Unit –

Introduction to IBusiness &

Economics
Busines
s

What is Business mean in simple

form
Definition of Business
• An organization or
economic
system where goods
and services are
exchanged for one
another or for money.
•The term "business"
also refers to
organized the
efforts of individuals to
activities
produce and sell goodsand
and services for profit.
Busines
s
Busi + ness

Busy in producing
necessity
Business structure
• In the commercial field, a
business structure refers to the
organization of a company in
regards to its legal status.
• Choosing the most appropriate
business structure creates a legal
recognition for your trade.
• A business structure trickles
down to so many other factors
which are part and parcel of
running a successful business.
Structure of a Business Firm
Organisation
Structure

Limited Liability
Sole Trader Partnership
Company

Private Limited Public Limited

Company Company

Public traded /
Listed Company
Sole Trader / Sole Proprietorship
• A sole trader is the simplest
form of business structure
and is relatively easy and
inexpensive to set up.
• As a sole trader you will be
legally responsible for all
aspects of the business.
• A Sole Trader generally
make all the decisions about
starting and running your
business and you can
employ people.
Partnership
• A partnership is a kind of
business where a formal
agreement between two
or more people is made
and agreed to be the co-
owners,
distribute responsibilities
for
running an organization
and share the income or
losses that the business
generates.
Limited Liability Company (LLC)
Liability is limited to equity
owner’s commitment to
capital

• Private limited
Company (Closely held
company)
• Public Limited Company
Public Limited Company
• A Public Limited Company (PLC)
is a separate legal business entity
which offers its shares to be traded
on the stock exchange for the
general public.
• In simple form more than 51% of
shares are held with general public
that is in know as public limited
company
• According to the regulations of the
corporate law, a PLC has to
compulsorily present its financial
stats and position publicly to
maintain transparency.
Private Limited Company
• A private limited company, is a
type of privately held small
business entity.
• In simple form more than 51% of
shares are held with private people
that is in know as private limited
company
• This type of business entity limits
owner liability to their shares, limits
the number of shareholders to 50,
and restricts shareholders from
publicly trading shares.
Theory of Firm
• Managerial theories of the firm place emphasis
on various incentive mechanisms in explaining
the behaviour of managers and
implications of this the
companies and the wider
conducteconomy. for
• According to traditional theories, the their
firm is
controlled by its owners and thus wishes to
maximise short run profits.
• The more contemporary managerial theories of
the firm examine the possibility that the firm is
controlled not by its owners, but by its
managers, and therefore does not aim to
maximise profits.
• Although profit plays an important role in
these theories as well, it is no longer seen as
the sole or dominating goal of the firm.
• The other possible aims might be sales revenue
maximisation or growth.
Theories of the Firm
MANAGERIAL THEORIES OF THE FIRM
• Profit Maximization Theory
• Baumol's Theory of Sales Revenue Maximisation
• Marris’ Growth Maximization Model
• Williamson’s Managerial Discretionary Theory

BEHAVIORAL THEORIES OF THE FIRM

– Simon’s model – satisfying behaviour
– Simple model of Behaviorism
– Value maximization
Profit Maximization Theory
• Objective of the firm is
generation of the largest
amount of Profit = (Total
Revenue – Total Cost)
• Traditionally, efficiency
of a firm is measured in
terms of its profit
generating capacity
Criticism of Profit Maximization thory

• Confusion on measure of Profit

• Confusion on Period of time

• Validity questioned in competitive markets

Baumol's Theory of Sales Revenue
Maximisation
• In competitive markets firms aim at maximizing revenue through maximization of sales
• Sales volumes determine market leadership in competition
• Dichotomy of managers’ goal and owners’ goals
• Manager’s salary and other benefits linked with sales volumes, rather than profits
• Manager attach their personal prestige to the company’s revenue and sales
• Managers maximize firm’s total revenue, instead of profits
Criticism of Baumol's Theory of Sales
Revenue Maximisation

• Insufficient empirical evidence

M a r r i s ’ Growth Maximization Model
• Two set of goals
– Owners (Shareholders) aim at profits and
market share (Uo)
– Managers aim at better salary, Job security and growth
(Um)
• Both achieved by making balanced growth of the
firm
– Growth rate of demand for the firm’s products (Gd)
– Growth rate of capital supply to the firm (Gc)
M a r r i s ’ Growth Maximization Model
(Contdd…)
• Constraints in the
objective of maximization
of balanced growth
– Managerial constraint ;
Non Availability of
managerial skill sets in
required size creates
constraints for growth
– Financial constraint ; debt
equity ratio (r1), Liquidity
ratio (r2) and retained
profit ratio (r3)
Williamson’s Managerial
Discretionary Theory
• Managers apply their discretionary power to maximize their
own utility function
– Constraint of maintaining minimum profit to satisfy
shareholders
• Utility function of managers (Um) depends on:
– Managers’ salary (measurable)
– Job security
– Power
– Status
– Professional satisfaction
– Power to influence firm’s objetives
Behavioral Theories

