Learnovate Ecommerce – Finance intern

NAME: YASH KUMAR NAYAK

DATE: 27 JULY 2021

MENTOR: DAMODAR DASH

1. A)Explain how firms and individuals participate and interact in the product market
and in the factor market.
The circular flow diagram offers a simple way of organizing the economic transactions that occur
between households and firms in the economy.

Households are buyers and firms are sellers in the product market. In particular, households buy
the output of goods and services that firms produce.
Households are sellers, and firms are buyers in the factor market. In this market households
provide the inputs that firms use to produce goods and services.

1. B) . what role does profit plays in in market system

Meaning of profit in a market system: – When a firm’s revenue is greater than its costs, that
firm earns a profit in a market system. When a firm’s costs are greater than its revenue, that firm
suffers a loss in a market system. When all of a company’s expenses have been paid, profit is the
remaining income. Profit can be described as a monetary benefit given to a company’s owners
or shareholders. Benefit plays an important role in providing incentives for businesses and
entrepreneurs in such a capitalist economy. A higher profit incentive would motivate an
incumbent company to decide to lower costs and produce new goods. If an economy is
expanding, new businesses may want to join. If a company becomes financially unviable, it must
either adapt and improve or close its doors. This profit incentive will aid in increasing
productivity, expanding customer choice, and allocating resources based on consumer
preferences.

2. A) Explain the concept and various determination of market demand

Definition: The Market Demand is defined as the sum of individual demands for a product per
unit of time, at a given price. Simply, the total quantity of a commodity demanded by all the
buyers/individuals at a given price, other things remaining same is called the market demand.

There are several factors that determine the demand for a product. These are:

1. Price of the Product: The price of a product is the most important determinant of market
demand in the long-run and the only determinant in the short-run. As per the law of demand, the
price of a product and its quantity demanded are inversely related, i.e. the quantity demanded
increases when the price falls and decreases when the price rises, other things remaining the
same.

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2. Price of the Related Goods: The market demand for a commodity is also affected by the
changes in the price of the related goods. The related goods may be
the substitute or complementary goods. Two commodities are said to be a substitute for one
another if they satisfy the same want of an individual and the change in the price of one
commodity affects the demand for another in the same direction.
3. Consumer’s Income: The income is the basic determinant of the quantity demanded of a
product as it decides the purchasing power of the consumers. Thus, people with higher disposable
income spend a larger amount of income on consumer goods and services as compared to those
with lower disposable income. Consumer goods and services can be grouped under four
categories: essential goods, inferior goods, normal goods, and prestige or luxury goods. The
relationship between the consumer’s income and these goods is explained below:

 Essential Consumer Goods: The essential goods are the basic necessities of the life and are
consumed by all the persons of the society. Such as food grains, salt, cooking oil, clothing,
housing, etc., the demand for such commodities increases with the increase in consumer’s income
but only up to a certain limit, although the total expenditure may increase with respect to the
quality of goods consumed, other things remaining the same.
 Inferior Goods: A commodity is deemed to be inferior if its demand decreases with the
increases in the consumer’s income beyond a certain level of income and vice-versa. For
example, Bajra, millet, bidi are the inferior goods.
 Normal Goods: The normal goods are those goods whose demand increases with the
increase in the consumer’s income, such as clothing, household furniture, automobiles, etc. It is
to be noted that, demand for the normal goods increases rapidly with the increase in the
consumer’s income but slows down with a further increase in the income.
 Luxury Goods: The luxury goods are those goods which add to the prestige and pleasure
of the consumer without enhancing the earnings. For example, jewelry, stone, gem, luxury cars,
etc. The demand for such goods increases with the increase in the consumer’s income.

