in prices of alternative/related goods

Alternative goods prices which consumers can adopt in the replacement of
that particular good or service must be same. If the alternative goods prices
will change, the law will not be applicable.

(d) No change in size and composition of population

There should not be at once change in population as when there will be
sudden change in the population, the demand of different items will increase
haphazardly. So, what’s ever the price of commodities, the demand will shift
upward and the law will not be applicable.

(e) No alternative goods discovered

Alternate goods which can fulfil the need of that particular good or service
may not be discovered. If alternative goods will be discovered and offered to
consumers to purchase then this law will not be applicable.

(f) No change in value of money

The value of money should remain same. There should not any change in the
value of money otherwise the law will not be fully applicable.

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Ch-3 Demand & Supply MGT-331

(g) No expectation of price change in future

It is assumed that there will be no expectation of future price changes
because this will affect present items demand. When consumers will come to
know the prices are being increased in near future, they will purchase more
and demand will increase.

3.3 Definition of supply:

In economics the term “supply” has special meaning. Supply can be defined
as, “the amount of a commodity which sellers are willing and able to sell at a
given price during a given period of time”.

3.4 Law of supply

The law of supply states that, “all other factors being equal, as the price of a
good or service increases, the quantity of goods or services that suppliers
offer will increase, and vice versa”.
In simple words, we may define the law of supply as “if all other factors
remain constant, when the price of a good or service increases its supply
increases and when the price of a good or service decreases its supply also
decreases”.

3.4.1 Explanation of law of supply with the help of

diagram & schedule:
If we have a look at law of supply, there is direct relationship between price
and supply. Law will be applicable with the assumption that all other factors
will remain constant. Let’s study the law of supply with the help of schedule
and diagram.

Supply Schedule
Price (in Rs.) Quantity Supplied (in Kg.)
10 1
20 2
30 3
40 4
50 5

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Ch-3 Demand & Supply MGT-331

As shown in the above schedule of law of supply, it consists of two columns:

on left side price per unit is Rupees and on right side quantity supplied in Kgs.
on specific price.

Figure 3.2 Supply Curve

According to the above diagram, there is positive relationship between price
& quantity supplied of a commodity (for example: sugar). When the price of
sugar is Rs. 10, its supply is 1 Kg. When price increase from Rs. 10 to Rs. 20,
quantity supplied shift upward from point A to point B with quantity 2 Kgs.
When price further increases from Rs. 20 to Rs. 30, Rs. 40 and Rs. 50, its
supply curve further shifts upward at point C, D, and E with rise in supplied
quantity 3 Kgs, 4 Kgs & 5 Kgs respectively.

3.4.2 Assumptions & limitations of law of supply:

The law of supply is based on the assumption that “remaining all other
factors constant” and if these assumptions are not fulfilled the law is no
more applicable in true spirit. These assumption or limitations are as below:

(a) No change in production cost

Cost which is being incurred for producing goods or services may not change.
If production cost will increase due to any reason, the law will not be
applicable.

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Ch-3 Demand & Supply MGT-331

(b) No change in production methods or technology

There should not be any change in production methods or change in
technology through which supplied products are being made. As if it changes,
and advance technologies are in practice, products may offer at lower prices
and law may not apply.

(c) No change in resources

For applicability of this law, there should not any change in the resources of
the country.

(d) No auction or clearance sale by seller

Sometimes, supplier offer sale to clear the out-fashion stock or for the sake
of urgent money. Usually in these situations, supplier offers low price. In
these cases, law of supply will not be applicable.

(e) No change in weather

Supply of agricultural products usually changes due to changes in weather
conditions. For applicability of this law, there should not be any change in the
weather of the country.

(f) No change in taxes

If government impose new taxes on the producing & supplied items, will
cause high production cost of that particular products or services and law will
not be applicable.

(g) No change in number of firms in the market

The firms which are engaged in producing the same nature products must be
same and there should not increase or decrease of suppliers otherwise the
law will not be applicable.
Under following circumstances, the law of supply does not apply. These
limitations are:
(i) Uncertain condition of market
(ii) Fear of war
(iii) Perishability factor of product
(iv) Requirement of urgent money
(v) Transferability

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Ch-3 Demand & Supply MGT-331

EXERCISE No. 3

Long Questions
Q.1. Define demand. Explain law of demand with the help of diagram or
schedule.
Q.2. Define supply. Explain law of supply with the help of diagram or
schedule.
Q.3. Define law of demand. Describe different assumptions of law of
demand.
Q.4. Define law of supply. Describe different assumptions of law of supply.

Short Questions
Q.1. Define demand.
Q.2. Define law of demand.
Q.3. Define supply.
Q.4. Define law of supply.
Q.5. How is the trend of demand curve?
Q.6. How is the trend of supply curve?
Q.7. Write any three assumptions of law of demand.
Q.8. Write any three assumptions of law of supply.
Q.9. Why law of supply does not apply when supplier need money
urgently?
Q.10. Make the schedule of law of supply.
Q.11. Make the schedule of law of demand
Q.12. Briefly explain law of demand with an example.
Q.13. Briefly explain law of supply with an example.
Q.14. What is meant by perishable good?
Q.15. What is the effect of transferability on law of supply?

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Ch-3 Demand & Supply MGT-331

Multiple Choice Questions (MCQs)

Choose the correct answer from the given possible answers and circle it.

Q.1. In economics, demand means?

(a) Power to purchase (b) Willingness to purchase
(c) Both a & b (d) None of these
Q.2. Nature of relation between price and demand is:
(a) Direct (b) Mix
(c) Inverse (d) No relation
Q.3. Slope of demand curve is towards?
(a) Center (b) left to right
(c) right to left (d) positive
Q.4. Relationship between price and supply is:
(a) Negative (b) Positive
(c) Constant (d) No relation
Q.5. Slope of supply curve is towards?
(a) Center (b) Downward
(c) Upward (d) Negative
Q.6. According to law of demand, the relationship between price and
demand is:
(a) Positive (b) Negative
(c) Neutral (d) Natural
Q.7. According to law of supply, the relationship between price and supply
is:
(a) Positive (b) Negative
(c) Neutral (d) Natural
Q.8. It is not included in perishable goods:
(a) Milk (b) Meat
(c) Eggs (d) Iron safe
Q.9. Nature of relation between price and supply is:
(a) Direct (b) Indirect
(c) Inverse (d) Common
Q.10. The term “all other factors remain constant” is the assumption of?

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Ch-3 Demand & Supply MGT-331

(a) Law of demand (b) Law of supply

(c) Both laws (d) it is not an assumption
Q.11. What is meant by “other things being equal”?
(a) Assumption (b) Limitations
(c) Exceptions (d) All of these
Q.12. Increase or decrease in price and supply is called?
(a) Law of demand (b) Law of supply
(c) Law of gravity (d) Law of motion
Q.13. Offering goods and services in a market at particular price is called?
(a) Demand (b) Supply
(c) Price (d) Business
Q.14. According to law of demand, when price of a commodity increase, its
demand becomes……….?
(a) Increase (b) Decrease
(c) Same (d) All of these
Q.15. Which is the assumption of “law of demand”?
(a) No change in habits, fashion and customs
(b) No change in income of consumers
(c) No change in prices of alternate goods
(d) All of theses

Answer Key

Q. No. Answer Q. No. Answer Q. No. Answer

1 c 6 b 11 d
2 c 7 a 12 b
3 b 8 d 13 b
4 b 9 a 14 b
5 c 10 c 15 d

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Ch-3 Demand & Supply MGT-331

Reference:
1. K. K. Dewitt, Modern Economic Theory, S. Chand Publisher, New Delhi
India -2006. ISBN 10: 8121924634 / ISBN 13: 9788121924634
2. An Introduction to Modern Economics, S.M. Akhtar, United Limited,
Lahore.
3. Economics by Sheikh Manzoor Ali, ILLMI Kutab Khana, Urdu Bazar,
Lahore.
4. Economics by Muhammad Irshad, Naveed Publications Lahore.
5. Saeed Nasir M A, Text book of Economics, ILLMI Kutab Khana, Lahore.
6. Salman Rizavi, Economics, Syed Mobin Mahmud & Co., Lahore.
7. Lioyd G Reynolds Irwin, Micro Economics — Analysis & Policy, Irwin
Homwood Illinois.
8. Small Business and Entrepreneurship, Paul Burns & Jim Dewhurst,
Red Globe Press London. https://doi.org/10.1007/978-1-349-24911-4
9. Business Organization, Nisar-ud-Din, Aziz Publisher, Lahore
10. Introduction to Business, M. Saeed Nasir, Ilmi Kitab Khana, Lahore.
11. Edward Shapiro, Macro Economic Analysis, Harcourt Brace.
12. Mankiw, “Principles of Economics” 7th Edition, (2008), Southwest
Publishers
13. McConnell and Bruce-Principles of Economics -17th Edition, (2006),
McGraw-Hill.
14. Williamson, Stephen D. (2010). Macroeconomics. Fourth Edition,
Prentice Hall.
15. Nicholson, W. & Snyder, C. (2009). Intermediate Microeconomics and
Its Application, 11th Edition. Cengage Learning
16. Dougherty, Christopher – Introduction to Econometrics – 2nd edition
(2002), Oxford University Press.
17. Gujrati, D. J. - Basic Econometrics – 4th Edition (2003) McGraw-Hill
Company.
18. Fredric S. Mishkin, (1995), Financial Markets and Money, Harper &
Row Publishers.
19. Laider, David E.W (1996), The Demand for Money: Theories, Evidence
and Problems (Fourth edition), Harper & Row, Publishers, New York.
20. Miller, R. L. and David Van Hose, (2001), Money, Banking & Financial
Markets. South Western, Singapore.
21. Baye, Michael, Managerial Economics and Business Strategy. Sixth
Edition. Boston: McGraw-Hill Irwin.

Page | 11
Ch-4 Factors of Production MGT-331

Chapter 4

Factors of Production

Chapter Objectives
After completion of this chapter students will be able to:

 Understand four factors of production.

 Define the four factors of production.
 Explain labour and its features.
 Describe capital and its peculiarities.

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Ch-4 Factors of Production MGT-331

Factors of Production:
All the resources from which the process of production of wealth become
into existence are known as factors of production. All goods and services are
produced by the combination of these factors of production. Following are
the main factors of production:

1. Land
2. Labour
3. Capital
4. Entrepreneurship/Organization

4.1 Land:
Land is the basic and more ancient factor of production. It is the first factor
of production. Generally, land means a part of earth or soil but
in economics, land means “all those natural (God gifted) resources which are
free of cost, contains utility and supply of these resources are fixed. For
example, air, water, sun light and heat etc.

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Ch-4 Factors of Production MGT-331

Following are the characteristics of land:

(i) Gift of nature

(ii) No mobility
(iii) Difference in fertility
(iv) Comparatively more durable
(v) Supply is fixed

4.2 Labour:
Labour is the second factor of production. Labour is defined as “any mental
or physical activity which is conducted for the sake of some reward”.
Physical activities are those in which a person is physically involved. For
example; working of a carpenter, mason or a barber. Mental activities are
those in which mental efforts are involved. For example, working of an
engineer, doctor, layer or a teacher. They all receive some rewards against
their services.
As defined above, mental or physical activities whose motive is to get some
reward is called labour but if someone is doing physical/mental efforts not
for the sake of reward will not come in the category of labor. For example, a
teacher teaches his child or an engineer repair his own car. Any activity
which is done for pleasure, fitness, hobby etc. is not to be considered as part
of labour.

4.2.1 Features of labour

Following are the features of labour:

(i) Low mobility

You may not insist a laborer to change their profession or change of place of
work without their consent.

(ii) Labour and laborers go hand to hand

Labour and laborers are always jointly related with one another.

(iii) Agree to work on low wages

Laborers has weak bargaining power and usually ready to work on low
wages.

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Ch-4 Factors of Production MGT-331

(iv) Lack of storage

The labour of a laborer cannot be stored.

(v) Unused labour is spoiled

It is not possible to store the labour. Unused labour may be spoiled.

(vi) Sale of services

Laborers get rewards against their services which they provide

(vii) Fixation of worker’s wages

Fixation of wages of workers depends upon their professional skills and
expertise. More experienced worker gets more wages.

(viii) Difference in the capacity of workers

Different laborer has different capacity to work due to different factors like
health, education, physical fitness etc.

4.3 Capital:
Third factor of production is capital. Capital includes all goods that are
produced by humans and further used for producing goods or services. In
simple words, capital is the part of income/wealth which further invested to
generate wealth. We usually used the capital for following purposes:
(i) Purchasing land
(ii) Purchasing machinery
(iii) Purchasing raw material
(iv) Wages/salaries of employees
(v) Transportation charges
(vi) Advertisement expenses

4.3.1 Characteristics of capital

Following are the characteristics of capital:

(i) Part of wealth

Capital is the part of wealth and wealth belongs to an individual, corporation,
group, or a country.

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Ch-4 Factors of Production MGT-331

(ii) Additional income

Capital is a part of wealth which may further enhance your income be
investing in different projects.

(iii) Condition of goods

Capital is that part of wealth which is used to earn extra income by buying
new goods only.

4.4 Organization:
Fourth factor of production is entrepreneurship or organization. A person
who manage the organization is called “entrepreneur” or “organizer”. The
entrepreneur combined all three factors of production to produce products
and services. According to Stonier and Hague, the main difference between
other factors of production and organization is that land, labour and capital
are hire-able but organization is not hire-able.

4.4.1 Functions of entrepreneur

(i) Commencement of business
(ii) Decision of level of business
(iii) Business management
(iv) Suitable combination of factors of production
(v) Decision about advertisement
(vi) Division of rewards
(vii) Innovative products
(viii) Sales of goods

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Ch-4 Factors of Production MGT-331

EXERCISE No. 4

Long Questions
Q.1. What is meant by factors of production? Explain each with the help of
examples.
Q.1. Define land. Describe its features in detail.
Q.1. Define capital. Also write features of capital with examples.
Q.1. Define organization. Write different functions of an organizer.

Short Questions
Q.1. How many factors of production are? Write their names.
Q.2. What is meant by factors of production?
Q.3. Which factor of production is more important and why?
Q.4. According to economics, what is meant by land?
Q.5. Write three features of land.
Q.6. Define labour.
Q.7. Differentiate between physical and mental work with examples.
Q.8. Write three features of labour.
Q.9. What is meant by bargaining power of labour?
Q.10. Define capital.
Q.11. Write three features of capital.
Q.12. Define entrepreneur/organization.
Q.13. Write three functions of organizer.

Multiple Choice Questions (MCQs)

Choose the correct answer from the given possible answers and circle it.
Q.1. Number of factors of production are?
(a) Two (b) Four
(c) Six (d) Eight
Q.2. Reward of land is called?
(a) Freight (b) Price
(c) Rent (d) Interest
Q.3. An ancient and most important factor of production is:
(a) Land (b) Labour

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Ch-4 Factors of Production MGT-331

(c) Capital (d) Organization

Q.4. It is not including in natural resources:
(a) Rain (b) Air
(c) Sunlight (d) Money
Q.5. Supply of land is:
(a)Less flexible (b) Variable
(c) Unlimited (d) Fixed
Q.6. It is non-transferable but rights of ownership may be changed:
(a) Land (b) Labour
(c) Capital (d) Organization
Q.7. This is gift of God.
(a) Organization (b) Capital
(c) Labour (d) Land
Q.8. This is reward of labour:
(a) Profit (b) Wages
(c) Interest (d) Rent
Q.9. This is physical and mental effort:
(a) Land (b) Labour
(c) Capital (d) Organization
Q.10. The labour of a professor is called:
(a) Physical (b) Mental
(c) Machinery (d) None
Q.11. The part of wealth which is used to produce more wealth is called:
(a) Land (b) Labour
(c) Capital (d) Organization
Q.12. The factor of production makes policy about process of production:
(a) Land (b) Labour
(c) Capital (d) Organization
Q.13. Machinery, raw material, building, tools and factories are called?
(a) Part of land (b) Savings
(c) Capital (d) None
Q.14. Reward of organization is:

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Ch-4 Factors of Production MGT-331

(a) Salary (b) Scholarship

(c) Profit (d) Tax
Q.15. Who distributes rewards of factor of production?
(a) Land (b) Labour
(c) Capital (d) Organization

Answer Key

Q. No. Answer Q. No. Answer Q. No. Answer

1 b 6 a 11 c
2 c 7 d 12 d
3 a 8 b 13 c
4 d 9 b 14 c
5 d 10 b 15 d

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Ch-4 Factors of Production MGT-331

Reference:
1. Business Organization, Nisar-ud-Din, Aziz Publisher, Lahore
2. Economics by Sheikh Manzoor Ali, ILLMI Kutab Khana, Urdu Bazar,
Lahore.
3. Introduction to Business, M. Saeed Nasir, Ilmi Kitab Khana, Lahore.
4. An Introduction to Modern Economics, S.M. Akhtar, United Limited,
Lahore.
5. Economics by Muhammad Irshad, Naveed Publications Lahore.
6. Saeed Nasir M A, Text book of Economics, ILLMI Kutab Khana, Lahore.
7. Lioyd G Reynolds Irwin, Micro Economics — Analysis & Policy, Irwin
Homwood Illinois.
8. Small Business and Entrepreneurship, Paul Burns & Jim Dewhurst,
Red Globe Press London. https://doi.org/10.1007/978-1-349-24911-4
9. Nancy Smith Barrett, The Theory of Macro Economics Policy, Prentice
Hall.
10. Edward Shapiro, Macro Economic Analysis, Harcourt Brace.
11. Gujrati, D. J. - Basic Econometrics – 4th Edition (2003) McGraw-Hill
Company.
12. Fredric S. Mishkin, (1995), Financial Markets and Money, Harper &
Row Publishers.
13. Laider, David E.W (1996), The Demand for Money: Theories, Evidence
and Problems (Fourth edition), Harper & Row, Publishers, New York.
14. Mankiw, “Principles of Economics” 7th Edition, (2008), Southwest
Publishers
15. McConnell and Bruce-Principles of Economics -17th Edition, (2006),
McGraw-Hill.
16. Williamson, Stephen D. (2010). Macroeconomics. Fourth Edition,
Prentice Hall.
17. Nicholson, W. & Snyder, C. (2009). Intermediate Microeconomics and
Its Application, 11th Edition. Cengage Learning
18. Dougherty, Christopher – Introduction to Econometrics – 2nd edition
(2002), Oxford University Press.
19. Miller, R. L. and David Van Hose, (2001), Money, Banking & Financial
Markets. South Western, Singapore.
20. Baye, Michael, Managerial Economics and Business Strategy. Sixth
Edition. Boston: McGraw-Hill Irwin.

Page | 10
Ch-5 Business Organization MGT-331

Chapter 5

Business Organization

Chapter Objectives
After completion of this chapter students will be able to:

 Understand forms of organization.

 Describe sole proprietorship, its merits and demerits.
 Explain partnership, its advantages and disadvantages.
 Describe joint stock company, its merits and demerits.
 Distinguish between public limited company and private limited
company.

Business Organization:
Business may be defined as “such economic activities, whose motive is to
earn profit” is called business and about we have studied in the previous
lecture in detail. So, combining the both, business organization means that
such organizations where economic activities are being conducted with the
motive of profitability. There are three main types of business organizations
which are appended below:

a) Sole proprietorship
b) Partnership
c) Joint stock company

5.1 Sole Proprietorship:

Sole proprietorship is the simple and oldest form of business organization.
Sole proprietorship is such business organization in which a single person is
responsible for commencing, managing, controlling and organizing the
business. He independently responsible for all decision like how much &
where to invest, what to produce, where to sell, how to sell, whom to be
recruited etc. In case of profit or loss, he is independently responsible and

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Ch-5 Business Organization MGT-331

usually not answerable to anyone. Following are some merits and demerits
of sole proprietorship.

5.1.1 Merits of sole proprietorship:

(i) Independency
Person who starts sole proprietorship business is independent in all decisions
and may not answerable to anyone.

(ii) Easy transfer of business

This business can be transfer easily from one person to another.

(iii) Easy formation

There is no legal binding in starting sole proprietorship business. Anyone can
start any business of his expertise and available resources.

(iv) Personal interest

You may start business of your personal interest or as per your experience or
capabilities.

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Ch-5 Business Organization MGT-331

(v) Start with low capital

This business can be started with low capital. More investment is not
required.

(vi) Low organizational expense

As this business is small in size, so there are low organizational expenses.

(vii) Entire profit

The entire profit received from the business is of the entrepreneur.

(viii) Easy to get loan

As the owner of the business is one, he/she can get a loan from any financial
institution like bank etc.

(ix) Complete supervision

The owner of the business is responsible for complete look after and
supervision of the business i.e. right from purchasing of raw material to
finished goods.

(x) Direct relation with others

Owner has direct relationship with supplier, employees, customers etc. in
dealing day to day matters of business.

(xi) Secrecy
There is secrecy in sole proprietorship business activities. As single owner
involves in business so secrecy may be maintained in different matters of
organization like, profit margin, raw material, suppliers, process etc.

(xii) Business closing

If owner wants to wind up his business, he can easily close or change the
business. There is no legal binding to close the business.

(xiii) More flexible

There is flexibility in sole proprietorship business. Owner may change
business according to market situation.

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Ch-5 Business Organization MGT-331

(xiv) Saving of tax

As the business is at small scale, less or no tax is applicable. So, there may be
saving of tax in this business.

(xv) Immediate decision

Due to single owner, immediate decisions can be made in day to day
business activities.

5.1.2 Demerits of sole proprietorship:

(i) Not suitable for large scale business
This type is not suitable for large scale businesses as it is very difficult for a
single owner to handle large scale business.

(ii) Lack of durability

This business is not long life and usually over in case of insolvency or death of
the owner.

(iii) Limited capital

As resources of a single person are limited so owner has to survive with
limited capital.

(iv) Limited management capability

Single person may not be expert in all matters of the organization. So, owner
has to run the business with limited management capabilities.

(v) Unlimited liability

The liability of the sole proprietorship is not limited to the invested amount.
In case of insolvency, the business as well as personal assets of the owner
can be sold in order to pay the claims of creditors.

(vi) Wrong decisions

As the single owner take all decisions of the organization, wrong decisions
can also be made due to lack of expertise which causes loss of business.

(vii) Personal presence

Personal presence is necessary to run this business as the owner of the
business in one. In the absence of sole proprietor, business activities stop.

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Ch-5 Business Organization MGT-331

(viii) Insolvency
Due to lack of experience in financial matters, owner become insolvent due
to non-payment of borrowings

(ix) Lack of expert services

Single person may not be expert in all the fields of business. Due to lack of
expertise, sometimes owner takes wrong decisions and face loss in the
business.

(x) Less public interest

Sole proprietor is not bound to prepare and issue the financial statements of
his business to the public. So, there is less public interest in this type of
business.

(xi) Limited life

This business has limited life and usually end with the solvency and death of
the owner.

(xii) Success depends upon one’s ability

Sole proprietorship business success depends upon the expertise and skills of
the sole proprietor himself.

5.2 Partnership:
Partnership is the second type of business in which two or more than two
persons jointly agreed to run a business with pre-decided profit/loss ratio.
Two or more than two persons do an agreement under the law of
partnership act 1932 and they all are legally bind to act upon all conditions
which they decided prior to start that business.
There is limitation of maximum and minimum partners in the partnership i.e.
maximum ten partners may run a business of banking sector and maximum
twenty in case of other than banking system while minimum condition of two
is applied in both categories.
Formally partnership may be defined as “it is a relation between the persons
who have agreed to share the profits of the business carried on by all or any
of them acting for all”.

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Ch-5 Business Organization MGT-331

5.2.1 Merits of Partnership:

Following are the advantage of partnership.

(i) Legal rights

This business become into existence under the partnership act 1932. All
partners have legal rights to dissolve the agreement in case of any dispute
between the partners and even one can sue if other partners do not
cooperate with them.

(ii) Easy formation

To start partnership business, the process is very easy. Two or more partners
just have a written or verbal agreement between them to start a legal
business.

(iii) Sufficient capital

As there are more than one partners involved this business so more capital
can be collected for running the business.

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Ch-5 Business Organization MGT-331

(iv) Distribution
The responsibilities of the business are distributed among the partners
according to their expertise and skills so that maximum profit may be
obtained. By this division, all partners concentrate on their work efficiently.

(v) Facility of loan

In partnership, there is facility of getting loan from any financial institute by
the mutual consent of partners.

(vi) Secrecy
There is secrecy in partnership business activities as the decisions are made
and implemented by the partners and always remains in them until unless
they share with someone.

(vii) Personal interest

As profit and loss has to be distributed among all partners as per agreed
ratio, so every partner does their assignments with keen interest to get
maximum profitability.

(viii) Service of capable persons

Every partner in the partnership business usually expert in their relevant
work so by using their expertise they may come with maximum output. So,
their company has services of capable persons.

(ix) Mutual cooperation

All partners by mutual cooperation struggle for maximum output as ultimate
objectives of any organization is to earn maximum profit.

(x) Direct relation with employees

All partners keep in touch with their respective/relevant employees working
under their supervision and solve their day to day issues. Employees feel
secure and work hard for achieving targets.

(xi) Relation with persons

Every partner has their personal relations in the market. Due to which, every
partner utilizes their maximum relations in the favor of organization’s
profitability.

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Ch-5 Business Organization MGT-331

(xii) Distribution of loss

As partners has an agreement between them, so in case of any loss, it may
distribute to all as per agreed ratio.

5.2.2 Demerits of Partnership:

(i) Lack of interest
As the profit/loss in the partnership is pre-decided, partners usually don’t
take much interest in the business.

(ii) Delay in business decisions

As many partners are involved and usually decisions are delayed due to non-
availability or difference of opinion of partners.

(iii) Disputes among partners

Sometimes, due to difference of opinions and personal liking disliking of
partners, they have disputes with one another which may cause the loss of
business.

(iv) Limited capital

As maximum twenty partners may participate in partnership business,
limited capital can be collected for running the business.

(v) Lack of trust of general public

In partnership, audit is not mandatory and usually company not publish their
financial statements so general public have less trust on this type of business.

(vi) Unlimited liability

The liability of the partners is not limited. In case of insolvency, the business
as well as personal assets of the owner can be sold in order to pay the claims
of creditors.

(vii) Lack of organizational skills

Most of the time, all partners are not well experienced in their respective
work which may cause financial loss of the company.