• Simon’s Satisfaction Model

• Model by Cyert and March

Simon’s Satisfaction Model
• Firms have to incur costs in acquiring
information in the present
• Objective of maximizing either profit, or sales,
or growth act as constaints to rational decision
making
• “Bounded rationality”
• Satisfactory level of profit, sales and growth
Model by Cyert and March

• Stakeholders have different and opt conflicting

goals
• ‘Satisfying behaviour’ aiming at satisfying all
stakeholders
• Aspiration level on basis of past experience,
past performance of the firm, performance of
other similar firms, and future expectations
Types of Business
Entities

Privat Joint Publi

e Secto c
Sector r Secto
r

Individual collective Company Corporation Department

Proprietorship Partnership Company Cooperativ

e
Types of Business Entities
• Private sector
– Sole Trader/Proprietorship
– Partnership
– Joint stock company
– cooperative
• Joint sector
• Public Sector
– Public sector units
– Cooperation based
– Departments
Private Sector
• Ownership is in the hands of individuals,
whether independently, or as a small group, or
in a large number, without any investment
from the government
• Types of business organizations under private
sector:
– Sole Proprietorship
– Partnership
– Joint Stock Company
– Cooperative
Sole Proprietorship

• The most ancient form of

ownership

• An individual invests own

(or borrowed) capital, uses
own skills in management,
and is solely responsible for
the results of operations.
Features of Sole Proprietorship
• One man ownership
• No separate business entity
• No separation between
ownership and management
• Unlimited liability
• Profit of losses bared by one
• Less legal formalities
Advantages of Sole Proprietorship

• Simple and easy to start or exit

• Undivided profits earned accrues to the owner
• Secrets of the trade are not leaked out
• Prompt decision making Personal touch
to business
Disadvantages of Sole Proprietorship
• No entity of firm separate from the owner
• Unlimited liability
• Limited availability of funds
• Uncertain life of business: The life of single
ownership business depends upon the will
and life of the owner
Partnership
• Two or more individuals
(individually partners and
collectively a firm) decide to
start a common business
• Persons who have entered into
partnership are individually
regarded as ‘partners’ and
collectively as a ‘firm’
Examples: any two names
comprising the name of a firm
Features of Partnership
• Two or More Persons
• Agreement
• Lawful Business
• Registration
• Profit Sharing
• Agency Relationship
• Unlimited Liability
• Not a Separate Legal
Entity
Advantages of Partnership
• Easy to form • Wise decision
• Access to more capital •Cooperation between
• Skill and talent partners
• Division of labor •Flexibility
• Contact with customer •Economy in
• Borrowing capacity operation
•Division of risks
• Incentive to work hard
•Maintenance of
• Expansion of business
secrets
•Incidence of tax
Disadvantages of Partnership
• Division of Responsibility
• Delay in decisions
• Lack of continuity
• No transferability of shares
• Lack of secrecy
• Unlimited liability
• Internal conflicts
• Misuse of assets
• Lack of Public confidence
Joint stock Company
• Established under Companies Act 1956
• Commonly called “company”
• Details of functions and scope of the company are governed
by
Memorandum of Association signed among members.
• Memorandum contains the name of the company, the location of the
head office, its aims and objectives, the amount of share capital, the
kind(s) and value(s) of shares and a declaration that the liability is
limited.
• Articles of Association contain the rules and regulation of the
company
Definition of Joint stock company
• Professor Haney defines it as
“a voluntary association of
persons for profit, having the
capital divided into some
transferable shares, and the
ownership of such shares is
the condition of membership
of the company.” Studying
the features of a joint stock
company will clarify its
structure.
Features of Joint Stock Company
• Separate legal entity
• Perpetuity
• Limited liability
• Number of Members
• Separation of Ownership from Management
• Transferability of shares
• Rigidity of objects
• Financial resources
• Statutory regulation
Advantages of Joint stock Company
• Financial strength • Efficient Management
• Limited liability • Higher profit
• Benefits of large • Diffused risk
scale organisation • Bolder management
• Scope of • Social benefits
expansion
• Stability
• Transferability of
shares
Disadvantages of Joint Stock
Company
• Formation is difficult • Conflict of Interest
• Fraudulent • Excessive
Management Government Control
• Concentration of • Lack of Prompt
control in Few Decision
Hands • Monopolistic
• Encourages Control

