Business Economics

For

Hoteliers
Contents:

1. Business Economics and Hotel Industry.

2. Economic systems.

3. Utility and laws associated with it

4. Demand and its measurement

5. Elasticity of demand

6. Elasticity of supply

7. Factors of Production

8. Cost Concepts.

9. Revenue concepts

10.Types of markets

11.Price determination under Perfect Competition

12.Price determination under Monopoly

13.Price determination under Monopolistic Competition

14.Money and its functions

15.Taxation

16.National Income

17.Entrepreneurship

18.Economic Growth.
Chapter I

Business Economics and Hotel Industry.

1. In Hotel Industry various Economic concepts are used while

taking different decisions. That is the reason why Business
Economics has to be studied by the students of hotel management.

2. Economic concepts used in hotel industry:

Size of a hotel
Location of a hotel
Costs
Profits
Price
Competition.
Revenue
Money
Taxation
National Income
Economic Growth

3. Remember that all hotel decisions are not economic decisions.

For such decisions Business Economics does not offer any
solutions.

4. Whether Economics is art or science?

For calling any branch of knowledge science to satisfy

Two things:
a. whether the study is being carried out systematically?
 b. Whether there are any laws studying cause and effect
relationship in that study?

5.Subdivisions of the study of Economics

1.Consumption: concept of utility, law of diminishing

marginal utility, equi marginal utility, consumers surplus,
demand, its estimation, law of demand, elasticity of
demand and its measurement.

2. Production: factors of production, land, labour , capital

and organization. Supply, law of supply and elasticity of
supply.

3. Distribution : Rewards to factors of production, rent,

wages, interest and profit. National income and its
measurement.

4. Exchange: money and its functions, markets and their

types, competition, monopoly, monopolistic competition,
Oligopoly, duopoly etc. Price determination under these
conditions.

5. Public Finance: Changed role of the Government from

Police state to Welfare state. Government revenue,
taxation, Government expenditure, Public debts, deficit
financing.

Development of economic thought:

1. England: Trade and commerce. General

understanding that Economics must be a study
of trade and commerce. Popularly known as
Mercantalism.
2. France: Predominantly an agricultural country
with various problems related to land and rent
charged by the landlords. The focus of
Economics there was on agriculture.
Popularly known as Physiocracy.

3. Adam smith: Wealth of Nations. Got an

opportunity to read the literature in England
and France and arrived at the conclusion that
Economics is the study of wealth. He was
harshly criticised by Church and its followers
saying that material wea;th cannot be the
subject of this study.

4. Marshall: Principles of Economics. He

shifted the whole empasis from the wealth to
man. whole emphasis from wealth to man. He
felt that Economics was a study of mankind
in relation to wealth. He gave a scientific base
to the study of Economics by arranging the
study in certain subdivisions like
consumption, production, distribution and
exchange.

5. Robbins: Economics is the study of human

behaviour. Problem Before the study :
Limited resources and unlimited wants. The
problem is aggravated as these resources
have alternate uses.

6. Lord Keynes: Great depression of 1929.

American Government wanted a solution for
this depression. Lord Keynes offered that
solution stating that the role of the
Government in controlling the Economy
 should be increased. Pouring money in the
economy by taking resort to deficit
financing. Economics of development.

7. Pigou: Introduced the concept of Welfare

Economics. Welfare should be the ultimate
goal of the study of Economics.

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Chapter II

Economic Systems

Capitalism, Socialism and Mixed Economy

Capitalism:

Industrial revolution changed the whole complexion of the economies

Large scale production became the order of the day.
Separation of labour from capital.
Few capitalists started owning all the means of production
In small scale production it was not so. Capital and labour were in one and the same
hand. But in large scale production this separation was inevitable.
This gave rise to capitalism.
The whole economic growth of the world owes its origin to this capitalistic system.

Characteristics of Capitalism:

1 Private ownership of economic resources.

2 Freedom of contract.
3 Free trade.
4 Consumers choice preserved.
5 Profit motive – sole guiding principle.
6 Price mechanism brings balance in production and consumption.
7 Minimum Govt. interference. Govt. performs the functions of a police.
8 Trade cycles.

Merits of Capitalism:

1. Automatic in nature
2. Consumers freedom is preserved.
3. Maximum utilisation of resources.
4. Least Govt. interference.
5. Profit is the motivating factor.

Demerits of Capitalism

1. Trade cycles
2. Ill directed use of resources.
3. Welfare of the community is sacrificed.
4. Exploitation of labour.
5. Division of the Society in haves and have nots. Class struggle.
6. Seeds of its destruction are sown in its development itself.
7. What we want is restricted capitalism.
Socialism:

Arose out of the problems associated with capitalism.

Carl Marx was the founder of this principle.
Soviet Russia and China are the best examples.
Class struggle results in revolution and socialism is resorted to.

Characteristics of Socialism:

1. Means of production owned by the Government.

2. To each according to his need and from each according to his capacity.
3. No choice to the consumers.
4. No private property.
5. Perfect balance in production and consumption through economic planning.
6. No trade cycles.
7. Centralised planning.

Merits of Socialism:

1. Equality
2. Planned economic activities
3. No trade cycles
4. Proper use of economic resources
5. Welfare of the Society.
6. No class struggle

Demerits of Socialism:

1. State capitalism
2. Ill directed use of resources
3. No choice for the consumers
4. No motivation to work
5. Undemocratic.

Mixed Economy- the best way out:

Both capitalism and Socialism were tried in different countries and it was observed that
both have their own limitations. Both of them in pure form are not acceptable to the
Society.

Fear of trade cycle was very dominant in Capitalism. When the whole world was down
with great depression in the year 1929 Soviet Russia was the only country which was
enjoying economic stability.
The existence of State capitalism resulted in poor motivation among the people so much
that the level of production started dropping down. Hence there was no way left out but
to dilute the system.

In India, immediately after the attainment of freedom in the year 1947 it was decided to
try Mixed Economy. This policy became still more clear when the country accepted a
new industrial policy in the year 1948 which recognised two independent sectors – public
and private – for the future economic development.

Our then prime minister Shri Jawaharlal Nehrus trip to Soviet Russia proved to be a
turning point for the economy. He saw the merits of planning as an effective tool for the
economic development of the country. Shortly, Planning Commission was appointed in
the country to frame the five year plans for the country. and from 1951 India resorted to
planning.

The Government identified the activities which could be reserved for the Public sector
and the activities reserved for the Private sector. In case of some economic activities both
the sectors were allowed to participate. Again in the year 1956 the Industrial policy was
further amended to bring the required clarity in the division of work in the two sectors.

