UNIT I:

INTRODUCTION TO BUSINESS AND ECONOMICS

BUSINESS:

In the world 'Business Economics' "Business" means a state of being busy. It means any activity
continuously undertaken by a man in order to earn income.
Stephenson defines business as, "The regular production or purchase and sale of goods
undertaken with an objective of earning profit and acquiring wealth through the satisfaction of human
wants."
Lewis Henry defines business as, "Human activity directed towards producing or acquiring
wealth through buying and selling of goods."

Characteristics or Features of business:

1. Dealing in Goods and Services: The first basic characteristic of a business is that it deals in goods
and services. Goods may be consumer goods such as bread, rice, cloth, etc., or capita goods such as
machines, tools, etc.
2. Production and Exchange: Every business is concerned with production and exchange of goods and
services for value (prices). Thus, goods produced or purchased for personal consumption (or) for
presenting to others as gifts do not constitute business because there is no sale or transfer for value
involved.
3. Regularity and Continuity in Dealings: One sale transaction cannot strictly constitute a business.
The production of goods or rendering of services for a price is undertaken regularly and continuously,
this activity will be called a business.
4. Uncertainty or Risk: Business is subject to risks and uncertainties. Some risks, such as risks of loss
due to fire and theft can be insured. There are also uncertainties, such as loss due to change in demand
or fall in price cannot be insured and must be borne by the businessman.
5. Profit Motive: The business is carried on with the intention of earning a profit. The profit is a reward
for the services of a businessman.
6. To Satisfy human wants: The businessman also desires to satisfy human wants through conduct of
business. By producing and supplying various commodities, businessmen try to promote consumer's
satisfaction.
7. Social obligations: Modern business is service oriented. Modern businessmen are conscious of their
social responsibility. Today's business is service-oriented rather than profit-oriented.

STRUCTURE OF BUSINESS FIRM

The most common types of business structures (Types of business) are:

SOLE PROPRIETORSHIP
A Sole Proprietorship is one individual or married couple in business alone. Sole proprietorships are the
most common form of business structure. This type of business is simple to form and operate, and may
enjoy greater flexibility of management, fewer legal controls, and fewer taxes. However, the business
owner is personally liable for all debts incurred by the business.
GENERAL PARTNERSHIP
A General Partnership is composed of 2 or more persons (usually not a married couple) who agree to
contribute money, labour, or skill to a business. Each partner shares the profits, losses, and management
of the business and each partner is personally and equally liable for debts of the partnership. Formal
terms of the partnership are usually contained in a written partnership agreement.

LIMITED PARTNERSHIP
A Limited Partnership is composed of one or more general partners and one or more limited partners.
The general partners manage the business and share fully in its profits and losses. Limited partners share
in the profits of the business, but their losses are limited to the extent of their investment. Limited
partners are usually not involved in the day-to-day operations of the business.

LIMITED LIABILITY PARTNERSHIP (LLP)

A Limited Liability Partnership (LLP) is similar to a General Partnership except that normally a partner
doesn’t have personal liability for the negligence of another partner. This business structure is used most
by professionals, such as accountants and lawyers.

LIMITED LIABILITY LIMITED PARTNERSHIP (LLLP)

A Limited Liability Limited Partnership is a Limited Partnership that chooses to become an LLLP by
including a statement to that effect in its certificate of limited partnership. This type of business structure
may shield general partners from liability for obligations of the LLLP.

CORPORATION (COMPANY)
A Corporation is a more complex business structure. A corporation has certain rights, privileges, and
liabilities beyond those of an individual. Doing business as a corporation may yield tax or financial
benefits, but these can be offset by other considerations, such as increased licensing fees or decreased
personal control. Corporations may be formed for profit or non-profit purposes..

LIMITED LIABILITY COMPANY (LLC)

A Limited Liability Company (LLC) is formed by 1 or more individuals or entities through a special
written agreement. The agreement details the organization of the LLC, including provisions for
management, assignability of interests, and distribution of profits and losses. LLCs are permitted to
engage in any lawful, for-profit business or activity other than banking or insurance.

NON-PROFIT CORPORATION (NON TRADING CONCERNS)

A Non-profit Corporation is a legal entity and is typically run to further an ideal or goal rather than in
the interests of profit. Many nonprofits serve the public interest, but some engage in private sector
activities.

TRUST
A Trust is a legal relationship in which one person, called the trustee, holds property for the benefit of
another person, called the beneficiary.

JOINT VENTURE
A Joint Venture is a collaboration of two or more business units, formed for a limited length of time to
carry out a business transaction or operation.
.
 'THEORY OF THE FIRM'

The theory of the firm consists of a number of economic theories that explain and predict the
nature of the firm, company, or corporation, including its existence, behaviour, structure, and
relationship to the market.
In simplified terms, the theory of the firm aims to answer these questions:
1. Existence. Why do firms emerge? Why are not all transactions in the economy mediated over the
market?
2. Boundaries: Why the boundary between firms and the market is located exactly there with relation to
size and output variety? Which transactions are performed internally and which are negotiated on the
market?
3. Organization: Why are firms structured in such a specific way, for example as to hierarchy or
decentralization? What is the interplay of formal and informal relationships?
4. Heterogeneity of firm actions/performances: What drives different actions and performances of
firms?

FORMS OF BUSINESS ORGANIZATIONS

SOLE TRADER (SOLEPROPRIETORSHIP)

The sole trader is the simplest, oldest and natural form of business organization. It is also called
sole proprietorship. ‘Sole’ means one. A business that runs under the exclusive ownership and control of
an individual is called sole proprietorship or single entrepreneurship.