speculation
• Lacks Initiative and
Motivation
Co-Operative Business
• A co-operative society
entirely different is
other forms of from all
organization.
business
• It protects the interests of the
weaker sections of the
society.
• It is a voluntary association
of persons joined together on
the basis of equality for
fulfillment of their economic
and business interests.
Who can form Co-operative Societies?
• A group of ten persons can form a co-
operative society.
• In India, such societies function under Co-
the
Operative Societies Act, 1912 and other State
Cooperative Societies Acts.
• The main objectives of co-operative society are
– To render service rather than earning profit,
– To provide mutual help instead of competition. and
– To offer self help
Features of Co-Operative Business
• It is a voluntary association of persons. Individuals having
common interest can join together to form a co-operative
society.
• To form a co-operative society, there has to be a minimum
number of 10 members. It can have unlimited members at
maximum.
• Co-operative societies has to be compulsorily registered under
the Co-operative Societies Act..
• Co-operative society can enjoy perpetual succession.
• It has its own common seal.
• It can own property in its name and enter into contract with
others.
• It can sue others in court of law.
Features of Co-Operative Business (Contd…)
• The aim of any co-operative society is to provide service to its
members and to the society in general.
• Each member has got the right to vote and can take part in the
management of the society.
• A co-operative society starts with a fund contributed by its
members in the form of units called shares. The capital of the
co-operative society is the funds provided by the members by
purchasing shares. It can also raise loans and obtain grants
from the government easily.
• Members of a Co-operative society enjoy a fixed rate of
dividend after deduction from the profit for the capital
subscribed
ADVANTAGES OF CO-OPERATIVE SOCIETIES
• It is easy to form a co-operative society. Any ten persons can
join together and voluntarily form an association. They can
register themselves with the Registrar of Co-operative societies.
• The liability of every member is limited to the extent of capital
contributed by him.
• Any individual can be a member of any co-operative society.
• Co-operatives get a financial assistance from the
State governments and enjoys exemptions and concessions in
taxes.
• The middleman’s profit is eliminated as the consumers control
their own supplies through co-operative societies.
• Each member has only one vote. Hence, it is managed
in democratic manner.
• It has got perpetual succession and enjoys legal entity.
DISADVANTAGES OF CO-OPERATIVE SOCIETIES
• The amount of capital generated by co-operative society is limited because
of the members belonging to same locality or region or a particular
section of people.
• Co-operatives do not function efficiently due to lack of managerial
abilities.
• It does not enjoy professionalism as they cannot employ professionals at
initial stages due to limited funds.
• Co-operatives, are formed to render service to its members than to earn
profit. This motive does not encourage co-operatives to function
effectively.
• Among the members, there exists lot of conflicts due to personality
differences, ego etc.
• Secrecy cannot be maintained in co-operative societies.
• The co-operative societies mostly depend on government for financial
assistance.
• Co-operative societies are not suitable for business organizations that has
objective to earn profit
Public Sector
• A public corporation is
form of publicenterprise
that
which is created as
autonomousan unit, by a special
Act of the Parliament or the
State Legislature.
• Since a public corporation is
created by a Statute; it is also
known as a statutory
corporation.
Public Sector (contdd…)
• Government is the investor and the
owner of a business
• Established in India as per the First
Industrial Policy enunciated in 1948
and restated in 1956
• Three broad categories of State
Enterprises in India:
– Public Sector Units (e.g. SAIL,
BHEL, ONGC and IOC)
– Corporations and Boards (e.g.
Coir Board, Railway Board and
Food Corporation of India)
– Departments (e.g. Telephone and
Telegraph, Education, and Health)
Features of Public sector
• Special Statute
• Separate Legal Entity
• Capital Provided by the
government
• Financial Autonomy
• Management by Board of Directors
• Own Staff
• Service Motive
• Public Accountability
Advantages and Disadvantages
Advantages Disadvantages

• Provides some of its services to • Often considered to

all consumer be
•As a public sector organisation, beaurocratic
it faces little competition •As there's no profit motive,
•Provides services that could be there's often a lack of
unprofitable if provided by firms innovation
in the private sector •A change of government is
•Provides goods and services for likely to mean changes in
those members of the priorities and so changes in
community who cannot afford funding and spending
them • Can often 'crowd out' private
firms
Limited Liability Companies
• A Limited Liability Company
or LLC is a business structure
in which the owners or
members have limited liability
with respect to the actions of
the company.
• An LLC offers the members
the benefit of personal liability
protection, meaning that the
business liability cannot be
recovered from the personal
assets of the owners.
Features of LLC
• Separate Legal Existence