Characteristics of Mixed Economy:

1. Division of economic activities in two sectors.

2. Cetralised economic planning.
3. Govt. interference in consumption, production, distribution and also in exchange.
4. Consumers freedom was preserved.
5. Equal opportunities of development to all.
6. Balance between consumption and production. Hence no fear of trade cycles.
7. Good motivation to private sector.

Is the experiment of mixed economy successful in India?

1. Inefficient Public Sector

2. Red Tapism.
3. Rampant Corruption.
4. Poor control over the Private sector.
5. Errors in planning.
6. Wastages arising out of democracy.
7. Not a single five year plan could be completed in time.

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Chapter III

Utility and the laws associated with it

1. Utility: want satisfying power.

2. It is subjective term. Varies from man to man , place to place,
and time to time.
3. Types of utility: form utility, place utility, time utility and
possession utility
4. Utility cannot be measured. We do not have any mechanism
to measure it.
5. Total and marginal utility: With every additional unit
consumed the total utility increases. Net addition to the total
utility by adding every additional unit of consumption is
termed as marginal utility.
6. Law of diminishing marginal utility: The more one has, the
less he wants.
Hypothetical example:
Oranges consumed Total utility Marginal utility
1 100 units 100 units
2 180 units 80 units
3 240 units 60 units
4 260 units 20 units
5 260 units 0 units
6 240 units (-) 20 units

What do we understand from this?

1. The more one has, the less one wants.
2. Total utility increases up to a particular point and if the
consumption is continued beyond a limit it decreases.
3. When total utility reaches the maximum level marginal
utility is zero.
 4. When total utility decreases, the marginal utility enters
the negative zone.
5. This law guides a consumer when he should stop the
consumption.
6. Critics say that this law is not applicable to money and
other items of conspicuous consumption but if we
examine the cases of these commodities carefully we
find that they are also not an exception to this law.

7. Law of Equi-marginal utility

In the above example it is quite evident that the last orange
consumed is giving (-) utility to the consumer. Thus instead
of consuming the last orange if he consumes first banana that
would give him more satisfaction. Here it is to his benefit
that one commodity is substituted by another commodity.
This substitution should continue till a point when the
marginal utility derived from the consumption of orange
equals to the marginal utility derived from the consumption
of bananas. That is the reason why this law is known as the
law of equi-marginal utility or law of substitution oer the law
of maximum satisfaction.

What is true in case of two commodities can be true in case

many more commodities also. That is the reason why every
person distributes his income on various commodities.

8. Concept of consumers surplus:

Alfred Marshall introduced this concept to the study of

Economics. When a person consumes a thing he derives
satisfaction from it. At the same time he has to make a
sacrifice also in the form of payment of price of the
commodity. If the satisfaction derived is more than the
sacrifice he should get a surplus satisfaction which Marshall
terms as consumers surplus. When the sacrifice and the
benefit are the same, the surplus would be zero.

This concept of consumers surplus is very much useful to the

business class, the finance minister and the consumer
himself. The businessman will extract higher price when he
comes to know that the consumer is getting more satisfaction.
The finance minister would collect more taxes and get a
share from this surplus. The consumer also would decide his
level of consumption considering the additional satisfaction
he is getting.

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Chapter IV

Demand and its measurement

1.Demand : wish- desire- want- demand- effective demand .

Effective demand is that demand which is backed by purchasing
power or money.

It is this effective demand which provides a driving force to the

economic activity.

Effective demand

Rise in income Rise in price

Rise in employment Rise in supply

Rise in production

2. Factors on which demand depends:

a. Price
b. Income
c. Population
d. Taste
e. Traditions
f. Advertisement
 g. Salesmanship
h. Habits
i. Expectations

3. Methods adopted to estimate demand

a. Gap between demand and supply.

b. Contacting the persons who know.
c. Experts in the field
d. Journals, magazines and news papers.
e. Product finders
f. Demand surveys.
g. Contacting the prospective purchasers.

4. Law of demand

a. It examines the relationship between price and demand.

b. Law states that these two are inversely related.
c. Increase in one is associated with decrease in another.
d. Individual demand schedule.
e. Market demand schedule.
f. Why should demand increase with the fall in price?
Existing purchaser will purchase more.
New purchasers will register their demand.
Same purchaser will purchase more units.
New uses will be found out by the Society.

g. Increase/decrease and expansion/contraction in demand.

h. Exception to this law : Inferior goods
i. This law becomes applicable only if other things remain
the same
Chapter V

Elasticity of demand

1. What is elasticity of demand?

a. The law of demand tells us whether there is a relationship

between demand and price but it does not tell us the
extent of relationship. That is what is answered by
elasticity of demand.
b. It measures the relationship between the proportionate
change in demand and the proportionate change in price.
To put it in the form of a formula it can be shown as
follows:

Proportionate change in demand

Elasticity= -----------------------------------------
Proportionate change in price

c. The formula can further be elaborated as follows:

Change in demand
Proportionate change in dem: = --------------------------

Original demand

Change in price
Proportionate change In price =----------------------------
Original price

Change in demand Change in price

E= ------------------------ (d) ----------------------
Original demand Original price
 Change in demand Original Price
E = ----------------------- x -------------------
Original demand Change in price

Example:

Price Demand Price Demand

10 500 5 1500

1000 10
E = ------- x ------
500 5

= 2 x 2 = 4

d. Types of elasticity :

a. Perfectly elastic
b. More elastic
c. Unity elastic
d. Less elastic
e. Perfectly inelastic

Out of the five cases presented above cases nos. 1,3 and 5 are more
or less hypothetical or imaginary. They do not exist in reality. Thus
only two cases are seen in vogue that more elastic and less elastic.

Examples: More elastic: luxuries comforts, clothings etc.

Less elastic: necessities, medicines , salt etc.
Price, Income and cross elasticity

1. Price elasticity:

It measures impact of price on demand

Price elasticity is negative
Only in case of inferior goods it can be positive.
Formula : Price elasticity = Proportionate change in demand
divided by proportionate change in price.
Useful to hotel industry to finalise the tariff

2. Income elasticity :

It measures impact of income on demand.

Income elasticity is positive
Only in case of inferior goods it can be negative.
Formula: Proportionate change in demand divided by proportionate change in
income.
If people shift to higher income groups, hotel industry is benefited.

3. Cross elasticity:

It measures the impact of price of one commodity on the demand for other
commodity.
Formula: Proportionate change in the demand for A commodity divided by the
proportionate change in the price of B Commodity

If the two commodities are substitutes: example tea and coffee

Price of tea Price of coffee Demand for coffee

10 10 500

15 10 800

As the price of tea has gone up the demand for coffee also has gone up. This the
cross elasticity here is positive.