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Ch-5 Business Organization MGT-331

(viii) Difficulty in withdrawing of capital

It is not easy to get back the invested capital from the business without the
consent of all partners. If one is not willing to continue partnership further,
there are some complexities which the partner has to face while in other
types of businesses it is quite easy.

(ix) Transfer of share

In partnership, partner cannot transfer his/her shares without mutual
consent of other partners. In case other partners agree, previous agreement
will be dissolved and another agreement will be made. While in other types
of business, partner can transfer shares to anyone without taking consent of
others.

(x) Uncertain future

The future of partnership is uncertain as the agreement of partnership may
be dismissed in many cases like, in case of any dispute between partners,
death of any partner etc. While joint stock company has not this drawback.

(xi) Nepotism
Every partner in this business try to induct his relatives or near and dear ones
in the company and usually below merit people may be hired due to
nepotism which ultimately cause loss in business.

(xii) Lack of confidence

Usually partners do not trust on one another due to different reasons which
create clashes between them. It effects the efficiency of business and
sometimes cause for winding up the business.

5.3 Joint Stock Company:

Third type of business organization. According to Company Act 2017 which
has replaced Company Act 1984, a joint stock company may be defined as
“joint-stock company is a business owned by its investors, with each investor
owning a share based on the amount of stock purchased”.
In simple words, Joint Stock Company is a company in which different
shareholders jointly invest their capital in the company which is called
“shares”, for the sake of getting dividend (profit). These shares can easily
sale, purchase or transfer. Company affairs are managed by the board of

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directors. Joint Stock Company may be called a “corporation”, or “public

company” or just “company”.

5.3.1 Merits of Joint Stock Company:

Following are different merits or advantages of a joint stock company:

(i) Transfer of shares

In this company, shareholders are free to transfer their shares to anyone
without mutual consent of other shareholders.

(ii) Large scale of business

This type is more suitable for large scale business. More capital can be
collected as number of shareholders/partners are more.

(iii) Experience & research

These companies spend large amount on research and development in
finding innovative methods and procedures for the organization through
which organization’s profitability can be increased.

(iv) Democratic style

Board of directors who are responsible for running the business are elected
through democratic style. All shareholders participate in electing BOD’s.

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Ch-5 Business Organization MGT-331

(v) Long life

This type of company is usually long life and may not wind up business
activities by insolvency or death of any shareholder.

(vi) External Audit

It is mandatory, the company has to be audited by external auditors at least
once a year and the financial reports are publicly available for all
shareholders.

(vii) Limited liability

If the company fails to pay its obligations, there will be no effect on personal
assets of shareholders. It is not the responsibility of shareholders to pay
those debts on the behalf of company.

(viii) Services of experts

As company has sufficient capital, services of experts can be attained for the
betterment and profitability of the company.

(ix) Facility of loan

As the company has its legal entity, it can easily borrow loan from any
financial institute in its name. All assets of the company are purchased or
sale in the name of company not in individual’s name.

(x) Trust of general public

This company becomes into existence under the company act 2017 and its all
financial record is open for all shareholders. Shareholders can observe the
position of the company through its financial reports which are dually
verified by internal and external auditors. So, shareholders have trust on this
type of company.

(xi) Government incentives

Government usually offer different incentives to these companies while
making policies, system & procedure or enforcing any law about industries.

(xii) Administration
The administrative and production matters of these companies are
administered by board of directors. These directors are more experienced
and technical in their field.

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5.3.2 Demerits of Joint Stock Company:

Following are different demerits or disadvantages of a joint stock company:

(i) Heavy expenses of formation

The process of formation of this company is lengthy, complicated and
required heavy expenses.

(ii) Difference of interests

Board of directors focus more on their interests rather shareholders as they
are supposed to manage the whole business activities.

(iii) Difference of opinion

There is difference of opinion between board of directors, managers and
shareholders. BOD’s usually want to re-invest the profit so that organization
size may grow, management usually concern with their increments, bonuses
and other fringe benefits and shareholder concern is that maximum dividend
to be given to them against their shares.

(iv) Lack of secrecy

As by law, company has to publish an annual report regarding financial
matters like profit/loss statements, balance sheet etc. so secrecy of the
company may compromise.

(v) Double taxes

In this company double tax has to pay to government. First, the company pay
taxes to government on its annual income itself. Second, when profit is
distributed to all shareholders, every shareholder has to pay tax on his/her
income receive from the company individually.

(vi) Nepotism
As board of directors supposed to look after all the matters of company and
involved directly in operations and administration, they usually practice
nepotism. They hire their relatives, near and dear ones at different key
positions without keeping in view that whether they are suitable or not
which in return cause wrong decisions and loss.

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(vii) Relations between employee & employer

There is almost no direct interaction between employees and employer
which may cause misunderstanding between them.

(viii) Chances of fraud

As all shareholders are not involved in the business directly, they don’t know
technicalities of the business.

(ix) Formation of monopoly

In joint stock Company, production is on large scale and usually they create
monopoly in the production of goods and survival of small & medium
business is crucial.

5.3.3 Types of registered companies:

Following are two main types of registered companies under the Company
Act 2017.
(a) Public Company
(b) Private Company

 Distinguish Public Limited Company and

Private Limited Company

Private Limited Company Public Limited Company

(i) Number of owners

There can be minimum two owners There can be minimum three owners
and maximum up to fifty owners in and for maximum, there is no limit in
the private limited company. the public limited company.

(ii) Number of directors

There are at least two directors in There are at least seven directors in
private limited company. public limited company.

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Ch-5 Business Organization MGT-331

(iii) Commencement certificate

Private limited company can Public limited company cannot

commence its business right after commence its business right after
receiving the certificate of receiving the certificate of
incorporation. It has no need to take incorporation. But it has to take a
certificate for commencing the certificate of commencing business.
business.

(iv) Prospectus

According to law, there is no binding There is binding by law to file the

to file the prospectus with the local prospectus with the local registrar
registrar’s office office.

(v) Capital

This company raises required capital This company raises required capital
by private arrangements. General by offering shares to general public.
public is not allowed to purchase its They are allowed to purchase
shares. shares.

(vi) Transfer of shares

Shares of private limited company is Each shareholder is entitled to

not allowed to transfer in other’s transfer his/her shares to anyone
name. without the consent of other
shareholders.

(vii) Listed in stock exchange

This company is not listed in stock This company can be listed in stock
exchange. exchange.

(viii) Financial statements

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Ch-5 Business Organization MGT-331

Private companies are not required to Public limited companies are bound
submit copies of financial statement to submit copies of financial
analyses to the registrar office or to statement analyses to the registrar
general public. office and stock exchange. Every
shareholder has rights to view these.

(ix) Title

Every private limited company has to Every public limited company has to
mention word “private limited” or mention word “limited” or “Ltd”
“Pvt Ltd” with its name. with its name.

(x) Statutory meeting

Private limited companies have no Public limited companies, by law

need to conduct statutory meetings or bound to conduct statutory
to submit meeting reports in registrar meetings and also to submit its
office. meeting points to the registrar
office.

(xi) Scale of business

Due to limited owners, the capital and As there are unlimited shareholders,
other resources remain limited so the capital and other resources are
business in not vast. more so business can be vast by
issuing shares and debentures to the
general public.

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Ch-5 Business Organization MGT-331

EXERCISE No. 5

Long Questions
Q.1. Define sole proprietorship. Also describe merits of sole
proprietorship.
Q.2. Define sole proprietorship. Also describe its demerits.
Q.3. Define partnership. Also describe merits of partnership.
Q.4. Define partnership. Also describe its demerits.
Q.5. Define Joint Stock Company. Also describe merits of Joint Stock
Company.
Q.6. Define Joint Stock Company. Also describe its demerits.
Q.7. Distinguish public limited company and private limited company.

Short Questions
Q.1. Write three kinds of business organization.
Q.2. Define sole proprietorship.
Q.3. Write any three merits of sole proprietorship.
Q.4. How many partner(s) (minimum and maximum) can be participate in
sole proprietorship?
Q.5. Write any three disadvantages of sole proprietorship.
Q.6. Write three features of sole proprietorship.
Q.7. What is the mode of profit distribution in sole proprietorship?
Q.8. Define partnership.
Q.9. Write any three advantages of partnership.
Q.10. Write three features of partnership.
Q.11. Write any three disadvantages of partnership.
Q.12. How many partners (minimum and maximum) can be participate in
partnership?
Q.13. What is meant by agreement of partnership?
Q.14. What is the mode of profit distribution in partnership?
Q.15. What is meant by “unlimited liability” in partnership?

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Ch-5 Business Organization MGT-331

Q.16. Define Joint Stock Company.

Q.17. Write any three advantages of Joint Stock Company.
Q.18. Write any three disadvantages of Joint Stock Company.
Q.19. What is the mode of profit distribution in Joint Stock Company?
Q.20. How many partners/shareholders (minimum and maximum) can be
Q. participate in Joint Stock Company?
Q.21. What is meant by “limited liability” in Joint Stock Company?
Q.22. Write three features of Joint Stock Company.
Q.23. Write any three differences in public & private limited company.
Q.24. Define public limited company.
Q.25. Define private limited company.
Q.26. How public limited company collect capital for business?
Q.27. What is the prospectus of the Company?
Q.28. What is meant by incorporation of a Company?

Multiple Choice Questions (MCQs)

Choose the correct answer from the given possible answers and circle it.

Q.1. Sole proprietorship business is suitable for?

(a) Small scale business (b) Medium Scale business
(c) Large scale business (d) All
Q.2. Anyone can start sole proprietorship business:
(a) After approval of govt. (b) According to Act 1932
(c) Whenever he/she wants (d) None of theses
Q.3. In sole proprietorship, capital is:
(a) Limited (b) Unlimited
(c) Abundant (d) All
Q.4. Economic activities whose purpose is to earn profit is called:
(a) Profit (b) Share
(c) Business (d) Dividend
Q.5. Sole proprietorship is ………type of business:
(a) Out dated (b) Latest

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Ch-5 Business Organization MGT-331

(c) Modern (d) Oldest

Q.6. Minimum number of partner(s) in sole proprietorship business is/are?
(a) Zero (b) One
(c) Two (d) Three
Q.7. Life of sole proprietorship business is:
(a) Long (b) Short
(c) Fixed (d) None
Q.8. In sole proprietorship, the relationship of sole proprietors with
customers are:
(a) Direct (b) Indirect
(c) Not exist (d) Both b & c
Q.9. Partnership business is formed under act:
(a) 1913 (b) 1932
(c) 1984 (d) 2021
Q.10. Liability of partners in partnership is:
(a) Unlimited (b) Limited
(c) Fixed (d) None
Q.11. Minimum number of partners in partnership:
(a) 20 (b) 10
(c) 7 (d) 2
Q.12. Distribution of profit/loss in partnership is made:
(a) As per agreement (b) As per capital ratio
(c) As per partner’s working (d) Equal
Q.13. Registration of partnership is legally:
(a) Mandatory (b) Not mandatory
(c) Depends on partner’s will (d) both b & c
Q.14. Maximum number of partners in banking system under partnership
is:
(a) 2 (b) 10
(c) 20 (d) Unlimited
Q.15. By the death of any partner, business will be:
(a) Continued (b) winded up

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Ch-5 Business Organization MGT-331

(c) Transferred (d) None

Q.16. Joint Stock Company is formed under …………...act in Pakistan.
(a) 1876 (b) 1932
(c) 1984 (d) 2017
Q.17. A joint stock company is a voluntary association of individuals for?
(a) Earning profit (b) Welfare
(c) Society (d) All are correct
Q.18. Liability of shareholders is……………... in joint stock company?
(a) Limited (b) Unlimited
(c) Fixed (d) All
Q.19. Shares of public limited company are ……….?
(a) Transferable to anyone
(b) Non-transferable to anyone
(c) Government approval required for transfer
(d) Other shareholders consent required for transfer
Q.20. Minimum number of partners/shareholders in a public limited
company as per act 2017 are?
(a) 2 (b) 3
(c) 7 (d) 10
Q.21. Minimum number of partners/shareholders in a private limited
company are?
(a) 2 (b) 3
(c) 7 (d) 10
Q.22. Maximum number of shareholders in a public limited company?
(a) 10 (b) 1000
(c) 5000 (d) Unlimited
Q.23. Minimum number of promotors in a public limited company?
(a) 2 (b) 5
(c) 7 (d) 50
Q.24. Minimum number of promotors in a private limited company?
(a) 2 (b) 3
(c) 5 (d) 7

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Ch-5 Business Organization MGT-331

Q.25. A document through which general public is offered to buy shares of

the company is called?
(a) Memorandum of association (b) Articles of association
(c) Prospectus (d) Statement in lieu of
prospectus
Q.26. A document which is prepared for guidance of public outside the
company is called?
(a) Memorandum of association (b) Articles of association
(c) Prospectus (d) Statement in lieu of
prospectus
Q.27. A document which is prepared for rules and regulation for smoothly
running internal matters of the company is called?
(a) Memorandum of association (b) Articles of association
(c) Prospectus (d) Statement in lieu of
prospectus
Q.28. A company which cannot start its business without certificate of
commencement of business is called?
(a) Statutory company (b) Charted company
(c) Private limited company (d) Public limited company
Q.29. A company which can start its business without certificate of
commencement of business is called?
(a) Statutory company (b) Charted company
(c) Private limited company (d) Public limited company
Q.30. Public limited company and private limited company are the types of?
(a) Sole Proprietorship (b) Partnership
(c) Joint Stock Company (d) All

Answer Key

Q. No. Answer Q. No. Answer Q. No. Answer

1 a 11 d 21 a
2 c 12 a 22 d
3 a 13 d 23 c
4 c 14 b 24 a
5 d 15 b 25 c

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Ch-5 Business Organization MGT-331

6 b 16 d 26 a
7 b 17 a 27 b
8 a 18 a 28 d
9 b 19 a 29 c
10 a 20 b 30 c

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Ch-5 Business Organization MGT-331

Reference:
1. Innovation and Entrepreneurship by Peter F. Drucker, Harper & Row
Publishers, 1985 - Business & Economics - 293 pages. ISBN:
0060154284, 9780060154288
2. Business Organization, Nisar-ud-Din, Aziz Publisher, Lahore
3. Introduction to Business, M. Saeed Nasir, ILLMI Kitab Khana, Lahore.
4. An Introduction to Modern Economics, S.M. Akhtar, United Limited,
Lahore.
5. Muhammad Irshad, Economics, Naveed Publications Lahore.
6. Sheikh Manzoor Ali, Economics, ILLMI Kutab Khana, Urdu Bazar,
Lahore.
7. Lioyd G Reynolds Irwin, Micro Economics — Analysis & Policy, Irwin
Homwood Illinois.
8. Saeed Nasir M A, Text book of Economics, ILLMI Kitab Khana, Lahore.
9. Salman Rizavi, Economics, Syed Mobin Mahmud & Co., Lahore.
10. K. K. Dewitt, Modern Economic Theory, S. Chand Publisher, New Delhi
India -2006. ISBN 10: 8121924634 / ISBN 13: 9788121924634
11. Nancy Smith Barrett, The Theory of Macro Economics Policy, Prentice
Hall.
12. Mankiw, “Principles of Economics” 7th Edition, (2008), Southwest
Publishers
13. McConnell and Bruce-Principles of Economics -17th Edition, (2006),
McGraw-Hill.
14. Williamson, Stephen D. (2010). Macroeconomics. Fourth Edition,
Prentice Hall.
15. Gujrati, D. J. - Basic Econometrics – 4th Edition (2003) McGraw-Hill
Company.
16. David N. Weil, Economic Growth, 3rd edition (2012). Pearson
Addison- Wesley. http://www.aw-bc.com/weil/.
17. Charles I. Jones and Dietrich Vollrath, Introduction to Economic
Growth, 3rd edition (2013). W. W. Norton & Company.
18. Ritter, L. S. and Peterson, R.L. Financial Institutions and Financial
Markets. 9th edition. New York.

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Ch-6 Entrepreneurial Skills MGT-331

Chapter 6

Entrepreneurial Skills

Chapter Objectives
After completion of this chapter students will be able to:

 Understand the goals of a business

 Describe the functions of an entrepreneur
 Know the way of establishing, managing & planning of Small Business
 Enlist the objectives & method of planning
 Describe the importance of planning
 Explain the reasons of business risks
 Describe the methods to minimize business risks

Concept of Entrepreneur and Entrepreneurship:

Entrepreneurs vs entrepreneurship may refer to the same category but have
a lot of differences. These both come under a business category.
“Such economic activities whose motive is to earn profit called business. The
ultimate goal in any business is profitability”.

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Ch-6 Entrepreneurial Skills MGT-331

(a) Entrepreneur:
“Entrepreneur is a person who sets up business with an idea, take risks in the
implementation of that idea, make different plans, establish and manage
business activities and strive to get maximum profit”. An entrepreneur is
someone who locates the need of society and tries to meet them with an
innovative idea.

Features of Entrepreneurs:
Following are some distinctive features of entrepreneur
a) Entrepreneurs are those who set a goal and convert it to a business
b) Someone who have new solutions for society by running an
enterprise
c) Create ideas and shape the business
d) Someone who leads the team by providing guidance and direction
e) A risk-taker, minimize the risk and looks forward to the future

(b) Entrepreneurship:
The term entrepreneurship is derived from a French word ‘Entreprendre’
which means ‘to undertake’, ‘to pursue opportunities’, or ‘to fulfill needs and
wants through innovation and starring businesses.
So, entrepreneurship refers to the process of establishing a business entity,
intending to get profit as a return in the future.

Features of Entrepreneurship:
Following are some distinctive features of entrepreneurship
a) Entrepreneurship is developing and operating the business
b) Systematic and creative to run the business smoothly
c) Pushes people to create and think unique products and services
d) Create a variety of professional networks
e) Strengthen interpersonal relationships with people
f) Motivate individuals and stay focus to run the organizations
g) Has both risks and rewards of a business
It may be clear that an entrepreneur is a person with a vision and goal, who
can give shape to that idea by going through the entrepreneurship process.

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Ch-6 Entrepreneurial Skills MGT-331

An entrepreneur is known for their decisions, which decides the destiny of

the enterprise.

6.1 Preparing, planning, establishing, managing,

operating and evaluating relevant resources in
small business:
6.1.1 Entrepreneurial skills:
The work which entrepreneur does is called entrepreneurship. Such person
starts the business on account of personal ability, skills and idea, takes a part
in business activities and faces all challenges to make it successful. This
process is called Entrepreneurship and the technicalities, abilities and skills
which he utilized for making his business successful are called

entrepreneurial skills.

6.1.2 Qualities of a good entrepreneur:

An entrepreneur must have following qualities for success of any business.

i. Financial resources
An entrepreneur must have sufficient financial resources which are
needed for smoothly running the business.

ii. Financial management ability

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An entrepreneur must have the ability to manage financial matters of

the organization. He must have balance spending in day to day
activities, supplier’s payments, disbursement of salaries etc. by
keeping in view available financial resources

iii. Adaptability
An entrepreneur must not so rigid rather he should flexible. If he
would flexible, can easily adapt changes which are important and
through which business may grow.

iv. Planning
Planning is the main factor in running the business. An entrepreneur
must have strong planning abilities as business activities are
dependent on planning.

v. Technical skills
An entrepreneur must have technical skills relevant to business.
Entrepreneur must know technicalities in the business process to
avoid financial loss at any stage.

vi. Business ethics

An entrepreneur must know business ethics like how to deal with
customers, employees, with other organization etc.

vii. Risk bearing

As there is risk factor involved in all type of business so entrepreneur
must have quality of risk bearing.

viii. Judgement
Judgement power of an entrepreneur must be strong. As he is
supposed to look after the matters of organization, so he must be
vigilant in different matters of the organization and in time decisions
must be made.

ix. Work as a team

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A good entrepreneur must have the ability to work with team. He

should adopt democratic style in his decisions so that all employees
feel that we are a team.

x. Expression
An entrepreneur has communication skills so that he can
communicate with employees, suppliers, customers or with his team
in a good manner.

xi. Personal traits

A good entrepreneur must have qualities like intelligence, mental
alertness, and knowledge of human nature, a sense of humor, self-
confidence and self-control.

xii. Emotional stability

A good entrepreneur has strong control on his emotions in the
matters of organization. He never takes haphazard decisions.

6.1.3 Preparing and Planning of small business:

Following are some points which an entrepreneur has to consider while
planning a small business.

i. Achievement of objectives
Entrepreneur plan different goals or objectives and strive for
achieving those goals. Ultimate goal of any business is to earn profit.

ii. Formation of administrative structure

Right after recruitment of employees, entrepreneur forms different
administrative structure for smooth running business activities.

iii. Selection of market

This is also included in the planning that which market has to target.
Selection of market plays an important role in the success of business.

iv. Fixation of capital

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Entrepreneur has also to fix capital for different activities like for the
purchase of machinery, salaries of staff, transportation etc.

v. Recruitment of staff
Entrepreneur has also to plan how much staff is required for each
department and what different technical skills must be with them.

vi. Training and guidance of staff

Entrepreneur must also plan training program for their staff. Which
staff is trained and further which have to train? Which sort of
guidelines to be provided the staff.

vii. Source of loan

Entrepreneur has also to decide that whether he has to continue
business activities with his own capital or have to arrange from some
creditors.
In case of borrowing, what would be the source and how much have
to borrow and under what terms and condition, loan will be taken
and repay.

viii.Control over materials, man and machine

Entrepreneur has also to plan how to manage human resource,
effective use of machinery and how much raw material should be in
stock for smooth production process.

ix. Business assets

Entrepreneur has also to decide which asset has to purchase at initial
level, whether land, building have to purchase or start business at
rental building etc.

6.1.4 Factors of establishing and Managing a small

business:
Prior to start any business, an entrepreneur must have how known about
that particular business so that business can be run successfully and must be
profitable.

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Ch-6 Entrepreneurial Skills MGT-331

Following are some factors which and entrepreneur must keep in mind while
starting a business.

i. Nature of business
First an entrepreneur has to consider that which type of business will
have to carry out. For example, whether manufacturing, trading,
services etc. or someone else in which entrepreneur has expertise.

ii. Demand
An entrepreneur must know that which business has demand in the
market and the business which he is going to start is really needed.

iii. Arrangement of capital

Capital is the basic requirement of starting a business. Entrepreneur
must estimate that how much capital is required for smoothly
running the business activities and whether he has capability to
arrange sufficient capital.

iv. Size of business

Size of business depends upon the demand of the business in the
market and available resources of the entrepreneur. Business may be
small scale, medium scale or large scale.

v. Form of business organization

Prior to start a business, entrepreneur must decide that which form
of business organization he/she wants to establish. Whether he is
interested in sole proprietorship, partnership or Joint Stock Company.

vi. Fulfilment of legal formalities

Business must be fulfilled all legal formalities of the business prior to
start the business. No business can be commenced which is against
the rules and regulations of that state in which that business is being
started.

vii. Place selection

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Ch-6 Entrepreneurial Skills MGT-331

One of the most important factors of success of any business is its

location. While selecting the location of business entrepreneur must
keep in mind that there is availability of labor, transportation, raw
material etc.

viii. Business policy

Business policy is the set of principles on the base of which the
business is run. Business policy must be clear prior to start a business.
For example; whether there is policy of credit or all goods will be sale
on cash and if credit allowed, how many days etc.

ix. Selection of employees

Recruitment of right person for the right job is the main challenge for
an entrepreneur. He has to decide when and how many staff has to
be hired and how much salary will be paid to them.

x. Government incentives
Prior to start a business, entrepreneur must know that in which
product line government supports the businesses or give any subsidy
etc. Different problems may have to face, if entrepreneur has no
knowledge of government policies.

6.1.5 Evaluating relevant resources in small business:

For starting a small business, entrepreneur has to arrange capital
whether from his own resources or from some financial
organizations. Following are different sources for financing the small
businesses.

i. Commercial banks
Commercial banks are the main sources in providing short term, mid-
term and long-term loans to the entrepreneurs on pledging their
moveable and immoveable assets.

ii. Financial institutions

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Financial institutes like SIS, PSIC, SBAF, SSIF, SBFC, YIPS etc. issue
credits to the small business enterprises for promoting their business
activities.

iii. Credit purchase

It is also a form to get loan for the small business. Sometimes, raw
material, machinery and other goods may purchase on credits and
through this way entrepreneurs may facilitate for smooth running of
business.

iv. Relatives and friends

Entrepreneurs may be borrowing from his near and dear ones,
relatives and friends.

v. Loan through installment

For the small business, payment of different kinds of tools, machinery
and equipment in installment form which may pay in easy way by the
organization from their profits.

vi. Shares
Different kinds of companies for the business on large scale, sell their
shares in the public to collect funds. The company takes theses shares
back when it closes the business.

vii. Debentures
The big companies sell debentures in the public when these want to
obtain further funds. Debenture is a kind of certificate that is issued
to get loan and its buyers are called debenture holders. A particular
fixed rate of interest is paid for them.

6.2 Business opportunities and goal setting:

6.2.1 Definition of Business Opportunity?
An opportunity is a chance to take advantage of a situation. It can relate to
several situations in career, sports, business, etc.

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Ch-6 Entrepreneurial Skills MGT-331

A business opportunity is the chance to take advantage of an occurrence in

the market for business gain. It is what makes some businesses succeed
while others fail. A business opportunity, also called bizopp, is the chance to
take advantage of an occurrence in the market to begin a business. It
involves some kind of favourable condition which exists in the market. A
business opportunity is what makes some businesses succeed while others
fail.

A good example of a business opportunity in the market today is e-books.

Amazon was one of the first companies in the online bookselling business
who initiated an e-book reader that made it possible to read books by means
of a digital device that looks more or less like a tablet pc.

6.2.2 Importance of A Business Opportunity:

In business, an opportunity is a key to success. Without it, a business cannot
begin, expand, or succeed. The main purpose of an opportunity is to serve as
the basis for any action that results in profit and business growth.
Opportunities allow businesses to create and implement ideas and
innovations and improve their performance. Only those who spot
opportunities early can take the best advantage of them and capitalise on
them.

Here are some reasons why a business opportunity is important:

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(a) The chance to build a business:

A business opportunity can be an existing unsolved problem in the market or
a new problem arising from current trends, which is the chance to build a
business.

(b) The chance to avoid failure:

A business is likely to fail without opportunities. This is because they are
essential for implementing ideas and innovations that can make a business
successful. They allow businesses to take the right decision at the right time.