• Limited Liability

• Flexibility in taxation

• Simplicity in operation
Advantages and Disadvantages of LLC
Advantages Disadvantages
• You can form a limited liability • You must pay employment tax on
company with just one member. company earnings.
• You can have a whole company as a • An LLC is like a partnership business;
member of an LLC. you cannot make profits from
• The owners of an LLC are protected incentive stock.
against the business liabilities of the • Since LLCs are governed by state law,
company. different rules apply in different states.
• The operations of an LLC are • Tax treatment also varies with the
managed by the managing members. state. You may have to pay tax in some
Since there is no board of directors, states while no tax may apply in
there are no requirements for holding others.
regular board meetings.
• It very little
financial
requires bookkeeping; and
requirements are alsoadministrative
simple.
Source of Capital for Company
• On the basis of Period
– Long Term
– Medium Term
– Short Term
• On the basis of Ownership
– Owners Fund
– Borrowed Funds
• On the basis of Source of Generation
– Internal Sources
– External Sources
On the basis of Period

Long Term
Medium Term Short Term
Equity

• Equity Shares • Trade Credit

• Loan from Banks
• Retained earnings
• Public Deposits • Factoring
• Preference Shares
• Loan from Financial • Banks
• Debentures
Institutions • Commercial Paper
• Loan from
Financial
Institutions
On the basis of Ownership

Owners Fund Borrowed Funds

• Debentures
• Equity Shares
• Retained earnings • Loans from Banks
• Loans from Financial Institutions
• Public deposits
• Lease Financing
On the basis of Source of Generation

Internal Sources External Sources

• Debentures
• Equity Shares
• Loans from Banks
• Retained earnings
•Loans from
Financial Institutions
• Public deposits
• Lease Financing
• Commercial papers
• Trade credit
• Factoring
Sources of funds
A company might raise new funds from the following sources:
• The capital markets:
– new share issues, for example, by companies acquiring a
stock market listing for the first time
– rights issues
• Loan stock
• Retained earnings
• Bank borrowing
• Government sources
• Business expansion scheme funds
• Venture capital
• Franchising.
Non Conventional source of Finance
• A non-conventional loan, or a non-conventional mo
rtgage, is a type of loan product that does not have
t o follow traditional mortgage loan requirements.
• Non-conventional loans are also sometimes referre
d to as non conforming loans.
• Conventional (or conforming) loans have a widely
used set of qualifications and eligibility, such as cre
dit scores, loan amounts, and debt-to-income ratios.
• In addition, most conventional loans require a 20 p
ercent down payment minimum, or private mortgag
e insurance payments.
Types of Non -
Conventional Source
of Finance
• Commercial loans
• Pricing Mechanism
• Accessing Capita Market
• Public – Private Partnershi
p
• Land as a Resource
• Social Capital through co
mmunity Participation
Economics
• Economics is the study of how h
umans make decisions in the face
of scarcity. These can be
individu al decisions, family
decisions, bu siness decisions or
societal decisi ons. If you look
around carefully, you will see
that scarcity is a fact of life.
• Economics is derived from the G
reek word “Oiko Nomo's” which
means house hold management
Four Types of Definition
• Adam Smith’s Definition
of Economics

• Alfred Marshall’s
Definition of Economics

• Lionel Robbin’s Definition of

Economics

• Modern Definition of
Econo mics
Adam Smith’s
Definition of Economics
Adam Smith was a Scottish philosopher, widely considered as the
first modern economist. Smith defined economics as “an
inquiry into the nature and causes of the wealth of nations.”

Criticism of Smith’s Definition

• The wealth-centric definition of economics limited its scope as a subject and was se
en as narrow and inaccurate. Smith’s definition forced the subject to ignore all non-
wealth aspects of human existence.
• The Smithian definition over-emphasized the material aspects of well-being and ign
ored the non-material aspects. It was assumed that human beings acted as rational e
conomic agents who mindlessly strived to maximize their own well-being.
• The Smithian definition prevents the subject from exploring the concept of resourc
e scarcity. The allocation and use of scarce resources are seen as a central topic of a
nalysis in modern economics.
Alfred Marshall’s
Definition of Economics
British economist Alfred Marshall defined economics as the study of
man in the ordinary business of life. Marshall argued that the subject
was both the study of wealth and the study of mankind. He believed
it was not a natural science such as physics or chemistry, but rather a
social science.