If the commodities are complimentary: example car and petrol

 Price of car Price of petrol Demand for petrol

1,00,000 50 5000

1,50,000 50 4000

With the increase in the price of car, the demand for petrol has gone down

Negative elasticity. in case of complimentary goods.

Factors on which elasticity depends:

a. Necessities
b. Luxuries and status symbols
c. Substitutes
d. Commodities having several uses.
e. Possibility of postponement of demand
f. Range of prices : too high or too low
g. Proportion of income spent on a commodity
h. Occasional purchases
i. First and subsequent purchases.

Hotel industry and elasticity of demand:

a. Five star hotels; inelastic demand

b. Usual low budget hotels: elastic demand
c. Factors which are inelastic demand:
d. Economic growth: Vendor development, Sales promotion,
Executive meetings, Market surveys. increase in the size of the markets,
Industrial and trade fairs.
e. Tourism: sight seeing, religious tourism, LTCS, conferences
and seminars, cultural exchanges, medical tourism
Chapter VI

Elasticity of supply

1. What is supply?:
Making the goods available to the market with an intention to sale
Difference between supply and stocks.
Individual supply schedule
Market supply schedule
Increase/decrease and expansion /contraction in supply
Joint and alternate supply

2. Role of time in supply:

Very short period: Supply cannot be increased at all. At the most conversion of
stock in supply will help to increase the supply to small extent.

Short period: Some increase is possible by using the idle capacity. But there are
limitations to maintain idle capacity. Hence only small increase is possible

Long period: Increase in supply is possible by changing the capacity itself

Expansion programme can be taken up to increase the supply Sizable increase in
supply is possible.

Very long period: By changing the technology of the production itself. With the
change in technology tremendous increase in supply is possible

3. Law of supply:

Relation between the price and supply.

It is a positive relationship between price and supply as per this law.
Higher the price: more the supply and vice versa.
Why should supply increase because of change in price?
At lower price the existing buyer will purchase more units.
At lower price some more buyers will join the list of purchasers.
At lower price new uses of the commodity will be found out.
If a supply curve is drawn, it will slope upwards.

4. Elasticity of supply:

Extent of response from supply to change in price.

If the response is more we say that the supply is elastic.
If the response is poor we call that the supply is less elastic.
 Examples:
Price supply Price Supply
10 500 15 2000

In this example the price has changed from 10 to 15 but in response the supply
has changed from 500 to 2000. This shows that the response from supply is much
more than the change in price.

Less elastic supply:

Price Supply Price supply

10 500 15 600

Here we observe that the price has changed quite sizably but the response from
the supply is very poor. Here we can say that the supply is less elastic.

Formula to measure elasticity of supply:

Proportionate change in supply

E = --------------------------------------------
Proportionate change in price

Five types of elasticity of supply:

1. Perfectly elastic supply: Infinite change in supply due to small change in

price.

2. Perfectly inelastic supply: No change in supply even

when the price has
changed

3. Unity elasticity : When the proportion of change in price and supply is

the same.

4. Elasticity more than one: When the proportionate change in supply is

more than the proportionate change in price

5. Elasticity less than one: When the proportionate change in supply is less
the proportionate change in price.

Use of the concept of Elasticity of supply to hotel industry:

Hotels are required to purchase food and beverage material and other materials as
their day to day requirements. While making these purchases the concept of elasticity
plays a major role.
Chapter VII

Factors of Production
Four factors of production

1. Factors which contribute to the production process are called as factors of

production. They are Land, Labour, Capital and Organisation.
2. In fact, there are innumerable factors of production. But broadly speaking,
they can be grouped in these four major categories.
3. Once upon a time there was only one factor of production which was
recognised as a factor of production viz. Labour. Natural resources were
amply available and that is why it was not necessary to take their note.
4. But later, with the increase in population, those resources which were
assumed to be ample were found to be scarce. That is why, in course of
time another factor by name land was recognised as a factor of production.
This term land included all the Natural Resources like soil, air, water
minerals and other gifts of Nature.
5. With the advancement, industrial revolution took place where large scale
production became the order of the day. Large Scale Production was
possible with the heavy investment of capital. As a result third factor of
production was born by name Capital which included all the man made
implements assisting the production process.
6. Managing this big business gave birth to the fourth factor of production by
name Organisation.
7. Now it has become necessary to recognise all these four factors of
productions they play equally important role in the production process.

(A) Land as a Natural factor of production

Land includes all the gifts of Nature like the land itself, water, air, forests, minerals etc.
Following are the major characteristics of land:

1. Land possesses indestructible powers.

2. Nature is famous for its niggardliness.
3. Self balancing system of Nature.
4. Growing population is a constant threat to Nature.

Extensive and Intensive methods of cultivation:

1. Human beings settled firstly on the sea shores and the banks of rivers.
That land was comparatively more fertile.
2. As population grew, they had to bring the second grade lands also into
cultivation.
3. State by stage, the entire land was brought under cultivation. This system
of cultivation was known as extensive cultivation.
 4. But a stage came when the entire land was brought under cultivation there
was no other go to cultivate the same land more intensively by spending
more doses of the remaining three factors of production on the same piece
of land. This was inevitable as the demand for food grains could not be
satisfied by the extensive use of land. This system of cultivation is known
as intensive cultivation of land.

Problems associated with the cultivation of land :

1. Mechanisation of the cultivation practices.

2. Subdivision and fragmentation of land in small pieces.
3. Poor productivity of land.
4. Contract farming.
5. Cooperative farming.
6. Suicides by farmers in recent years.
7. Continuous degradation of land due to over use of fertilisers.
8. Too much pressure of population on land
9. Poor irrigation and economic use of water resources.

(B) Labour as a factor of production

Labour is a live factor of production. It possesses following characteristics:

1. Labour and labourer are inseparable.

2. There is a difference between labourer and slave
3. Being a human factor, it needs a special consideration.
4. Labour cannot be stored.
5. Motivation plays important role in getting the work done.
6. Bargaining power of labourers increases due to their organisations.

Issues associated with Labour

Efficiency of labour : Cheap labour is costly labour. Efficiency of labour depends upon
different factors: such as: remuneration, education, training, environment, motivation,
treatment, better tools, better service conditions, work culture, climatic conditions, etc.

Division of Labour: Division of work in various parts and assigning each part to
different worker . Thereby the efficiency increases and the output increases
tremendously. This division can be in complete or incomplete parts. This concept was
very popularly used by Adam Smith in Economics. There can be a geographical division
of labour, each region specialising in different products

Advantages : a). output increases. b) efficiency increases .c) right man for the right job.
d) specialisation develops. e) departmentalisation possible.
Disadvantages: a) monotony b) too much of specialisation is harmful. c) incomplete
man. d) blockade anywhere results in problem everywhere.