(c) The chance to grow:

Opportunities allow businesses to create and implement ideas and
innovations. It is also a chance to improve performance by solving existing
problems better, providing a more refined value proposition to the target
market, and building a more efficient business model.

(d) The chance to maximize profits:

A business opportunity involves favourable conditions that can be used to
increase profits. These conditions include but are not limited to the
availability of resources, the existence of market demand, and the presence
of favourable competition.

The goal is to find solutions that can potentially maximize profits while
solving problems.

6.2.3 Types of Business Opportunities:

There are different types of business opportunities, each one serves as the
basis for important decisions that help businesses succeed. Here are some
examples:

(a) New market opportunity:

A new market opportunity involves an untapped market, which gives

businesses the chance to create and implement ideas and innovations
without facing much competition.

(b) Untapped resource opportunity:

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An untapped resource opportunity is a type of business opportunity that

involves under-utilized or unexploited resources that can be used to create
added value.

(c) Repressed demand opportunity:

A repressed demand opportunity capitalizes on existing demands that the

current offerings don’t cater to. For example, Uber capitalized on a repressed
demand for an on-demand cab system in the existing cab industry.

(d) Technology opportunity:

A technology opportunity is a type of business opportunity that allows

businesses to introduce new technologies that can be used in existing
markets.

(e) Competitive opportunity:

A competitive opportunity allows businesses to introduce new products or

services that can provide more value than their competitors while solving the
problems of the target market better.

(f) Strategic partnership opportunity:

A strategic partnership opportunity involves the chance to collaborate with

businesses from complementary industries, allowing them to access new
resources, strengthen their product offerings, and increase their competitive
advantage.

6.2.4 Why goal setting is important:

Goals are an important part of running a successful business. They can give
you a clear focus, motivate employees and set targets for your business to
work towards. Goal setting can also provide you with a set of criteria to see if
your business is succeeding. Having clear, well-defined goals can help you
take control of your business’s direction and increase the chances of
achieving your larger business targets.

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Starting or running a business requires deliberate planning and goal setting.

A healthy company will have a clear set of consistently updated goals to help
it achieve smart objectives.

Tips for Setting Effective Business Goals

(a) Set goals that are clearly defined and not overly complicated.
(b) Set goals that establish both a short-term and long-term strategy
(c) Set goals are ambitious but achievable.
(d) Set goals that help your team see the overall company vision and
require teamwork to attain.

6.2.5 How to Use SWOT Analysis to Measure Your

Business’s Health:
In order to set business goals, you have to know where your business stands,
and one way to evaluate your business status is to conduct an analysis of
your company’s SWOT—an acronym for Strengths, Weaknesses,
Opportunities, Threats. A SWOT analysis enables you to assess where you
need to improve and how you need to grow.

Strengths: The things about your business that are working.

Weaknesses: The things about your business that need fixing.

Opportunities: The markets, processes, products, and other factors where

your business has the potential to grow.

Threats: Challenges to your business success from competitors, shifting

demand, etc.

6.2.6 How to Use the SMART Method to Set Business

Goals:
Once you’ve evaluated your business and can see how it stands to grow
within your industry and market, you can set accurate and attainable
business goals. Before you do this, though, you’ll want to familiarize yourself
with the concept of SMART goals—an acronym for Specific, Measurable,
Attainable, Realistic, Timely. This approach is a time-tested technique for
developing goals that innumerable companies have found effective.

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When setting goals, business owners who employ the SMART method
evaluate their goals on the following basis:

Specific: Can you explain your goal clearly to your staff? Say your overall goal
is to boost market share and increase revenue. That's all fine and good, but
what are the specific actions you can implement to move toward those
goals?

Measurable: Will you be able to track how far along you are toward
achieving your goal? Say your goal is to boost customer satisfaction: What
metrics will you use to track how consumers feel about your product?

Attainable: Based on your homework about your business, your industry,

and your competitors, are able to achieve your goal?

Realistic: Have you taken into account all the factors that will affect your
ability to reach your goal? What obstacles do you face? Do you have
sufficient resources?

Timely: Have you set a timeline for your goal? Will you be able to attain your
goal in a reasonable amount of time?

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6.3 Organizing, evaluating and analyzing and Risks

task:
There is risk of loss in all types of business. The ultimate motive of every
business is to earn profit. The future of the business is unpredictable and
these unpredictable situations are because of few risks. Following are some
reasons of risks from which some are controllable by the entrepreneur and
others are uncontrollable:

i. Incapable management
If the management of business is not capable, they would not be able
to do right decisions in the business which ultimately cause the loss of
business.

ii. Traditional method

Using traditional methods in managing the business like in this
modern age if management is working with old technologies, then
their cost of production will increase and the organization will not be
able to compete in the market.

iii. Shortage of raw material

Storage or excess of raw material both may affect business activities.
There must be a balance in the storage level. In case of shortage,
production may suffer and in case of excessive raw material, there is
chance of spoil or cause blockage of capital.

iv. Shortage in demand

Sometimes there is shortage in demand due to different factors like
change of fashion, change of climate or change in habits of
consumers which may cause loss. Entrepreneur have to be more
vigilant while forecasting the demand of products and there must be
flexibility in his decisions.

v. Strikes
When there is clashes between management and labor due to any
issue, labor do strikes in the industry and production process may

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suffer badly. It not only damage productivity but also the reputation
of the company in the market.

vi. Government laws

Sometimes government introduces such laws which may affect
business activities of the small business. For example, govt. impose
taxes on different items which are being used in the production
process or govt. change the tariffs of electricity, fuel, import/export
charges etc. which may directly affect organization’s survival in the
market.

vii. Shortage of energy

In industries production is based on oil, gas, power and coal, their
shortage may be danger for the survival of the companies. Due to
shortage, production of companies reduces, per unit cost increases
and business begins to decline.

viii. Bad debts

Sometimes big amounts are not received against the goods which
companies sold on credit and due to this heavy amount companies
face loss and have to close their businesses.

ix. Natural calamities

The entrepreneur continue to make different plans to avoid different
threats but sometimes due to some external natural factors, business
suffer. These natal disasters may be flood, earthquake etc. due to
which entrepreneur face loss.

x. Theft
The theft of business commodities, fraud in accounts or theft of
money also causes loss of the company. The entrepreneur must be
very vigilant in such cases and the employees engages in such
activities must be fired immediately.

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xi. War
War is a big threat for all types of business. Nobody wants to invest in
business, if there is chance of war of there is instability in the country.
Business grow in peace not in war. Due to war businessmen wind up
business activities.

xii. Political situation

The instable political situation of the country also influences business
activities. Frequent changes in government policies due to political
changes causes downfall in the business. Investors are reluctant to
invest further or continue their businesses.

xiii. Geographical location

If business is located in such place where difficulties in finding labor,
transportation are there, the long-term survival of the organization
my not be possible. The circumstance of the country as well as region
ought to be peaceful. If there is tension and disorder, the business
will never progress.

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EXERCISE No. 6

Long Questions
Q.1. Describe qualities of a good entrepreneur.
Q.2. Describe the steps taken for the commencement of a small-scale
business.
Q.3. What is meant by planning? Describe key points which an
entrepreneur must have to consider while planning a small business.
Q.4. What is meant by financial resources of a business? Discuss different
types of financial resources.
Q.5. What are the different possible causes of business risk? How to
minimize these risks?

Short Questions
Q.1. Define business.
Q.2. Define entrepreneur.
Q.3. What is meant by entrepreneurship?
Q.4. Write three features of an entrepreneur.
Q.5. Write three features of a business.
Q.6. What is meant by planning?
Q.7. Why planning is important in a business?
Q.8. What is meant by financial resources in a business?
Q.9. What is meant by risk in a business?
Q.10. Write three measures to avid risks in a business.
Q.11. Write three types of possible risks in a business?
Q.12. Differentiate between internal and external risk factors.
Q.13. Government policies can affect organization’s success, how?
Q.14. An entrepreneur must have technical skills to run a business, how?
Q.15. What is the main objective of a business?

Multiple Choice Questions (MCQs)

Choose the correct answer from the given possible answers and circle it.

Q.1. All those activities whose purpose is to earn profit are called:

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(a) Commerce (b) Education

(c) Business (d) Management
Q.2. A person who manages or controls the business to earn profit is
called:
(a) Entrepreneur (b) Professional
(c) Laborer (d) Doctor
Q.3. The basic goal/purpose of a business is:
(a) To earn profit (b) God’s consent
(c) Buy/Sell goods (d) None
Q.4. The success of business depends upon:
(a) Administrative & technical activities (b) Availability of raw material
(c) Better means of transportation (d) All of these
Q.5. To decide in advance, is called:
(a) Business (b) Business risk
(c) Planning (d) All
Q.6. Objectives or goals of planning are:
(a) Determination of staff (b) Determination of designation
(c) Method of leading (d) All of these
Q.7. To become a good entrepreneur, one must have:
(a) Ability of planning (b) Power of decision making
(c) Stability (d) All of these
Q.8. In small business, number of employees are:
(a) Less than 10 (b) More than 10
(c) 20 (d) 30
Q.9. When we perform job without planning, its results will be:
(a) Effective (b) Ineffective
(c) Very good (d) All
Q.10. Short time loans time span is:
(a) More than 1 year (b) Less than 1 year
(c) 1 to 7 years (d) 1 to 10 years
Q.11. Loans for business can be obtained from:
(a) Bank (b) Credit purchase
(c) By debentures (d) All
Q.12. Due to business risks, business goes towards:
(a) Failure (b) Success
(c) Profit (d) All

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Q.13. Reason(s) of business risks is/are:

(a) Incapable management (b) Shortage of raw material
(c) Shortage of demand (d) All
Q.14. Methods of reducing business risks includes:
(a) Reduction in losses (b) Speculation
(c) Insurance (d) All
Q.15. To select place of business, it is necessary to have:
(a) Availability of raw material (b) Suitable atmosphere
(c) Availability of means of transportation (d) All
Q.16. In the business, this has a position like blood in the body:
(a) Raw material (b) Capital
(c) Labour (d) Industrialist
Q.17. This is a feature of business:
(a) Need of capital (b) To earn Profit
(c) Trend of competition (d) All
Q.18. This is included in the economic objectives of a business:
(a) Innovation (b) To earn Profit
(c) To create customers (d) All
Q.19. This is included in the social objectives of a business:
(a) Production of quality products
(b) Avoid activities against society
(c) To provide employment
(d) All
Q.20. This is included in the human objectives of a business:
(a) Proper reward to employees
(b) Increase workers ability
(c) To provide facilities to workers
(d) All
Q.21. By planning, efficiency of business and staff will be:
(a) Decreased (b) Increased
(c) Ineffective (d) None
Q.22. To obey law is the purpose of business:
(a) Economic (b) National
(c) Human (d) Social
Q.23. It includes in the functions of a businessman:
(a) Administrative function

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Ch-6 Entrepreneurial Skills MGT-331

(b) Division of labour function

(c) Financial function
(d) All
Q.24. Medium term loans time period is:
(a) One year (b) One to seven or ten years
(c) One to fifteen years (d) One to twenty years
Q.25. Long term loans time period is:
(a) One to five years (b) One to seven years
(c) More than seven years (d) All

Answer Key

Q. No. Answer Q. No. Answer Q. No. Answer

1 c 10 a 19 d
2 a 11 d 20 d
3 a 12 a 21 b
4 d 13 d 22 b
5 c 14 d 23 d
6 d 15 d 24 b
7 d 16 b 25 c
8 a 17 d
9 b 18 d

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Ch-6 Entrepreneurial Skills MGT-331

Reference:
1. Small Business and Entrepreneurship, Paul Burns & Jim Dewhurst,
Red Globe Press London. https://doi.org/10.1007/978-1-349-24911-4
2. Innovation and Entrepreneurship by Peter F. Drucker, Harper & Row
Publishers, 1985 - Business & Economics - 293 pages. ISBN:
0060154284, 9780060154288
3. The 4 Routes to Entrepreneurial Success by John B. Miner, Berrett-
Koehler Publishers, 1996 - Business & Economics - 216 pages. ISBN:
1881052826, 9781881052821
4. Business Organization, Nisar-ud-Din, Aziz Publisher, Lahore
5. Introduction to Business, M. Saeed Nasir, Ilmi Kitab Khana, Lahore.
6. An Introduction to Modern Economics, S.M. Akhtar, United Limited,
Lahore.
7. Muhammad Irshad, Economics, Naveed Publications Lahore.
8. Sheikh Manzoor Ali, Economics, ILLMI Kutab Khana, Urdu Bazar,
Lahore.
9. Saeed Nasir M A, Text book of Economics, ILLMI Kutab Khana, Lahore.
10. K. K. Dewitt, Modern Economic Theory, S. Chand Publisher, New Delhi
India -2006. ISBN 10: 8121924634 / ISBN 13: 9788121924634
11. Nicholson, W. & Snyder, C. (2009). Intermediate Microeconomics
and Its Application, 11th Edition. Cengage Learning
12. David N. Weil, Economic Growth, 3rd edition (2012). Pearson
Addison- Wesley. http://www.aw-bc.com/weil/.
13. Charles I. Jones and Dietrich Vollrath, Introduction to Economic
Growth, 3rd edition (2013). W. W. Norton & Company.
14. Elhanan Helpman, The Mystery of Economic Growth, (2010). Belknap
Press of Harvard University Press.
15. “New Venture Creation: Entrepreneurship for the 21st century”, by
Jeffry Timmons, Stephen Spinelli, Jr. 8th edition
16. Entrepreneurship: A process perspective 2e, by Robert A. Barona and
Scott A. Shane
17. Parker, Simon C., “The economics of Entrepreneurship” latest Edition,
Cambridge University Press, USA, New York.
18. “Entrepreneurship” latest Edition, McGraw-Hill Companies, Inc. USA,
New York.
19. Naqi, S. M., “Entrepreneurship: A Recipe for Economic Development”
Latest Edition, New fine Printing Press, Lahore.

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Ch-7 Scale of Production MGT-331

Chapter 7

Scale of Production

Chapter Objectives
After completion of this chapter students will be able to:

 Understand scale of production.

 Explain scale of production and its determination.
 Describe large scale production and its merits.
 Explain small scale of production, its advantages and disadvantages.

7.1 Meaning of scale of production and

determination:
There are following three scales of production but we will read following two
scales of production.

(i) Small-scale of production

(ii) Large-scale of production

Generally, if a firm is producing goods with small size plants, the scale of
production is said to be small scale production. Small scale of production is
associated with low capital output and capital labor ratios. In small scale of
production, the economies of scale do not occur to the firm.

If a firm uses more capital and larger quantities of other factors, it is said to
be operating on large scale production. Large scale production enjoys both
internal and external economies of scale.

Scale of production means the volume of that particular business. How much
people, capital, resources involved that business and how many units are
being produced. Following are the factors on which the decision to
determine the scale of production is made:

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7.1.1 Factors to determine the scale of production:

(a) Financial resources
The scale of any business is mainly depending upon financial resources of the
entrepreneur. If the sufficient amount of capital is available in the hands of
an entrepreneur and credit facilities are also available then definitely, large
scale production business may be started and if low capital available them
small scale business can be started.

(b) Entrepreneur’s capabilities

If the entrepreneur is capable and competent enough to handle a large
business then he may prefer large-scale business. On the other hand, if
entrepreneur lacks technical skills, self-confidence and efficiency in work
then he will prefer small scale business.

(c) Nature of work

In some type of businesses, the production technique is simple and straight
forward and use of machines on large scale is not possible so ultimately
these businesses can only be done on small scale of business-like hand-made
dresses, furniture, embroidery or jewelry work etc. and if the production
technique is complicated then its production will be on large scale like
manufacturing of cars, fridges etc.

(d) Transportation facilities

When transport and communication facilities are available easily,
entrepreneur decides to produce a product at a large scale because it makes
the raw material easily available and output is supplied economically to the
market. While in rural areas these facilities are not available and hence the
entrepreneurs produce products at small scale.

(e) Expansion of market

If the demand of a product is more in the market then they will be produced
at large scale level while if its demand is low, production level will be small.

(f) Technical aspect

Some goods are produced manually or through simple machines while in
other case, heavy machines are required for production of goods. If the

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goods are being produced through simple machinery, it will be small scale
while if heavy machinery is being used then it will be large scale business.

7.2 Large-scale production:

Under large scale of production, an entrepreneur produces goods in large
quantity, invested large capital, hence a big risk is involved in it. Following are
some advantages and disadvantages in large scale production which must be
kept in mind while starting, running and managing the business.

7.2.1 Merits of large-scale production:

There are some merits and demerits of all businesses which we have already
discussed in chapter 5. In the business which is typically on large scale, may
have following merits or advantages:

(i) Economy in sale and purchase

In large scale of production there is economy in sales as well as purchases of
the organization. As business is on large scale, economies of scale is achieved
through which entrepreneurs produce goods at a cheaper rate and therefore
may also sale at low rate. In purchasing, when raw material or other items
are purchased in bulk quantity, may available at discounted rate form the
suppliers.

(ii) Economy in labour

In large scale production is carried out by applying the principles “division of
labour”, through which maximum production can be achieved by minimum
labour as every worker become expert in his relevant work. So, in this way,
entrepreneur gets maximum production by less man power and per unit cost
also decrease.

(iii) Utilization of by products

In large scale of production, by products may easily utilized in somewhere
else in the production. So, less wastage may occur and it also reduce per unit
cost of the organization.

(iv) Research and development

In large scale of production, organization is in the position that it may bear
the expense of research and development. Research & development has a

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key role in the success of any organization and have significance positive
relationship with the productivity and profitability of the organization.

(v) Advertisement
Advertisement has also a positive role in increasing sales of goods.
Advertisement is a tool through which you make people aware about your
goods or services and its features. Through advertisement, company’s sales
increases and a large-scale organization may bear the expenses of
advertisement.

(vi) Use of advance machines

In large scale of production, companies purchase and used advance
technology and advanced machines in their production process. By using
advance machine, production and quality of products may practice. High
quality with low price attracts customers for purchasing goods of that
particular company in the competitive market.

(vii) Support of government

Government usually supports large scale organizations while making its
policies as these organizations are the key players in boosting up the overall
economy of any country. Government supports these organizations by
lowering the tariffs of bills, rebate in exports etc.

(viii) Competition power

In case of any economic crises or natural disaster, large scale production
organization usually survive while small scale companies usually unable to
survive such crises and winds up their business activities.

(ix) Economy in repair

In large scale of production, facilities of repair of machines are available at
cheaper rates due to localization of firms. In this way, cost of production of
an organization is reduced.

(x) Credit facilities

The large-scale production organizations comparatively get loan more easily
from the banks or other funding organization.

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(xi) Welfare of the labour

Due to achieving higher production and quality level, entrepreneur looks into
the welfare aspect of the labour. Along with good salary packages, labour
also enjoy other fringe benefits from the company.

7.2.2 Demerits of large-scale production:

There are some demerits of large-scale production businesses which are as
follows:

(i) Formation of monopoly

Large scale organizations usually develop monopolistic environment in the
market as they are main seller and purchaser. In this condition, it is very hard
to survive small scale organizations in that particular market.

(ii) Relation of labour and owner

There is very less interaction between employee and employer in large scale
business. Owners are usually unaware with the problems of employees.

(iii) Strikes
Due to less interaction between owners and employees of large-scale
business, they are unable to understand the economic problems of the
labour which causes strikes in the factories which sometimes lockout by
entrepreneurs.

(iv) Accidents
Due to heavy machinery installation and excess quantity of machines,
accidents in large scale organization are comparatively more. Mostly
accidents are happened due to negligence of employees.

(v) Delay in timely decisions

In large scale business, sometimes decisions are not made timely which
cause financial losses.

(vi) Unequal distribution of wealth

Employees of large scale production organizations are not paid their
remuneration as per ratio of profitability of the business. They are paid only

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Ch-7 Scale of Production MGT-331

a limited remuneration which is comparatively very low as compare profit

ratio which goes in the pocket of owners.

(vii) Downfall of artistic products

Due to focus of large-scale businesses, artistic products like handicrafts
cannot be produced. Hence in modern times, these product as facing
downfall.

(viii) Unemployment in case of uncertainty

Although large scale organizations are the main source of decreasing un-
employment in any country but due to any unavoidable situation, more
unemployment may be occurred. Whenever there is depression phase in the
country, demand for goods and services falls down very quickly which cause
downsizing in the organization which raise un-employment ratio of the
country.

(ix) Moral degradation

In large scale of business, principle of division of labor is applied for
maximization of production. When an employee doing a work repeatedly
although efficiency is enhanced but employee is not able to do any other
work with more efficiency.

7.3 Small Scale Production:

Although there is main role of large scale of production in boosting up the
economy of the country but role of small-scale production is also there as
there are many businesses which may only be done at small scale.
Handicrafts (ornaments, decoration, handmade jewelry etc.), artistic goods
(paintings, drawing, sculpture etc.) are the examples of small-scale business.

7.3.1 Merits of small scale of production:

Following are some advantages of small scale of business

(i) Effective supervision

In small scale of business, an entrepreneur can easily look after all business
activities as business size is not large.

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(ii) Care of customer’s choice

Employer has direct interaction with the customers and prepare products
according to their choice, taste, feedback and demand.

(iii) Start with low capital

Small scale of business can be started with low capital. Huge capital is not
required for commencing and managing the business activities.

(iv) Flexibility in business

Small scale business can easily be changed whenever needed. In small scale
business, there is flexibility in business. It can be easily adjusted in
accordance with the business fluctuation and any decision can be made by
entrepreneur for closure, limiting or expanding of the business.

(v) Decrease in un-employment

Whenever any business starts, it creates job opportunities. Small business
can be easily start with the low capital and on commencing any type of
business overall unemployment decreases.

(vi) Timely decision

Due to small size of business, decisions are made timely by the entrepreneur.
Number of entrepreneurs are very less in small size business, so decision is
not getting delayed.

(vii) Distribution of wealth

The countries in which number of small size business are more, the money
circulation is more. People prefer to do business rather to put their money in
banks or in locker.

(viii) Focus of business affairs

In small scale of production, employees and employer are closely connected
to each other. In case of any deficiency or issue, immediate decisions for its
solution are made as everybody focus on business affairs.

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7.3.2 Demerits of small scale of production:

Following are some demerits or disadvantages of small scale of business:

(i) By products
In small scale of production, most of the time by products cannot be utilized.
It causes increase in per unit cost of the organization and entrepreneur faced
difficulties in getting suitable profit.

(ii) Increase in expenditures

As it is the principle that fixed cost may be decreased by increasing the
production. In small scale production, building rent, interest, advertisement
charges are fixed which may cause increase in the expenditures of the
organization and lower the profitability rate.

(iii) No division of labour

Due to small scale production, labour is not divided in doing specific task so
they are unable to achieve the principle of economies of scale. Labour may
not able to produce goods efficiently.

(iv) Difficulties in getting loan

In small scale of production, the future of the business is unpredictable and
most of the time, entrepreneurs face difficulties in getting loans from banks
or other funding organizations.

(v) Costly repairing

In small scale of production, entrepreneur usually not hire full time engineer
or mechanic. But when machinery becomes out of order, heavy cost has to
pay in its transportation and repairing.

(vi) Lack of capital

In small scale of business, entrepreneur starts working with limited capital
which if mismanage, all business activities stop.

(vii) Increase cost of sale and purchase

It is also a disadvantage of small-scale business that while purchasing of raw
material, you may not get any type of discount from the supplier.

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Same like, while selling the goods, you may sale goods with very little profit
margin as products which are being produced incurred high cost due to
higher per unit cost.

(viii) Lack of research

In small scale of production, entrepreneur is supposed to run all business
activities. Due to lack of time and resources, entrepreneur don’t focus on
research and development.

(ix) Lack of expert opinion

Usually in small scale production, entrepreneur don’t hire any expert or
technical person and usually perform all business activities. A single person
may not be expert in all fields.

(x) Lack of advertisement

Advertisement has a positive role in increasing sales of goods but in small
scale of production, entrepreneur is usually not in the position of paying
advertisement charges so customers may not be aware with the features of
product or service.

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Ch-7 Scale of Production MGT-331

EXERCISE No. 7

Long Questions
Q.1. Define scale of production. Explain determinants of scale of
production in detail.
Q.2. Define large scale of production. What are the merits of large scale of
production?
Q.3. Define small scale of production. What are the merits of small scale of
production?
Q.4. Define small scale of production. What are the demerits of small scale
of production?

Short Questions
Q.1. How many scales of production are?
Q.2. What is meant by scale of production?
Q.3. Differentiate small scale of production and large scale of production.
Q.4. What is meant by financial resources in the determination of scale of
production?
Q.5. Scale of production depends upon the means of production, why?
Q.6. Write three advantages/merits of large scale of production.
Q.7. Write three disadvantages/demerits of large scale of production.
Q.8. What is meant by “division of labour”?
Q.9. Write three advantages/merits of small scale of production.
Q.10. Write three disadvantages/demerits of small scale of production.

Multiple Choice Questions (MCQs)

Choose the correct answer from the given possible answers and circle it.

Q.1. It means volume of business firm?