According to D.W.T. Staffod, "It is the simplest form of business organization, which is owned
and controlled by one man."
According to G. Baker, "Sole proprietorship is a business operated by one person to earn profit."

Ex: Restaurants, Supermarkets, pan shops, medical shops, hosiery shops etc.

FEATURES

1. Easy to start and easy to close: A sole proprietary concern is free from Government
regulations. No formalities are to be observed in its formation, management or in its closure.
2. Single Ownership: In sole proprietorship, the capital is normally provided by the owner himself.
However, if additional capital is required, such capital can be increased by borrowing.
3. Own Control: He has absolute control over the affairs of the concern. His decision is final. Since the
need not consult others, he can take quick decision and gain enormously
4. Profit Motive: The attraction of reaping the entire profits motivates him to put forth the best in him.
He strives tirelessly for the improvement and expansion of his business.
5. No Separate Entity: The sole trading concern is not regarded as an entity different from the
proprietor. Consequently the business comes to an end with the permanent disability or death of the
proprietor
6. Unlimited Liability: The liability of the sole proprietor is unlimited. As a result, when his
business assets are not adequate for paying the debts, his private properties have to be sold.
 7. Limited Capital: Since capital is contributed by only one individual it is bound to be small. Apart
from this financial constraint his inability to manage beyond a level also impedes its expansion. The
size of the business unit therefore tends to be small.
8. Flexibility: In sole proprietorship, single owner is the sole master of the business, therefore, he has
full freedom to modify or change the entire business.
9. Business secrets: A sole proprietor can easily maintain the secrecy of his business.
10. Low Tax Rate: Rates of tax, i.e., income tax and so on are comparatively very low.
11. Limited Life: The business comes to a close with the death, illness or insanity of the sole trader.
Unless, the legal heirs show interest to continue the business, the business cannot be restored.
12. Ownership & Management are same: In sole proprietorship, the management of the business lies
with the sole owner.
13. Personal Contact with Customers: In Sole proprietorship, the owner himself manages it hence he
can be directly in touch with the customers.
14. Transferability: The legal heirs of the sole trader may take the possession of the business or it can be
sold to any others without any others permission
15. Quick decision-making: Being a single owner, he can take any decision and implement the same
quickly.

Advantages:

1. Easy to start and easy to close:

2. Personal contact with customers directly:
3. Quick decision-making:
4. High degree of flexibility:
5. Secrecy:
6. Low rate of taxation:
7. Direct motivation:
8. Total Control:
9. Minimum interference from government:
10. Transferability of share:

Disadvantages:

1.Unlimited liability:
2.Limited capital:
3.Uncertainty (Limited life):
4.No division of labor: All the work related to different functions such as marketing, production,
finance, labor and so on has to be taken care of by the sole trader himself. There is nobody else to take
his burden. Family members and relatives cannot show as much interest as the trader takes.
5.Less scope for growth and expansion: This from is suitable for only small size, one-man-show type
of organizations. Being a single man he unable to expand the business beyond a certain limit.
6.Lack of specialization: The services of specialists such as accountants, market researchers,
consultants and so on, are not within the reach of most of the sole traders.
SUITABILITY:
The sole trader form of business is suitable where
Business is of small size and requires low volume of capital
Business can be managed by one person
Personal attention is necessary to take care of the customers
Products/services need to be provided as per the customer specifications

PARTNERSHIP

Partnership is an improved from of sole trader in certain respects. Where there are like-minded
persons with resources, they can come together to do the business and share the profits/losses of the
business in an agreed ratio. Persons who have entered into such an agreement are individually called
‘partners’ and collectively called ‘firm’. The relationship among partners is called a partnership.

Indian Partnership Act, 1932 defines partnership as the relationship between two or more persons
who agree to share the profits of the business carried on by all or any one of them acting for all.

Features

1.Relationship: Partnership is a relationship among persons. It is the relationship resulting out of an

agreement.
2.Two or more persons: There should be two or more number of persons to start partnership.
3.There should be a business: Business should be conducted.
4.Agreement: Persons should agree to share the profits/losses of the business
5.Carried on by all or any one of them acting for all: The business can be carried on by all or any one
of the persons acting for all. This means that the business can be carried on by one person who is the
agent for all other persons. Every partner is both an agent and a principal. Agent for other partners and
principal for himself. All the partners are agents and the ‘partnership’ is their principal.

The following are the other features:

 Unlimited liability: The liability of the partners is unlimited. The partnership and partners, in the eye
of law, are not different but one and the same. Hence, the partners have to bring their personal assets
to clear the losses of the firm, if any.
 Number of partners: According to the Indian Partnership Act, the minimum number of partners
should be two and the maximum number is restricted to10 partners is case of banking business and 20
in case of other (non-banking) business.
 Division of labor: Because there are more than two persons, the work can be divided among the
partners based on their skills, knowledge and expertise.
 Personal contact with customers: The partners can continuously be in touch with the customers to
monitor their requirements.
 Flexibility: All the partners are likeminded persons and hence they can take any decision relating to
business.
 Joint & Several liabilities: All the partners are jointly and severally liable for the debts of the
partnership.
 Implied authority: The partner looking after the affairs of the partnership has certain implied
authority and each partner binds others through his acts since every partner is the agent of the firm. In
other words, the act of every partner is deemed to be an act of the firm and binding on the firm.
 Transferability of share/interest: The partners cannot transfer their share/interest in partnership in
the firm to others without the consent of the other partners.
 Dissolution (Instability) : The closure of partnership is called dissolution. When any of the partner
die, becomes insolvent or insane, the partnership is to be dissolved. This mean the duration of the
partnership is not certain. The remaining partners can restart their business with a new name if they are
interested.
 Quick and prompt decisions: If there is consensus among partners, it is enough to implement any
decision and initiate prompt action. Sometimes, it may take more time for the partners on strategic
issues to reach consensus.