Mobility of labour: moving away from the native place for employment. Offers more
rewards to the labourers. Mobility depends upon: a) Education b) means of
transportation. c) attitude d) Political stability. e) Monetary rewards. f) family ties.

Labour turnover: leaving one job and joining the other. May be better for the employee
as he climbs the ladder but not good for the organisation as there is a huge wastage in
recruitment and training cost.

(C) Capital as a factor of production:

Capital is that part of wealth which is used for further creation of wealth. It naturally
means that capital is wealth ant all wealth is not capital.

Capital may assume very many forms. Sometimes it may be in the form of money.
Sometimes in the form of equipment, material, land and building, stocks, debtors etc.

Difference between fixed and working capital: Fixed capital may be in the form of land,
building, machinery, equipment etc. Working capital may be in the form of material,
work in progress, stocks, debtors etc.

How is capital formed?

Capital is created out of public savings.

Income = Consumption + saving
Saving depends upon power to save and will to save.
Power to save depends upon income level.
Will to save depends upon habits, desire to safeguard the future, political stability
welfare schemes undertaken by the Government etc.
Banking institutions mobilise the saving of the community.
For better mobilisation bankers should reach the depositors.
Investors approach the banks for loans.
This borrowing gets converted into capital.
Entrepreneurs are responsible for converting savings into capital.

Why is capital formation poor in India?

a.Illiteracy
b. Poor banking habits.
c.Poor branch expansion of banks.
d. Poverty.- less power to save
e.Poor development of entrepreneurship.
f. Strong preference for gold.
g. No encouragement from the Government.
Role of foreign Capital

a. Judicious use of foreign is always better.

b. Terms and conditions of getting the loan should be very carefully examined before
the loan is taken.
c. Generally flag follows the foreign capital.
d. Foreign loans come from individuals, institutions, governments or even foreign
lending agencies like World Bank,. Asian development Bank etc.
e. Foreign Governments lend huge funds to poor countries and later interfere in the
political and economic decisions. The best example is that of United States Of
America which is forcing its decisions on the Government of our country.

(D) Organisation as a factor of production

a. All the factors of production lie scattered here and there. Organiser brings them
together and starts the production.
b. Organiser and entrepreneur are one and the same.
c. Organiser performs three primary functions; They are : Innovation, risk bearing
and organising the productive activity.
d. There are five different forms of organisation. They are:

Sole trading concern

Partnership
Joint stock company
Government organisation
Cooperative organisation.
Sole Trading concern

One man organisation

Unlimited liability
No perpetual existence
Suitable for small organisations.
Suitable for gully hotels, road side hotels, dhabas etc.

Partnership organisation:

Two and more persons form and run the organisation.

Generally friends or relatives form such organisation.
Governed by partnership deed: constitution of the firm.
Unlimited liability
No perpetual existence
Amount of capital, profit sharing etc. stated in the deed.
Besides normal partners, there are nominal partners and minor partners. etc.
Liability of such partners may be limited.
Suitable for medium size hotels.
Joint stock companies:

Share capital divided in small shares.

Share money collected from innumerable shareholders.
Registered under companies act.
Two stages of registration: Certificate of incorporation and certificate of commencement
Limited liability
Perpetual existence.
Ownership separated from management.
Two constitutions of the company: Memorandum and articles of association.
Two types of shares: Preference and equity.
Two types of companies: Public limited company and private limited company
Liability of the directors can be made unlimited by provision in the constitution
Finances can be raised through debentures..
Shares of the companies are sold and purchased in stock exchanges.
Suitable for big hotels.

Government organisations:

First three organisations are started with profit motive,

This organisation is started with welfare motive.
Promotion of tourism may be the objective of this organisation.
Ashoka hotel in Delhi, ITDC and MTDC chains of hotels are the best examples.

Cooperative organisation:

Financially weaker individuals come together and form such organisation.

Welfare motive.
Perpetual existence
Limited liability.
Registration under Cooperative act.
Minimum members required are 11.
Successful experiments in cooperative housing. cooperative credit. etc.
Generally cooperative canteens are managed by such organisations.

Which of these forms is best suited for a hotel?

No form is good and no form is bad. Different forms for different sizes of hotels.
For a small roadside hotel: sole trading concern
For a moderate size of hotel: partnership
For big hotels: Joint stock company
For promotion of tourism: Government organisation.
For offices, schools, colleges etc.: Cooperative organisation.

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Chapter VIII

Cost concepts

1.Importance of costing:

Profit = Revenue - Cost.

Price is decided by the market and not by us.
Hence, for increasing the profits, the only way left, is to reduce cost.
There are various coast centres in our organisation. such as purchase
department, power department, man power department etc. Each of them is a
cost centre. All our efforts should be directed to economise the cost of
production. For that we should be aware of various cost concepts. Main of
them are studied as follows:

2. Direct costs:

Cost of material, labour and power.

If different products are produced in one and the same establishment these
costs can be directly identified to every product.
Direct control of this cost is possible.
For a hotel cost of food and beverages, labour etc can be called as direct costs.

3. Indirect costs:

These costs are called as overheads as they cannot be ascribed to any

particular product. Office staff, general office expenses etc are such indirect
cost.
Difficult to control.
These costs are debited to different products in different proportions.

4. Out of pocket costs:

These costs are actually incurred. There is an outflow of money. That is why
these costs are known as out of pocket costs.
Wages paid to labourers, electricity bills, water bills, cost of food and
beverages etc are the examples of out of pocket costs.

5. Book costs:

In such costs actual payments are not involved. It is merely by passing a book
entry these costs are taken into account.
Interest on capital, rent of premises payable to the owner himself, depreciation, etc are
the examples of book costs.
At the end of the year, it should be verified that no such costs are excluded.
Indian farmers face such costs very often. Wages of family members, Use of bullocks for
farm operations, seeds preserved to be sown next year involve some cost which is not
taken into account by the farmers and therefore their cost calculations are incorrect

6. Opportunity costs:

Factors of production have alternate uses. If they are used for one particular
purpose, they cannot be used elsewhere.
Thus we lose some opportunity which has its own cost.
This cost of loss of opportunity should also be taken into account while
calculating the cost.
Our hotel is booked by one party for three days for a marriage of his son. He
wants that during this period we should give all the facilities exclusively to
him. We have 20 rooms in our hotel. Because of our contract with him we
would not be in a position to let out these rooms. This is a loss of opportunity
for us. While giving him the quotation this cost of loss of opportunity should
also be taken into account.
A factory has two departments – spinning and weaving. The spun yarn of the
factory can be used in two ways: It can be sold in the open market or it can be
used in our weaving department. If we use it in our weaving department we
would lose the opportunity of selling it. Thus while calculating the cost of
woven cloth this loss of opportunity should be taken into account.