(a) Scale of production (b) Ability of manager
(c) Economy in repair (d) Use in machines
Q.2. If there is vast market, then business can be started at:

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(a) Small scale (b) Medium scale

(c) Large scale (d) None
Q.3. If means of transportation are developed then business can be
started at?
(a) Small scale (b) Medium scale
(c) Large scale (d) None
Q.4. Car, cement, sugar and paper manufacturing business can be started
at?
(a) Small scale (b) Medium scale
(c) Large scale (d) None
Q.5. Jewelry manufacturing can be started at?
(a) Small scale (b) Medium scale
(c) Large scale (d) None
Q.6. A work in which use of machines is not at last level, can be started at:
(a) Small scale (b) Medium scale
(c) Large scale (d) None
Q.7. At this scale of production, chances of division of labour are
increased:
(a) Small scale (b) Medium scale
(c) Large scale (d) None
Q.8. At this scale of production use of costly and standard machine is
profitable:
(a) Small scale (b) Medium scale
(c) Large scale (d) None
Q.9. At this scale of production, benefit can be obtained by sub-
production:
(a) Small scale (b) Medium scale
(c) Large scale (d) None
Q.10. At this scale of production, average expenses are less than others:
(a) Small scale (b) Medium scale
(c) Large scale (d) None
Q.11. At this scale of production, owner of business is able to face economic
crisis:

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(a) Small scale (b) Medium scale

(c) Large scale (d) None
Q.12. At this scale of production, owner has personal relations with
customers:
(a) Small scale (b) Medium scale
(c) Large scale (d) None
Q.13. At this scale of production, owner can get maximum benefit by
making quick decision:
(a) Small scale (b) Medium scale
(c) Large scale (d) None
Q.14. At this scale of production, owner pays large amount of buying and
selling:
(a) Small scale (b) Medium scale
(c) Large scale (d) None
Q.15. At this scale of production, by product benefit cannot be obtained:
(a) Small scale (b) Medium scale
(c) Large scale (d) None
Q.16. At this scale of production, research and development is difficult:
(a) Small scale (b) Medium scale
(c) Large scale (d) None
Q.17. Rate of interest on capital at large scale of production:
(a) High (b) Low
(c) No interest (d) All
Q.18. At large scale of production, advertisement expenses are suffered by:
(a) Labourers (b) Owner
(c) Employees (d) Consumer
Q.19. Number of scales of production are:
(a) 1 (b) 2
(c) 4 (d) 5
Q.20. Which scale of production is suitable, if owner has low capital?
(a) Small (b) Medium
(c) Large (d) All

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Answer Key

Q. No. Answer Q. No. Answer Q. No. Answer

1 a 8 c 15 a
2 a 9 c 16 a
3 c 10 c 17 b
4 c 11 c 18 d
5 a 12 a 19 b
6 a 13 a 20 a
7 c 14 a

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Reference:
1. Saeed Nasir M A, Text book of Economics, ILLMI Kutab Khana, Lahore.
2. Mankiw, “Principles of Economics” 7th Edition, (2008), Southwest
Publishers
3. Small Business and Entrepreneurship, Paul Burns & Jim Dewhurst,
Red Globe Press London. https://doi.org/10.1007/978-1-349-24911-4
4. Business Organization, Nisar-ud-Din, Aziz Publisher, Lahore
5. Economics by Sheikh Manzoor Ali, ILLMI Kutab Khana, Urdu Bazar,
Lahore.
6. Introduction to Business, M. Saeed Nasir, ILLMI Kutab Khana, Lahore.
7. An Introduction to Modern Economics, S.M. Akhtar, United Limited,
Lahore.
8. Economics by Muhammad Irshad, Naveed Publications Lahore.
9. Lioyd G Reynolds Irwin, Micro Economics — Analysis & Policy, Irwin
Homwood Illinois.
10. Nancy Smith Barrett, The Theory of Macro Economics Policy, Prentice
Hall.
11. Edward Shapiro, Macro Economic Analysis, Harcourt Brace.
12. Gujrati, D. J. - Basic Econometrics – 4th Edition (2003) McGraw-Hill
Company.
13. Fredric S. Mishkin, (1995), Financial Markets and Money, Harper &
Row Publishers.
14. Laider, David E.W (1996), The Demand for Money: Theories, Evidence
and Problems (Fourth edition), Harper & Row, Publishers, New York.
15. McConnell and Bruce-Principles of Economics -17th Edition, (2006),
McGraw-Hill.
16. Williamson, Stephen D. (2010). Macroeconomics. Fourth Edition,
Prentice Hall.
17. Nicholson, W. & Snyder, C. (2009). Intermediate Microeconomics and
Its Application, 11th Edition. Cengage Learning
18. Dougherty, Christopher – Introduction to Econometrics – 2nd edition
(2002), Oxford University Press.
19. Baye, Michael, Managerial Economics and Business Strategy. Sixth
Edition. Boston: McGraw-Hill Irwin.
20. Miller, R. L. and David Van Hose, (2001), Money, Banking & Financial
Markets. South Western, Singapore.

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Chapter 8

Economic System

Chapter Objectives
After completion of this chapter students will be able to:

 Understand different economic systems.

 Describe free economic system and its characteristics.
 Explain centrally planned economic system, its merits and demerits.
 State mixed economic system and its features.

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Introduction of Economic System:

An economic system is a means by which societies or governments organize
and distribute available resources, services, and goods across a geographic
region or country. Economic systems regulate the factors of production,
including land, capital, labor, and physical resources. An economic system
encompasses many institutions, agencies, entities, decision-making
processes, and patterns of consumption that comprise the economic
structure of a given community.

Types of Economic Systems:

There are many types of economies around the world. Each has its own
distinguishing characteristics, although they all share some basic features.
Each economy functions based on a unique set of conditions and
assumptions. In a society, the economic system answers three fundamental
questions: What do we produce? How do we produce it? For whom do we

produce it? Economic systems can be categorized into three main types as
follows:
(i) Free Economic System (Capitalism)
(ii) Centrally planned economy (Socialism)
(iii) Mixed economic system

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8.1 Free Economic System (Capitalism):

It is an economic system based on private ownership of the means of
production. Capitalism is an economic system in which private individuals or
businesses own capital goods. The production of goods and services is based
on supply and demand in the general market—known as a market
economy—rather than through central planning—known as a planned
economy or command economy.

The purest form of capitalism is free market or laissez-faire capitalism. Here,

private individuals are unrestrained. They may determine where to invest,
what to produce or sell, and at which prices to exchange goods and services.

Today, most countries practice a mixed capitalist system that includes some
degree of government regulation of business and ownership of select
industries.

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8.1.1 Characteristics Capitalism:

The following are the primary characteristics capitalism.

(i) Private Ownership

Capitalism is based on property rights and the principle that the government
should leave economic production to the private sector.

(ii) Capital Accumulation

Capitalism is a competitive system whereby individuals who are successful in
the market accumulate capital. This is intended to give individuals incentives
to work, innovate and improve things.

(iii) Capital concentration

In a capitalist system, capital typically becomes concentrated such that a
relative small number of people, known as a capitalist class, own much of the
property in a nation.

(iv) Voluntary Participation

Capitalism is based on a system of voluntary participation whereby you are
free to start any company you imagine or pursue any career you desire.

(v) Free Markets

Economic decisions are made by the market as opposed to a government
makes economic decisions. Market participants freely decide how to allocate
and what prices to set for goods. This can be contrasted with system of
government control where the government decides what will be produced
and how much it will cost.

(vi) Wage Labor

In a capitalist system, a small capitalist class usually owns much of the
capital. Most people in a capitalist system offer their labor to the market to
earn a living. This group is known as the working class. Wages are set by
supply and demand and people may pursue education and self-improvement
to achieve higher wages by becoming qualified for professions that are in
high demand.

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(vii) Competition
Capitalism relies on intensive competition to allocate resources efficiently,
improve things and lower prices. If the government interferes in the market
by preferring one firm to another, competition can break down. Likewise, if a
firm becomes extremely large it begins to resemble a government that
controls an entire industry without competition. Governments play a role in
designing and enforcing rules to keep competition alive.

(viii) Welfare Capitalism

A pure form of capitalism, known as laissez-faire capitalism is a survival of
the fittest system where the government plays no role in the economy. This
is exceeding rare. In practice, governments impose regulations, taxes, tariffs
and subsidies. For example, a government can tax the capitalist class to
provide a basic quality of life for all residents in areas such as education,
infrastructure, transportation and healthcare. A government can also protect
consumers, workers and the environment by regulating businesses.

(ix) Good & Bad

An economic good is an output of the economy that has value to people. An
economic bad is an undesirable output of the economy such as pollution.
Historically, capital systems give market participants strong incentives to
produce economic goods but may give few incentives to prevent economic
bad.

8.1.2 Advantages of Capitalism:

Several advantages are included within a capitalist economy.

(i) Optimization of Resources

Since government intervention is kept at a limited level, several issues that
generally arise with government intervention including corruption and poor
circulation of information within the market are prevented, allowing
individual incentives to work as hard as possible to achieve as much as
possible.
Also, the important feature of capitalism to make profit, pushes for the
optimum utilization of available resources.

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There is great competition among producers to capture a bigger chunk of the

market size, so capitalists are constantly on the look-out for ways to
maximize the resources employed in production so as to positively increase
their profit margin amidst the competition.

(ii) Leads to increased individual wealth

As the capitalist economy is dependent on the push factor of individuals,
there is no limit to the level of wealth an individual can accumulate through
progression within the economy. As company proficiency improves so does
the ability for people to move through social class, as an increase in wealth is
available.
This pushes individuals to work harder in the interest of self-preservation to
achieve more. Profit increase within the economy and personal industry,
allows an expansion in wealth and company resources, resources that will be
used so as to best benefit the company and in turn the economy by
promoting foreign investment.

(iii) Increases consumer choices

Capitalism allows individuals to choose both in commodity purchase and
employment opportunities. It allows resources to be distributed according to
consumer choice rearing the market in a more productive consumer friendly
range.

(iv) More efficient production

Through capitalism, firms and companies are inclined to produce with
greater efficiency, by cutting cost and improving efficiency. This is done with
an aim to prevent losses in an industry where competition is high bettering
the economy as a whole.

(v) Results in profit maximization

Profit maximization is a main priority within the capitalist’s state. This can be
produced via meeting consumer wants. This causes large suppliers of goods
and services that are similar and diversification in brands allow for customer
distinction and individuality.
There is competition among producers to capture a bigger chunk of the
market size, so capitalists are always on the look-out for ways to maximize

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the resources employed in production so as to positively increase their profit

margin and possibly beat the competition.

8.1.3 Disadvantages of Capitalism

Within the capitalists state the consumer has all the power in the
economy because some people will always be able to work harder, achieve
more and eventually achieve dominance above others in the economy. Along
with a lack of Government welfare and human nature several disadvantages
would eventuality occur within the economy.

(i) Unequal distribution of wealth

In a capitalist system where the means of production and distribution of
goods and services are owned by just a few members of the society, just a
few wealthy individuals and families could control the wealth of an entire
nation. The rest of the people, who depend on the largeness of the rich
through jobs offered to them, live from one pay cheque to the next. The
wealth of the nation is not evenly distributed among the bulk of the people.

(ii) Could result in costs to the environment

Due to market being profit and demand driven, negative externalities such as
pollution are generally ignored until they become a serious issue within the
economy. This leads to a necessity to reduce the money supply in the
economy to resolve these issues. The drive for profit in a capitalist system
sometimes pushes the captains of industry to go to the extremes, all for the
sake of profits. The by-products of some business entities are harmful to the
environment but these by-products are not disposed of properly, therefore
causing harm to the environment.

(iii) Propensity for industrial unrest

There is always a power play between the owners of industry who want to
pay less in wages and salaries to enhance their profit margin and the workers
who believe their wages must be increased in consonance with the efforts
they put into the production of goods and services. This power play results in
industrial unrest that could affect the stability of the society.

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(iv) Labour could be under-valued and exploited

Socialists and communists are people who do not support capitalism. They
say it hurts workers, because businesses make more money by selling things
than they pay the workers who make the things. Business owners become
rich while workers remain poor and exploited (taken advantage of). They also
argue society would be more efficient if people thought less about
competing against one another for their own interests and thought more of
working together for the overall good of society. Another argument is that
each person has a right to basic needs (such as food and shelter). Within
capitalism, sometimes people might not get everything they need to live.

(v) Capital could reside with a few people

One of the disadvantages of capitalism is that wealth and the control of the
means of production is concentrated in the hands of very few individuals.
The rich families always control the wealth of the society. In the United
States of America, which is the bastion of capitalism in the world, according
to the New York Times, the richest 1% of the total population of the country
controls roughly 38% of all privately held wealth. On the other hand, 73% of
the debt owed in the U.S. is owed by 90% of the population.

8.2 Centrally planned economy (Socialism):

Socialism rose to prominence in the mid-19th century in opposition to the
economic inequality brought about by early capitalism. By the turn of the
19th century, the industrial revolution and the resulting industrial capitalism
had led to very inhumane working conditions.

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Karl Marx used systematic analysis to show the shortcomings of capitalism

and the exploitation and alienation that resulted from it. According to Marx,
workers were the source of wealth, yet, through capitalism, this wealth went
to the hands of a few instead of trickling back to the workers. Some of the
principles of socialism include as follows:

8.2.1 Characteristics Socialism:

The following are the primary characteristics socialism.

(i) Public Ownership

This is the core tenet of socialism. In a socialist economy, the means of
production and distribution are owned, controlled and regulated by the
public, either through the state or through cooperatives. The basic motive is
not to use the means of production for profit, but rather for the interest of
social welfare.

(ii) Economic Planning

Unlike in a capitalist economy, the laws of supply and demand do not drive a
socialist economy. Instead, all economic activities, production, distribution,
exchange and consumption are planned and coordinated by a central
planning authority, which is usually the government. A socialist economy
relies on the central planning authority for distribution of wealth, instead of
relying on market forces

(iii) Egalitarian Society

Socialism rose as an opposition to the economic inequality brought about by
early capitalism. As such, it aims for an egalitarian society where there are no
classes. Ideally, all the people within a socialist economy should have
economic equality.

(iv) Provision of Basic Needs

In a socialist economy, the basic needs, food, shelter, clothing, education, the
government without any discrimination provides health and employment.

(v) Social Welfare

The state takes care of the working class through employment protection,
minimum wages and trade union recognition rights.

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(vi) No Competition
In a socialist economy, there is no competition in the market since the state
is the sole entrepreneur. The state only focuses on provision of necessities,
which results in limited consumer choice.

(vii) Price Control

In socialist economies, the prices of products are controlled and regulated by
the state. The states sets both the market price for consumer goods and the
accounting price that helps managers make decisions about productions of
goods.

8.2.2 Advantages of Socialism:

Socialism has a number of benefits which made it an appealing economic
system at a time when capitalism was rife with injustices and exploitation.
Some of the benefits of socialism include:
(i) Social Justice
This is perhaps the greatest advantage of socialism. Socialism advocates for
elimination of economic inequalities and the even and equitable distribution
of the national income. Under socialism, everyone gets his or her fair share
of the national wealth. All the people are given equal opportunities and
exploitation is eliminated.
(ii) Production Based On Need
One of the major downsides of capitalism is that production depends on the
purchasing power of the tiny elite. The super-rich rides in Lamborghinis and
travel in private jets while the poor cannot afford a meal. Socialism prevents
such scenarios. Under socialist economies, production is directed to ensure
that the basic needs of the masses are met first.
(iii) Egalitarian Distribution of Wealth and Income
Socialist economies are dedicated to providing equal opportunities for all.
There is no exploitation. Wealth is distributed to workers based on their
input to the economy. This prevents situations where a few members of
society piggyback on the efforts of workers to create and amass wealth for
themselves.

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(iv) Rapid Economic Development

Under a socialist economy, there is a central authority in charge of planning
for the use of resources and making quick decisions. Resources are used fully
and there is minimal wastage. This leads to fast economic growth of socialist
states. A good example of this is the development that was made by the
USSR in its early years.
(v) Balanced Economic Development
With the economic planning that is central to socialism, development can be
carried out in a balanced manner within the entire country. Instead of having
development focused on certain areas, economic planning ensures that all
regions are developed, including backward areas. Similarly, planning ensures
that all sectors of the economy develop at par with each other.
(vi) Economic Stability
Socialism also minimizes the risk of economic instability. Under capitalism,
economies often undergo fluctuations, which can lead to wastage of
resources and high levels of unemployment. This is very unlikely in a socialist
economy. Since the economy is well planned, and owing to the fact that
there is no private investment, economic fluctuations are a rare occurrence
in socialist economies.
(vii) Ecological Conservation
One of the biggest problems with capitalistic economies is that there is great
disregard for natural resources. Private enterprises care more about profits
than the future of the world. Socialism, on the other hand, is not driven by
profit. Since a central authority controls the economy, this authority can plan
for the future and put in place measures to ensure that the country’s natural
resources are conserved and utilized efficiently.
(viii) Minimal Exploitation and Class Struggles
One of the main objectives of socialism is to create a classless society where
all members are equal. There is no rich class that can exploit the poor. There
is no discrimination and no favors accorded to some members of the society
because everyone is equal. This eliminates the class struggles that are a
major part of capitalistic economies.

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(ix) Social Welfare

Another advantage of socialism is that it caters for the needs of all members
of society. All the basic needs of an individual are catered for by the state.
Imagine a situation where the state provides you with food, a house,
clothing, healthcare, education and employment. If you get involved in an
accident while performing your duties, the state cares and provides for your
family as you recover.
In such an economy, people can dedicate themselves to work without a lot of
worry about tomorrow, which leads to increased productivity. Compare this
to capitalist societies where a person might be employed yet doesn’t earn
enough to get house to sleep at night or to pay for healthcare when he falls
sick.

8.2.3 Disadvantages of Socialism:

Despite its numerous advantages, socialism is not all virtue. Socialism also
has its disadvantages, some of which ultimately led to the fall of some
economies that were purely socialistic.
Some of the disadvantages of socialism include:

(i) No Suitable Basis of Cost Calculation

In a capitalistic economy, the cost of production and the subsequent pricing
of products is determined by market forces. In socialistic economies, on the
other hand, market forces are not at play. Since the government, which also
doubles as the sole entrepreneur, owns the means of production the means
of production do not have a market price. This creates a situation where
there is no suitable basis of calculating the production costs for goods and
services.

(ii) Lack of Incentive

Socialism advocates for communal wellbeing over personal gain or self-
interest. Since socialism is against the accumulation of wealth for yourself, it
gets to a point where additional effort on your part does not result in any
gain for yourself. Without the motive for profit, workers lack the incentive to
work hard and be innovative. This ultimately leads to low productivity and
decreases the rate of economic development.

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(iii) Lack of Economic Freedom

Through social ownership, socialism takes away people’s freedom to
enterprise, which in turn takes away people’s free choice of occupation.
Unlike in capitalistic economies where you are free to choose your
occupation, workers are assigned jobs by the planning authority in a
socialistic economy. The workers cannot change their jobs without the
consent of the planning authority.

(iv) Lack of Consumer Freedom

Capitalistic economies provide consumers with choice. You don’t like Coca-
Cola? You can drink Pepsi. Feel like a Ferrari is too expensive for you? Well,
you can go ahead and buy a Mercedes, or a Chevy. Basically, you have
freedom of choice. Under a socialist economy, you don’t have such choice.
The planning authority determines the products that will be produced as well
as the prices for these products. If you don’t like a product or its price, there
is not much you can do. It’s a take-it-or-leave-it situation.

8.3 Mixed Economic System:

Mixed systems combine the characteristics of the market and command
economic systems. For this reason, mixed systems are also known as dual

systems. Sometimes the term is used to describe a market system under

strict regulatory control.

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Many countries in the developed western hemisphere follow a mixed

system. After it, all developing countries like Pakistan, India and Bangladesh
are mixed economies. Most industries are private, while the rest, composed
primarily of public services, are under the control of the government.

8.3.1 Features of Mixed Economy:

A mixed economy possesses the following features

(i) Public Sector

The public sector is under the control and direction of the state. All decisions
regarding what, how and for whom to produce are taken by the state. Public
utilities, such as rail construction, road building, canals, power supply, means
of communication, etc., are included in the public sector. They are operated
for public welfare and not for profit motive. The public sector also operates
basic, heavy, and strategic and defense production industries, which require
large investment and have long gestation period. But they earn profits like
private industries, which are utilized for capital formation.

(ii) Private Sector

There is a private sector in which production and distribution of goods and
services are done by private enterprises. This sector operates in farming,
plantations, mines, internal and external trade, and in the manufacture of
consumer goods and some capital goods. This sector operates under state
regulations in the interest of public welfare. In certain fields of production,
both public and private sectors operate in a competitive spirit. This is again in
the interest of the society.

(iii) Joint Sector

A mixed economy also has a joint sector, which is run jointly by the state and
private enterprises. It is organized on the basis of a joint stock company
where the majority shares are held by the state.

(iv) Cooperative Sector

Under a mixed economy, a sector is formed on cooperative principles. The
state provides financial assistance to the people for organizing cooperative
societies, usually in dairying, storage, processing, farming, and purchase of
consumer goods.

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(v) Freedom and Control

A mixed economy possesses the freedom to hold private property, to earn
profit, to consume, produce and distribute, and to have any occupation. But
if these freedoms adversely affect public welfare, they are regulated and
controlled by the state.

(vi) Economic Planning

There is a central planning authority in a mixed economy. A mixed economy
operates on the basis of some economic plan. In order to fulfill them, the
state regulates the economy through various monetary, fiscal and direct
control measures. The aim is to check the evils of the price mechanism.

(vii) Social Welfare

The principal aim of a mixed economy is to maximize social welfare. This
feature incorporates the merits of socialism and avoids the demerits of
capitalism. To remove inequalities of income and wealth, and unemployment
and poverty, such socially useful measures as social security, public works,
etc. are adopted to help the poor. On the other hand, restrictions are placed
on the concentration of monopoly and economic power in the hands of the
rich through various fiscal and direct control measures.

8.3.2 Merits of Mixed Economy:

A mixed economy possesses certain merits, which are as under:

(i) Best Allocation of Resources

Since a mixed economy incorporates the good features of both capitalism
and socialism, the resources of the economy are utilized in the best possible
manner. The price mechanism, the profit motive, and the freedoms of
consumption, production, and occupation lead to the efficient allocation of
resources within the economy.

(ii) General Balance

A mixed economy maintains a general balance between the public sector and
the private sector. There is competition as well as cooperation between the
two sectors, which are conducive for achieving a high rate of capital
accumulation and economic growth. Further, an estimate of the successes
and failures of the two sectors can be made by comparing their respective

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performances, and corrective measures are adopted accordingly.

(iii) Welfare State

A mixed economy contains all the features of a welfare state. There is no
exploitation either by the capitalists as under a free enterprise economy or
by the state as under a socialist economy. The workers are not forced to
work; Workers are provided monetary incentives in the form of bonus and
cash rewards for inventions. Labour laws are passed fixing minimum wages,
hours of work, and laying down the working conditions of workers in
factories and on farms.

(iv) Safeguards Personal Freedom

A mixed economy safeguards personal freedom. Under a mixed economy,
People have a choice of consumption, profession, enterprise and thought.

(v) Reduces Income Disparity

A mixed economy reduces income disparity between sections of society by
providing equal opportunities for employment and education. There is
almost just distribution of national wealth between all citizens of the country
thereby reducing the income gap.

(vi) Central Planning and Control

A mixed economy enables central planning and control thus economic
disturbances are avoided.

(vii) Helps Poor Economies

A mixed economy helps poor economies to have fast and balanced economic
development.

(viii) Fair Pricing and Distribution of Goods

It promotes fair pricing and distribution of goods and services as the market
is regulated by Govt. owned bodies. It promotes fair completion and
avoids predatory pricing.

(ix) Advantages of Economic Planning:

In the mixed economy, there are all advantages of economic planning.
Government takes measures to control economic fluctuations and to meet
other economic evils.

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(x) Competition and Efficient Production:

Due to competition between both private and public sectors, the level of
efficiency remains high. All factors of production work efficiently in the hope
of profit.

(xi) Economic Development

Under this system, both government and private sector join their hands for
the development of socio-economic infrastructures, moreover, government
enacts many legislative measures to safe guard the interests of the poor and
weaker section of the society. Hence, for any underdeveloped country,
mixed economy is a right choice.

8.3.3 Demerits of Mixed Economy:

A mixed economy has also certain defects that are discussed below:

(i) Non-Cooperation between the Two Sectors

The experience of the working of mixed economies reveals that the public
sector and the private sector do not see eye to eye with one another. The
private sector is treated like a step-child and groans under the various
restrictions imposed upon it by the state. Thus, a sense of bitterness and
non-cooperation develops between the two sectors.

(ii) Inefficient Public Sector

The public sector of a mixed economy is a big burden on the economy
because it works inefficiently. Bureaucratic control brings in inefficiency.
There is over-staffing of the personnel, red-tapism, corruption and nepotism.
As a result, production falls and losses emerge.

(iii) Economic Fluctuations

The experience of the working of the mixed economic system in the
developed countries also reveals that they have not been able to remove
economic fluctuations. This is because of the improper mixture of capitalism
and socialism. The private sector is allowed to operate freely under a loose
system of government regulations and controls. The public sector also does
not operate under the rigid conditions that are laid down under a planned
economy.

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(iv) The Market Equilibrium

In a mixed economy, the market equilibrium is tough to maintain because of
public and private interests.

(v) Hinders the Growth of Private Sector

Excessive state control in a mixed economy hinders the growth of private
sector industries.

(vi) Lack of Efficiency

In this system, both sectors suffer due to lack of efficiency. In public sector it
is so because government employees do not perform their duty with
responsibility, while in private sector, efficiency goes down because
government imposes too many restrictions in the form of control, permits
and licenses, etc.

(vii) Delay in Economic Decisions

In a mixed economy, there is always delay in making certain decisions,
especially in case of public sector. This type of delay always leads to a great
hindrance in the path of smooth functioning of the economy.

(viii) More Wastages

Another problem of the mixed economic system is the wastages of
resources. A part of funds allocated to different projects in public sector goes
into the pocket of intermediaries. Thus, resources are misused.

(ix) Corruption and Black Marketing

There is always corruption and black marketing in this system. Political
parties and self- interested people take undue advantages from public
sector. Hence, this leads to emergence of several evils like black money,
bribe, tax evasion and other illegal activities. All these ultimately bring red-
tapism within the system.

(x) Threat of Nationalism

Under mixed economy, there is a constant fear of nationalism of private
sector. For this reason, private sector does not put into use their resources
for the common benefits.

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EXERCISE No. 8

Long Questions
Q.1. Define capitalism and describe characteristic of capitalism.
Q.2. What is socialism? Explain features of socialism.
Q.3. State the advantages and disadvantages of socialism.
Q.4. Define mixed economic system. State the characteristics of this
system.
Q.5. Describe the advantage and disadvantages of mixed economic
system.

Short Questions
Q.1. What is economic system?
Q.2. Write four features of capitalistic system.
Q.3. Write down four advantages of capitalistic system.
Q.4. State four disadvantages of capitalistic system.
Q.5. What is socialism?
Q.6. Write four characteristics of socialistic economic system.
Q.7. State four merits of socialism.
Q.8. Write four disadvantages of socialism.
Q.9. In which economic system there is central planning board?
Q.10. Write four characteristics of mixed economic system.
Q.11. Write four disadvantages of mixed economic system.
Q.12. In which economic system there is no permission of private business.
Q.13. In which economic system government makes all economic decisions.
Q.14. In which system there is unequal distribution of wealth?
Q.15. Which economic system is prevailing in our country?

Multiple Choice Questions (MCQs)

Choose the correct answer from the given possible answers and circle it.