ADVANTAGES:

1.Easy to form:
2.Division of labor
3.Flexibility:
4.Personal contact with customers:
5.Quick and prompt decisions:
6.Availability of larger amount of capital:

DISADVANTAGES:

1.Formation of partnership is difficult: Only like-minded persons can start a partnership. It is

sarcastically said,’ it is easy to find a life partner, but not a business partner’.
2.Lack of harmony: It is likely that partners may not, most often work as a group with cohesiveness.
This result in mutual conflicts, an attitude of suspicion and crisis of confidence. Lack of harmony
results in delay in decisions and paralyses the entire operations.
3.Limited growth: The resources when compared to sole trader, a partnership may raise little more. But
when compare to the other forms such as a company, resources raised in this form of organization are
limited, because of restriction on the maximum number of partners.
4.Instability (Life):
5.Unlimited Liability:

SUITABILITY:

This form of business is suitable where the business

Requires moderate volume of funds
Requires more persons of different skills
 JOINT STOCK COMPANY

The joint stock company emerges from the limitations of partnership such as joint and several
liability, unlimited liability, limited resources and uncertain duration and so on.

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

Lord Justice Lindley explained the concept of the joint stock company form of organization as
‘an association of many persons who contribute money or money’s worth to a common stock and
employ it for a common purpose.
Section 3 (1) of the Companies Act, 1956 defines a Company as a company formed and
registered under the act or an existing company.
A joint stock company is described as a voluntary association of persons recognized by law,
having a distinct name, a common seal, formed to carry on business for profit, with capital divisible into
transferable shares, limited liability, corporate body and perpetual succession.

FEATURES:

This definition brings out the following features of the company:

1. Artificial person: The Company has no physical form or shape. It is an artificial person created by
law. It is intangible, invisible and existing only, in the eyes of law.
2. Separate legal existence: it has an independence existence, it separate from its members. It can
acquire the assets. It can borrow for the company. It can sue others if they are in default in payment of
dues, breach of contract with it, if any. Similarly, outsiders for any claim can sue it. A shareholder is
not liable for the acts of the company. Similarly, the shareholders cannot bind the company by their
acts.
3. Voluntary association of persons: The Company is an voluntary association of persons who want to
carry on business for profit. To carry on business, they need capital. So they invest in the share capital
of the company.
4. Limited Liability: The shareholders have limited liability i.e., liability limited to the face value of the
shares held by him. In other words, the liability of a shareholder is restricted to the extent of number of
shares held by them in the company. The shareholder need not pay anything, even in times of loss for
the company, if they have already paid all the share capital.
5. Capital is divided into shares: The total capital is divided into a certain number of units. Each unit is
called a share. The price of each share is priced so low that every investor would able to invest in the
company.
6. Mobilization of larger resources: A joint stock company provides opportunity for the investors to
invest, even small sums, in the capital of large companies. The facilities rising of larger resources.
7. Transferability of shares: In the company form of organization, the shares can be transferred from
one person to the other. A shareholder of a public company can sell his shares at his will. However,
the shares of a private company cannot be transferred.
8. Common Seal: As the company is an artificial person created by law has no physical form, it cannot
sign its name on a paper; so, it has a common seal on which its name is engraved. The common seal
should affix every document or contract; otherwise the company is not bound by such a document or
contract.
9. Perpetual succession: ‘Members may comes and members may go, but the company continues
forever and ever’ A. company has uninterrupted existence because of the right given to the
shareholders to transfer the shares.
10. Ownership and Management separated: The shareholders of a company can spread over thought the
country, or world. To facilitate administration, the shareholders elect some among themselves or the
promoters of the company as directors to a Board, which looks after the management of the business.
The Board recruits the managers and employees at different levels in the management. Thus the
management is separated from the owners.
11. Winding up: Winding up refers to the putting an end to the company. Because law creates it, only law
can put an end to it in special circumstances such as representation from creditors of financial
institutions, or shareholders against the company that their interests are not safeguarded. The company
is not affected by the death or insolvency of any of its members.
12. The name of the company ends with ‘limited’: it is necessary that the name of the company ends
with limited (Ltd.) to give an indication to the outsiders that they are dealing with the company with
limited liability and they should be careful about the liability aspect of their transactions with the
company.
13. Liquidity of investments: By providing the opportunity to transferability of shares, shares can be
converted into cash.