7. Fixed costs:

For every economic activity some infrastructure is needed. For a hotel we may
need land, building, interior decoration of rooms, kitchen equipment, furniture
etc. Expenditure for procuring these assents is called fixed cost.
This cost, being fixed, does not change with the level of output. It means that even
if the occupancy in the hotel changes, this cost is not going to change.
Thus fixed cost in the short run remains unchanged.
In the long run however, we may require bigger infra structure to satisfy the
needs of increased occupancy. Thus in the long run this fixed cost will no more be
fixed.
 Y
8. Variable cost:

Some costs however, will change with the level of output. These costs

Fixed Costs
pertain to labour cost, material cost, power cost etc. which are bound to
increase with the increase in to output. Increased occupancy in the hotel will
require more staff, more quantity of food and beverages, more expenditure
on power etc. Thus variable costs increases as the output increases.
It naturally means that if the output is zero, the variable cost would also be
zero.
If we want that the show must go on, at least the variable cost should be
recovered from the revenue earned . It does not matter even if the fixed cost
is not recovered because these costs would be there even if the production in
stopped.

a
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9. Total costs:

If the two costs shown above are added , we get the total cost. This can be shown
with the help of following formula:

Total costs = Fixed costs plus Variable costs.

If we want to show all these three costs with the help of diagram the fixed cost
curve will be parallel to x axis. The variable cost will slope upwards , the curve
 passing through origin. The total cost curve will also slope upwards. Both total
cost curve and the fixed cost curve will cut the Y axis at the same point.

10. Average cost, average fixed and average variable costs:

The formula shown above can be divided by N i.e the output produced.
It will appear as follows:

Total cost Fixed cost Variable cost

------------ = ------------- - ---------------
Output Output Output

TC FC VC
---- = ---- + ---- i.e. AC = AFC + AVC
N N N

Y
Example:
+ FC + VC

Output FC VC TC AFC AVC AC MC

1 10 5 15 10 5 15 15
2 10 9 19 5 4.5 9.5 4
 3 10 12 22 3.3 4 7.3 3
4 10 16 26 2.5 4 6.5 4
5 10 21 31 2 4.2 6.2 5
6 10 28 38 1.7 4.7 6.4 7
7 10 36 46 1.4 5.1 6.5 8
8 10 48 58 1.3 6 7.3 12
9 10 62 72 1.1 6.9 8 14
10 10 80 90 1 8 9 18

From the above example following conclusions can be very well drawn:

a. For different levels of output fixed cost is the same.

b. Variable cost is continuously increasing
c. Total cost is the total of FC and VC
d. AFC falls very rapidly initially but later the fall is slow
e. AVC is a U shaped curve: firstly falling and then rising
f. AC is the total of AFC and AVC
g. It falls down initially and then rising.
h. It falls down due to large scale economies
i. It rises because of large scale diseconomies.
j. Marginal cast is initially falling down and then rising.
k. When marginal cost is falling the average cost also is falling
l. Marginal cost curve cuts the average cost curve and moves above from the
lowest point of the average cost curve.
m. Marginal cost curve is not influenced by fixed cost. It is the
variable, cost which influences the marginal cost.

11. Marginal cost:

Marginal cost is the difference between two total costs.

Marginal cost is the increase in the total cost when additional unit is brought into
production It can be explained with the help of a
formula:

Marginal cost = ( TC) - ( TC)

n n-1
 Y
12. Avoidable and unavoidable costs:

In the process of production and distribution ,if proper precaution is taken we may be
successful in avoiding certain costs. Certain wastages are there which cannot be
avoided as they are normal wastages. But if abnormal wastages are there efforts can

ac + mc
be made to avoid them. In printing business 8% wastage is supposed to be normal
wastage . Any wastage above that is termed as avoidable wastage and by taking
special efforts such wastages can be avoided.

In some cases we feel as if we have avoided the wastage but if we carefully consider
that cost recurs in another form. We can do away with the fleet of delivery vans am
their maintenance is a very serious problem. But if we dispose them off we may be
required to hire vehicles and thereby that cost will come up in another form.

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Chapter IX

Revenue concepts

1.What is revenue?

Revenue is income generated out of business activities. That may be the sale proceeds of
the goods produced and sold or the service charges for the services rendered.

Entire revenue generated is not profit. From that revenue the cost of production has to be
subtracted and the balance left is profit. If the revenue generated is less than the cost of
production the businessman may even be required to face losses.

1.What is break even point?

Break even point is that minimum level of output where the costs are just covered by the
revenue. That is the minimum level of output which should be targeted by every
businessman.

Any effort to produce more than the break even point will lead to profitability. Every
businessman should try to be quite away fro the break even point as that will increase his
safety margin.

1.Total Revenue :

Total sales proceeds received by the business is total revenue

Total revenue = goods sold x price.

When the sale is zero Total Revenue is also zero and as sales increase the total revenue
would increase.

Total revenue will increase up to a particular level of sale but once that level is crossed
the total revenue is also likely to fall.

Example:

Price Sales Total Revenue

1 10 10
2 9 18
3 8 24
4 7 28
 5 6 30
6 5 30
7 4 28

In the above example, we find that as the price increases our sales will go down but the
total revenue will increase upto a point but later it will also fall down.

1.Average revenue

If the total revenue is divided by the units sold we should get average revenue. That can
be shown with the help of following formula:

Total Revenue TR

Average revenue = ------------------- i.e. AR = ------

Units sold N

For a firm under perfect competition, AR curve will be parallel to x axis

Bit in other case AR curve will slope downward..

1.Marginal revenue:

Any increase in the Total revenue because of the sale of one additional unit will be
termed as Marginal Revenue.

Under perfect competition AR =MR and both will be represented by one and the same
curve.

under other conditions AR > MR

Chapter X

Types of Markets

1.What is a market?
Market is a place where the sellers and buyers interact with each other and sell and
purchase goods at the decided price.

There can be specialised markets like vegetable market, grain market, cloth market, Share
market etc.

The markets can be local, regional, National or even international. For some goods there
can be local market only (like bricks, sand etc) Some food grains are consumed only in
some regions. For such products the market can be regional (like Jowar, Bajra etc) When
the sale and purchase crosses national boundaries we call that market as international
market.

There can be a wholesale or retail market. In wholesale markets traders purchase goods
for resale. In retail markets, however, the end purchasers i.e. the consumers who
ultimately consume goods purchase their requirements.