Q.1. These economic system exist in the world-------------------

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(a) Capitalism (b) Socialism

(c) Mixed (d) All
Q.2. Who has the sovereignty in capitalism?
(a) Businessman (b) Labour
(c) Consumer (d) Govt.
Q.3. Which economic systems is opposite to socialism?
(a) Mixed (b) Socialism
(c) Capitalistic (d) None
Q.4. There is unequal distribution of wealth in-----------economic system.
(a) Mixed (b) Socialism
(c) Capitalistic (d) all
Q.5. Which economic system gives freedom of choice and business?
(a) Mixed (b) Socialism
(c) Command (d) Capitalistic
Q.6. ------------Institutions compete mutually in capitalistic economic
system
(a) Many (b) Four
(c) Five (d) Six
Q.7. Resources are in in the ownership of----------in capitalism.
(a) Public (b) Govt.
(c) Businessman (d) Employees
Q.8. Boom and depression are parts of and Parcels of ----------system.
(a) Mixed (b) Capitalistic
(c) Socialism (d) All
Q.9. In which economic system all recourses are in the hand of Govt.?
(a) Socialism (b) Capitalistic
(c) Mixed (d) None
Q.10. In which economic system there is no concept of private property?
(a) Capitalistic (b) Socialism
(c) Mixed (d) None
Q.11. Under economic system consumers are slaves to producers.
(a) Capitalistic (b) Mixed

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(c) Socialism (d) All

Q.12. In this economic system Govt. takes the responsibility of supervision
of public.
(a) Socialism (b) Mixed
(c) Capitalistic (d) All
Q.13. This economic system is in between capitalistic and socialism
(a) Socialism (b) Mixed
(c) Capitalistic (d) All
Q.14. In mixed economic system all the productive resources are
(a) Owned by Govt. (b) Owned by Public
(c) A & B (d) None
Q.15. In this economic system, sometimes Govt. nationalize the private
business
(a) Mixed (b) Socialism
(c) Capitalistic (d) All

Answer Key
Q. No. Answer Q. No. Answer Q. No. Answer
1 d 6 a 11 c
2 a 7 c 12 a
3 c 8 b 13 b
4 c 9 a 14 c
5 d 10 b 15 a

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Reference:
1. Williamson, Stephen D. (2010). Macroeconomics. Fourth Edition,
Prentice Hall.
2. Perloff, J.M. (2013). Microeconomics: Theory & Applications with
Calculus, 3rd Edition Pearson.
3. Nicholson, W. & Snyder, C. (2009). Intermediate Microeconomics
and Its Application, 11th Edition. Cengage Learning
4. Gujrati, D. J. - Basic Econometrics – 4th Edition (2003) McGraw-Hill
Company.
5. Paul R. Krugman and Maurice Obstfeld, International Economics:
Theory and Policy, Addison Wesley, 7th edition (2016).
6. David N. Weil, Economic Growth, 3rd edition (2012). Pearson
Addison- Wesley. http://www.aw-bc.com/weil/.
7. Charles I. Jones and Dietrich Vollrath, Introduction to Economic
Growth, 3rd edition (2013). W. W. Norton & Company.
8. Mishkin, Frederic S., (2001), the Economics of Money, Banking and
Financial Markets. (Sixth edition). Addison Wesley, New York.
Latest edition
9. Bennett T. McCallum, (1989), Monetary Economics, Theory and
Policy, McMillan. latest edition.
10. Fredric S. Mishkin, (1995), Financial Markets and Money, Harper &
Row Publishers.
11. Ritter, L. S. and Peterson, R.L. Financial Institutions and Financial
Markets. 9th edition. New York.
12. Akbar, S. Zaidi. Issue in Pakistan’s Economy. Karachi: Oxford
University Press, 2018.
13. Business Organization, Nisar-ud-Din, Aziz Publisher, Lahore
14. Introduction to Business, M. Saeed Nasir, Ilmi Kitab Khana, Lahore.
15. Muhammad Irshad, Economics, Naveed Publications Lahore.
16. Saeed Nasir M A, Text book of Economics, Ilmi Kutab Khana, Lahore.
17. Salman Rizavi, Economics, Syed Mobin Mahmud & Co., Lahore.
18. K. K. Dewitt, Modern Economic Theory, S. Chand Publisher, New Delhi
India -2006. ISBN 10: 8121924634 / ISBN 13: 9788121924634
19. Mankiw, “Principles of Economics” 7th Edition, (2008), Southwest
Publishers
20. McConnell and Bruce-Principles of Economics -17th Edition, (2006),
McGraw-Hill.

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Ch-9 Money MGT-331

Chapter 9

Money

Chapter Objectives
After completion of this chapter students will be able to:

 Understand money.
 Explain barter system and its inconveniences.
 Define money.
 Explain the factors of money.

Concept of Money:
Money is really anything that people use to pay for goods and services and to
pay people for their work. Historically, money has taken different forms in
different cultures—everything from salt, stones, and beads to gold, silver,
and copper coins and, more recently, virtual currency has been used.

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Regardless of the form it takes, money needs to be widely accepted by both

buyers and sellers in order to be useful.
To understand the usefulness of money, we must consider what the world
would be like without money. How would people exchange goods and
services? Economies without money typically engage in the barter system.

9.1 Barter System and its inconveniences:

In ancient times, when there was no concept of money. People used to meet
their needs by mutual exchange of their products. The farmer used to get
everything he needed in return for his agricultural production. The carpenter
used to exchange wood and its products. This type of mutual transaction is
called barter system in economics.

According to Professor Stanley

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“Barter system refers to an economy in which a popular public exchange tool

is not used”.
Barter system can be defined in this way
“When things are exchanged for goods to meet each other's needs, such a
system is called barter System”.

9.1.1 Inconveniences/Difficulties of Barter System:

Under direct exchange, people had to face such difficulties. Below is an
overview of some of these difficulties.

(a) Lack of Double Coincidence of Wants

The biggest difficulty in the direct transaction of goods was the mutual
inconsistency of needs. In it, everyone had to find someone else who could
be willing to exchange things. For example, if a man has wheat, he wants to
get copper in return. So he had to find someone who had more copper than
he needed and was willing to buy wheat in return. It was very difficult to
create such a two-way harmony in needs.

(b) Problem of Sub-Division of some items

In the direct exchange of goods, if the solution of both the difficulties was
found in the upper valley, then another third difficulty was that, there were
many commodities, which were indivisible. If they are divided into different
parts, then their stature will be end.

(c) Lack of Storage Value

One of the difficulties in the direct exchange was Lack of Storage of Value. A
man could not store his wealth. Because there were many goods that, if
stored, would rot and disappear in two or three days for example,
vegetables, fruits, meat and milk etc. There are large sustainable
commodities like wheat, cotton, rice and cattle, if these were stored; there
was a danger of loss due to a natural calamity or a catastrophe. In addition,
they had to take great precautions to store goods.

(d) Difficulty of future payments

There was a problem in the direct transaction of goods because in the future
there will be great difficulties in making payments.

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(e) Difficulty in Transferability.

It was very difficult to move goods from one place to another when there
was a business transaction under Barter system.

(f) Difficulty in Receipt of Government Revenue

When the government in the barter system had to collect in the form of
items, which was very difficult because the items have to be stored for long
periods, it is very difficult to collect goods, Objects deteriorate and their size
decreases over time. Due to which the government suffered a great loss.

(g) Non-Existence of the unit of Calculation

In this system there was no concept of the unit of calculation, which caused
great difficulty.

(h) Limited Business

Trade was booming in this era because the exchange of goods was a very
difficult task and there were more expenses.

9.2 Definition of Money:

Different economists have defined money, some of which are as follows.
In the opinion of Professor Crothar:
“Money refers to anything that has become popular as a means of
exchange, as well as preforms the function of quality and storage”.
In the words of the senior
"Money is something that is widely accepted for repaying loans."
According to Professor Robertson:
“Money refers to something that is generally accepted for the
payment of goods or liability of another”.

9.2.1 Function of Money:

The following are some of the important functions of money.

(a) Medium of Exchange

The main function of money is that it serves as an exchange tool. Now,
people get other items and services for their needs in return of money. Now,

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in the presence of money, it is not necessary to have a bilateral match of

needs in buying and selling goods and services. Now people sell their goods
and services for money and this has become very fast and simple.

(b) Measure of Value

Every item can be bought or sold can now be valued in terms of the common
unit and the value of the commodity is measured in terms of money
constitute its price.

(c) Store of Value

People used to face great difficulties and losses in dazzling goods in direct
exchange. First of all, it took a lot of effort to store them. Others were in
danger of being stolen or lost in the event of a natural disaster.
Third, their value was subject to change over time, but there was a risk of
change. But money has been a great help in overcoming all these difficulties
and losses. Now the person who wants can transfer his wealth in the form of
money and save it for as long as he wants.

(d) Source of Transfer Value

It is source to transfer movable and immovable property from one place to
another. The property is acquired by selling the property and the property is
acquired at another place like this.

(e) A unit of account

It is also used as a unit for accounting. Through it, goods and services are
calculated and the price of goods is stated.

(f) The source of government payments and revenue

The government collects tax, fines etc.in the form of money. And the
government also pays the salaries of the employees in the form of money.

(g) Measures of Goodwill

The human being who has an abundance of money in the present period has
the same stature.

(h) Future Payments

In the barter system, people used to face great difficulty in making future
payments in connection with their debts. Has also been eliminated. Because

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there is a great deal of stability in the value of. So now people have started
trading without fear and danger. Thanks to this duty of money, business has
become very wide.

EXERCISE No. 9

Long Questions
Q.1. What is meant by barter system? State difficulties/inconveniences
of barter system.
Q.2. What is meant by money? Explain important functions of money.

Short Questions
Q.1. Define Barter system.
Q.2. Write three difficulties of barter system.
Q.3. What is money?
Q.4. Write the four duties of money.
Q.5. Money is medium of exchange. How?
Q.6. Write four characteristics of good money.
Q.7. Give three examples of bank money.
Q.8. How money is playing role as a source of Government Payments?
Q.9. What is meant by homogeneity as a feature of money?
Q.10. Explain lack of store of value as difficulty of barter system.

Multiple Choice Questions (MCQs)

Choose the correct answer from the given possible answers and circle it.

Q.1. Which of the following is near to money:

(a) Bill of exchange (b) Bonds
(c) Cheque (d) all
Q.2. Direct exchange of goods against goods is called

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(a) Charter (b) Money

(c) Barter (d) none
Q.3. It exists in barter system:
(a) Happiness (b) Interest
(c) Difficulty (d) all
Q.4. Difficulties of barter system were removed by
(a) Govt. (b) Bank
(c) Money (d) all
Q.5. In barter system there was problem of
(a) Storage (b) Division
(c) a & b (d) none
Q.6. It is used to measure national income.
(a) Money (b) Barter
(c) Metals (d) Coins
Q.7. Every country tries to maintain foreign exchange reserves.
(a) Constant (b) Maximum
(c) Minimum (d) b& c
Q.8. Money made economic activities
(a) Vast (b) Speedy
(c) a & b (d) none
Q.9. Before invention of money, needs were met with exchange of
(a) Slaves (b) Animals
(c) Gold (d) all
Q.10. It has made the tax collection easy for Govt.
(a) Money (b) Barter
(c) Gold (d) Wealth

Answer Key

Q. No. Answer Q. No. Answer Q. No. Answer

1 a 5 c 9 d
2 c 6 a 10 a
3 c 7 b
4 c 8 c

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Reference:
1. Mishkin, Frederic S., (2001), the Economics of Money, Banking and
Financial Markets. (Sixth edition). Addison Wesley, New York.
Latest edition
2. Bennett T. McCallum, (1989), Monetary Economics, Theory and
Policy, McMillan. latest edition.
3. Fredric S. Mishkin, (1995), Financial Markets and Money, Harper &
Row Publishers.
4. Laider, David E.W (1996), The Demand for Money: Theories, Evidence
and Problems (Fourth edition), Harper & Row, Publishers, New York.
5. Miller, R. L. and David Van Hose, (2001), Money, Banking & Financial
Markets. South Western, Singapore.
6. Patinkin Don, Money, Interest and Prices, Harper and Row Publishers,
(Latest Edition)
7. Baye, Michael, Managerial Economics and Business Strategy. Sixth
Edition. Boston: McGraw-Hill Irwin.
8. Elinor Ostrom, "Understanding Institutional Diversity" 4th Edition
(2013), Princeton University Press.
9. Fabozzi, F. and Modigliani, F. Capital Markets. 2nd edition. Prentice-
Hall London (1996).
10. Ritter, L. S. and Peterson, R.L. Financial Institutions and Financial
Markets. 9th edition. New York.
11. Miller, R. L –EconomicsToday-14th Edition (2005) Addison Wesley.
12. McConnell and Bruce-Principles of Economics -17th Edition, (2006),
McGraw-Hill.
13. Nicholson, W. & Snyder, C. (2009). Intermediate Microeconomics
and Its Application, 11th Edition. Cengage Learning
14. Akbar, S. Zaidi. Issue in Pakistan’s Economy. Karachi: Oxford
University Press, 2018.
15. S.M. Burke and Lawrence Ziring. Pakistan’s Foreign policy: An
Historical analysis. Karachi: Oxford University Press, 2013.
16. Business Organization, Nisar-ud-Din, Aziz Publisher, Lahore
17. Introduction to Business, M. Saeed Nasir, ILLMI Kitab Khana, Lahore.
18. An Introduction to Modern Economics, S.M. Akhtar, United Limited,
Lahore.
19. Muhammad Irshad, Economics, Naveed Publications Lahore.
20. Sheikh Manzoor Ali, Economics, ILLMI Kutab Khana, Urdu Bazar,
Lahore.
21. Saeed Nasir M A, Text book of Economics, ILLMI Kutab Khana, Lahore.

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Ch-10 Bank MGT-331

Chapter 10

Bank

Chapter Objectives
After completion of this chapter students will be able to:

 Understand bank and its functions.

 Define bank.
 Describe commercial bank and its functions.
 State central bank and its functions.

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10.1 Definition of Bank:

Banking is one of the oldest industries and banking in the form that we know
of began at about 2000BC of the ancient world. It started with merchants
making grain loans to farmers and traders while carrying goods between
cities. Since then, the banking industry has evolved from a simplistic barter
system and gift economies of earlier times to modern complex, globalized,
technology-driven, and internet-based e-banking model.

Banks play a key role in the entire financial system by mobilizing deposits
from households spread across the nation and making these funds available
for investment, either by lending or buying securities. Today the banking
industry has become an integral part of any nation’s economic progress and
is critical for the financial wellbeing of individuals, businesses, nations, and
the entire globe. In this article, we will provide an overview of key industry
concepts, main sectors, and key aspects of the banking industry’s business
model and trends.
A bank is a financial institution that provides banking and other financial
services to their customers. Banks are a subset of the financial services

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industry and play an important role in the global economies. They are a key
player in stimulating economic growth. Banking is an important undertaking.
The movement of capital handled by banks allows economies to grow and
prosper. Businesses and governments need money to operate, and banks act
as intermediaries between the suppliers of funds and users of funds.

Types of Banks:
There are two types of banks based on the authority,
(a) Central banks
(b) Commercial banks
Central bank can be called the apex bank, which is responsible for
formulating the monetary policy of an economy.
Commercial banks, on the other hand, are those banks that help in the flow
of money in an economy by providing deposit and credit facilities.
Commercial banks provide financial services to the individuals and
businesses.

10.2 Commercial Bank and its Functions:

A commercial bank is a kind of financial institution that carries all the

operations related to deposit and withdrawal of money for the general
public, providing loans for investment, and other such activities. These banks
are profit-making institutions and do business only to make a profit.

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The two primary characteristics of a commercial bank are lending and

borrowing. The bank receives the deposits and gives money to various
projects to earn interest (profit). The rate of interest that a bank offers to the
depositors is known as the borrowing rate, while the rate at which a bank
lends money is known as the lending rate.
According to Prof. Roger.
"The bank which deals with money and money’s worth with a view to
earning profit is known as commercial bank".
According to Prof. Gilbert.
"A commercial bank is a dealer in capital or more property a dealer in
money. It is intermediate party between the borrower and the lender.
He borrows from one party and lends to another and the difference
between the terms at which he borrows and those at which he lends
from the source of his profit”.

10.2.1 Types of Commercial Bank:

There are two types of commercial bank in Pakistan

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(a) Scheduled bank

The banks, which are registered in the list of central bank under its charter,
are known as scheduled banks. For example, National bank of Pakistan
united Bank Ltd and Bank of Punjab etc. They are bound to perform banking
services according to the policies and instructions of central bank.

(b) Non-scheduled bank

The banks, which are not registered in the list of central bank under its
charter, are known as non-scheduled banks. They are not bound to perform
banking services according to the policies and instructions of central bank
like Khushhalli Bank Ltd and Kshaf Foundation etc.

10.2.2 Functions of Commercial Bank:

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The primary functions of a commercial bank are as follows:

(a) Accepting Deposits:

Commercial banks accept deposits from people, businesses, and
other entities in the form of:
(i) Savings deposits – The commercial bank accepts small deposits,
from households or persons, in order to encourage savings in
the economy.
(ii) Fixed deposits – The bank accepts deposits for a fixed time and
carries a higher rate of interest as compared to savings
deposits.
(iii) Current deposits – These accounts do not offer any interest.
Further, most current accounts offer overdrafts up to a pre-
specified limit. The bank, therefore, undertakes the obligation
of paying all cheque against deposits subject to the availability
of sufficient funds in the account.

(b) Advancing Loans/Lending of Funds:

Another important activity is lending funds to customers in the form
of loans and advances, cash credit, overdraft and discounting of bills,
etc. Loans are advances that a bank extends to his customers with or
without security for a specified time and at an agreed rate of interest.
Further, the bank credits the loan amount in the customers’ account,
which he withdraws as per his needs.

(c) Secondary Functions of Commercial Banks (Agency

Function):
The secondary functions of a commercial bank are as follows:

(i) Bank as an Agent:

A bank acts as an agent to its customers for various services like:
 Collecting bills, draft, cheque, etc.
 Paying the insurance premium, rent, loan installments, etc.
 Working as a representative of a customer for purchasing or
redeeming securities, etc. in the stock exchange.

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 Acting as an executor, administrator, or trustee of the estate of a

customer
 Also, preparing income tax returns, claiming tax refunds, etc.

(ii) General Utility Services:

There are several general utility services that commercial banks offer like:
 Issuing traveler cheque
 Offering locker facilities for keeping valuables in safe custody
 Also, issuing debit cards and credit cards, etc.

10.3 Central Bank and its Functions:

In the words of Professor de Cock, “the central bank is the head of a
country's banking and monetary system. And performs mining duties for the
economic benefit of the country. It works for the betterment and welfare of
the people instead of making a profit and making a profit is secondary to it.”
The central bank is the institution responsible for the stability and security of
the country's financial and economic system. This bank makes every effort to
develop its country financially and economically. Government authorized
state bank of Pakistan to formulate and implement the economic policies to
bring economic & financial stability in the country.

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10.3.1 Functions of State Bank of Pakistan (Central Bank):

State bank of Pakistan performs it’s all functions only for two concern parties
first for government & second banking sector. As a government bank the
state bank of Pakistan performs the following functions.

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(a) Monopoly of the Note Issue (Currency regulator)

The most important function of the state bank of Pakistan is issuance of
currency notes. It has monopoly over issuance of currency note. In earlier
age this function was performed by commercial banks individually which was
inherited with lack of uniformity, loss of public confidence, inflation, and
different purchasing power. Therefore, state bank of Pakistan authorized to
issue currency note to overcome the above evils. Fixed fiduciary system,
Proportional reserve system & Minimum reserve system are followed for
note issuance

(b) Controller of Credit (Controls Credit)

The State bank of Pakistan controls and regulates credit money in the
country in order to the requirement of the economy. Credit money
expansion or contraction has direct relation with inflation or deflation. The
state bank of Pakistan controls the credit money for keeping the price level
stable in the country by using the following methods: Bank rate policy, Open
market operations, Bank reserve ratio, Rationing of credit, other
miscellaneous methods.

(c) Custodian of international Currency/Foreign Exchange

Every country earns foreign exchange through exports of goods and services.
This earned and other foreign exchange is held in the custody of the state
bank of Pakistan. This is a use to finance the imports of goods & services.
When businessmen export goods & earn foreign exchange, which is not
handover to them, but it is held with the state bank of Pakistan. The bank
pays to them in a local currency.

(e) Issuance and Management of Public Debts

When the government needed public debts, the state bank of Pakistan, on
behalf of it, manages its issuance, payment of interests, & retirement
(returns the principle amount on maturity). Public debts are usually issued
annually to general public; the government utilizes this cash according to his
requirements.

(f) Development of the Financial Institutions

The state bank of Pakistan is responsible to develop financial institutions in
the country, which play a vital role in industrial, agricultures, and capital

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development of the country, it also facilitates the establishment and running

of money markets and stock of exchange.

(g) Bank to the Government/Functions for Banker

The state bank of Pakistan also acts as a banker`s bank in the capacity it
performs valuable service to its scheduled commercial banks, these are given
below.

(h) Lender of the Last Resort

In crisis, when a commercial bank has exhausted all its resources and stills
finds itself unable to meet all its obligations the state bank of Pakistan comes
forward & provides loans to the commercial banks to enable to discharge its
liabilities. Thus, commercial bank prevents from bankruptcy one of the ways
to help is to rediscount bills of the commercial bank.

(i) Rediscounting bill of exchange

The state bank of Pakistan rediscount bills of exchange, which means to
again discount the bill of exchange, which the commercial bank has already
discounted for its clients. Commercial bank discount bills of exchange of
businessmen (encashment of the bill before it matures, at a certain rate of
interest) as a result commercial banks fall short of cash & the approach the
state bank of Pakistan for rediscounting of the same bills.

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(j) Clearing House Services

The state bank of Pakistan provides clearing house facility to commercial
banks. Every bank receives cheque drawn on other banks, because of which
every bank becomes creditor or debtor to other banks. All these cheques are
sent to the state bank of Pakistan where it settles & adjusting their debit or
credit balances. Clearing service is possible because the state bank of
Pakistan possesses cash reserves of the commercial bank.

(k) Custodian of Cash/Bank Reserves

According to the banking law, every scheduled bank is bound to deposit a
certain percentage of all its deposits with the state bank of Pakistan; State
bank of Pakistan uses this reserve for many objectives. It provides safety to
the account holders, it us used to control credit money. It is used to help
scheduled bank in need of cash. It is use to settle banks obligations to one
another. The practice is known as a clearing service.

10.3.2 Difference between Central & Commercial Bank:

There are two types of banks based on the authority, these are central/State
banks and commercial banks. Central bank can be called the apex bank,
which is responsible for formulating the monetary policy of an economy.
Commercial banks, on the other hand, are those banks that help in the flow
of money in an economy by providing deposit and credit facilities.
Commercial banks provide financial services to the individuals and
businesses.
Let us look at some of the points of difference between the central bank and
commercial banks.

Central/State Bank Commercial Bank

Definition

Central bank is the apex financial It is a type of financial institution

institution of the country that is that is concerned with providing
concerned with formation of banking services to the general

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monetary policies and the way public and businesses by

money should be regulated in the facilitating deposit, offering loan
economy facilities

Ownership

Central bank is always having Commercial banks can be either

public ownership public or private in their
ownership

Number of Banks

There is only one central bank in a There can be many commercial

country banks in a country

Profit Motive

Central bank does not operate for Commercial banks operate with
making profit the motive of earning profit

Clients

Commercial banks and the Individuals and businesses

government

Right to Print notes

The right to print currency notes Commercial Banks have no such

and issue them lies with the right.
Central Bank.

Policy creator

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Central banks create monetary Commercial banks do not create

policy to regulate interest rates in any policies that are essential for
an economy the functioning of an economy

Source of Money Supply

Central banks are the source of Commercial banks run on the

money supply in an economy deposits obtained from the
individuals and hence they
perform no such function

EXERCISE No. 10

Long Questions
Q.1. Define bank and explain the functions of Commercial bank.
Q.2. Describe the functions of Central bank of Pakistan in detail.
Q.3. Define bank. Differentiate central bank and commercial bank.

Short Questions
Q.1. What is commercial bank?
Q.2. Write the name of any four-scheduled banks.
Q.3. Write the name of three functions of Commercial bank?
Q.4. Define central bank?
Q.5. Why central bank is called as Lender of Last Resort.
Q.6. What is meant by non-Scheduled bank?
Q.7. Describe the difference b/w current account and saving account
Q.8. When and which book was written by Professor Robbins?

Multiple Choice Questions (MCQs)

Choose the correct answer from the given possible answers and circle it.