ADVANTAGES:

1. Mobilization of larger resources:

2. Separate legal entity
3. Limited liability:
4. Transferability of shares:
5. Liquidity of investments:
6. Democracy in management: the shareholders elect the directors in a democratic way in the general
body meetings. The shareholders are free to make any proposals, question the practice of the
management, suggest the possible remedial measures, as they perceive. The directors respond to the
issue raised by the shareholders and have to justify their actions.
7. Economics of large scale production: Since the production is in the large scale with large funds, the
company can enjoy the internal economies of large scale production.
8. Continued existence: The Company has perpetual succession. It has no natural end. It continues
forever and ever unless law put an end to it.
9. Professional management: Availability of larger funds helps the Board of Directors to recruits
competent and professional managers to handle the affairs of the company in a professional manner.
10. Growth and Expansion: With large resources and professional management, the company can earn
good returns on its operations, build good amount of reserves and further consider the proposals for
growth and expansion.
 DISADVANTAGES:

1. Formation of company is a long drawn procedure: Promoting a joint stock company involves a
long drawn procedure. It is expensive and involves large number of legal formalities.
2. High degree of government interference: The government brings out a number of rules and
regulations governing the internal conduct of the operations of a company such as meetings, voting,
audit and so on, and any violation of these rules results into statutory lapses, punishable under the
companies act.
3. delays in decision-making: As the size of the organization grows, the number of levels in
organization also increases in the name of specialization. The more the number of levels, the more is
the delay in decision-making.
4. Lack or initiative: In most of the cases, the employees of the company at different levels show slack
in their personal initiative, with the result the opportunities once missed do not recur and the company
loses the revenue.
5. Conflicting interests: The Company has divergent groups of people associated with it. The
shareholders want maximum dividends. The company wants to maintain good amount of reserves.

SUITABILITY:
It is more suitable where
There is a need for a high degree of specialization
There is need for large funds
There is a need for growth and expansion
There is need for government control or interference

DISTINCTIONS BETWEEN SOLEPROPRIETORSHIP, PARTNERSHIP AND COMPANY

SOLE JOINT STOCK
PARTNERSHIP
PROPRIETORSHIP COMPANY

Easy to start and easy Easy to start and easy Formation is

Formation
to close to close difficulty

Min. 2 Min 7
No. of Persons Single Owner
Max. 10 or 20 Max. Unlimited
Ownership and
Control
Own Control Own Control Management are
(Management)
separated
No Separate Legal No Separate Legal
Entity Separate Legal Entity
Entity Entity

Capital Limited Limited Unlimited

Liability Unlimited Unlimited Limited
Flexibility Highly flexible flexible Rigid
Business secrets: Maintained Cannot be maintained Cannot be maintained
 (Dissolution)Life Limited Life Limited Life Perpetual Succession

Personal Contact with Personal Contact No Personal Contact

Personal Contact
Customers with Customers with Customers
Transferability of Transferable only
Share or Interest Freely Transferable with the consent of Freely Transferable
other partners
Liquidity of
liquid liquid More Liquid
investments
Quick decision- Quick decision- Delay in decision-
Decision Making
making making making
Joint & Several
liability No Yes No
Implied authority
Common Seal No No Yes

Division of Labor
No division of labor Division of labor Specialization
(Specialization)

Taxation Individual income tax Individual income tax Corporate tax

Growth &
No growth Limited growth High growth
Expansion

Limited Liability Company (LLC):

Definition: A form of business organization with the liability-shield advantages of a corporation and the
flexibility and tax pass-through advantages of a partnership.
Advantages of Starting an LLC
 The members of an LLC have protection against liability. They cannot be held liable for company
losses, or debts and business credit, and their personal assets (such as a house or car) cannot be
recovered by the debtors.
 LLCs have the freedom of selecting any form of profit distribution, which does not have to be in the
ratio of the ownership between different members.
 LLCs do not have a legal requirement to conduct formal meetings, maintain minutes of the meeting, or
record resolutions.
 Benefits similar to a corporation are available without going through any incorporation formalities.
 Pass-through taxation principles apply and the company itself is not taxed unless it opts for being
treated as a regular corporation. All business profits, losses, and expenses are accounted for by its
individual members. Members have to show the earnings in their individual tax returns and
accordingly pay taxes. This allows the avoidance of double taxation by way of corporate tax payment
along with the individual income tax.
 Disadvantages of Starting an LLC:
 LLCs have a limited life and are usually dissolved when a member dies, or if the company faces
bankruptcy.
 LLCs cannot go public, as there are no shares or shareholdings. For the same reason, issuing shares to
employees through stock options is not possible.
 Even though the paperwork and the complexities associated with LLCs are significantly less than
those required for forming a corporation, its formation is still substantially more complex than a
partnership or sole-proprietorship.

CAPITAL
Capita is defined as wealth, which is created over a period of time through abstinence to spend.
Money that one has invested.
Cash or goods used to generate income either by investing in a business or a different income
property.
The net worth of a business; that is, the amount by which its assets exceed its liabilities.

TYPES OF CAPITAL

Capital can broadly be divided into two types: Fixed Capital and Working Capital

FIXED CAPITAL:
Fixed capital is that portion of capital which is invested in acquiring long term assets such as land and
buildings, furniture etc. Fixed capital forms the skeleton of the business. It provides the basic assets as
per the business needs. These assets are not meant for resale. They are intended to generate revenues.

WORKING CAPITAL:

Working capital is the flesh and blood of the business. It is that portion of capital that makes a company
to work. It is not just possible to carry on the business with only fixed assets; working capital is must.

Working capital is also called circulating capital. It is used to meet regular or recurring needs of the
business. It is also called as revolving capital, temporary capital etc.

METHODS AND SOURCES OF FINANCE

Sources of finance mean the ways for mobilizing various terms of finance to the industrial concern.
Sources of finance state that, how the companies are mobilizing finance for their Requirements. The
companies belong to the existing or the new which need sum amount of finance to meet the long-term
and short-term requirements such as purchasing of fixed assets, construction of office building, purchase
of raw materials and day-to-day expenses.