Criticism of Marshall’s Definition

• Consideration of only Material Things
• Makes a distinction between those things that are capable of promoting wel
fare of people and those things that are not capable of promoting welfare
• No clear cut definition of welfare
Lionel Robbin’s
Definition of Economics
• Lionel Robbin, another British economist, defined economics as the
subject that studies the allocation of scarce resources with countless
possible uses.
• In his 1932 text, “An Essay on the Nature and Significance of Econo
mic Science,” Robbins said the following about the subject: “Econo
mics is the science which studies human behaviour as a relationship
between ends and scarce means which have alternative uses.”

Criticism of Robbin’s Definition

• No distinction between goods conducive to human welfare and goods that are not conducive t
o human welfare
• Robbins conclude that economics is neutral between ends
• Reduced economics to theory of resource allocation
• Does not over the theory of economic growth and development
Modern
Definition of Economics
The modern definition, attributed to the 20th-century economist,
Paul Samuelson, builds upon the definitions of the past and
defines the subject as a social science.

According to Samuelson, “Economics is the study of how people

and society choose, with or without the use of money, to
employ scarce productive resources which could have
alternative uses, to produce various commodities over time and
distribute them for consumption now and in the future among
various persons and groups of society.”
Basic Economics Concepts
• Scarcity
• Choices
• Opportunity Cost
• Production Possibility Frontier (Production Pos
sibility Curve)
Economic Question
• What to Produce
• How to Produce
• From whom to Produce
• When to Produce
• Where to Produce
Other Basic Concepts in Economics
• Wants
• Resources
• Commodities
• Goods
• Free goods and Economic goods
• Private goods , Public goods and Merit goods
• Intermediate goods and final goods
• Services
Significance of Economics
To understand the
resources
allocation
Analyzing the
opportunity cost How to achieve
social efficiency

Importanc
Understanding the e of To make the better
consumer
Economics choices from
behaviour alternatives

How to overcome
To forecast for
from market
economy
failure
Economics is divided into two
different categories

• Microeconomics

• Macroeconomics
Micro Economics
• Microeconomics is the study of
individuals and business decisi
ons, while macroeconomics loo
ks at the decisions of countries
and governments.
• Microeconomics can be define
d as the study of decision-maki
ng behaviour of individuals, co
mpanies, and households with
regards to the allocation of thei
r resources
Microeconomics determines to
understand the following
• How people and households spend their budgets
• What combination of products and services are the best fit for their needs a
nd wants, in the context of their available budget
• How individuals decide whether or not to work, and if they choose to work,
whether or not it will be full time or part time
• How people decide to save for the future, how much they choose to save, o
r whether they decide to go into debt
• How a business decides to produce and sell certain products, how it will pr
oduce it, how many of each it will sell, and for how much
• What causes them to decide how many workers it will hire
• How a firm will finance its business
• At what time a business will decide to expand, downsize, or even close
Macroeconomic
• Macroeconomics issthe holistic study of the structu
re, performance, behaviour, and decision-making
p rocesses of an economy, at a national level.
• Essentially, macroeconomics is a ‘top-down’ appro
ach.
• It seeks to understand changes in the nation’s Gros
s Domestic Product (GPD), inflation and inflation
expectations, spending, receipts and borrowings at
a governmental level (fiscal policies), unemploym
ent, and monetary policy.
• This is done to interpret and know the state of the
economy, so that policies can be formulated at a hi
gher level, and macro research can be carried out f
or academic purposes.
Macroeconomics strives to answer the following
• Which factors determine how many goods and services a coun
try can produce
• What determines the number of jobs available in an economy
• What determines a country’s standard of living
• What factors cause the economy to speed up or slow down
• What causes organisations to hire or fire more labour on a nati
onal scale
• What causes the economy to grow over the long term
• What the state of the nation’s economic health is, based on imp
rovement in the standard of living, low unemployment, and lo
w inflation
Difference Between
Micro Economics & Macro Economics
National Income
• “National Income measures the total
value of goods & Services produced
within the economy during the cours
e of a year”

• “The labour & capital of a country ac

ting upon its natural resources produ
ces annually a certain amount of net
aggregate of commodities, material a
nd immaterial including services of
a ll kinds”
Prof. Marshal
Circular flow of National Income
Factor Payment
Rent, wages, interest & Profits

Factor Payment
Land, Labour, Capital, Enterprise

Firm or House hold or

Producing consuming
Sector sector

Goods & Services

Consumption expenditure on goods and services

Concepts of National Income
• Gross Domestic Product (GDP)
• Net Domestic Product (NDP)
• Gross National Product (GNP)
• Net National Product (NNP)
• National Income at Factor Cost (NI)
• Personal Income (PI)
• Disposable Personal Income (DPI)
Gross Domestic Product (GDP)
• “GDP is the aggregate money
value of all final value of the
goods and services produced i
n the domestic territory of a c
ountry during an financial yea
r