There can be spot market or even future market. When the possession of goods is given
by the seller to the purchaser immediately after the bargain strikes we call it a spot
trading. But sometimes, the sellers undertake to supply goods to the purchasers at a fixed
price for a definite future period we call it future trading.

2, Different market situations :

1. Perfect competition: Large no of buyers and sellers.

2. Monopoly: One seller and large no of buyers
3. Monopolistic competition: Sellers with different trade brands
4. Oligopoly: Few sellers and large no of buyers.
5. Duopoly: Two sellers and large no of buyers.
6. Monopsony. One purchaser and large no of sellers.
Chapter XI

Price determination under Perfect Competition

1.Characteristics of perfect competition:

Large number of buyers and sellers

Free entry and free exit

Identical products.

Many firms make one industry.

Poor control over demand and supply

Price taker and not a price maker

Perfect knowledge of the market.

No attachment between buyers and sellers.

No transport cost.

2, Is Perfect competition a myth?

Considering the conditions stated above we cam conclude that perfect competition cannot
exist in reality. It is that way a myth. In such a situation why should we study it? It works
as a simple model of the market. Once we study it we can have deviations in the
conditions and visualise what would be the situation in study it? It works as a

3.Process of price determination:

Interaction between the buyers and the sellers.

If demand is greater than supply – Price will rise

If supply is greater than demand – Price will fall down

And ultimately it will settle down at that point which is acceptable to both parties.

That is what is known as market price.

Supply and demand curves will shift up and down – as they depend upon other factors
as well.

Thus the price is likely to fluctuate depending upon the market conditions.

4. Impact of the market price on different firms (short run)

All the firms can be broadly divided in three categories.

Those firms which earn abnormal profits
Those firms which face abnormal losses
Those firms which will get only normal profits.
Price for all these three types will be the same. Only difference
will be their cost structure.
Should the firms facing losses stop their production?
No - firstly because they expect better days ahead.
Secondly – if they are recovering variable costs completely.

5. Position in the long run:

Y D
Firms facing profits - will face tough competition – and their abnormal profits
will not continue
pply
Firms facing losses – will try for cost cutting – and recover from abnormal losses
– If not possible will withdraw themselves from production.
Thus in the long run all will be getting only normal profits.
In such a situation why should they continue their operations?
Because somebody will disturb the equilibrium and again start getting abnormal
profits in the situation.

Y
D

Demand & Supply

Firm Facing Losses

S
0 O
0
Y

AR / MR / AC / MC
Chapter XII

Price determination under Monopoly

1.Characteristics of Monopoly:

One seller and large number of buyers.

Firm and industry are one and the same.

Price maker and not taker.

Entry and exit made difficult.

Perfect control over supply.

Control over – either price or supply.

Price discrimination possible.

2.Price determination in the short run:

Firm and industry being the same, the demand curve will be sloping down ward for the
firm as well.
Price will however be decided by the intersection of the demand and supply curve.
Monopolist cannot control both – the supply as well as price. He has to choose one of
them. If he chooses to control the price, the market will decide how much to purchase and
if he decides to regulate the supply the market will decide the price.
This price determination under the condition of monopoly will be a matter of trial and
method. The monopolist will try to maximise the profit at a particular level of output and
stabilise there.

Because the market situation is in his favour, he will draw abnormal profit in the short
run. He may even face abnormal loss in the shot run due to maladjustments in the market.
But such situation will not continue for a long period. as he will try his level best to
return to a stage where he will gat abnormal profit.
Can a monopoly price be less than competitive price? It can be if the monopolist is
Government where the objective of the monopoly will be welfare of the Society. A
monopolist who has started the activity with an intention to earn profit will see that his
price will be more.

1.Threats to monopoly:
It would be a wrong conclusion if we say that monopolist always charges exorbitant
prices That need not be so because he has to work under different pressures. such as:
Potential competition.
Agitation by consumers
Price controls introduced by the Govt.
Govt. entering the market as a competitor
Competition from foreign competitors.
Social and political aspirations of the monopolist.

2. Position of monopolist in the long run:

Monopoly is recognised by the monopoly power the monopolist commands. If he can

command that monopoly power in the long run also he will gat abnormal profits in the
long run as well.

3. Price discrimination in monopoly:

Monopolist is free to charge different prices to different customers. Such policy is known
as price discrimination.
This discrimination can assume different forms:

Different prices for different regions – i.e .regional discrimination.

Different groups of customers: i.e. electricity bills charged by electricity boards to

domestic consumers, farmers, industrial units, public utility services

Different classes : i.e. first class, second class passengers. etc.

Different seasons; Off season and seasonal variation s by hotels.

Different quantities purchased : different levels of discounts to different customers

purchasing different quantities.

Dumping practices.: Selling at a very competitive rate to foreign markets and recovering
the losses by charging high prices in domestic markets.

Different timings; i.e. telephone department fixing the tariff schedule time wise such as
morning tariff , day tariff, evening tariff and midnight tariff.

Is discrimination possible?

Yes For that two conditions are there.

a .He should be successful in creating compartments of the markets
b. Elasticity of demand in different markets should be different.
Is price discrimination profitable?..

If the monopolist is making use of his idle capacity in that case his profit margins will
increase because of discrimination. Best example is that of Air transportation companies.
Their present policy of giving lavish concessions to passengers booking well in advance
will definitely add to their revenue.
Chapter XIII

Price determination under Monopolistic competition

1.What is monopolistic competition?

Large number of buyers and sellers

But not as large as in perfect competition.

In one industry there are many firms.

A seller may get a patent or copy right . That may give a feeling of monopoly.
But the degree of monopoly power is so poor that the market share of each
seller is not significant. There is a competition in different brands and that is
why such condition is known as monopolistic competition.

Entry and exit made somewhat difficult.

Everybody has different products. similar products.

2. Product differentiation:

Different trade marks.

Different sizes

Different tastes, colours, smells, components. etc

Different packings

Different trade and selling conditions. such as credit, home delivery, gifts
other services etc.

Advertising and salesmanship

Loyalty of customers.

Psychological differentiation.

3. Price determination:

Market picture cannot be painted as market schedules cannot be prepared due to

variations in the products.
Nobody dares to touch the price. Price reduction by one will result in price wars and
everybody would be a loser in the price war. Increase in price by anybody will cause
harm to him only as others would not increase their prices.

1.What is the way out ?

In such a situation what should be the way out:

Non price competition. Price competition is immediately met with and therefore the
sellers follow the technique of non price competition.

Non price competition is not immediately noticed.

Even if it is noticed copying is difficult.