Sources of Finance may be classified under various categories based on the period.
 Long – term finance
 Medium – term finance
 Short – term finance
 LONG - TERM FINANCE:
Long – term finance refers to that finance available for a long period say three years and above.
It is used to purchase fixed assets such as Land & Buildings and Plant & Machinery etc.

I. Own Capital: Irrespective of the form of organization, the owners of the business have to invest their
own money to start with. Money invested by the owner, partners or promoters is permanent and will
stay with the business throughout the life of the business.

i. Share Capital: The capital obtained by issue of shares is known as share capital. The capital of a
company is divided into small units called shares. Each share has its nominal value. For example, a
company can issue 1, 00,000 shares of Rs. 10 each for a total value of Rs. 10, 00,000. The person
holding the share is known as shareholder. There are two types of shares issued by a company
ii. Equity Share Capital: Equity Shares also known as ordinary shares, which means, other than
preference shares. Equity shareholders are the real owners of the company (They are referred to as
‘residual owners’ since they receive what is left after all other claims on the company’s income and
assets have been settled). Further, through their right to vote, these Share holders have a right to
participate in the management of the company. (i.e. control over the management of the company).
Equity shareholders are eligible to get dividend if the company earns profit. Equity share capital
cannot be redeemed during the lifetime of the company. The liability of the equity shareholders is
limited to the extent of capital contributed by them in the company.
iii. Preference Share Capital: The capital raised by issue of preference shares is called preference
share capital. The preference shareholders enjoy a preferential position over equity shareholders in
two ways: (i) receiving a fixed rate of dividend, out of the net profits of the company, before any
dividend is declared for equity shareholders; and (ii) receiving their capital after the claims of the
company’s creditors have been settled, at the time of liquidation. Preference shareholders are eligible
to get fixed rate of dividend and they do not have voting rights.
Preference shares may be classified into the following major types:
a. Cumulative preference shares:
b. Non-cumulative preference shares
c. Participating Preference Shares.
d. Redeemable preference shares:
e. Irredeemable Preference Shares
II. Debentures: A Debenture is a document issued by the company. It is a certificate issued by the
company under its seal acknowledging a debt.
According to the Companies Act 1956, “debenture includes debenture stock, bonds and any other
securities of a company whether constituting a charge of the assets of the company or not.”

Types of Debentures:

1. Unsecured debentures:
2. Secured debentures
3. Redeemable debentures:
4. Irredeemable debentures:
5. Convertible debentures:
Non-convertible debentures Fully convertible debentures Partly convertible debentures
III. Government Grants and Loans: Government may provide Long – term finance directly ar indirectly
by subscribing to the shares of the companies or by the way of loans. Only if the project satisfies
certain conditions such as setting up a project in a back ward area, or ventures into projects which are
beneficial for the society as a whole.

MEDIUM – TERM FINANCE:

Medium term finance refers to such sources of finance where the repayment is usually over one
year and less than three years.

I. Bank loans: Commercial banks extend loan facility at a fixed rate of interest. Repayments of the loan
and interest are scheduled at the beginning and these loans are secured loans.
II. Hire-Purchase: The term hire purchase originated in the U.K. Hire purchase is a method of financing
the fixed assets. Under this method of financing, the purchase price is paid in installments. Under this
method the buyer can take the physical possession of the asset after making first installment (i.e. down
payment) and Ownership of the asset is transferred after the payment of the last installment.
III. Leasing or Renting: A lease is a contractual agreement whereby one party i.e., the owner of an asset
grants the other party the right to use the asset in return for a periodic payment. In other words it is a
renting of an asset for some specified period. The owner of the assets is called the ‘lessor’ while the
party that uses the assets is known as the ‘lessee’. The lessee pays a fixed periodic amount called lease
rental to the lessor for the use of the asset. At the end of the lease period, the asset goes back to the
lessor.
IV. Venture Capital: Venture capital is money provided by an outside investor to finance a new,
growing, or troubled business. The venture capitalist (person who provides venture capital) provides
the funding knowing that there’s a significant risk associated with the company’s future profits and
cash flow. Capital is invested in exchange for an equity stake in the business rather than given as a
loan, and the investor hopes the investment will yield a better-than-average return.

SHORT – TERM FINANCE:

Short term finance is that finance which is available for a period of one day to one year.
I. Bank Overdraft: An overdraft is an extension of credit from a lending institution when an account
reaches zero. An overdraft allows the individual to continue withdrawing money even if the account
has no funds in it. Basically the bank allows people to borrow a set amount of money. Interest is
charged on a day to day basis on the actual amount overdrawn.
II. Trade Credit: Trade credit is the credit extended by one trader to another for the purchase of goods
and services. Trade credit facilitates the purchase of supplies without immediate payment. Trade credit
is commonly used by business organizations as a short-term source of financing. The volume and
period of credit depends on factors such as reputation of the purchasing firm, financial position of the
seller, volume of purchases, past record of payment and degree of competition in the market.
III. Advances from Customers: It is common to collect full or part of the order amount from the
customers in advance. Such advances are useful to meet the working capital needs.
IV. Retained Earnings (Internal Funds): The portion of the net earnings of the company that is not
distributed as dividends is known as retained earnings. The amount of retained earnings available
depends on the dividend policy of the company. It is generally used for growth and expansion of the
company.
 NON CONVENTIONAL SOURCES OF FINANCE

1.Commercial Paper (CP): Commercial Paper emerged as a source of short term finance in our country
in the early nineties. Commercial paper is an unsecured promissory note issued by a firm to raise funds
for a short period, varying from 90 days to 364 days. It is issued by one firm to individuals, other
business firms, insurance companies, pension funds and banks. The amount raised by CP is generally
very large. As the debt is totally unsecured, the firms having good credit rating can issue the CP.