• GDP = Consumption Expenditure + Invest

ment Expenditure + Government
Expendit ure
Net Domestic Product (NDP)
• NDP refers to the market value of
all final goods and services turne
d out in an economy during a giv
en period of time after making
all owance for depreciation
charges

• NDP = GDP - Depreciation

Gross National Product (GNP)
• GNP is defined as the total market v
alue of all final goods and services p
roduced in a country in an year’s
tim e

• GNP = GDP + X – M
– X = Income earned by nationals abroad
– M = Income earned by foreigners in the
given country
Net National Product
• NNP is the market value of the net output of final goods and s
ervices produced by the country during the relevant income pe
riod

• NNP = GNP – Depreciation charges

• NNP = NDP + X – M
• NNP gives idea net increase in total production of the country
National Income at Factor Cost
• NI at factor cost refers to all inco
mes earned by resource owners (fa
ctors of production) for their contr
ibution to the production of
differe nt goods & services in a
year
• NI = NNP – Indirect Taxes + subsi
dies
• This concept throws light on the d
istribution side of national output
Personal Income (PI)
• PI is the sum of all incomes all re
ceived by the individuals and hou
seholds in a during one year

• PI = NI – Corporate Income taxes

– Undistributed Profits – social se
curity contributions + Transfer pa
yments
• This concept help us to know the
potential purchasing power of the
people and house holds and the w
elfare of consumers in society
Disposable Personal Income (DPI)
• DPI is that part of personal income which is left after the paym
ent of personal direct taxes

• DPI = PI – Personal Direct Taxes

• DPI = Consumption + Saving

• This concept indicates the purchasing power in the hands of th

e people and their actual living standards
Methods of Measuring National Income

• Product Method

• Income Method

• Expenditure Method
Importance of National Income
• Know the production performance & achievements
• Indicates the living standards of the people
• Know whether a country is growing, stagnant or decli
ning
• Shows the contribution made by various sectors to NI
• Know the purchasing power of Money
Inflation Printing
more
• Inflation is defined as a s money

ustained increase in the

price level or a fall in the More Higher
demand input cost
value of money.
• Inflation is a rise in gener
al level of prices of good
s and services in the cou Inflation

ntry over a period of tim

e.
In a broad
sense
• Inflation is that state in which the prices of go
ods and services rise on the one hand and val
ue of the money falls on the other.
• As the cost of goods and services increase, the
value of a currency declines because you
won’ t be able to purchase as much with that
curre ncy as you could have last month or
year.
Definitio
n
• MEYER “An increase in the prices that occurs a
fter full employment has been attained.”
• CROWTHER: “ In the state of inflation, the pric
es are rising , i.e., the value of money is falling.
”
• Coulburn:“ In inflation , too much money cha
ses too few goods.”
Other Terms Related To
•
Inflation
Dis-inflation: The reduction o
f rate of inflation is termed
as Disinflation.
• Stagflation: High inflation co
mbined with economic stagna
tion and unemployment.
• Hyperinflation: An out of
control inflationary spiral is
know n as Hyperinflation.
Types of
Inflation
• Demand pull Inflation

• Cost push Inflation

Demand Pull
• Inflation
The demand for goods and services
increases and production remains
same or does not increase as fast. Demand
• The excess demand results in price s
being pulled up. Supply
• The demand pull inflation occurs w hen
total demand for goods and se rvices
exceeds the total supply.
• This type of inflation happens whe n
there is an inflationary gap.
Cost push
Inflation
• The cost push inflation is caused by an increas
e in the cost of production.

• Increased costs push up the price level.