Y
What are the techniques? - credit, home delivery, gifts, personal attention, durable
goods, diaries, calendars, greetings, making the goods available during the periods of
stringencies, friend, philosher and guide.
c / ar
Leadership:

A shopkeeper having some control over the market share, having a dashing nature tries
to gain leadership in the market. Others recognise him as the leader and follow his
policies. When he increases the price others follow him. When he reduces the price others
do the same without entering into price war. This leadership is informal.

This leader may have many products out of which he develops one as a fighting brand .
He is recognised in the market by that brand. Example: Hindustan lever and Lux toilet
soap. He tries his level best to see that nobody comes very closer to him as far as the
fighting brand is concerned.

Cost plus pricing:

This has become the most popular technique of pricing. The producer calculates his cost
of production and adds his normal profit to that and fixes the price. This pricing policy is
so transparent that the costumer also likes it.

1.Equilibrium of a firm:

There can be three types of firms. a) firms getting abnormal profits in the short run b)
firms facing short run abnormal losses in the short run and c) firms getting only normal
profits.

Firms getting abnormal profit in the short run may face tough competition and the
abnormal profit may disappear in the long run.

Firms facing abnormal losses may adopt remedial measures and cut the costs and survive.

In the long run however, some firm may disturb the equilibrium by some innovation and
again the short run adjustments would start.
Chapter XIV

Money and its functions

1.When money was not there:

In a primitive Society money was not in use because the volume of transactions was very
small.

But with the increase in transactions necessity of medium of exchange was very strongly
felt.

Initially people accepted the principle of barter where commodities were exchanged for
commodities.

Barter system worked quite well when the transactions were few in number. But as
transactions multiplied various defects in the system were revealed. Main of them were:

2.Difficulties faced in barter system

Problem of double coincidence.

Problem of medium of exchange

Problem of measure of value

Problem of store of value

Problem of deferred payments.

As a result, something as a measuring rod was necessarily found out That measuring rod
passed through various evolutionary stages

1.Evolution of Money

Money passed through different evolutionary states:

2. Commodity money: like goats, food grains, courie

3. leather money: leather pieces

4. Metal money: mainly gold and silver

 5. Paper money: Representative paper money

6. Paper money: inconvertible paper currency

7. Credit money: cheques, bills of exchange , credit cards. etc

2.Functions of money:

One unknown poet has presented one stanza to show the functions of many which read as
follows:

Money is a matter of functions four,

Medium, measure, standard and store.

Medium of exchange:

Introduction of money solved the problem of double coincidence. Now we are not in
search of a person who is ready to purchase our commodity in exchange of a commodity
which we want. Because of the solution of the problem of double coincidence four
transactions which were mixed up got separated. Because of this separation, markets are
easily formed.

Measure of value:

We have many measuring rods in the community. For measuring liquids we have a
measure of litre, for measuring solids we have a measure of kilogram, for measuring
distance we have a meter. Similarly for measuring value we have a measuring rod known
as money. It measures everything, may be litres, kilograms, meters or anything.

Standard of deferred payments:

On many occasions, we are required to defer payments to some future dates. This
happens mostly in borrowing and lending transactions. If a commodity is borrowed while
returning the same problems related to size, colour, quality, taste, etc are likely to arise.
But that problem is nomore there . If one borrows Rs.1000 now he would refund rs.1000
later.

Store of Value:

Instead of consuming a thing now we may decide to consume it in future. But

unfortunately commodities are perishable. Besides, if we save wheat we may be required
to consume wheat only in the future. But money has solved this problem also. We can
store money and use it later for any purpose we want. Arising out of this function of
money the entire banking system has come into being where people go and save money
for future.
a. Money can be used as a tool for Economic development:

Now a days money can be used as a tool for economic development.

Following are the ways to use it for economic development.:

Capital formation has become possible due to the use of money.

Deficit financing has become possible.

Redistribution of income has become possible by using taxation system.

Balanced development has become possible.

Development of markets has become possible.

2.Value of money:

Money does not have intrinsic value.

It has value in exchange.

Value of money and quantity of money are inversely related

In inflation the value of money fall down.

Value of money can be measured with the help of index numbers.

When the index number rises it means that the value of money has gone down and
vice versa.

Measurement of absolute value of money is not possible. Index numbers help us

measuring relative value of money.
Chapter XV

Taxation : A Major tool of Public finance

1.Government as a welfare state:

Once upon a time Government was merely a police state. It was performing only two
functions viz: Protecting the people from foreign aggression and maintenance of law and
order in the country.

But now the concept of governance has changed very fast. Now government is a major
player in the economic activity. It has an active role to play in all the four subdivisions of
Economics. i.e. consumption, production, distribution and exchange. The main objective
of most of the governments is welfare. Objective of our government:

Bahujan Hitaya ; Bahujan Sukhay

Naturally all the activities need finances. Therefore a separate subdivision has come
forth in Economics known as Public Finance dealing with revenue of the government,
public expenditure, public debt and finance management by the government.

2.Public Revenue:

Public revenue is the income of the Government from various sources. In good old days
the policy of the Governments was to collect revenue as less as possible because
governments used to spend money lavishly for unproductive purposes. But the modern
governments being welfare states need financial resources to carry out government
works for the welfare of the Society.

Governments collect money from following sources:

Taxation: Major source – nearly 80% money is raised through this source.

Income of the public undertakings: Now a days this source also contributes significantly
as many public utility services are run by the government.

Other misc. receipts in the form of fees etc.

3.Taxation – Major fund raiser:

Governments are interested in collecting as much fund as possible from the taxation
system. That is why every government plans a multiple tax system where it really
becomes difficult for every person to avoid the taxes. For example:
 if he earns income, there is a income tax
if he spends money, there is expenditure tax.
if he donates money, there is a gift tax.
if he invests money, there is a tax on profit he earns.
if he acquires property, he has to pay wealth tax
if he dies because of pressure of tax, there is a death duty.

4. Canons of taxation:

Most of the Governments are democratic in nature and that is why while levying the
taxes they have to see that the tax payers are not unnecessarily punished. They have to
follow certain principles of taxation which are[popularly known as canons of taxation.
Major of them are:

Canon of simplicity

Canon of economy

Canon of productivity

Canon of elasticity

Canon of equality.

Canon of multiplicity.

Canon of certainty

Canon of convenience.

5.Direct and indirect taxes

In every tax, we should find out who pays the tax and who bears the burden of the taxes.
If the impact of tax and the burden of tax is shared by one and the same person we call it
as direct tax. The best example is that of income tax. A particular person pays the income
tax. The burden of that tax is borne by the same person . That is why we call income tax
as a direct tax.

But that is not the case with the sales tax. Sales tax is paid by the seller to the
Government. But ultimately, he shifts it to the customer who purchases the goods. It
means that the impact falls on the seller but the incidence falls on the purchaser. That is
why such taxes are known as indirect taxes.

