Unit I

1. Scope of economics: SCOPE OF ECONOMICS

The horizon of economics is grad a!!" e#panding. It is no more a $ranch of %no&!edge that dea!s on!" &ith the prod ction and cons mption. 'o&e(er) the $asic thr st sti!! remains on sing the a(ai!a$!e reso rces efficient!" &hi!e gi(ing the ma#im m satisfaction or &e!fare to the peop!e on a s staina$!e $asis. The scope of economics as nder: 1. Microeconomics: This is considered to $e the $asic economics. Microeconomics ma" $e defined as that $ranch of economic ana!"sis &hich st dies the economic $eha(io r of the indi(id a! nit) ma" $e a person) a partic !ar ho seho!d) or a partic !ar firm. *. Macroeconomics: Macroeconomics ma" $e defined as that $ranch of economic ana!"sis &hich st dies $eha(io r of not one partic !ar nit) $ t of a!! the nits com$ined together. Macroeconomics is a st d" in aggregates. 'ence it is often ca!!ed +ggregati(e Economics. ,. Internationa! economics: +s the co ntries of the modern &or!d are rea!ising the significance of trade &ith other co ntries) the ro!e of internationa! economics is getting more and more significant no&ada"s. -. P $!ic finance: P $!ic Finance or the fisca! economics &hich means gro&th) redistri$ tion of income) etc. .. /e(e!opment economics: economics re0 ired different treatment for gro&th and de(e!opment. 1. 'ea!th economics: + ne& rea!isation has emerged from h man de(e!opment for economic gro&th. Therefore) $ranches !i%e hea!th economics are gaining moment m. 2. En(ironmenta! economics: En(ironmenta! Economics is one of the ma3or $ranches of economics that is considered significant for s staina$!e de(e!opment.

*. E#p!ain (a! es) ti!it" and &ea!th:

4a! e: 4a! e refers to a &orth that can $e e#pressed in c rrenc". The parado# of (a! e is the sit ation &here some necessities ha(e !itt!e monetar" (a! e) &hereas some non5 necessities ha(e a m ch higher (a! e. Scarcit" is re0 ired for (a! e) $ t scarcit" a!one isn6t eno gh to create (a! e. Uti!it": Uti!it" is the capacit" to e sef ! and pro(ide satisfaction7 it is re0 ired for something to ha(e (a! e. The ti!it" of a good or ser(ice ma" (ar" from one person to the ne#t. + good or ser(ice does not ha(e to ha(e ti!it" for e(er"one) on!" ti!it" for some.

8ea!th: 8ea!th is the acc m !ation of those prod cts that are tangi$!e) scare) sef !) and transfera$!e from one person to another. + nation6s &ea!th is comprised of a!! items. 9oods are co nted as &ea!th $ t ser(ices are not $eca se the" are intangi$!e.

,. Factors of prod ction:

Factors of prod ction are the inputs to the prod ction process. Finished goods are the output. There are three basic factors of prod ction: !and) !a$o r) capita!. :and: :and inc! des earth6s s rface and reso rces a$o(e and $e!o& the s rface of the earth. It inc! des fo!!o&ing nat ra! reso rces:5 On the s rface ;e.g. soi!) agric !t ra! !and) etc.< =e!o& the s rface ;e.g. minera! reso rces) roc%s) gro nd &ater) etc.< +$o(e the s rface ;e.g. c!imate) rain) space monitoring) etc.< Pec !iarities > Characteristics > Feat res of :and 1. :and is a free gift of nat re :and is a free gift of nat re to man%ind. It is not a man5made factor $ t is a nat ra! factor. *. :and is a primar" factor of prod ction Tho gh a!! factors are re0 ired for prod ction) !and p ts fo ndation for prod ction process. Starting point of prod ction process is an ac0 isition of !and. So) it is a primar" factor. ,. :and has perfect!" ine!astic s pp!" From societ"6s point of (ie&) s pp!" of !and is perfect!" ine!astic i.e. fi#ed in 0 antit". Neither it can $e increased nor decreased. Simp!") "o can not change size of the earth. = t from indi(id a! point of (ie&) its s pp!" is re!ati(e!" e!astic. -. :and has grad a$i!it" :and (aries from region to region on the $asis of ferti!it". Some !and are more ferti!e and some are not at a!!. So) ferti!it" &ise) grading of !and is possi$!e. So) in this &a") !and has grada$i!it". .. :and is a passi(e factor :and itse!f doesn6t prod ce an"thing a!one. It is a passi(e factor. It needs he!p of :a$o r) Capita!) Entreprene r) etc. :i%e !a$o r and entreprene r) it doesn6t &or% on its o&n initiati(e. So it is a passi(e factor. 1. :and ma" ha(e diminishing ret rns 'ere) ret rn means 0 antit" of crops. =" sing ferti!it" of !and &ith the he!p of capita! and !a$o r contin o s!") ret rns gets diminished $eca se of red ction in ferti!it". 2. :and has a deri(ed demand /emand for agric !t ra! goods is a direct demand and for prod cing s ch goods) !and is indirect!" demanded. So) as a factor) !and has a deri(ed demand from cons mer6s point of (ie&. ?. :and has no socia! cost