2.Family and friends: These are people who should believe in you, without waiting to see if your idea
works, or waiting until you have real customers, revenue, and hard assets. These commitments should
always be positioned in writing as promissory notes, or so-called bridge-loans, which convert to equity
at a rate determined by later investors.

3.Peer-to-peer lending: This is a process whereby a group of people comes together to lend money to
each other. The P2P companies provide a platform or market for borrowers and lenders. Lenders have
to register to use the platform. Some P2Ps charge a one-time registration fee while others earn their
revenue based on how much is lent. Borrowers too have to register. They are listed on these platforms
under different risk categories, and the interest rates vary for each category. They are charged a
registration fee and a processing fee too after they get a loan, which depends on the amount and term
for which the loan is borrowed. Of course, they have to pay the agreed-upon interest on the loan.

4.Crowd funding: the practice of funding a project or venture by raising money from a large number of
people who each contribute a relatively small amount, typically via the Internet.

5.Microloans: There are many private companies and non-profits that offer small loans, to promote
entrepreneurship, to individuals who would not normally qualify for bank financing.

6.Vendor financing: If you need tangible products for inventory, many manufacturers and distributors
can be convinced to defer your payment until the goods are sold by you. This really means an
extension of the normal 30-day payment terms to a period of months or longer, depending on your
credit worthiness and extra fees.

7.Purchase order financing: The most common scaling problem faced by startups is the inability to
accept a large new order, since they don’t have the cash to build and deliver the product. PO financing
companies will often advance the required funds directly to the supplier, allowing the transaction to
complete and profit to flow to the startup.

8.Debt Factoring: Factoring is a transaction in which a business sells its accounts receivable, or
invoices, to a third party, commercial financial company, also known as a “factor.” Factoring is
sometimes called “accounts receivable financing.” The advance rate can range from 80% to as much
as 95% depending on the industry, your customers’ credit histories and other criteria. The factor also
provides you back-office support. Once it collects from your customers, the factor pays you the
reserve balances of the invoices, minus a fee for assuming the collection risk. The benefit of factoring
is that, instead of waiting one to two months for a customer payment, you now have that cash in hand
to operate and grow your business.
 ECONOMICS
The word ‘Economics’ originates from the Greek work ‘Oikonomikos’ which can be divided
into two parts: (a) ‘Oikos’, which means ‘Home’, and (b) ‘Nomos’, which means ‘Management’
Thus, Economics means ‘Home Management’.

All the activities of human being can be classified into two types. They are
Non – Economic activities and Economic activities
An activity which don’t result in earning or spending money is called non economic activity
Such activities of earning and spending money are called economic activities.
Economics is a study of human activity both at individual and national level. The economists of
early age treated economics merely as the science of wealth.
Every one of us in involved in efforts aimed at earning money and spending this money to
satisfy our wants such as food, Clothing, shelter, and others. Such activities of earning and spending
money are called “Economic activities”.
Economics is the social science that studies economic activities

Swedish economist Rognar Frisch first used Micro and Macro terms in 1920s to represent the
"level of aggregation" of economic variables analyzed in an economic problem.

Micro economics:

Micro economics also called as the Theory of Firm. Micro means ‘one millionth.

“Micro-economics is the study of particular firms, particular households, individual prices,

wages, incomes, individual industries, particular commodities”. In micro-economic theory, we study
how various units of the economy like consumers, producers or firms, workers and resource suppliers do
their economic activities and reach their equilibrium states.

Macro economics:

The term ‘macro’ means large. “Macro - economics deals with aggregates of individual
quantities, national income, general price level and the national output.” Thus, it furnishes us with the
macroscopic view of the economy.

Though macroeconomics provides the necessary framework in term of government policies,

price level in general, the level of employment in the economy. It discusses aggregate consumption,
aggregate investment, price level, and payment, theories of employment, and so on.

Significance of the Study of Managerial Economics

Importance: In order to solve the problems of decision making, data are to be collected and analyzed in
the light of business objectives. Managerial economics provides help in this area. The importance of
managerial economics maybe relies in the following points:

1. To allocate the scares resources in the optimal manner.

2. To minimize risk and uncertainty

 3. To help in profit maximization.

4. It provides tool and techniques for managerial decision making.

5. It gives answers to the basic problems of business management.

6. 4. It provides tools for demand forecasting and profit planning.

7. It guides the managerial economist.

8. It helps in formulating business policies.

9. It assists the management to know internal and external factors influence the business.

The important concepts of NATIONAL INCOME are:

1. Gross Domestic Product (GDP)

2. Gross National Product (GNP)

3. Net National Product (NNP) at Market Prices

4. Net National Product (NNP) at Factor Cost or National Income

5. Personal Income

6. Disposable Income

1. Gross Domestic Product (GDP): Gross Domestic Product (GDP) is the total market value of all final
goods and services currently produced within the domestic territory of a country in a year.

Four things must be noted regarding this definition.

First, it measures the market value of annual output of goods and services currently produced.

Secondly, for calculating GDP accurately, all goods and services produced in any given year must be
counted only once so as to avoid double counting. So, GDP should include the value of only final goods
and services and ignores the transactions involving intermediate goods.

Thirdly, GDP includes only currently produced goods and services in a year. Market transactions
involving goods produced in the previous periods such as old houses, old cars, factories built earlier are
not included in GDP of the current year.