Q.1. The bank is an institute that deals with

(a) Gold (b) Money

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(c) Barter (d) none

Q.2. Basic function of a commercial bank is
(a) Investment (b) Provide loans
(c) Earn profit (d) all
Q.3. Commercial bank issues loan
(a) Govt. (b) Public
(c) Other bank (d) none
Q.4. Which bank issues notes?
(a) Scheduled (b) Commercial
(c) Central bank (d) PIDC
Q.5. Bank is an institution, which transacts
(a) Credit creation (b) Money
(c) Deposits (d) none
Q.6. Commercial bank is an agent of
(a) Govt. (b) Account holder
(c) Public (d) all
Q.7. The purpose of central bank is
(a) Welfare of People (b) To earn profit
(c) To earn interest (d) none
Q.8. Which bank is not bound to follow the instruction of SBP?
(a) Scheduled bank (b) Commercial bank
(c) Non-scheduled bank (d) IDBP
Q.9. The bank that provides services of clearing house.
(a) NBP (b) BOP
(c) ADBP (d) Central bank
Q.10. The bank does not pay interest on----------- Ac.
(a) Saving (b) Current
(c) Fixed (d) a & b

Answer Key
Q. No. Answer Q. No. Answer Q. No. Answer
1 b 5 b 9 d
2 c 6 b 10 b
3 b 7 a
4 c 8 c

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Reference:
1. Bennett T. McCallum, (1989), Monetary Economics, Theory and
Policy, McMillan. latest edition.
2. Mishkin, Frederic S., (2001), the Economics of Money, Banking and
Financial Markets. (Sixth edition). Addison Wesley, New York.
Latest edition
3. Fredric S. Mishkin, (1995), Financial Markets and Money, Harper &
Row Publishers.
4. Laider, David E.W (1996), The Demand for Money: Theories, Evidence
and Problems (Fourth edition), Harper & Row, Publishers, New York.
5. Miller, R. L. and David Van Hose, (2001), Money, Banking & Financial
Markets. South Western, Singapore.
6. Patinkin Don, Money, Interest and Prices, Harper and Row Publishers,
(Latest Edition)
7. Baye, Michael, Managerial Economics and Business Strategy. Sixth
Edition. Boston: McGraw-Hill Irwin.
8. Elinor Ostrom, "Understanding Institutional Diversity" 4th Edition
(2013), Princeton University Press.
9. Fabozzi, F. and Modigliani, F. Capital Markets. 2nd edition. Prentice-
Hall London (1996).
10. Ritter, L. S. and Peterson, R.L. Financial Institutions and Financial
Markets. 9th edition. New York.
11. Miller, R. L –EconomicsToday-14th Edition (2005) Addison Wesley.
12. McConnell and Bruce-Principles of Economics -17th Edition, (2006),
McGraw-Hill.
13. Nicholson, W. & Snyder, C. (2009). Intermediate Microeconomics
and Its Application, 11th Edition. Cengage Learning
14. Akbar, S. Zaidi. Issue in Pakistan’s Economy. Karachi: Oxford
University Press, 2018.
15. S.M. Burke and Lawrence Ziring. Pakistan’s Foreign policy: An
Historical analysis. Karachi: Oxford University Press, 2013.
16. Business Organization, Nisar-ud-Din, Aziz Publisher, Lahore
17. Introduction to Business, M. Saeed Nasir, Ilmi Kitab Khana, Lahore.
18. An Introduction to Modern Economics, S.M. Akhtar, United Limited,
Lahore.
19. Muhammad Irshad, Economics, Naveed Publications Lahore.
20. Sheikh Manzoor Ali, Economics, ILLMI Kutab Khana, Urdu Bazar,
Lahore.
21. Saeed Nasir M A, Text book of Economics, ILLMI Kutab Khana, Lahore.

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Ch-11 Cheque MGT-331

Chapter 11

Cheque

Chapter Objectives
After completion of this chapter students will be able to:

 Understand cheque and dishonor of cheque.

 Define cheque.
 Enlist the characteristics of cheque.
 Identify the kinds of cheque.
 Describe the causes of dishonor of a cheque.

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11.1 Definition of Cheque:

The earliest usage of cheque may have originated with ancient Roman
prescriptions, but cheques resembling what we have today are more
definitively traced to 9th-century Muslim traders. As international commerce
grew—and required merchants to travel in person over multiple weeks or
months—merchants were often burdened with bags of coins they needed to
carry with them. That led traders to invent the sakk, which was a piece of
paper with instructions to the merchant’s bank to make a payment from his
account. A sakk could be cashed in another city or country, making travel
easier and safer from theft.

Figure 11.1 Specimen of cheque

Europeans came in contact with the Muslim world—and its payment

methods—during the Crusades, it wasn’t until the 15th century that cheques
began to be used in Europe.
The first cheque started cropping up in the United States toward the end of
the 17th century, and the first printed versions were introduced in 1762 by
British banker Lawrence Childs. Before that, cheques were simply written out
by hand, sort of like IOUs. Childs’ printed cheques included serial numbers on
them for record-keeping purposes, which granted bankers the ability to
“cheque” them—and possibly bestowing the payment method with a name.

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A cheque is an instrument in writing containing unconditional order that is

issued in order to withdraw money from bank. The customer draws it upon
on a specified bank. There should be amount in the account of Drawer.

11.1.1 Parties of a cheque:

I. Drawer- He is also called the maker and is the account holder that
creates the cheque.

II. Drawee- It is the bank of which the cheque is drawn, and thus it is
called drawee. As mentioned above, the cheque is always drawn
for a specific bank.

III. Payee- He/she is the person whose name is mentioned in the

cheque for getting the payment. If it is just a transfer, then the
drawer and payee can be the same individuals.

11.2 Characteristics and Kinds of cheque:

11.2.1 Characteristics of cheque:
Following are the main characteristics of a cheque:

(a) In writing
It must be in writing. It means it can’t be verbal or oral. Try to write with that
kind of ink, which is not removable, and never write a cheque with help of
led pencil. The bank does not accept a cheque written with led pencil.

(b) It should be drawn on banker

It is always drawn on a specified banker. A cheque can be drawn on a bank
where the drawer has an account, saving bank, or current.

(c) It contains an unconditional order to pay

A cheque cannot be drawn so as to be payable conditionally. The drawer’s
order to the drawee bank must be unconditional and should not make the
cheque payable dependent on a contingency.

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(d) The cheque must have an order to pay a certain sum

The cheque should contain an order to pay a certain sum of money only. If a
cheque is drawn to do something in addition to, or other than to pay money,
it cannot be a cheque.

(e) It should be signed by the drawer

A cheque does not carry any validity unless signed by the original drawer. It
should also be dated as well.

(f) It is payable on demand

A cheque is always payable on demand.

(g) Validity
A cheque is normally valid for six months from the date it bears. Thereafter it
is termed as stale cheque. A post-dated or antedated cheque will not be
invalid. In both cases, the validity of the cheque is presumed to commence
from the date mentioned on it.

(h) Cheque must mention exact amount to be paid

Cheque must be for money only. The amount to be paid by the banker must
be certain. It must be written in words and figures.

11.2.2 Kinds of Cheque:

Major types of cheque are being presented below.

(a) Bearer Cheque

A bearer cheque is the one in which the payment is made to the person
bearing or carrying the cheque. These cheques are transferable by delivery,
that is, if you are carrying the cheque to the bank, you can be issued the
payment to. The banks need no other authorization from the issuer to be
allowed to make the payment. How can you identify a bearer cheque? You
know it is a bearer cheque when you see the words ‘or bearer’ printed on
them.

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Ch-11 Cheque MGT-331

Figure 11.2 Specimen of bearer cheque

(b) Order Cheque

In these cheques, the words ‘or bearer’ is cancelled. Such cheques can only
be issued to the person whose name is mentioned on the cheque, and the
bank will do its background cheque to authenticate the cheque bearer’s
identity before releasing the payment.

Figure 11.3 Specimen of order cheque

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Ch-11 Cheque MGT-331

(c) Crossed Cheque

You may have observed cheques with two sloping parallel lines with the
words ‘a/c payee’ written on the top left corner. That is a crossed cheque.
The lines ensure that irrespective of who presents the cheque, the payment
will only be made to the individual whose name is written on the cheque, in
other words, the a/c payee along with his/her account number. These
cheques are relatively safe because they can be uncashed only at the

drawee’s bank.

Figure 11.4 Specimen of cross cheque

(e) Open cheque

An open cheque is basically an uncrossed cheque. This cheque can be in
cashed at any bank, and the payment can be made to the person bearing the
cheque. This cheque is transferable from the original payee (the original
recipient of the payment) to another payee too. The issuer needs to put his
signature on both the front and back of the cheque.

(f) Post Dated Cheque

If any cheque issued by a holder to the payee for the upcoming withdrawn
date, then that type of cheque is called post-dated cheque.

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(g) Anti-Dated Cheque

If a cheque bears a date earlier than the date on which it is presented to the
bank, it is called as "anti-dated cheque". Such a cheque is valid up to Six
months from the date of the cheque.

(h) Stale Cheque

If a cheque is presented for payment after six months from the date of the
cheque it is called stale cheque. The bank does not Honor a stale cheque.

11.3 Dishonour of Cheque

When Cheque is presented for payment, the bank should make the payment
to the payee as mentioned in the Cheque if everything is in order and the
bank refuses to make payment of amount then cheque is said to be
dishonored. Bank returns the Cheque to Payee with a memo in which reason
of dishonored is written.

11.3.1 Causes/Reasons of dishonoured of Cheque:

Following are the major reasons of dishonor of cheque.

(a) Insufficient Funds

It is a very common mistake or reasons due to which bank return the cheque
unpaid. Sometime, you write the cheque against salary to be credited on a
specific date. But if salary is not credited or get late then cheque is presented
for payment, Bank will return it unpaid.
So, confirm or maintain bank balance in your account before issuing. In case
of overdraft account, Cheque is dishonored with the reason “Exceeds
Arrangement”.

(b) Amount in Words and Figures

Bank dishonor the Cheque if amounts written in words and figures are
different. So, avoid this mistake.

(c) Payee Name

If payee name is absent then bank can dishonor the Cheque with the reason
that “Payee Name Required”.

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(d) Signature Differ

Sometime you forget your signatures as you did while opening your bank
account. Bank will dishonor the Cheque if your (drawer) signature don’t
match with specimen available in bank record.

(e) Alterations / Overwriting

Bank will not honor the Cheque in case you overwritten / altered something
on Cheque. So, avoid overwriting and alternation on Cheque.

(f) Post Dated Cheque

When date written on Cheque is yet to come is called post-dated Cheque.
Suppose, Date written on Cheque is 04th June 2018, but you present it for
payment on 1st June 2018. Bank will dishonor the Cheque and return it
unpaid, as bank cannot honor it before the date mentioned on Cheque.

(g) Instrument Out-Dated / Stale Cheque

A Cheque is valid for six months from the date written on Cheque. If a
Cheque is presented after six months of the date written on Cheque then
Cheque is called Stale Cheque. Bank cannot make the payment of Stale
Cheque and return it unpaid with the reason “Stale Cheque”.

(h) Payment Stopped by Drawer

Mostly drawer stop the payment in case of Cheque is lost or stolen or other
reason may be. In this case, Bank dishonors the Cheque and returns it unpaid
with the reason that payment stopped by drawer.

(i) Frozen Account

If government or court has ordered that a person’s account has to be frozen,
in such case, the bank will dishonor all the cheques bearing that account
number.

(j) Banking Hours

If the any one presents the cheque after the banking hours then bank will not
make payment of that cheque.

(k) Death of Account Holder

The Bank will not make payment of the cheque in case of receiving
information about the death of concerned account holder.

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EXERCISE No. 11

Long Questions
Q.1. Define cheque and explain characteristics of cheque.
Q.2. Explain important types of cheque in detail.
Q.3. What are the reasons of dishonor of cheque in detail?

Short Questions
Q.1. What is cheque?
Q.2. Define Drawer?
Q.3. What is cross cheque?
Q.4. What is order cheque?
Q.5. Define payee.
Q.6. What is post-dated cheque?
Q.7. What is anti- dated cheque?
Q.8. Write four reasons of dishonor of cheque.
Q.9. Write three characteristics of cheque.
Q.10. Define frozen account.

Multiple Choice Questions (MCQs)

Choose the correct answer from the given possible answers and circle it.

Q.1. A cheque has parties:

(a) 4 (b) 3
(c) 6 (d) 5
Q.2. It should not be on cheque:
(a) Cutting (b) Amount
(c) Signature (d) Name
Q.3. The person who receives the amount of cheque is called

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Ch-11 Cheque MGT-331

(a) Drawer (b) Payee

(c) Drawee (d) all
Q.4. Maximum amount of cheque
(a) 1000 (b) 10,000
(c) 3, 00,000 (d) None
Q.5. Cheque is a document
(a) Conditional (b) Unconditional
(c) a & b (d) None
Q.6. The person who receives the amount of cheque is called
(a) Drawer (b) Drawee
(c) Payee (d) all
Q.7. A cheque is considered safer for payment:
(a) Bearer (b) Open
(c) Order (d) Cross
Q.8. Cheque can be cashed before ------months
(a) 4 (b) 6
(c) 1 (d) 7
Q.9. Cheque is issued by
(a) Owner (b) Employee
(c) Payee (d) Drawer
Q.10. Cheque can be deposit into bank
(a) Banking Time (b) After Prayer
(c) Before Time (d) all

Answer Key

Q. No. Answer Q. No. Answer Q. No. Answer

1 b 5 b 9 d
2 a 6 c 10 a
3 b 7 d
4 d 8 b

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Ch-11 Cheque MGT-331

Reference:
1. Fredric S. Mishkin, (1995), Financial Markets and Money, Harper &
Row Publishers.
2. Miller, R. L. and David Van Hose, (2001), Money, Banking & Financial
Markets. South Western, Singapore.
3. Mishkin, Frederic S., (2001), the Economics of Money, Banking and
Financial Markets. (Sixth edition). Addison Wesley, New York.
Latest edition
4. Bennett T. McCallum, (1989), Monetary Economics, Theory and
Policy, McMillan. latest edition.
5. Laider, David E.W (1996), The Demand for Money: Theories, Evidence
and Problems (Fourth edition), Harper & Row, Publishers, New York.
6. Patinkin Don, Money, Interest and Prices, Harper and Row Publishers,
(Latest Edition)
7. Baye, Michael, Managerial Economics and Business Strategy. Sixth
Edition. Boston: McGraw-Hill Irwin.
8. Elinor Ostrom, "Understanding Institutional Diversity" 4th Edition
(2013), Princeton University Press.
9. Fabozzi, F. and Modigliani, F. Capital Markets. 2nd edition. Prentice-
Hall London (1996).
10. Ritter, L. S. and Peterson, R.L. Financial Institutions and Financial
Markets. 9th edition. New York.
11. Miller, R. L –EconomicsToday-14th Edition (2005) Addison Wesley.
12. McConnell and Bruce-Principles of Economics -17th Edition, (2006),
McGraw-Hill.
13. Nicholson, W. & Snyder, C. (2009). Intermediate Microeconomics
and Its Application, 11th Edition. Cengage Learning
14. Business Organization, Nisar-ud-Din, Aziz Publisher, Lahore
15. Introduction to Business, M. Saeed Nasir, ILLMI Kitab Khana, Lahore.
16. An Introduction to Modern Economics, S.M. Akhtar, United Limited,
Lahore.
17. K. K. Dewitt, Modern Economic Theory, S. Chand Publisher, New Delhi
India -2006. ISBN 10: 8121924634 / ISBN 13: 9788121924634
18. Muhammad Irshad, Economics, Naveed Publications Lahore.
19. Saeed Nasir M A, Text book of Economics, ILLMI Kutab Khana, Lahore.
20. Sheikh Manzoor Ali, Economics, ILLMI Kutab Khana, Urdu Bazar,
Lahore.

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Ch-12 Financial Institutions MGT-331

Chapter 12

Financial Institutions

Chapter Objectives
After completion of this chapter students will be able to:

 Understand financial institutions.

 Explain IMF and its objectives.
 Explain organizational setup and objectives of IDBP.
 Explain organizational setup and objectives PIDC.

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Financial Institutions:
A financial institution (FI) is a company engaged in the business of dealing
with financial and monetary transactions such as deposits,
loans, investments, and currency exchange. Financial institutions encompass
a broad range of business operations within the financial services sector
including banks, trust companies, insurance companies, brokerage firms, and
investment dealers.
Virtually everyone living in a developed economy has an ongoing or at least
periodic need for the services of financial institutions.
Financial institutions serve most people in some way, as financial operations
are a critical part of any economy, with individuals and companies relying
on financial institutions for transactions and investing. Governments consider
it imperative to oversee and regulate banks and financial institutions because
they do play such an integral part of the economy. Historically, bankruptcies
of financial institutions can create panic.

12.1 International Monetary Fund (IMF):

The International Monetary Fund (IMF) is an international organization of

190 member countries that works to ensure the stability of the international
monetary and financial system. The IMF’s mandate includes facilitating the
expansion and balanced growth of international trade, promoting exchange
stability, and providing the opportunity for the orderly correction of
countries’ balance of payments problems. It came into existence on 1946,
when 29 countries signed the Articles of Association. It started its working on
March 1947.

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The largest authority in the IMF is the Board of Governors, which consists of
a governor and an alternate governor appointed by the members of fund.
The Board of Governors must meet once a year that is called the Annual
Meeting, the second largest Authority in the IMF is the Executive Board. Its
members include the Executive Board of Directors and Managing director,
which is chairman of this Board.

12.1.1 IMF Objectives:

The basic objective of IMF has been to promote international monetary
cooperation. The IMF Charter prescribes its six objectives.
(i) To promote international monetary cooperation among
members.
(ii) To facilitate the balanced growth of international trade and to
contribute to high levels of employment, real incentive, and
productive capacity.
(iii) To promote exchange stability and orderly exchange
arrangements while avoiding competitive currency devaluation.

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(iv) To foster a multilateral system of payments and transfers while

eliminating exchange restrictions.
(v) To make financial resources available to members.
(vi) To seek reduction of payment imbalances.

12.2 Industrial Development Bank of Pakistan (IDBP):

Industrial development bank of Pakistan established in August 01, 1961 is

one of Pakistan oldest financial institution and was created with the primary
objective of extending term finance for investment in the manufacturing
sector of the economy. Over the years, however, the bank has become an
institution fostering the growth of small and medium enterprises in the
rural/less developed of the country.

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Industrial development bank of Pakistan is wholly owned by Pakistani

government entities with total paid up capital 50 Million, 51% of it shares
held by federal government, 49% by the Provincial governments, commercial
banks and private sector. After nationalization the private sector share was
transferred to Federal government. It is an important source, which supplies
the funds for industrial development.

12.2.1 Management:
The government appoints the Board of Directors to run IDBP, which includes
President, Managing director and seven directors.

12.2.2 Head Quarter:

Its headquartered is in Karachi but has major branches in Lahore,
Gujranwala, Faisalabad, Peshawar, Hyderabad and Quetta. Its small branches
are in every city of Pakistan

12.2.3 Merits / Efficiency:

(i) The establishment of this bank yielded the following benefits.
(ii) Indefinite industries and factories have been set up.
(iii) National income has increased.
(iv) Employment has increased.
(v) Per capital income has increased

12.2.4 Objectives of IDBP:

The major objectives of IDBP are following
(i) It provides medium term and long-term credit facilities.
(ii) It provides loans for the establishment of new industrial units.
(iii) It also provides loan for the replacement needs of the old units.
(iv) It acts as a merchants banking.
(v) It undertakes the commercial banking.
(vi) It provides consultancy facility to its clients.
(vii) It provides loan in the form of equity.
(viii) It encourages the establishment of industries in the less developed
areas of the country.

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12.3 Pakistan Industrial Development Corporation:

It is a state corporation of Pakistan working under Ministry of Industries and

Production. It was established in 1952. PIDC was created to set up industries
in such fields where large capital was required and was difficult for the
private sector and to set up industries in such backward areas to creating
employment opportunity.

12.3.1 Management:
The government-appointed Board of Directors run Corporation, which
includes one Managing director and four directors. The head office of the
corporation is located in Karachi.

12.3.2 Objectives of the Corporation:

The objectives of the corporation are as follows.

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(i) National industrial development

The main purpose of this organization is to invest in those industries which
are very crucial from national point of view and whose chances of
development are very bright but people are hesitant to invest in them. Duty
assigned to PIDC by Govt. to establish such kind of industries like Cotton,
Cement, Textile, and medicines, Natural Gas, Electricity, Heavy Engineering
and Sugar etc.

(ii) Private Investment

PIDC and private sector both together establish factories, however, if private
investors are not willing to make investment. Then, PIDC makes investment
in factories. And when the factories are ready, it sells them to private
investors so that the private sector can also participate in the development
of Pakistan economy.

(iii) Establishment of industries in backward area

The establishment of industries in backward area is also the purpose of PIDC
with a view to creating employment opportunities and removal of regional
disparities.

(iv) National Economic Development

National economic development is also including in the duties of PIDC. Of
course, more industrialization causes more employment. The issue of
unemployment will be solved with help of industrialization. In this way,
Production will be higher, imports will be lower, exports will be higher, better
and cheaper goods will be available, country will make development and
thus the standard of living will also be higher.

(v) Motivation about Investment

One of the goals of the corporation is to motivate and create an environment
in which people can invest their capital and savings only in productive
activities.

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EXERCISE No. 12

Long Questions
Q.1. What is the IMF and explain the functions of IMF?
Q.2. Describe the importance of Industrial Development bank of Pakistan.
Q.3. What is meant by PIDC? Explain the objectives of PIDC.

Short Questions
Q.1. What is the abbreviation of IMF?
Q.2. What is the purpose of PIDC?
Q.3. How does IMF stabilize the economies?
Q.4. Write the name of four important function of IMF.
Q.5. What is the abbreviation of PIDC?
Q.6. When and where was the first meeting of IMF Executive Board
conducted?
Q.7. Where is the Head quarter and main branches of IDBP?
Q.8. Write down the four functions of IDBP.
Q.9. What do you know about the management of IDBP?
Q.10. Who controls the system of IMF?

Multiple Choice Questions (MCQs)

Choose the correct answer from the given possible answers and circle it.

Q.1. Which of the following has five members in its board of directors?
(a) PIDC (b) IDBP
(c) IMF (d) all
Q.2. International monitoring fund is an------------institution.
(a) International (b) Regional
(c) Home (d) all
Q.3. IMF was set up in--------
(a) 1947 (b) 1946
(c) 1950 (d) 1951

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Q.4. This is the objective of IMF:

(a) Peace (b) Issuance of gold coins
(c) Issuance of currency (d) Provide loans to countries
Q.5. Which of the following has nine members in its board?
(a) IDBP (b) PIDC
(c) IMF (d) all
Q.6. Where is the head quarter of IDBP located?
(a) Islamabad (b) Lahore
(c) Sahiwal (d) Karachi
Q.7. When was PIDC set up?
(a) 1948 (b) 1952
(c) 1960 (d) 1962
Q.8. Which of the following grants loan to the heavy industry in Pakistan?
(a) PIDC (b) IDBP
(c) IMF (d) all
Q.9. When was IDBP set up?
(a) 1950 (b) 1955
(c) 1961 (d) 1970
Q.10. To maintain exchange stability is the function of
(a) World Bank (b) IMF
(c) Both (d) None

Answer Key

Q. No. Answer Q. No. Answer Q. No. Answer

1 a 5 a 9 c
2 a 6 d 10 b
3 b 7 b
4 d 8 a

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Ch-12 Financial Institutions MGT-331

Reference:
1. Ritter, L. S. and Peterson, R.L. Financial Institutions and Financial
Markets. 9th edition. New York.
2. Fabozzi, F. and Modigliani, F. Capital Markets. 2nd edition. Prentice-
Hall London (1996).
3. Fredric S. Mishkin, (1995), Financial Markets and Money, Harper &
Row Publishers.
4. Laider, David E.W (1996), The Demand for Money: Theories, Evidence
and Problems (Fourth edition), Harper & Row, Publishers, New York.
5. Miller, R. L. and David Van Hose, (2001), Money, Banking & Financial
Markets. South Western, Singapore.
6. Mishkin, Frederic S., (2001), the Economics of Money, Banking and
Financial Markets. (Sixth edition). Addison Wesley, New York.
Latest edition
7. Bennett T. McCallum, (1989), Monetary Economics, Theory and
Policy, McMillan. latest edition.
8. Patinkin Don, Money, Interest and Prices, Harper and Row Publishers,
(Latest Edition)
9. Baye, Michael, Managerial Economics and Business Strategy. Sixth
Edition. Boston: McGraw-Hill Irwin.
10. Small Business and Entrepreneurship, Paul Burns & Jim Dewhurst,
Red Globe Press London. https://doi.org/10.1007/978-1-349-24911-4
11. Business Organization, Nisar-ud-Din, Aziz Publisher, Lahore
12. Introduction to Business, M. Saeed Nasir, ILLMI Kitab Khana, Lahore.
13. An Introduction to Modern Economics, S.M. Akhtar, United Limited,
Lahore.
14. Muhammad Irshad, Economics, Naveed Publications Lahore.
15. Sheikh Manzoor Ali, Economics, ILLMI Kutab Khana, Urdu Bazar,
Lahore.
16. Lioyd G Reynolds Irwin, Micro Economics — Analysis & Policy, Irwin
Homwood Illinois.
17. Saeed Nasir M A, Text book of Economics, ILLMI Kutab Khana,
Lahore.
18. Salman Rizavi, Economics, Syed Mobin Mahmud & Co., Lahore.
19. K. K. Dewitt, Modern Economic Theory, S. Chand Publisher, New Delhi
India -2006. ISBN 10: 8121924634 / ISBN 13: 9788121924634
20. Mankiw, “Principles of Economics” 7th Edition, (2008), Southwest
Publishers.

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Chapter 13

Trade Union

Chapter Objectives
After completion of this chapter students will be able to:

 Understand the historical background of trade union

 Define trade union
 Describe the objectives and functions of trade union
 Explain the merits and demerits of trade union
 Identify the problems of Industrial Labour

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13.1 Introduction and Brief History of Trade Union:

Trade union means an organization, which wants to keep the owner equal to
the labourers bargaining power. Web defines trade union in these words “It
is a group of labourers which aims to maintain and improve the working
condition of the labourers

Factories began to be established in the Indian subcontinent in the last half

of the nineteenth century. When British imperialism ignored the Indian
workers, on which the workers started protest. In 1881, the first British-style
factory act was passed for the first time in the subcontinent. The purpose of
which was to allocate the appropriate working hours for the children. The
young children were prohibited to work in factories.

The law was slightly amended in 1891. Then, at the beginning of the 20th
century, this movement got strength so the government added another law
in 1911. Under which working hours were also fixed for the employees in the
factory. In 1926, the movement gained momentum.

The 1922 laws were amended to make better laws, and the Trade
Associations Act was passed, which legalized the establishment of healthy
Unions. In 1934, an act was passed which divided the factories into two

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types, permanent and seasonal. In 1936, a law prohibited the employment of

children in dangerous factories. In 1947, the Workers' Welfare Act was
passed. In Pakistan, when Pakistan was formed in 1947, there was much
shortage of factories in the region.

The government focused on industrial development and as a result the

number of workers began to increase. In the beginning, neither did the
workers strive for their own betterment nor did the government pay any
attention to their problems. Finally, in 1953, the movement started. In 1954,
the government of Pakistan passed laws for their welfare.

In Pakistan the trade union act was formulated in 1960 by amending the laws
of 1926. Further, amendments were made in this act in March 1961. The
government of President Ayyub Khan did much work in the interest of
industrial workers. But the industrial workers were facing uncountable
issues, so, they started successful movement for their rights. Strikes and
lockouts began in 1968-69, forcing the government to make better laws.

The PPP came to power in 1972. It focused on the problems of the workers
recognizing the importance of workers. They emphasized on the formation of
associations and worked on giving accommodation, medical facility and
canteen to the workers.