:and is a gift of nat re to societ". It is a!read" in e#istence. :and is no created $" societ" $" p tting an" efforts and pa"ing an" price. So) for societ") s pp!" price of !and is zero. = t) $eca se for the p rchase of !and or for its impro(ement) indi(id a! has to pa" certain price) so its s pp!" price for indi(id a! is not zero. @. :and is a indestr cti$!e factor :and is d ra$!e and not perisha$!e. It has a !ong !ife. No one can destro" the !and. The po&er of !and is permanent and indestr cti$!e. Its ferti!it" can $e destro"ed as &e!! as restored $" h man efforts. 1A. :and is perfect!" immo$i!e Mo$i!it" means a$i!it" to mo(e. Mo(ement of !and from one p!ace to another is impossi$!e. Th s) ph"sica!!") !and is perfect!" immo$i!e. = t it has certain occ pationa! mo$i!it" $eca se it can $e sed for (ariet" of occ pations) !i%e agric !t ra! se or for constr ction of ho ses. :a$o r: It can $e defined as an" e#ertion of mind or $od" ndergone part!" or &ho!!" &ith a (ie& to earning some good other than the p!eas re deri(ed direct!" from the &or%. Pec !iarities of :a$o r: The important pec !iarities of !a$o r are as nder. 1. :a$o r is insepara$!e from the !a$o rer: 'ere !a$o r means a 0 ant m of &or% performed &hi!e !a$o rer means &ho perform the &or% ;e.g. !a$o r<. Therefore) the !a$o rBs &or% has to $e de!i(ered in person. *. :a$o rer se!!s his ser(ices not himse!f: If !a$o rer is emp!o"ed means an emp!o"er on!" pa"s in the form of &ages on acco nt of ser(ices recei(ed from the !a$o rer. Th s !a$o rer is on!" se!!ing his ser(ices not himse!f. ,. :a$o r is more perisha$!e than other commodit": If time passes) it !apses fore(er. Therefore a da" !ost &hich o t &or% means the da"s &or% gone for e(er. That is &h" man" times &or%ers ha(e to accept !o&er &ages rather than earn nothing. -. :a$o rer has not the same po&er of $argaining as their emp!o"ers. This is $eca se !a$o r can not $e stored p and !a$o rers are poor and ignorant. .. Man) not a machine: + !a$o rer differs from machine. 'e can not render ser(ices !i%e machine. +fter a!! !a$o rer is man and he has fee!ings and !i%ings. If good s rro nding) hea!th) recreation is pro(ided) he can &or% efficient!" other&ise he &i!! not &or% efficient!". 1. :ess mo$i!e: 9enera!!" !a$o rer does not &ant to !ea(e his home. It is therefore !a$o r is s ch !ess mo$i!e a compared to other factors.

Cons mption:
The process in &hich the s $stance of a thing is comp!ete!" destro"ed) sed p) or incorporated or transformed into something e!se. Cons mption of goods and ser(ices is the amo nt of them sed in a partic !ar time period.

Cons mption f nction is a sing!e mathematica! f nction sed to e#press cons mer spending The simp!e cons mption f nction is sho&n as the affine f nction: &here

C C tota! cons mption) c0 C a tonomo s cons mption ;c0 D A<) c1 is the margina! propensit" to cons me ;ie the induced consumption< ;A E c1 E 1<) and Yd C disposa$!e income ;income after go(ernment inter(ention F $enefits) ta#es and transfer pa"ments F or G H ;9 F T<<.