Lastly, GDP refers to the value of goods and services produced within the domestic territory of a
country by nationals or non-nationals.

2. Gross National Product (GNP): Gross National Product is the total market value of all final goods
and services produced in a year. GNP includes net factor income from abroad whereas GDP does not.
Therefore,

GNP = GDP + Net factor income from abroad. (Exports-Imports)

3. Net National Product (NNP) at Market Price: NNP is the market value of all final goods and
services after providing for depreciation. That is, when charges for depreciation are deducted from the
GNP we get NNP at market price. Therefore’

NNP = GNP – Depreciation (Depreciation means fall in the value of fixed assets due to wear and tear)

4. Net National Product (NNP) at Factor Cost (National Income): NNP at factor cost or National
Income is the sum of wages, rent, interest and profits paid to factors for their contribution to the
production of goods and services in a year. It may be noted that:

NNP at Factor Cost = NNP at Market Price – Indirect Taxes + Subsidies.

5. Personal Income: Personal income is the sum of all incomes actually received by all individuals or
households during a given year. In National Income there are some income, which is earned but not
actually received by households such as Social Security contributions, corporate income taxes and
undistributed profits. On the other hand there are income (transfer payment), which is received but not
currently earned such as old age pensions, unemployment doles, relief payments, etc. Thus, in moving
from national income to personal income we must subtract the incomes earned but not received and add
incomes received but not currently earned. Therefore,

Personal Income = National Income – Social Security contributions – corporate income taxes –
undistributed corporate profits + transfer payments.

Disposable Income: From personal income if we deduct personal taxes like income taxes, personal
property taxes etc. what remains is called disposable income. Thus,

Disposable Income = Personal income – personal taxes. or

Disposable Income = consumption + saving.

SIGNIFICANCE OF NATIONAL INCOME:

1. Standard of living: Standard of living denotes the nature of life and comforts of individuals. It is
obtained by dividing the total population with the national income. National Incomes estimates reveal
the changes in the standard of living of the people.

2. Nature & Trends of the economy: National income estimates are also useful for knowing the trends
of the economy. They reveal whether the economy is moving forward or declining or in a stable
condition. They also enlighten the rate of growth of the economy.

3. Output in different sectors: National income estimates are of great utility for knowing the level of
output produced in different sectors like agriculture, industry, transport, business etc. They also inform
the significance and contribution of different sectors to the national dividend. The various changes that
took place in different sectors are also known by the national income estimates.

4. Distribution of income: National income estimates provide valuable information regarding the
distribution of income among different individuals and institution in a country. They point out the
proportion of national income received by different sections of society. They also acquaint us about
the proportions of rent wages, interest and profits in the national income. Lastly these estimates reveal.
The inequalities in the distribution of income and wealth.
5. Necessary for devising proper economic policies: National income estimates inform the various
changes that took place in the economy. They help the government in understanding the causes and
consequences of such changes. Government frames proper economic policies with the help of these
estimates. Hence these estimates are considered as the main basis for devising economic policies by
the government.

6. Levels of income, savings, and investment can be known: National income estimate present correct
data and information regarding the levels of savings, investment, income and consumption. Such
information is highly useful for devising planning programmes.

7. Purchasing power: The purchasing power oi the people is also known with the help of the national
income figures.

8. Future changes in different sectors: National income figures indicate the changes that will take place
in different sectors in future. Such information is a boon to government and private enterprises. Both
the government and private enterprises mold their economic policies on the basis of the speculations
made by national income estimates.

BUSINESS CYCLE:

"The business cycle is the periodic but irregular up-and-down movements in economic activity,
measured by fluctuations in real GDP and other macroeconomic variables."
Business cycle is defined as the real fluctuations in economic activity and gross domestic product (GDP)
over a period of time.
The different phases of business cycles are:

1. Expansion (Boom, Upswing or Prosperity)

2. Peak (upper turning point)
3. Recession (Downswing, Contraction or Depression)
4. Trough (lower turning point)
5. Recovery
1.Expansion: A speedup in the pace of economic activity defined by high growth, low unemployment,
and increasing prices. The period marked from trough to peak.
2.Peak: The upper turning point of a business cycle and the point at which expansion turns into
contraction.
3.Recession: A slowdown in the pace of economic activity defined by low or stagnant growth, high
unemployment, and declining prices. It is the period from peak to trough.
4.Trough: The lowest turning point of a business cycle in which a contraction turns into an expansion.
This turning point is also called Recovery.
5. Recovery: In trough phase, an economy reaches to the lowest level of shrinking. Once the economy
touches the lowest level, it happens to be the end of negativism and beginning of positivism. This
leads to reversal of the process of business cycle. This process of reversal IS called recovery

Features of Business Cycles:

1.Business cycles occur periodically. Though they do not show same regularity, they have .some distinct
phases such as expansion, peak, contraction or depression and trough. Further the duration of cycles
varies a good deal from minimum of two years to a maximum of ten to twelve years.
2.Business cycles are Synchronic. That is, they do not cause changes in any single industry or sector but
are of all embracing character. For example, depression or contraction occurs simultaneously in all
industries or sectors of the economy. Recession passes from one industry to another and chain reaction
continues till the whole economy is in the grip of recession. Similar process is at work in the
expansion phase, prosperity spreads through various linkages of input-output relations or demand
relations between various industries, and sectors.
3.It has been observed that fluctuations occur not only in level of production but also simultaneously in
other variables such as employment, investment, consumption, rate of interest and price level.
4.Iinvestment and consumption of durable consumer goods such as cars, houses, refrigerators are
affected most by the cyclical fluctuations. Since consumption of durable consumer goods can be
deferred, it also fluctuates greatly during the course of business cycles.
5.Consumption of non-durable goods and services does not vary much during different phases of
business cycles. Past data of business cycles reveal that households maintain a great stability in
consumption of non-durable goods.
6.The immediate impact of depression and expansion is on the inventories of goods. When depression
sets in, the inventories start accumulating beyond the desired level. This leads to cut in production of
goods. On the contrary, when recovery starts, the inventories go below the desired level. This
encourages businessmen to place more orders for goods whose production picks up and stimulates
investment in capital goods.
7.Another important feature of business cycles is profits fluctuate more than any other type of income.
During the depression period profits may even become negative and many businesses go bankrupt. In
a free market economy profits are justified on the ground that they are necessary payments if the
entrepreneurs are to be induced to bear uncertainty.
8.Business cycles are international in character. That is, once started in one country they spread to other
countries through trade relations between them. For example, if there is a recession in the USA, which
is a large importer of goods from other countries, will cause a fall in demand for imports from other
countries whose exports would be adversely affected causing recession in them too.
BUSINESS (MANAGERIAL) ECONOMICS (Definitions):

According to 'E. T. Brigham' and "J. L. Pappas', "Managerial Economics is the application
of Economic theory and methodology to business administration practice."
M. H. Spencer' and 'L. Siegel man' defined as "Managerial Economics is the integration of
economic theory with business practice for the purpose of facilitating decision making and
forward planning."

Nature of Business Economics

1.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.
2.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.
3.Normative statements: A normative statement usually includes or implies the words ‘ought’ or
‘should’. 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 verify by looking at the
facts, because they mostly deal with the future. Disagreements about such statements are usually
settled by voting on them.
4.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. It does not
merely mention the concept, it also explains whether the concept can be applied in a given context on
not
5.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.
6.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.
7.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.
8.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:

The scope of managerial economics refers to its area of study.

1.Demand Analysis and Forecasting: Analysis of demand is undertaken to forecast demand, which is a
fundamental component in managerial decision-making. Demand forecasting is of importance because
an estimate of future sales is a primer for preparing production schedule and employing productive
 resources. Demand analysis helps the management in identifying factors that influence the demand for
the products of a firm.
2.Input Output Decision: Here the costs of inputs in relation to output are studied to optimize the
profits. Production function and cost function are estimated at different parameters. The behavior of
costs at different levels of production is assessed. The entire focus of this decision is to optimize
(maximize) the output at minimum cost.
3.Price output Decision: Pricing is an important area in managerial economics. It involves the
determination of prices under different market conditions, pricing methods, pricing policies,
differential pricing, product line pricing and price forecasting.
4.Profit related Decisions: Every business and industrial enterprise aims at maximizing profit. Here we
use various techniques such as Break Even Analysis, Ratio Analysis etc. to ascertain the level of
profits.
5.Investment Decisions: Capital is the foundation of any business. It efficient allocation and
management is one of the most important tasks of the managers. Some of the important issues related
to capital include: choice of investment project; assessing the efficiency of capital; and, the most
efficient allocation of capital.
6.Economic Forecasting and Forward Planning: The firm operates in an environment which is
dominated by the external and internal factors. The external factors include major forces such as
government policy, competition, employment resources, finance and marketing. The internal factors
include its policies and procedures relating to finance, people, market and products. It is necessary to
forecast the trends in the economy to plan for the future in terms of investments, profits products and
markets. This will minimize the risk and uncertainty about the future

ROLE OF BUSINESS ECONOMIST:

The role of managerial economist can be summarized as follows:
1. He studies the economic patterns at macro-level and analyses its significance to the specific firm he
is working in.
2. He has to consistently examine the probabilities of transforming an ever-changing economic
environment into profitable business avenues.
3. He also carries cost-benefit analysis.
4. He assists the management in the decisions pertaining to internal functioning of a firm such as
changes in price, investment plans, type of goods /services to be produced, inputs to be used,
techniques of production to be employed, expansion/ contraction of firm, allocation of capital,
location of new plants, quantity of output to be produced, replacement of plant equipment, sales
forecasting, inventory forecasting, etc.
5. In addition, a managerial economist has to analyze changes in macro- economic indicators such as
national income, population, business cycles, and their possible effect on the firm’s functioning.
6. He is also involved in advising the management on public relations, foreign exchange, and trade. He
guides the firm on the likely impact of changes in monetary and fiscal policy on the firm’s
functioning.
7. He also makes an economic analysis of the firms in competition. He has to collect economic data
and examine all crucial information about the environment in which the firm operates.
8. The most significant function of a managerial economist is to conduct a detailed research on
industrial market.
9. He also provides management with economic information such as tax rates, competitor’s price and
product, etc. They give their valuable advice to government authorities as well.
10. At times, a managerial economist has to prepare speeches for top management.

MULTDISCIPLINARY NATURE OF BUSINESS ECONOMICS

Relationship between managerial economics and other subjects

Other related subjects of managerial economics are:
• Economics•
• Mathematics•
• Statistics•
• Accounting•
• Operation Research•
• Computers
• Management
• Production Management
• Financial Management

INFLATION:
Inflation is basically a rise in prices.

Inflation is the rate at which the general level of prices for goods and services is rising and,
consequently, the purchasing power of currency is falling.
Inflation means an increase in the cost of living as the price of goods and services rise.