Causes of
•
Inflation
Population explosion.
• Political Instability.
• Imported goods.
• Increase in wages and salaries.
• Climatic factors.
• Oil prices.
• Corruption.
• Slow agricultural development
• Slow Industrial growth.
Effects of
Inflation
• Un employment
• Decreasing the purchasing power
• Decrease in stock.
• Exports decline.
• Breakdown of monetary system.
• Investment fall.
Remedies to control
Inflation
Inflation rate is increasing day by day .Following
are the some remedies to control this problem…
•Increase the supply of essential items .
•Tight monetary policy.
•Reduce government expenditures……
Monetary
•
Measures.
Monetary policy is the process by which the monetary authority of
a country controls the supply of money, often targeting a rate of int
erest for the purpose of promoting economic growth and stability.
• The official goals usually include relatively stable prices and low une
mployment. Monetary policy is adopted by central bank of a countr
y.
• Most central banks use high interest rates as the traditional way to f
ight or prevent inflation.
• • Decrease money supply.
• • Decrease availability of credit from banks
• .• Decrease currency control.
Fiscal
Measures
• Fiscal policy is the deliberate change in either
government spending or taxes, to simulate or
slow down the economy.
• • Increase direct taxes.
• • Increase indirect taxes.
• • Reduce government spending .
• • Increase in savings
• • Surplus budgets
Direct or Other
•
measures.
It means the step of government like rationing of goods and
freezing of prices and wages. The government can also
increase voluntary savings of people by giving them various
incentives.
• • To Increase Production
• • Rational Wage Policy
• • Price Control
• • Control of smuggling
• • Industrial peace
• • Control of money supply
• • No deficit financing
• • Population control
• • Simple living
Money suppy in
inflation
• Money does not have any inherent value
It is valuable because it is:
• Medium of Exchange:
– the most convenient medium of exchange.
– all the things which have utility are available in exchange for money.
– Under barter system where goods (or services) are exchanged for goods (or
services) dual coincidence of wants is the basis for exchange.
• Measure of Value:
– Provides a common denominator to all types of goods and services.
• Store of Value:
– Can be saved for future with convenience, whereas other goods can be saved for
a limited time period only.
Demand for
Money
Keynes has identified three motives to hold money
•Transaction Motive: Consumers need money to meet their day to day needs,
producers need money to make investments.
•Precautionary Motive: To cover for unforeseen events such as sickness, accidents and
losses, money is kept as precaution for contingency.
•Speculative Motive: For making gains from speculation on future value of bonds and
securities.

-Money may be demanded as a flow (transaction motive) as well as a stock (precautionary

motive).
- Money as a flow is that which is in circulation.
Total money supply at any point of time consists of money in circulation as well as in stock
(in various forms of savings and deposits).
Supply of
•
Money
Earlier money was in the form of coins, composed of gold silver and
copper ,etc. Value of the coins was based on the value of the metals
they contained.
• The gold standard broke down in 1930 in UK, in USA it lasted till
1971
• A currency issued by the government is called a fiduciary issue
(based on trust and confidence).
• Modern form of money is simply pieces of paper or numbers in a
ledger.
• System of paper money was introduced based on the gold standard
or silver standard or some combination of the two, to ensure peopl
e’s faith in the system.
The Business
Cycle
What is Business
•
Cycle
The term “business cycle” refers to economy-wide fluctuations in
production, trade, and general economic activity.
• From a conceptual perspective, the business cycle is the upward and
downward movements of levels of GDP (gross domestic product)
and refers to the period of expansions and contractions in the level
of economic activities (business fluctuations) around a long-term
growth trend.
OR
• The business cycle can also be defined the downward and upward
fluctuations of gross domestic product (GDP) along its natural
growth rate over a long period of time
How Does the Business Cycle Work?

The duration of a business cycle is the period of time containing a

single boom and contraction in sequence. The time it takes to
complete this sequence is referred to as the length of the business
cycle.
According to author Joseph
Business Cycle has 4
steps in production and prices,
• Expansion: Increase
low interests rates.
• Crisis: Stock exchanges crash and multiple
bankruptcies of firms occur.
• Recession: Drops in prices and in output high int
erests rates.
• Recovery/Revival: Stocks recover because of the
fall in prices and incomes.
Phases of Business Cycle or Is
Business Cycle or Fluctuations
Boom /
Prosperity
• The business outlook is extremely optimistic.
• The important features of prosperity are:
- A high level of output ,trade, employment and in
come,
- A high level of effective demand and high
marginal efficiency of capital,
- A large expansion of bank credit, and
- A rising trend in prices, profits and interest rates
.
PEAK