8ants:
' man 8ants and their C!assification Man is a $ nd!e of desires. 'is &ants are infinite in (ariet" and n m$er. Some &ants are nat ra!) for e#amp!e foods) air) c!othing and she!ter &itho t &hich e#istence of manBs !ife is not possi$!e. Simi!ar!" &ants (ar" from indi(id a! to indi(id a! and the" m !tip!" &ith ci(i!ization. Characteristics of ' man 8ants: 1. ' man &ants are n!imited: ManBs mind is so made that he ne(er comp!ete!" satisfied and hence there is no end to h man &ants. One &ant is satisfied another &ant &i!! crop p to ta%e its p!ace and th s it is ne(er ending c"c!e of &ant. *. +n" partic !ar &ant is satia$!e: Tho gh the &ants are n!imited) $ t it is possi$!e to satisf" a partic !ar &ant) pro(ided has the means ;reso rce<. ,. 8ants are comp!ementar": It is a common e#perience that &e &ant things in gro ps. + sing!e artic!e o t of gro p can not satisf" h man &ants $" it se!f. It needs other things to comp!ete its se e.g. a motor5car needs petro! and mo$i!e oi! it starts &or%ing. Th s the re!ationship $et&een motor5car and petro! is comp!ementar". -. 8ants are competiti(e: Some &ants competes to other. 8e a!! ha(e a !imited amo nt of mone" at o r disposa!7 therefore &e m st choose some things and re3ect the other. E.g. s gar and 3agger") tea and coffee. .. Some 8ants are $oth comp!imentar" and competiti(e: 8hen se of machiner" is done the se of !a$o r needs to $e red ced. This indicates competiti(e nat re. = t to r n the machiner" the !a$o r is a!so re0 ired and as s ch it indicates comp!imentar" re!ationship. 1. 8ants are a!ternati(e: There are se(era! &a"s of satisf"ing a partic !ar &ant. If &e fee! thirst") &e can ha(e &ater) !assi) in s mmer &hi!e coffee) tea in &inter. The fina! choice depends pon a(ai!a$i!it" of mone" and the re!ati(e prices.

2. 8ants (ar" &ith time p!ace and person: 8ants are not a!&a"s the same. It (aries &ith indi(id a! to indi(id a!. Peop!e &ant different things at different times and in different p!aces. ?. 8ants (ar" in Urgenc" and Intensit": +!! &ants are not e0 a!!" rgent and in tense. Some &ants are rgent &hi!e some are !ess rgent. @. 8ants m !tip!" &ith ci(i!ization: 8ith the ad(ancement the &ants m !tip!". Therefore the &ants of peop!e !i(ing in r$an area are more than the (i!!agers. 8ith ci(i!ization the demand for radio) T.4) motor5car etc) are increasing. 1A. 8ants are rec r: Some &ants are rec rring in nat re) e.g. food &e re0 ire again and again. C!assification of 8ants: The &ants can $e c!assified as nder. +. Necessaries: These can $e s $ di(ided as Necessaries of e#istence: The things &itho t &hich &e can not e#ist e.g. &ater) food) c!othing) she!ter. Con(entiona! necessaries: The things &hich &e are forced to se $" socia! c stom.

=. Comforts: +fter satisf"ing o r necessaries &e desire to ha(e some comforts. For e#amp!e ta$!e and chair for a st dent he!p to increase the efficienc". = t c shioned cost!" chair is not a comfort. C. : # ries: : # r" means s perf! o s cons mption. +fter getting comforts) man desire ! # r". The ! # r" artic!es need not re0 ired e.g. go!d and si!(er) cost!" f rnit re) etc.

Unit III 1. Credit contro!

6Credit control' is the s"stem sed $" a $ siness to ma%e certain that it gi(es credit on!" to c stomers &ho are a$!e to pa") and that c stomers pa" on time.

*. Monetar" po!ic":
Monetar" po!ic" is the process $" &hich monetar" a thorit" of a co ntr") genera!!" a centra! $an% contro!s the s pp!" of mone" in the econom" $" e#ercising its contro! o(er interest rates in order to maintain price sta$i!it" and achie(e high economic gro&th. The (ario s o$3ecti(es of the monetar" po!ic" are: Price Sta$i!it"

Price Sta$i!it" imp!ies promoting economic de(e!opment &ith considera$!e emphasis on price sta$i!it". Contro!!ed E#pansion Of =an% Credit One of the important f nctions of I=I is the contro!!ed e#pansion of $an% credit and mone" s pp!" &ith specia! attention to seasona! re0 irement for credit &itho t affecting the o tp t. Promotion of Fi#ed In(estment The aim here is to increase the prod cti(it" of in(estment $" restraining non essentia! fi#ed in(estment. Iestriction of In(entories O(erfi!!ing of stoc%s and prod cts $ecoming o tdated d e to e#cess of stoc% often res !ts is sic%ness of the nit. Promotion of E#ports and Food Proc rement Operations Monetar" po!ic" pa"s specia! attention in order to $oost e#ports and faci!itate the trade. It is an independent o$3ecti(e of monetar" po!ic". /esired /istri$ tion of Credit Monetar" a thorit" has contro! o(er the decisions regarding the a!!ocation of credit to priorit" sector and sma!! $orro&ers. E0 ita$!e /istri$ tion of Credit The po!ic" of Ieser(e =an% aims e0 ita$!e distri$ tion to a!! sectors of the econom" and a!! socia! and economic c!ass of peop!e To Promote Efficienc" It is another essentia! aspect &here the centra! $an%s pa" a !ot of attention.