Laws were enacted to facilitate the education and training of child laborers.
After the PPP government, several governments came. Each tried to include
the workers. If every incoming government continues to provide benefits to
the Pakistani workers, then in a very short period of time, the Pakistani
workers will be on the path to prosperity and peace in the society.

13.2 Objectives, Merits and Demerits of Trade Union:

13.2.1 Objectives of Trade Union:
Trade unions have the following main objectives and functions:

I. Reasonable Wage

The foremost duty of the trade union is to get reasonable wages fixed
for the labourers. It should the factory owner to the full wages.

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II. Protection of Lamoure rights

Trade union is also responsible to safeguard the rights of the laborers

and to take necessary action if their rights are being exploited.

III. Improvement of working conditions

It is responsible to force the owner to provide suitable working

conditions in the factories like water, electricity, air and cleanliness. It
should also check the working duration.

IV. Strengthen the barraging power

Trade union is the representative of all the labourers. It strengthens

their bargaining power with discussions. Further, it brings shortage in
the availability of laborers to increase their wages

V. Accommodations Facility

It arranges the accommodation for the labourers. Usually factories

are established in cities and the labourers have to travel long
distances, which increase their work cost and work duration so
accommodation at factories help them to work with full
concentration.

VI. Medical Facilities

It is the duty of the trade union to arrange the provision of the

medical facilities by the factory owner. Health issues are natural with
every living being so it is necessary for them to be provided with the
necessary health care.

VII. Education Facilities

Trade union should convince the factory owner to provide education

facilities to the laborers’ children because it is the basic right of every
human being. This helps to civilize a laborer and enhance his work
capacity, which can be very beneficial for the factory owner and the
country. Every factory should have a school to provide education to
their children so that they can become the useful and respectable
citizens.

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VIII. Entertainment Facilities

Providing entertainment is also one of the duties of the trade union.

The entertainment sources like parks and gardens should be provided
within the factory area so that the laborers and their families can
relax themselves in their free time. It would also add to his work
capacity

IX. Prevention from undeserved termination

Trade union is also responsible to resolve any case of undue

termination. It tries to regulate his job after discussion with the
factory owner.

X. Part in Management affairs

It is the duty of the trade union to fix a reasonable participation of the

laborers in the factory management so that they can also convey their
feelings to the factory owner.

XI. Strikes

If the laborers are not given their due rights peacefully the trade
union conducts strike according to the rules and regulations and
these strikes continue till the issues are resolved.

XII. Organizing the training of the labourers

Trade union is also responsible for the training of the laborers to

enhance their work capacity.

XIII. Compensation of accidents.

It makes the factory owner pay the reasonable compensation to the

labourers or the family in case of any accident.

XIV. Improve their moral thinking

The trade union is also responsible to improve the social and moral
thinking of the laborers.

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XV. Old Age Benefits to the laborers

The trade union does not leave the workers alone in their old age. It
arranges pension and health facilities for the retired employees.

13.2.2 Merits of Trade Union:

Trade unions have the following benefits. Better quality of life:

I. Better State of Life

Due to the pressure of the union, the workers get wages and in
addition they are able to get other financial benefits such as bonus,
transport, medical facilities etc. In this way the economic condition of
the workers improves and their standard of living enhances.

II. Security of the Rights

In the presence of the trade union, the administration cannot violate

the rights of the workers by extinguishing the individual problem of
the workers.

III. Peaceful Solution of Problems

In the event of a dispute, the issue is resolved through negotiations

between the administration and trade union officials. It enforces to
resolve the issues peacefully.

IV. To strengthen the bargaining power

The emergence of trade unions has increased the bargaining power of

the workers. Workers do not have much time to acknowledge their
legitimate rights because they do not have the power to do so.

V. Use of Latest Equipment

The trade union forces employers to use better and more modern
equipment in addition to reasonable wages and other facilities. In this
way, modern industrialization takes place in the country and the
country develops technically.

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VI. Better Working Condition of Factories

The trade union demands the provision of Better Working Condition

in Factories, which plays an important role in improving the factory
environment.

VII. Improvement in Ethical Condition

The union also improves the moral condition of the workers. The
union protects the workers from bad habits, drugs, wasteful spending
and other immoral activities.

VIII. Provision of Medical Facilities

One of the benefits of trade unions is that it helps in ensuring health

facilities along with other facilities.

IX. Participation of Management

Due to trade unions, workers have the opportunity to participate in

management decisions.

X. Democratic Way

Trade unions are formed in a democratic way. Therefore, the workers

have the opportunity to choose the representatives of their choice.
Matters are presented through the union rather than individually.
This helps in resolving them. As a result, long-term relationships
between the owner and workers are good.

XI. Help in Law Making

The government consults the trade unions for the legislation to

secure the rights of the workers.

13.2.3 Demerits of Trade union:

The disadvantages of trade unions are as follows.

i. Discouragement of investment

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Fear of unions frightens industrialists into investing. This is because

the pressure on labor unions to obtain illegitimate wages and
benefits, which increases the cost of production. And the profits of
the industrialists keep on decreasing.

ii. Unnecessary Interference

It has been generally observed that the workers consider it their duty
to oppose every policy of the manufacturer and as if the pleasant
effects and results of these policies are not forthcoming.

iii. Opposition of latest Machinery

Where workers force the employer to use better equipment, it has

also been observed that the trade union sometimes strongly opposes
the use of machinery, which affects the employment

iv. Hurdles in business

The trade union does not allow the employers to exercise their
powers. That's how it interrupts the business.

v. Ineligible and Irresponsible Representatives

It harms the collective interest of Work Force because they

collaborate with the employers.

vi. Intervention of Politicians

Trade union representatives become tools of politicians and work for

political leaders in business instead of fighting for the interests of the
hardliners.

It is used for strikes, rallies, processions, and exploitations day after

day. This stops the production process from which both the
manufacturer and the laborer suffer.

vii. Dispute between employer and employees

Another drawback of the trade union is that they put pressure on the
employers even for illegitimate work, which leads to the dispute
between the employer and employees.

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13.3 Problems of Industrial Labour:

The following are some of the major problems of industrial workers.

i. Lack of Employment Information

There is a dearth of institutions in Pakistan that provide employment

information to the workers. The lack of information institutions in the
country is a big problem for the workers to get employment.

Jobs are usually obtained through agents and they take unfair
advantage of public unawareness.

ii. Poor Recruitment System

One of the major problems of industrial workers is poor management

of recruitment. Once a Pakistani manufacturer starts recruiting, he
immediately stops recruiting without any prior notice, which brings
restlessness among the workers.

iii. Lack of Physical Training

Pakistani factories do not provide sufficient facilities before and

during the working hours.

iv. Low Rate of Remuneration

The wage rate of Pakistan's industrial workers is very low. It is so low

that sometimes a poor person cannot maintain the relationship
between his soul and body. ‫۔‬

v. Lack of Welfare Facilities

There are no parks or playgrounds in these factories. They neither

have a library nor adequate transportation to their homes.
Educational and non-educational facilities are not available.

Because of all these things, many of our workers do not have the
facilities of rest, entertainment and food and drink in our factories.

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vi. Lack of Labor Union

There are very few trade unions in Pakistan. Therefore, the bargaining
power of the workers is very weak and they are forced to work in
dirty environment at low wages.

vii. Lack of Social Security

One of the major problems of industrial workers is the lack of social

security. Even in this field, he has no personnel. No one is willing to
part with the workers if they are involved in an accident, or if there is
a bad attack, or if there is a state of unemployment, or if there is a
problem of pension and special benefits in the old age.

viii. Poor Working Condition

Working conditions are not good for workers in Pakistani factories.

Workers work in foul environment and smelly air. There is no
provision for proper rest. There is no avoidance of taking more work
and the payment of time is reduced.

ix. Lack of Security of Employment

Industrial workers also face this problem. Their jobs are at the mercy
of their employer.

x. Low Bargaining Power

Labor's bargaining power is weak of which the employers take full

advantage.

xi. Insulting Behavior

This contemptuous attitude of the employers has caused mental

anguish to the workers. This hugely affects their performance.

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EXERCISE No. 13

Long Questions
Q.1. Describe the historical background of Trade Union.
Q.2. Explain the advantages and disadvantage of Trade Union.
Q.3. Write down the problems faced by current workers of Pakistan, in
detail.
Q.4. Explain the problems of industrial labour.
Q.4. Define Trade Union. Write down its objectives and functions.

Short Questions
Q.1. Define Trade Union.
Q.2. Why the Indian workers did make a protest for the first time?
Q.3. When did the trade union Act was formulated in Pakistan?
Q.4. Write down the four merits of Trade Union.
Q.5. Explain the four demerits of Trade Union.
Q.6. Write three objectives of industrial labour.
Q.7. Write the four issues of Trade union
Q.8. How does trade union improve the bargaining power of workers?
Q.9. What is lack of social security?
Q.10. Why did trade union encourage unfair strikes?

Multiple Choice Questions (MCQs)

Choose the correct answer from the given possible answers and circle it.

Q.1. The prime objective of trade union is to protect the

(a) Industries (b) traders
(c) Workers (d) farmers
Q.2. The bargaining power of labour is?
(a) High (b) low
(c) Moderate (d) all
Q.3. What does a trade union do for sick or on strike workers?
(a) Makes a leader (b) financial support

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(c) send back to home (d) expel from the job

Q.4. Which of the following is included in the merits of trade union?
(a) Sharing profit (b) increase in wages
(c) Protection of labour rights (d) all
Q.5. It is not included in the demerits of trade union.
(a) Undue pressure (b) negative attitude
(c) Strikes (d) medical facility
Q.6. Sometime the labour union creates problem for
(a) Employer (b) Government
(c) Students (d) all
Q.7. Which of the following is the problem of industrial labour?
(a) Excess of the facilities (b) high wage rate
(c) Low wage rate (d) none of these
Q.8. When did the trade act formulated in Pakistan?
(a) 1947 (b) 1960
(c) 1973 (d) 1991
Q.9. First of all, work started to solve labour issues in the period of
(a) Zullifqar Ali Bhutto (b) Ayyub Khan
(c) Benazir Bhutto (d) Imran Khan
Q.10. Labour unions create the problem of
(a) Inefficient workers (b) Undue strikes
(c) Pressure on management (d) all

Answer Key
Q. No. Answer Q. No. Answer Q. No. Answer
1 c 5 d 9 a
2 b 6 a 10 d
3 b 7 c
4 d 8 b

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Ch-13 Trade Union MGT-331

Reference:
1. Business Organization, Nisar-ud-Din, Aziz Publisher, Lahore
2. Introduction to Business, M. Saeed Nasir, ILLMI Kitab Khana, Lahore.
3. Sheikh Manzoor Ali, Economics, ILLMI Kutab Khana, Urdu Bazar,
Lahore.
4. Saeed Nasir M A, Text book of Economics, ILLMI Kutab Khana, Lahore.
5. K. K. Dewitt, Modern Economic Theory, S. Chand Publisher, New Delhi
India -2006. ISBN 10: 8121924634 / ISBN 13: 9788121924634
6. Nancy Smith Barrett, The Theory of Macro Economics Policy, Prentice
Hall.
7. A History of Economics “The Past as The Present” by: Galbraith, John
Kenneth. Published by David & Charles – 1987, pages 336: ISBN-10.
0241123887.
8. Mankiw, “Principles of Economics” 7th Edition, (2008), Southwest
Publishers
9. Miller, R. L –EconomicsToday-14th Edition (2005) Addison Wesley
10. McConnell and Bruce-Principles of Economics -17th Edition, (2006),
McGraw-Hill.
11. Williamson, Stephen D. (2010). Macroeconomics. Fourth Edition,
Prentice Hall.
12. Nicholson, W. & Snyder, C. (2009). Intermediate Microeconomics
and Its Application, 11th Edition. Cengage Learning
13. Paul R. Krugman and Maurice Obstfeld, International Economics:
Theory and Policy, Addison Wesley, 7th edition (2016).
14. Zaidi Akbar (2006), Issues in Pakistan’s Economy, Oxford University
Press, Karachi
15. Ishrat Hussain, (2007) Pakistan: The Economy of an Elite State, Oxford
University Press, Karachi
16. “Entrepreneurship” latest Edition, McGraw-Hill Companies, Inc. USA,
New York.
17. Baye, Michael, Managerial Economics and Business Strategy. Sixth
Edition. Boston: McGraw-Hill Irwin.
18. Ritter, L. S. and Peterson, R.L. Financial Institutions and Financial
Markets. 9th edition. New York.
19. Burki, Shahid Javed. State & Society in Pakistan, The Macmillan Press
Ltd 2017.

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Chapter 14

International Trade

Chapter Objectives
After completion of this chapter students will be able to know the concept of:

 Understand & define international trade

 Explain the difference between national and international trade
 Describe the merits of International Trade
 Explain the demerits of International Trade

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14.1 Introduction:
International trade has existed since ancient times because people used to
take goods from one area to another from the very beginning. And in this
way they used to earn profit from trade. International trade allows countries,
states, brands, and businesses to buy and sell in foreign markets. When
exported, it is called foreign trade or international trade. Clothing, rice and
sports goods are exported from Pakistan to other countries. And we import
goods like medicines, cars, and machinery etc. from outside. So such trade
between the two countries is called international trade.

The basic principle of international trade is that each country imports goods
from other countries that are not produced in that country. Nature has
endowed each country with different resources and the difference in
resources also leads to international trade, for example, oil is abundant in
Arab countries. While, other countries need Arabs for this. Therefore, it is
this petrol that causes trade in these countries.

In this way, the European countries are far ahead in technology due to which
their products and commodities are cheaper and of better quality than the
other countries. Therefore, other countries depend on these countries for
their products and goods.

14.2 Advantages of International Trade:

i. Availability of all type of goods

It enables a country to obtain goods, which it cannot produce or

which it is not producing due to higher costs, by importing from other
countries at lower costs.

ii. Specialization and division of labour

It is beneficial in several respects. Important advantage is the division

of labour and the consequent specialization. Different regions are
endowed with different types of productive agents. It is to the
advantage of each nation or region to specialize in the production of
those goods for which their factor equipment is most suited.

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iii. Availability and cheapness of commodities

Because of international trade the consumers can get access to

foreign goods at lower prices. Normally foreign goods are imported
because of their relative cheapness in comparison with the prices of
domestic goods.

iv. Ability to face natural calamities

Natural calamities such as drought, floods, famine, earthquake etc.,

affect the production of a country adversely. Deficiency in the supply
of goods at the time of such natural calamities can be met by imports
from other countries.

v. Large-scale production

Due to international trade, goods are produced not only for home
consumption but for export to other countries also. Nations of the
world can dispose of goods in the international markets, which they
have in surplus. This leads to production at large scale and all the
countries of the world can obtain the advantages of large-scale
production.

vi. Development of backward nations

With the help of international trade, the economically backward and
under-developed countries are able to import machinery and capital
goods in exchange for their raw materials, agricultural products and
foodstuffs.

vii. Improvement in transport

International trade has resulted in the improvement in the means of
transport in all parts of the world.

viii. Optimal use of natural resources:

Foreign trade helps each country to make optimum use of its natural
resources. Each country can concentrate on production of those
goods for which its resources are best suited. Wastage of resources is
avoided.

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ix. International co-operation and understanding:

The people of different countries come in contact with each other.

Commercial intercourse amongst nations of the world encourages
exchange of ideas and culture. It creates co-operation, understanding,
and cordial relations amongst various nations.

x. Latest Technology:

International trade allows every country to benefit from modern

technology. In today's world, modern technology is essential for
progress in every field.

xi. Increase in efficiency:

Due to international competition, the producers in a country attempt

to produce better quality goods at the minimum possible cost. This
increases the efficiency and benefits to the consumers all over the
world.

14.3 Disadvantages of International Trade:

Here are some of the disadvantages of international trade.

i. Exhaustion of Essential Materials

International trade may result in the exhaustion of essential materials
and minerals of a country. Most of the minerals were exported to
other countries. If they had been preserved, they would have brought
better returns to the country.

ii. Affects Domestic Industries

International trade may adversely affect the consumption pattern of
a country due to the import of cheaply manufactured and at times
harmful commodities. Indian handicrafts suffered a severe setback
through free trade and unrestricted imports of English textiles.

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iii. Use of Narcotics

Unhealthy items are sometimes imported due to international trade.
Such as alcohol, heroin, opium, etc., which are bad for people's health
and morals.

iv. Burden of Foreign Loans

As a result of this trade, the imports of developing countries exceed
their exports and the balance of payments goes into deficit. This
deficit is met by acquiring foreign debt.

Vi. Import of Harmful Goods

Import of spurious drugs, luxury articles, etc. adversely affects the

economy and wellbeing of the people.

v. Storage of Goods:

Sometimes the essential commodities required in a country and in

short supply are also exported to earn foreign exchange. This results
in shortage of these goods at home and causes inflation. For example,
India has been exporting sugar to earn foreign trade exchange; hence
the exalting prices of sugar in the country.

vi. Dependence on other Nation

Though it ensures higher standard of living for a nation, it makes the

countries dependent on foreign markets not for raw materials but
also for selling the finished products. This dependence should be
reduced or eradicated.

vii. Economic Dependence:

The underdeveloped countries have to depend upon the developed

ones for their economic development. Such reliance often-leads to
economic exploitation. For, instance most of the underdeveloped
countries in Africa and Asia have been exploited by European
countries.

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viii. Political Dependence:

Foreign trade often encourages subjugation and slavery. It impairs

economic independence that endangers political dependence. For
example, the Britishers came to India as traders and ultimately ruled
over India for a very long time.

ix. Local unemployment

While the economy of some countries may greatly benefit and

companies may be able to create high numbers of jobs, companies in
other countries may be significantly harmed by global trade since
they might lose their competitiveness, which in turn may lead to job
losses in those countries

x. International War

International trade creates rivalry and jealousy between different

countries, leads to war. The main reason for the First World War was
trade. It was a bargain at the markets between England and Germany.

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Ch-14 International Trade MGT-331

EXERCISE No. 14

Long Questions
Q.1. What is National trade? Describe the difference between national and
international trade.
Q.2. Define international trade. State the advantages of international
trade.
Q.3. Describe the disadvantages of international trade.

Short Questions
Q.1. What is National Trade?
Q.2. Describe four reasons of difference b/w national and foreign trade.
Q.3. Why can a country not survive without International Trade?
Q.4. What is foreign exchange?
Q.5. Describe unfavorable balance of Payment.
Q.6. Write four merits of International Trade.
Q.7. Write the names of five products imported by Pakistan.
Q.8. Describe four demerits of International Trade.
Q.9. How are natural resources misused due to foreign trade?
Q.10. What is meant by import and export?

Multiple Choice Questions (MCQs)

Choose the correct answer from the given possible answers and circle it.

1. The trade within a country is called

(a) Foreign (b) national
(c) a & b (d) None
2. The trade with another country is known as
(a) International (b) national
(c) domestic (d) None
3. If goods are purchased from some other country, it is called
(a) Import trade (b) export trade
(c) home trade (d) all
4. The main kinds of international trade
(a) Five (b) four

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Ch-14 International Trade MGT-331

(c) three (d) two

5. This trade can become the cause of International War
(a) National (b) International
(c) Both (d) None
6. International trade is harmful for---------------
(a) Trader (b) shopkeeper
(c) Buyer (d) national trade
7. If we supply Rice to England from Pakistan, It is called
(a) Import (b) Export
(c) Both (d) None
8. It is not included in benefits of international trade
(a) Unemployment (b) latest technology
(c) Improvement of transport (d) Increase in efficiency
9. It is included in the advantages of foreign trade.
(a) Destruction of small industries (b) dependence on other country
(c) Source of national income (d) cultural difference
10. It becomes the cause of foreign debt
(a) National (b) international
(c) Both (d) None

Answer Key

Q. No. Answer Q. No. Answer Q. No. Answer

1 b 5 b 9 c
2 a 6 d 10 b
3 a 7 b
4 d 8 a

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Ch-14 International Trade MGT-331

Reference:
1. Mishkin, Frederic S., (2001), The Economics of Money, Banking and
Financial Markets. (Sixth edition). Addison Wesley, New York.
Latest edition
2. Bennett T. McCallum, (1989), Monetary Economics, Theory and
Policy, McMillan. latest edition.
3. Patinkin Don, Money, Interest and Prices, Harper and Row Publishers,
(Latest Edition)
4. Baye, Michael, Managerial Economics and Business Strategy. Sixth
Edition. Boston: McGraw-Hill Irwin.
5. Ritter, L. S. and Peterson, R.L. Financial Institutions and Financial
Markets. 9th edition. New York.
6. Fabozzi, F. and Modigliani, F. Capital Markets. 2nd edition. Prentice-
Hall London (1996).
7. Fredric S. Mishkin, (1995), Financial Markets and Money, Harper &
Row Publishers.
8. Laider, David E.W (1996), The Demand for Money: Theories, Evidence
and Problems (Fourth edition), Harper & Row, Publishers, New York.
9. Miller, R. L. and David Van Hose, (2001), Money, Banking & Financial
Markets. South Western, Singapore.
10. Small Business and Entrepreneurship, Paul Burns & Jim Dewhurst,
Red Globe Press London. https://doi.org/10.1007/978-1-349-24911-4
11. Muhammad Irshad, Economics, Naveed Publications Lahore.
12. Sheikh Manzoor Ali, Economics, ILLMI Kutab Khana, Urdu Bazar,
Lahore.
13. Lioyd G Reynolds Irwin, Micro Economics — Analysis & Policy, Irwin
Homwood Illinois.
14. Saeed Nasir M A, Text book of Economics, ILLMI Kutab Khana,
Lahore.
15. Salman Rizavi, Economics, Syed Mobin Mahmud & Co., Lahore.
16. K. K. Dewitt, Modern Economic Theory, S. Chand Publisher, New Delhi
India -2006. ISBN 10: 8121924634 / ISBN 13: 9788121924634
17. Mankiw, “Principles of Economics” 7th Edition, (2008), Southwest
Publishers
18. Business Organization, Nisar-ud-Din, Aziz Publisher, Lahore
19. Introduction to Business, M. Saeed Nasir, ILLMI Kitab Khana, Lahore.
20. An Introduction to Modern Economics, S.M. Akhtar, United Limited,
Lahore.

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Chapter 15

Management

Chapter Objectives
After completion of this chapter students will be able to:

 Understand & define Management

 Describe the Functions of Management
 Explain the Problems of Business Management

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15.1 Meaning of management:

Management is a distinct process of planning, organizing, directing and
controlling, performed to determine and accomplish stated objectives with
the use of human beings and other resources. Management is the process of
designing and maintaining an environment in which individuals, working
together in groups, efficiently accomplish the selected aims.

Management is defined as the process by which a co-operative group directs

actions towards common goals.

15.2 Functions of Management:

The main aim of management is to achieve the organizational goals while
using the organizational resources most effectively.

In

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order to get things done as desired, the management performs functions

like:

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

15.2.1 Planning:
Planning is the first and foremost function of the management. All other
functions are based on planning function. Manager has to determine in
advance what it is to be done, when it is to be done, and how it is to be
done. Optimum utilization of resources is out of question without
planning. Planning eliminates the tendency to work in a haphazard
fashion. It sets the direction for the entire organization to proceed
towards the goals. Planning may be regarded as the process of
determining objectives, discovering alternative courses of action and
selecting an appropriate course of action for accomplishing goals. In the
absence of planning, no other managerial function can be
performed. Plans are not rigid and they are supposed to be flexible in
response to changes in external environment.

Managers at every level perform planning function because planning may

either be for the entire enterprise or for any section or department
thereof. The managers at the top level devote more time on planning;
the managers at the lower level follow the policies, programs and
procedures laid down by the top management.

15.2.2 Staffing:
Staffing as a function of management involves recruiting people with
right qualification and experience for the right job at the right time. It
involves selecting people and providing training if required so that they
are capable enough to achieve organizational goals effectively and
efficiently.

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15.2.3 Organizing:
Organizing means dividing up the work and identifying resources, both
material and human. You have to determine what tasks need to be
carried out, what materials should be used for the purpose and who will
carry out the task. To be a good organizer, you should have the skills of
thinking logically, using your resources judiciously and making decisions.

15.2.4 Controlling:
Controlling as a function of management monitors the performance
of employees at all critical levels. It involves comparing the current
performance with established standards of performance so that the
corrective actions are taken and organizational goals are achieved as
desired. Plan, the quantity of raw material to be used and the standard
time to be taken for production. Once the production process starts, he
constantly monitors the floor performance of workers and keep giving
them on the job instructions to achieve the desired targets.

15.2.5 Directing:
Directing as a function of management involves managers to use their
leadership qualities to lead, influence and motivate their subordinates to
perform the tasks assigned to them most efficiently. In a way, it involves
directing individuals what to do, how to do and ensure that it is done the
way as planned. Praise, positive criticism and timely guidance help
employees to achieve their best.

15.3 Management problems:

15.3.1 Lack of raw materials
This is a very big issue that often affects the management. Lack of raw
materials increases the cost of business. And the production process is
disrupted.

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15.3.2 Credit recovery

Most of the time in the business world, you have to sell items on credit. It
also happens that you do not pay the price of the items bought on credit or
try to delay. Under these circumstances, it becomes difficult to run a
business. The business goes into deficit and the business becomes uncertain.
Therefore, this is also a big problem for the management

15.3.3 Worker Turnover

When couple of people leaves work and go to another business, the first
business is affected due to their departure. Which creates a problem for the
management? New workers have to be hired to run the business.

15.3.4 Lack of capital

Capital is like blood for the any kind of business sometimes, when there
is a lack of capital in the business; it creates a problem for the business. Due
to lack of capital quantity and quality of the goods will also be decrease.

15.3.5 Communication Gap

Sometimes the delivery of information in different sectors is not found at
time and accurate manner that leads to misunderstandings and creates
problems for the management.

15.3.6 Existence of Trade Union

Some businesses also have trade unions that are often against the
management.

15.3.7 Natural Disasters

Sometimes natural disasters such as earthquakes, heavy rains, storms and
floods etc. cause damage to the business. When business will be damaged, it
creates issues for management.

15.3.8 Government Taxes

The government imposes taxes on business and changes it from time to time.
In this way, it creates problem for employer and production schedule is
affected.

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15.3.9 Communication Gap

Sometimes the delivery of information in different sectors is not found at
time and accurate manner that leads to misunderstandings and creates
problems for the management.

15.3.10 Existence of Trade Union

Some businesses also have trade unions that are often against the
management.