• Slackening in expansion rate

• Highest level of prosperity
• Downward slide in economic activities
• The phase of recession begins
Recessio
n
During recessions, many macro economic
indicators vary in a similar way.
•Production, as measured by gross domestic
product (GDP),employment, investment spending,
capacity utilisation, household incomes, business
profits, and inflation all fall
•while bankruptcies and the unemployment
rate rise.
Recessio
n
• Downward slide in growth rate becomes rapid
and steady
• Output, employment, prices etc. register a
rapid decline
• When the growth rate goes below the steady
growth rate depression sets in.
Depressio
n
• The phase of depression economic activity is at its
low. Wages, cost, price are very low.
• There is massive unemployment leading to a fall in
the aggregate income of the people.
• This brings down the purchasing power of the
community.
• General demand falls faster than production.
• The piled-up stock are sold at very high rates of dis
count leading to heavy loss to the firms.
Depressio
n
Depression begins when
• Growth is less than zero
• Total output, employment, prices, bank
advances etc. Decline during subsequent
period
• Depression lasts as long as growth rate stays
below the stagnated growth rate
Troug
• h the downward trend in
Phase during which
the economy slows down and eventually
stops
• Economic activities once again register an
upward movement
• Period of severe strain on the economy
• Economy registers a continuous and rapid
upward trend in output,employment, etc.
• It enters the phase of recovery
Recover
y
• The rising price of an asset Increased economic
activity during a business cycle, resulting in growth
in the gross domestic product.
• Collection of all or a portion of a debt previously
considered uncollectible.
• Valuable materials remaining after processing.
• Proceeds from the sale of an asset that represent d
epreciation that has already been taken.
Expansio
Increase in Outputn
•Employment
•Investment
•Aggregate demand
•Bank credits
•Wholesale & Retail prices
•Per capita output
•Standard of living
Recovery &
Expansion
• In the recovery phase the growth rate may still
remain below the steady growth rate.

• When it exceeds this rate, the economy enters

the phase of expansion And prosperity
Nature & Scope of Managerial
Economics
Introduction to Managerial
Economics
Managerial Economics as a subject gained popularity in USA after
the publication of the book Managerial Economics” by Joel Dean in
1951.
Managerial Economics refers to the firm‟s decision making process.
It could be also interpreted as “Economics of Management” or
“Economics of Management”.
Managerial Economics is also called as “Industrial Economics” or
“Business Economics”.
As Joel Dean observes managerial economics shows how economic
analysis can be used in formulating polices.
Definition:
In the words of E. F. Brigham and J. L. Pappas Managerial
Economics is “the applications of economics theory and
methodology to business administration practice”

M. H. Spencer and Louis Siegel man explain the “Managerial

Economics is the integration of economic theory with business
practice for the purpose of facilitating decision making and
forward planning by management”
Nature of Managerial
Economics
(a) Close to microeconomics: Managerial economics is concerned with finding
the solutions for different managerial problems of a particular firm. Thus, it
is more close to microeconomics.
(b) Operates against the backdrop of macroeconomics: The macroeconomics
conditions of the economy are also seen as limiting factors for the firm to
operate. In other words, the managerial economist has to be aware of the
limits set by the macroeconomics conditions such as government industrial
policy, inflation and so on
(c) Normative statements: A normative statement usually includes or implies
the words „ought‟ or „should‟. They reflect people‟s moral attitudes and
are expressions of what a team of people ought to do. For instance, it deals
with statements such as „Government of India should open up the economy.
Such statement are based on value judgments and express views of what is
„good‟ or „bad‟, „right‟ or „ wrong‟. One problem with normative
statements is that they cannot to verify by looking at the facts, because they
mostly deal with the future. Disagreements about such statements are
usually settled by voting on them
Cond..

(d) Prescriptive actions: Prescriptive action is goal oriented. Given a problem

and the objectives of the firm, it suggests the course of action from the
available alternatives for optimal solution. If does not merely mention the
concept, it also explains whether the concept can be applied in a given
context on not. For instance, the fact that variable costs are marginal costs
can be used to judge the feasibility of an export order
(e) Applied in nature: „Models‟ are built to reflect the real life complex
business situations and these models are of immense help to managers for
decision-making. The different areas where models are extensively used
include inventory control, optimization, project management etc. In
managerial economics, we also employ case study methods to conceptualize
the problem, identify that alternative and determine the best course of
action.
(f) Offers scope to evaluate each alternative: Managerial economics provides
an opportunity to evaluate each alternative in terms of its costs and revenue.
The managerial economist can decide which is the better alternative to
maximize the profits for the firm.
Cond…
(g) Interdisciplinary: The contents, tools and techniques of managerial
economics are drawn from different subjects such as economics,
management, mathematics, statistics, accountancy, psychology, organizational
behavior, sociology and etc.
(h) Assumptions and limitations: Every concept and theory of managerial
economics is based on certain assumption and as such their validity is not
universal. Where there is change in assumptions, the theory may not hold
good at all.
Scope of Managerial
Economics
Role of Business
•
Economist
Studies at Macro level and links in to b u
siness
• Transform it to profitable business
• Assist in business plan
• Carried cost benefit analysis
• Decision making related to price, invest
ment, goods, etc
• Conduct research on industrial market
• Conducts statistical Analysis
• Must be vigilant and ability to handle p r
essure
Multi-Disciplinary nature of
Manag erial Economics
• Managerial Economics and Economics
• Managerial Economics and Decision making
• Managerial Economics and Statistics
• Managerial Economics and Accounting
• Managerial Economics and operation Research
Thank
you