,. Credit Instr ment:

+ promissor" note or &ritten e(idence of a de$tor6s o$!igation.

-. +na!"sis of financia! statement ana!"sis:

Finance: Finance is a fie!d &ithin economics that dea!s &ith the a!!ocation of assets and !ia$i!ities o(er time nder conditions of certaint" and ncertaint". +na!"sis of financia! statement: Financia! statement ana!"sis ;or financia! ana!"sis< is the process of nderstanding the ris% and profita$i!it" of a firm ;$ siness) s $5$ siness or pro3ect< thro gh ana!"sis of reported financia! information) $" sing different acco nting too!s and techni0 es. Financia! statement ana!"sis consists of

1< Ieform !ating reported financia! statements) *< +na!"sis and ad3 stments of meas rement errors) and ,< Financia! ratio ana!"sis on the $asis of reform !ated and ad3 sted financia! statements. Financia! statement ana!"sis is the fo ndation for e(a! ating and pricing credit ris% and for doing f ndamenta! compan" (a! ation.

.. F nd f!o& statement:
F nd f!o& statement a!so referred to as statement of Jso rce and app!ication of f ndsK pro(ides insight into the mo(ement of f nds and he!ps to nderstand the changes in the str ct re of assets) !ia$i!ities and e0 it" capita!. The information re0 ired for the preparation of f nds f!o& statement is dra&n from the $asic financia! statements s ch as the =a!ance Sheet and Profit and !oss acco nt. Proforma of f nd !o& statemnt:

1. E#terna! Commercia! =orro&ing

;EC=<:

+n e#terna! commercia! $orro&ing ;EC=< is an instr ment sed in India to faci!itate the access to foreign mone" $" Indian corporations and PSUs ;p $!ic sector nderta%ings<. EC=s inc! de commercia! $an% !oans) $ "ers6 credit) and s pp!iersB credit) sec ritised instr ments s ch as f!oating rate notes and fi#ed rate $onds etc.) credit from officia! e#port credit agencies and commercia! $orro&ings from the pri(ate sector &indo& of m !ti!atera! financia! Instit tions s ch as Internationa! Finance Corporation ;8ashington<) +/=) +FIC) C/C) etc. EC=s cannot $e sed for in(estment in stoc% mar%et or spec !ation in rea! estate. + f!oating e#change rate or f! ct ating e#change rate is a t"pe of e#change5rate regime in &hich a c rrenc"6s (a! e is a!!o&ed to f! ct ate according to the foreign5e#change mar%et. +n e#port credit agenc" ;%no&n in trade finance as EC+< or In(estment Ins rance +genc") is a pri(ate or 0 asi5go(ernmenta! instit tion that acts as an intermediar" $et&een nationa! go(ernments and e#porters to iss e e#port financing. Financia! instit tion is an instit tion that pro(ides financia! ser(ices for its c!ients or mem$ers. Credit contro!: 6Credit contro!6 is the s"stem sed $" a $ siness to ma%e certain that it gi(es credit on!" to c stomers &ho are a$!e to pa") and that c stomers pa" on time. Credit contro! is part

of the financia! contro!s that are emp!o"ed $" $ sinesses partic !ar!" in man fact ring to ens re that once sa!es are made the" are rea!ised as cash or !i0 id reso rces. Process of credit contro!: 1. Forma! !etter of app!ication for credit to $e e#tended to a c stomer entit" *. 'ead of Finance e(a! ates the credit re0 ested ,. Iis% managers e(a! ate if the credit fits in &ith the c rrent ris% portfo!io -. Credit Co!!ection period ; s a!!" in /a"s< is considered $oth as a stand a!one and as a component of the &or%ing capita! c"c!e in partic !ar ens ring that it does not e#ceed the Pa"a$!es Period ; s a!!" in /a"s too<. .. E#terna! rating agencies ma" $e in(o%ed to assess the ris% attached to e#tending credit to the c stomer.