15.3.11 Natural Disasters

Sometimes natural disasters such as earthquakes, heavy rains, storms and
floods, etc., cause damage to the business. When business will be damage, it
creates issues for management.

EXERCISE No. 15

Long Questions
Q.1. Define Management and explain importance of Management.
Q.2. Describe the problems in detail faced by business Management.
Q.3. Explain important functions of Management.

Short Questions
Q.1. Write the names of level of management.
Q.2. What is top management?
Q.3. What is low level of management?
Q.4. Define Planning.
Q.5. Write the name of four issues faced by the management.
Q.6. What is meaning of staffing as function of management?
Q.7. What is meant by” lack of capital” as management issue?
Q.8. Describe Organizing.
Q.9. Why is it not being considered good Communication Gap between
management and workers?

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Q.10. What is the function of middle management?

Multiple Choice Questions (MCQs)

Choose the correct answer from the given possible answers and circle it.

Q.1. The persons who involve in planning, recruiting, instructions and

controlling are called?
(a) Watch men (b) clerk
(c) Management (d) All
Q.2. To make decision in advance is called:
(a) Organizing (b) instructing
(c) planning (d) staffing
Q.3. How many levels does management have?
(a) Two (b) three
(c) four (d) seven
Q.4. Planning is necessary for
(a) Progress (b) prosperity
(c) Success (d) All
Q.5. It is the responsibility of management
(a) Controlling (b) staffing
(c) A & B (d) None of these
Q.6. Planning is vital for
(a) Student (b) management
(c) Teacher (d) all
Q.7. Which of the management function means, creating a framework of
management?
(a) Instructions (b) controlling
(c) Planning (d) organizing
Q.8. It is included in the problems of management
(a) Goodwill (b) shortage of material
(c) London School of Economics (d) all
Q.9. It is the duty of management:
(a) To implement the Decisions (b) to take results
(c) A & B (d) none
Q.10. Under which function “the management guides its subordinates”
(a) Planning (b) directing

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(c) controlling (d) all

Answer Key
Q. No. Answer Q. No. Answer Q. No. Answer
1 c 5 c 9 c
2 c 6 d 10 b
3 b 7 d
4 d 8 b

Reference:
1. Business Organization, Nisar-ud-Din, Aziz Publisher, Lahore
2. Introduction to Business, M. Saeed Nasir, Ilmi Kitab Khana, Lahore.
3. An Introduction to Modern Economics, S.M. Akhtar, United Limited,
Lahore.
4. Muhammad Irshad, Economics, Naveed Publications Lahore.
5. Sheikh Manzoor Ali, Economics, Ilmi Kutab Khana, Urdu Bazar,
Lahore.
6. Lioyd G Reynolds Irwin, Micro Economics — Analysis & Policy, Irwin
Homwood Illinois.
7. Saeed Nasir M A, Text book of Economics, Ilmi Kutab Khana, Lahore.
8. Salman Rizavi, Economics, Syed Mobin Mahmud & Co., Lahore.
9. K. K. Dewitt, Modern Economic Theory, S. Chand Publisher, New Delhi
India -2006. ISBN 10: 8121924634 / ISBN 13: 9788121924634
10. Nancy Smith Barrett, The Theory of Macro Economics Policy, Prentice
Hall.
11. Edward Shapiro, Macro Economic Analysis, Harcourt Brace.
12. Mankiw, “Principles of Economics” 7th Edition, (2008), Southwest
Publishers
13. A History of Economics “The Past as The Present” by: Galbraith, John
Kenneth. Published by David & Charles – 1987, pages 336: ISBN-10.
0241123887.
14. Miller, R. L –EconomicsToday-14th Edition (2005) Addison Wesley
15. McConnell and Bruce-Principles of Economics -17th Edition, (2006),
McGraw-Hill.
16. Weil, David N. (2012). Economic Growth. Third Edition, Pearson.

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Ch-15 Management MGT-331

17. Williamson, Stephen D. (2010). Macroeconomics. Fourth Edition,

Prentice Hall.
18. Perloff, J.M. (2013). Microeconomics: Theory & Applications with
Calculus, 3rd Edition Pearson.
19. Nicholson, W. & Snyder, C. (2009). Intermediate Microeconomics
and Its Application, 11th Edition. Cengage Learning
20. Dougherty, Christopher – Introduction to Econometrics – 2nd
edition (2002), Oxford University Press.
21. Gujrati, D. J. - Basic Econometrics – 4th Edition (2003) McGraw-Hill
Company.

Chapter 16

Advertisement

Chapter Objectives
After completion of this chapter students will be able to:

 Understand & define Advertisement

 Describe the Merits of Advertisement
 Explain the Demerits of Advertisement
 Identify the Different Advertising Media

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16.1 Concepts, Benefits and Draw-backs:

16.1.1 Concept of Advertisement:
W.J. Stanton definition of advertising is– “Advertising consists of all the
activities involved in presenting to a group a non-personal, oral or visual,
openly sponsored message regarding a product, service or idea, this message,
called an advertisement is disseminated through one or more media and is
paid for by the identified sponsor”.

According to Wheeler, “Advertising is any form of paid non-personal

presentation of ideas, goods or services for the purpose of inducting people
to buy”.

According to Richard Busk irk, “Advertising is a paid form of non-personal

presentation of ideas, goods or services by an identified sponsor”.

The above definitions clearly reveal the nature of advertisement. This is a

powerful element of the promotion mix. Essentially advertising means
spreading of information about the characteristics of the product to the
prospective customers with a view to sell the product or increase the sale
volume.

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16.1.2 Benefits/Advantages of Advertisement:

This is beneficial to manufacturers, traders, consumers and society as a

whole. Advertising offers the following advantages.

(a) Introduces a New Product in the Market

Advertising plays significant role in the introduction of a new product
in the market. It stimulates the people to purchase the product.

(b) Expansion of the Market

It enables the manufacturer to expand his market. It helps in
exploring new markets for the product and retaining the existing
markets. It plays a sheet anchor role in widening the marketing for
the manufacturer’s products even by conveying the customers living
at the far-lung and remote areas.

(c) Increased Sales

Advertisement facilitates mass production to goods and increases the
volume of sales. In other words, sales can be increased with
additional expenditure on advertising. With every increase in sale,
selling expenses will decrease.

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(d) Enhances Good-Will

Advertising is instrumental in increasing goodwill of the concern. It
introduces the manufacturer and his product to the people. Repeated
advertising and better quality of products brings more reputation for
the manufacturer and enhances goodwill for the concern.

(e) Educates the Consumers

Advertising is educational and dynamic in nature. It familiarizes the
customers with the new products and their diverse uses and also
educates them about the new uses of existing products.

(f) Elimination of Middlemen

It aims at establishing a direct link between the manufacturer and the
consumer, thereby eliminating the marketing intermediaries. This
increases the profits of the manufacturer and the consumer gets the
products at lower prices.

(g) Encouragement to Research

The manufacturers will undertake research and discover new
products or new uses for existing products only when they are
assured of sufficient profits. Advertising provides this assurance and
thus encourages industrial research with all its advantages.

(h) Customers Facilities

Due to advertising, consumers not only get better quality products
available at lower prices but also, they know it from where the item
can be purchased.

(i) Encourage competition

Advertising increases competition between different companies.
Customers benefit from in form of better-quality products available at
cheaper price.

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(j) More Employment Opportunities

Advertising provides and creates more employment opportunities for
many talented people like painters, photographers, singers,
cartoonists, musicians, models and people working in different
advertising agencies.

(k) Help in consumer choice

Advertising helps to solve the problem of consumer choice.
Advertising helps to know the features, prices, etc. of the products
made by different companies so that consumers can choose the
goods according to their need and purchasing power.

(l) Regular Demand

Advertising is a regular source for manufacturers as well as
shopkeepers to make regular customers. Demand change due to
seasonal change, invention of alternatives or any other reason.
Advertising prevents from the negative effects of all.

16.1.3 Draw-backs/Disadvantages of Advertising:

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Advertising has the following disadvantages.

(a) Burden upon Consumers

Media of advertisement being costly, manufacturers have to spend
huge amount on advertising. This ad adds to cost of production and
increases cost per unit and finally the price of the product. Increased
prices are a burden on consumer.

(b) Advertisement Creates Monopoly

Advertising ultimately blocks other firms from entering an industry
(barriers to entry) leading to market power for the firm and ultimately
to higher prices. If sheer advertising volume expenditure is directly
related to increased sales, small firms cannot afford it. This enables
large-scale manufacturer to stay and enjoy monopoly. However,
advertisement also creates healthy competitive market for the
products.

(c) Advertisement Leads to Luxurious Life

Advertising luxurious goods is often done in a manner that consumers
feel them necessary to buy. Such goods become status symbol.
Consequently, people are made to live a luxurious life even when they
cannot afford it. However, in so far as advertising offers wide choice in
making their purchases, it improves their life style and raises their
standard of living.

(d) Advertisement is Wastage

Money spent on advertising is wastage if demand for advertised goods
and services does not increase. This is however not necessarily so
because very often, advertisement increases demand through wider
coverage and new uses of product.

(e) Advertisement Gives Birth to Social Evils

Advertisement often gives birth to social evils like smoking, drinking
etc. Conclusion, various criticisms are true, measures can be adopted
to check these social evils.

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(f) Leads to Price War

Large-scale competitive advertising by prominent competing firms can
possibly lead to advertising wars with the consumers being made to
pay for it. It leads to a situation of price war and that makes the
production activity unduly wasteful. The entire industry has to suffer a
setback.

(g) Leads to Unequal Competition

The producers spend a huge amount of money for the advertisement
of their products and services. Small local firms cannot match the big
advertising budgets of multinational companies. Therefore, the scales
are always tilted in favour of the bigger producers leading to unequal
competition.

(h) Confuses the Buyers

Many a time distorted version of reality is shown in the advertising.
Believing in advertising, consumers buy the product. On its use, they
feel cheated. They come to realize later that the information given in
the advertisement was something else whereas the actual product was
quite different from it. Thus, people lose confidence in advertising
because of wrong presentation. In this reference it is said that
advertising confuses rather than helps.

(i) Sale of Inferior Products

Every manufacturer projects his product as superior one in the
advertisement. Therefore, the buyer is unable to decide as to which
product is really good. Consequently, it is difficult to get good quality
product even after paying a handsome price for it. If a seller gets good
price for some inferior product, it becomes a habit with him. It affects
other sellers also. Therefore, it is said that advertisement encourages
the sale of inferior products.

(j) Advertising is harmful to children:

Children cannot make informed choice or cannot differentiate
between real life and the life portrayed in the world of ad. Ads

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targeting children are released even before the claims are verified like
complain.

(k) Declines in Moral Values

In order to attract attention of the people, many times advertisers use
indecent, vulgar language and obscene photographs.

16.2 Principal Media used in Business World:

Advertising media are the devices by which and through which the
advertisers to the future and existing customers transmit the advertising
messages. The message regarding the product or service is passed on to the
consumers or persons concerned through the media. In advertising, media
are the facilitating functions and constitute an industry. Media are the
carriers of message of an advertiser whose aim is to reach to the public so

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that he and his product or service may come to the knowledge of the public
and in turn public may turn to him and his product or service.

16.2.1 Types of Advertising Media:

Different types of advertising media available to an advertiser are

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(a) Direct Mail

This is one of the oldest types of advertising media. Under this
method message is sent to the prospective buyers by post. A mailing
list is prepared for this purpose. Circular letters, folders, calendars,
booklets and catalogues are sent under this type of advertising. This
method is very effective as it establishes direct contact with the
consumer and also maintains secrecy in advertising.

(b) Newspapers
These are the important forms of press advertising, newspapers are
the most effective and powerful medium of advertising. There are
daily, bi-weekly and weekly newspapers. Newspapers have widest
circulation and read by many people. The newspapers may be local,
provincial or national.

(c) Magazines
Magazines or periodicals are other important media of
communication. Magazines may be released weekly, monthly,
quarterly, bi-annual or annual. The readers as compared to
newspapers read these with more interest. Advertisements given in
magazines are more descriptive and attractive. They are usually in
colored form, which depicts the product nicely and gives lasting
impression to the reader

(d) Radio Advertising

Radio advertising is very popular these days. The advertisements are
broadcasted from different stations of All India Radio. Radio
advertising can be explained as “word of mouth advertising on a
wholesale scale”. The advertising messages can be in different
regional language. The most important advantage derived from radio
advertising is that it covers every type of listener whether illiterate or
educated. The coverage of this medium is wider extending to a large
number of listeners. It ensures quicker repetition.

(e) Television Advertising

This is the latest and the fast-developing medium of advertising and is

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getting increased popularity these days. It is more effective as

compared to radio as it has the advantages of sound and sight. On
account of pictorial presentation, it is more effective and impressive
and leaves ever lasting impression on the mind of the viewer. This
method of advertising is gaining rapid coverage and immense
popularity among the masses.

(f) Film Advertising

This is also known as cinema advertising. This also provides sight and
hearing facilities like television. Short advertisement films are not
prepared by big business houses which are sent to different cinema
houses to be shown to the audience before the regular shows or
during the intermission. It has more repetitive value but not to the
same viewers. Its coverage is limited which benefits the local
population only.

(g) Outdoor Advertising

This type of advertising includes different media like posters,
placards, electric displays or neon signs, sandwich men, skywriting,
bus, train and tram advertising. These sources help in advertisement.
They also become cause of interest. The main aim of outdoor
advertising is to catch the attention of passerby within twinkling of an
eye. This is very suitable in the case of consumable and household
articles like soaps, medicines, fans, shoes and pens etc.

(h) Window Display

It is a common method that is usually undertaken by retailers who
display their products in the shop windows in order to attract the
customers. This is also known as exterior display. It is the most
effective and direct method of influencing the people. Window
display has direct appeal to the onlookers. It is instrumental in
arousing the desire to purchase in the prospective customers. It acts
as a silent salesman. In order to operate this method successfully,
goods should be arranged properly and systematically in the show
windows.

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(i) Fairs and Exhibition

A trade exhibition or a fair is organized on extensive scale, which is
attended by different manufacturers and traders along with their
products to be sold to the large number of people who visit the
exhibition. The exhibition may be either organized on local, provincial
or international basis.

EXERCISE No. 16

Long Questions
Q.1. Define advertisement and explain the advantages of advertisement.
Q.2. Describe the disadvantages of advertisement in detail.
Q.3. Explain advertisement media in detail.

Short Questions

Q.1. Define advertisement.

Q.1. Write four merits of advertisement.
Q.1. Write down four demerits of advertisement.
Q.1. Does advertisement increase awareness among customers?
Q.1. What is window display?
Q.1. Does advertisement increase the profit of producer?
Q.1. Does advertisement increase the goodwill of producer?
Q.1. What is meaning of advertisement media?
Q.1. Write down four important medias of advertisement.
Q.1. How is an advertisement harmful for children?

Multiple Choice Questions (MCQs)

Choose the correct answer from the given possible answers and circle it.

Q.1. By advertising the goods, there is a huge--------in prices

(a) Not effected (b) decrease
(c) Increase (d) both
Q.2. He has to bear the advertisement expenses.
(a) Customer (b) Employer
(c) wholesaler (d) retailer

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Q.3. The advertisement is helpful for

(a) Shopkeeper (b) buyer
(c) a &b (d) none
Q.4. Due to advertisement, the unemployment will
(a) Increase (b) stable
(c) unchanged (d) decrease
Q.5. The purpose of advertisement is
(a) More sale (b) more profit
(c) a & b (d) none
Q.6. Advertisements can minimize this
(a) Price (b) production
(c) role of agent (d) none
Q.7. This is source of advertisement
(a) Radio (b) television
(c) Internet (d) all
Q.8. Due to advertising, customer demands
(a) Goods (b) product
(c) a &b (d) none
Q.9. There is wastage of------------ due to advertisement
(a) Money (b) time
(c) persons (d) all
Q.10. It is included in disadvantages of advertisement
(a) More sales (b) more profit
(c) Additional costs (d) none

Answer Key
Q. No. Answer Q. No. Answer Q. No. Answer
1 c 5 c 9 a
2 a 6 c 10 c
3 c 7 d
4 d 8 c

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Ch-16 Advertisement MGT-331

Reference:
1. Small Business and Entrepreneurship, Paul Burns & Jim Dewhurst,
Red Globe Press London. https://doi.org/10.1007/978-1-349-24911-4
2. Innovation and Entrepreneurship by Peter F. Drucker, Harper & Row
Publishers, 1985 - Business & Economics - 293 pages. ISBN:
0060154284, 9780060154288
3. Business Organization, Nisar-ud-Din, Aziz Publisher, Lahore
4. Introduction to Business, M. Saeed Nasir, Ilmi Kitab Khana, Lahore.
5. An Introduction to Modern Economics, S.M. Akhtar, United Limited,
Lahore.
6. Muhammad Irshad, Economics, Naveed Publications Lahore.
7. Sheikh Manzoor Ali, Economics, Ilmi Kutab Khana, Urdu Bazar,
Lahore.
8. Lioyd G Reynolds Irwin, Micro Economics — Analysis & Policy, Irwin
Homwood Illinois.
9. Saeed Nasir M A, Text book of Economics, Ilmi Kutab Khana, Lahore.
10. K. K. Dewitt, Modern Economic Theory, S. Chand Publisher, New Delhi
India -2006. ISBN 10: 8121924634 / ISBN 13: 9788121924634
11. Nancy Smith Barrett, The Theory of Macro Economics Policy, Prentice
Hall.
12. Mankiw, “Principles of Economics” 7th Edition, (2008), Southwest
Publishers
13. Miller, R. L –EconomicsToday-14th Edition (2005) Addison Wesley
14. McConnell and Bruce-Principles of Economics -17th Edition, (2006),
McGraw-Hill.
15. Weil, David N. (2012). Economic Growth. Third Edition, Pearson.
16. Williamson, Stephen D. (2010). Macroeconomics. Fourth Edition,
Prentice Hall.
17. Perloff, J.M. (2013). Microeconomics: Theory & Applications with
Calculus, 3rd Edition Pearson.
18. Nicholson, W. & Snyder, C. (2009). Intermediate Microeconomics
and Its Application, 11th Edition. Cengage Learning
19. Paul R. Krugman and Maurice Obstfeld, International Economics:
Theory and Policy, Addison Wesley, 7th edition (2016).
20. Ishrat Hussain, (2007) Pakistan: The Economy of an Elite State, Oxford
University Press, Karachi
21. Parker, Simon C., “The economics of Entrepreneurship” latest Edition,
Cambridge University Press, USA, New York.

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Ch-17 Economy of Pakistan MGT-331

Chapter 17

Economy of Pakistan

Chapter Objectives
After completion of this chapter students will be able to:

 Understand the Meaning of under development

 Describe the Basic Weaknesses of Pakistan’s Economy
 Explain the Economic Problems of Pakistan
 Identify the Remedial Measures for Economic Development of
Pakistan

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17.1 Introduction:
Pakistan is a developing country. Its economy is still on the path of
development. According to UN experts, developing economies belong to
those countries whose per capital income is low as compared to the per
capital income of United States, Canada, Australia and Western European
countries. Pakistan is one such country in which the rate of population is
maximum and the means of production are less. Its people have a lower per
capital income than rich countries.

17.2 Economic problems of Pakistan:

The following are the economic problems/issues of Pakistan Economy.

17.2.1 Agricultural Underdevelopment

Pakistan is an agricultural country with about 70% of its population
engaged in agriculture. Despite this, production of agricultural goods
is so low that we have to seek help from foreign countries to meet
our domestic needs. The reason for this is that still we are using the
old methods of cultivation. Most of the farmers do not have access to
proper fertilizers, modern seeds, equipment and capital facilities due
to which our yield per hectare is very low and Pakistan is
economically poor.

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17.2.2 Lack of Natural Resources

The economy is largely dependent on agriculture. While our vast area
production depends on rainfall. In addition, a lot of land has become
unusable due to drought. Mineral resources play an important role in
the economic development of a country. Pakistan has low reserves of
important minerals such as coal and petroleum. In addition, due to
lack of capital and technical experts, the existing reserves are not
being fully utilized, which in turn increases Pakistan's economic
problems.

17.2.3 Industrial backwardness

Industry is the second most important sector of Pakistan's economy.
Its importance can be judged from the fact that the development of
the country's agricultural sector also depends on industrialization.
Industrial backwardness is a significant obstacle to our economic
growth. Lack of honest employers is also one of the reasons for
Pakistan's industrial backwardness.

17.2.4 Lack of financial resources

Lack of financial resources is also an obstacle to Pakistan's
development. There is a basic need of capital to complete the
projects. Pakistan's low per capita income reduces people's savings.
Due to which the investment climate is weak. So when capital
investment is low, industrialization will be in a small chunk, resulting
in low per capital income. Poverty is also a major obstacle to
Pakistan's development. Developed countries save 15 to 20 percent
of their GDP, while Pakistan's savings are only 5 to 7 percent of GDP.

17.2.5 Shortage of foreign exchange

Due to shortage of foreign exchange, Pakistan cannot import heavy
machinery equipment and required raw material. This makes it
difficult to revive the economy.

17.2.6 Lack of latest technology

Pakistan does not have latest technology like other developed
country in the industry. So, our industrialists are unable to produce

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cheaper and quality product and we can’t compete in international

market.

17.2.7 Lack of educated entrepreneur

It is also obstacle in way of economic development of Pakistan. Many
uneducated persons are doing business with old pattern. They are
unable to use modern equipment at their business. Their production
remains low and they can’t export product in international market
due to low standards and huge cost.

17.2.8 Burden of Foreign of Foreign Debt

From time to time, Pakistan borrows from other countries to meet its
needs. Debts are an obstacle to the economic development of a
backward country. When we borrow loans, they also set their
conditions that are in their interest. In this way, we are bound by
their agreements with loans even which are against of our interests. It
affects our economic development.

17.3 Remedial measures for economic problems of

Pakistan:

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The following basic steps should be taken to accelerate the economic growth
of Pakistan.

17.3.1 Execution of the Islamic Economic System

If we want to see Pakistan rise to the top in the field of economic
development, the first and foremost condition is that the Islamic
economic system should be implemented in it. This economic system
itself is full of orderly blessings and protects from backwardness.

17.3.2 Development of Technology

Today is the age of technology in which only nations can move
forward that can ride the horses of technology

17.3.3 Self-reliance policy

Self-reliance policy should be adopted. Help yourself and God also
helps them. Youth helps you. Nations do not rely on foreign aid. Even
a stagnant nation cannot develop.

17.3.4 Administrative Reforms

If Pakistan wants to make progress, then administrative reforms
should be made in it. Selection of competent and honest
administrative persons is very crucial for the development

17.3.5 Increased Savings

The government should enact legislation to increase savings.
Increasing savings will increase in investment and industrialization.
The economic situation will improve rapidly. Employment
opportunities and per capital income will also increase as a result
Pakistan will make progress.

17.3.6 Increase in foreign exchange

In order to increase foreign exchange, the government should
discourage the import of goods and encourage the exports of
different goods.it will improve the balance of payments of Pakistan.

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17.3.7 Literacy
Education is considered as the base for the economic development of
any country. It will remove social and cultural obstacles in the way of
economic development of Pakistan.

17.3.8 Equal Division of Wealth

The government should impose heavy taxes on the rich and give
concessions to the poor so that the concentration of wealth can be
eliminated. And the equitable distributions of wealth become
possible.

17.3.9 Stable Financial Policy

In order to improve the pace of industrial development, fiscal policy
should be carefully formulated. Duties and taxes should be
implemented in a stable manner and should not be changed
unnecessarily.

17.3.10 Industrial Development

The industrial development of a country helps a great deal in
overcoming its economic problems. National income increases due to
increase in industrial production.

17.3.11 Agricultural Development

Our country's economy is dependent on agriculture. To increase our
yield per acre, we need to use modern production equipment, better
seeds and fertilizers. In addition, farmers should be given loans on
easy terms to buy fertilizers and agricultural implements so that there
is a better crop. Most part of our national’s income comes from
agriculture sector. Therefore, development of this sector is the
development of the economy of Pakistan

17.3.12 Development in Transport and Communication

The development of means of transportation and communication
increases the migration of labor capital. Furthermore, their
development facilitates the movement of goods. Due to which the

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country develops, therefore Pakistan should pay special attention to

this.

EXERCISE No. 17

Long Questions
Q.1. What is underdeveloped economy?
Q.2. Describe the problems on the way of economic development of
Pakistan.
Q.3. State the corrective measures in detail for the economic growth of
Pakistan.

Short Questions

Q.1. Write three major obstacles on the way of economic growth?

Q.2. How per capital income is calculated?
Q.3. Which sector is more contributing in our GDP?
Q.4. Why industrial development is important?
Q.5. State the four characteristics of Pakistan economy?
Q.6. What are the three basic economic problems of Pakistan?
Q.7. State the name of four political problems.
Q.8. Describe four corrective measures for economic growth.
Q.9. Write short note on Agricultural growth.
Q.10. Write the name of four administrative issues in Pakistan.

Multiple Choice Questions (MCQs)

Choose the correct answer from the given possible answers and circle it.

Q.1. A country having less per capital income is called?

(a) Developed (b) underdeveloped
(c) Progressive (d) none
Q.2. Pakistan economy is facing following issues
(a) Economic (b) political (c) None (d) a & b
Q.3. Pakistan population is growing with the ratio of?
(a) 5% (b) 4% (c) 6% (d) 2%
Q.4. For economic development we should focus on:

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(a) Industry (b) agriculture (c) Technology (d) all

Q.5. It is the cause of industry backwardness.
(a) Availability of funds (b) lack of capital
(c) Lack of modern technology (d) b & c
Q.6. It is helpful for economic development of Pakistan.
(a) Modern technology (b) technical workers
(c) Educated management (d) all
Q.7. Increase in population affects --------
(a) Financial Institutes (b) banks (c) Resources (d) persons
Q.8. Economy of Pakistan is:
(a) Developed (b) underdeveloped
(c) At the top of poverty (d) None
Q.9. Which country of the world has the highest annual per capita
income?
(a) America (b) Japan
(c) Australia (d) Qatar
Q.10. Which of these included among the remedial measures for economic
development of Pakistan?
(a) Adoption of self-reliance policy
(b) Increase in exports and foreign exchange
(c) Advancement of technology
(d) All of these

Answer Key
Q. No. Answer Q. No. Answer Q. No. Answer
1 b 5 d 9 d
2 d 6 d 10 d
3 b 7 c
4 d 8 b

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