Five examples of direct taxes:

Income tax
 Property tax

Wealth tax

Road tax for vehicles.

Fair tax

Five examples of Indirect taxes

Sales tax

Entertainment tax

Vat tax

Service tax

6.Merits of direct taxes:

Certainty in payment.

Economy in collection

Very productive

Flexible

Equality

7. Demerits of direct taxes:

Most inconvenient.

Complicated..
Tax on honesty.

Possibility of heavy corruption in collection of tax.

8. Merits of indirect taxes:

Most convenient

Simple
 productive

flexible

9. Demerits of indirect taxes:

Heavy cost of collection

Uncertain

Possibility of evasion

degressive in nature

less productive.
Chapter XVI

National Income and its measurement

1. Circular flow of Economic activities:

Factor Market

Factors and Producers

consumers

Product market

Inner circle: There is a factor flow from factor to the producer In return, there is a factor
remuneration

Outer circle: The consumers make the payment for purchase of goods and in return they
get the goods from the producers.

1.What is national income?

Money vale of all the goods and services produced in the country during the period of
one year. + Net result of the transactions with the rest of the world

2.What for national income is measured?

To measure the economic welfare of the country.

To know the standard of living of the country.
To assess the rate of economic growth of the country.
To diagnose the economic ills and imbalances.
To forecast the future economic growth of the country.
Per capita income is supposed to be the indicator of economic growth of the country.

1. Methods of measurement of national income:

Output approach:

a. Census of production to know the gross value of the final

goods and services produced in different economic sectors.
b. Add export surplus
c. Add net income from abroad
d. subtract depreciation
e. Add subsidies
f. Subtract indirect taxes
g. Avoid double counting.

Income approach :

a. Income of all the factors of production like rent + wages + interest +

profits.

b.This method is also known as factor cost method because rewards to

actors is the base of this method.

How to compute?

Total personal incomes

Add net income from abroad
Add Undistributed profits of the firms and companies
Add direct taxes on the company
Income from Govt properties.
Subtract transfer payments
Subtract depreciation

Expenditure approach:

Expenses incurred by individuals, firms an Governments.

Add subsidies
Add exports
Subtract imports
Subtract depreciation

Which of these methods is best?

Output and income methods are widely used

In UK and USA income method is popular
In our country, mixture of income and output methods.
Expenditure method is very rarely used.
In India output method for industry and agriculture and
income method for trade, commerce, banking and transport
Only in exceptional cases expenditure method is used.

Measurement of National income in India:

a. Even in pre independence era the estimation of

National income was done
b. Dadabhai Naoroji did it for the first time in India in the
year 1867-68
c. In 1949 the National income committee was appointed
under the chairmanship of Shri P.C.Mahalanobis. Other members
were Dr. D.R.Gadgiland Dr.V.K.R.V.Rao
d. On the recommendations the NIC Government
established the National Sample Survey (NSS)
e. From 1967 onwards the Central Statistical Organisation
has designed the perfect system of measurement
f. Output method for agriculture and manufacturing
sectors and income method for service sector.
Chapter XVII

Promotion of entrepreneurship

Who is an entrepreneur?

1. He is an instrument of change.

2. Innovation is his primary job.

3. He introduces purposeful change.

4. Directions of change:
Altogether a new product or service.
Durable product.
New taste, new shape, new colour, new size, new packing, new components.
New market.
New channel of distribution.
New use.
Product substitution.
Import substitution.
New campaign.

5. Basic functions of entrepreneur:

Innovation
Risk bearing
Organisation.

6. Entrepreneurship In India:
Entrepreneurship before Moghuls
Entrepreneurship during Moghul rule
Entrepreneurship during British regime: Too much of exploitation.
Managing Agency system: great threat to entrepreneurship in India.
Independence and after.

7. Efforts by the Govt to promote entrepreneurship:

Training.
Readymade industrial plots.
Readymade sheds
Readymade infrastructure.
Subsidies to undeveloped areas.
Creation of financial institutions for provision of fixed capital
Working capital through banks
Marketing facilities.
Export promotion.
Tax concessions.
Arranging industrial exhibitions.
Assistance to sick units.
Chapter XVIII

Economic Growth

1. Two types of growth:

Natural growth
Planned growth.

2. Stages of Economic development:

Too much of dependence on agriculture- Poorly developed countries.
More dependence on industries: Developing countries.
More dependence on service industries: Developed countries.

3. Factors impeding Economic growth:

Economic factors: Poor resources

Population explosion.
Economic systems
Poor entrepreneurship
Infra structural facilities.
Banking habits.
Economic stability

Political factors: Political will.

Political stability

Social factors: Social systems- Joint family system. Caste system

Religious attitude
Mind set – traditional attitude
Social infrastructure.
Education.
Materialist attitude.

a. How to speed up the economic growth?

i. Economic planning.
ii. Development of infra structural facilities.
iii. Mobilisation of saving.
iv. Development of entrepreneurship.
v. Political support.
vi. Balanced regional growth.
vii. Subsidies and tax concessions.
viii. Export promotion.
 Question Bank for II Students

1. Compare and contrast between Capitalism and Socialism and

show how Mixed Economy reaps the benefits of both of these
systems.

2. You propose to start a five star hotel at Aurangabad. How will

you estimate the demand for such a hotel?

3. Examine the concept of elasticity of demand. Show its various

types. Shoe how this concept is useful in finalizing the tariff of a
hotel.

4. Differentiate between stocks and supply. Examine the role of

time in increasing the supply.

5. Examine the different cost concepts. Show how they are useful
in taking hotel decisions.

6. Examine the utility of the concept of perfect competition even

when it is a hypothetical situation. How are prices determined
under this condition?

7. Elaborate the concept of price discrimination. How is it

practiced? Is price discrimination profitable?

8. Show how product differentiation is practiced under the

conditions of Monopolistic Competition. Why is non price
competition preferred to price competition?

9. Point out the difference between direct and indirect taxes by

giving five different examples of each of them. Which of these two
systems better?
10.”Money is a matter of functions four,
Medium, measure, standard and store.” Examine this statement in
the light of functions of money.

11. Discuss the role of National income statistics in framing the

National policies. How can it be measured?

12. Discuss the bottlenecks in enhancing the rate of economic

growth. How can these hurdles be removed?

13. State the various forms of organization. Which of them is best

suited to the hotel industry?

14. Point out the merits and demerits of division of labour. In spite
of the demerits, show why it should be practiced.

15. Examine the role of capital in speedy economic growth of the

country. How is it mobilized? Discuss the various measures
implemented by the Govt. to promote capital formation.