4. Consumers’ tastes and preferences: Consumer’s Tastes and preferences play a vital role
in determining a demand for a product. Tastes and preferences often depend on the lifestyle,
culture, social customs, hobbies, age and sex of the consumers and the religious sentiments
attached to a commodity. The change in any of these factors results in the change in the
consumer’s tastes and preferences, thereby resulting in either increase or decrease in the demand
for a product.
5. Advertisement Expenditure: Advertisement is done to promote sales of a product. It helps
in stimulating demand for a product in four ways; by informing the prospective consumers about
the availability of a product, by showing its superiority over the competitor’s brand, by
influencing the consumer’s choice against the rival product and by setting new fashion and
changing tastes of the consumers. The effect of advertisement is said to be fruitful if it leads to
the upward shift in the demand curve, i.e. the demand increases with the increase in the
advertisement expenditure, other things remaining constant.
6. Consumers’ Expectations: In the short run, the consumer’s expectation with respect to
the income, future prices of the product and its supply position plays a vital role in determining
the demand for a commodity. If the consumer expects a high rise in the price of the commodity,

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shall purchase it today at a high current price so as to avoid the pinch of the high price in the
future. On the contrary, if the prices are expected to fall in the future the consumer will postpone
their purchase with a view to avail benefits of lower prices in the future, especially in case of
nonessential goods.
Likewise, an expected increase in the income increases the demand for a product and vice-versa.
Also, in the case of scarce goods, if its production is expected to fall short in the future, the
consumer will buy it at current higher prices.

7. Demonstration Effect: Often, the new commodities or new models of an existing product
are bought by the rich people. Some people buy goods due to their genuine need for them or have
excess purchasing power. While some others do so because they want to exhibit their affluence.
Once the commodity is in very much fashion, many households buy them not because they have
a genuine need for them but their neighbors have purchased it. Thus, the purchase made by such
people arises out of feelings as jealousy, equality in society, competition, social inferiority, status
consciousness. The purchases made on the account of these factors results in the demonstration
effect, also called as Bandwagon Effect.
8. Consumer-Credit Facility: The availability of credit to the consumer also determines the
demand for a product. The credit extended by sellers, banks, friends, relatives or from other
sources induces a consumer to buy more than what would have not been possible in the absence
of the credit. Thus, the consumers with more borrowing capacity consumes more than the ones
who borrow less.
9. Population of the Country: The population of the country also determines the total
domestic demand for a product of mass consumption. For a given level of per capita income,
tastes and preferences, price, income, etc., the larger the size of the population the larger the
demand for a product and vice-versa.
10. Distribution of National Income: The national income is one of the basic determinants of
the market demand for a product, such as the higher the national income, the higher the demand
for all the normal goods. Apart from its level, the distribution pattern of the national income also
determines the overall demand for a product. Such as, if the national income is unevenly
distributed, i.e., the majority of the population falls under the low-income groups, then the market
demand for the inferior goods will be more than the other category goods.
2. B) write a detailed note on price output decisions in multi plant firms
When the firm produces the homogeneous product in two different plants each with different
costs, the multi plant monopolist has to decide also how to allocate the profit maximizing output
between two plants. Firm must determine how to distribute production between both plants 1.
Production should be split so that the MC in the plants is the same 2. Output is chosen here
MR=MC. Profit is therefore maximized when MR=MC at each plant. Q1 and C1 is output and
cost of production for Plant 1 –Q2 and C2 is output and cost of production for Plant 2 –QT = Q1
+ Q2 is total output –Profit is then 𝝅 = PQT – C1(Q1) – C2(Q2) Firm should increase output
from each plant until the additional profit from last unit produced at Plant 1 equals 0 In the long
run, a monopoly organisation with a number of plants may increase (or decrease) the number of
its plants with a view to obtain the profit-maximising solution. Now, each plant of the monopolist
may be of a different size, and in the long run the size of each plant is a variable.

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3. A) Elaborate the meaning and various types of cost in detail.
Definition Of Cost
Cost is the monetary value that a company has spent to produce something. The cost denotes the
amount of money that a company spends on the creation or production of goods or services. It
does not include the mark-up for profit. Cost is a measurement in monetary terms of the number
of resources used for the production of goods or rendering services.

Types Of Cost
1. Actual Costs
These are the costs which the firm incurs while producing or acquiring a good or a service. The
actual costs are also known as acquisition cost or outlay costs. The ex-amples of such costs are
material costs, labour costs, rent etc.

2. Opportunity Cost:
Opportunity cost represents the benefits or revenue forgone by pur-suing one course of action
rather than other. This means, when best alternative is adopted, it is obvious that second best
alternative cannot be implemented and its benefits are forgone.

3. Marginal Cost:
Marginal cost is the increase in cost as a result a unit change in output. Marginal cost can also be
defined as, the additional costs incurred when there is a unit change in the existing output of
goods and services.

4. Incremental Costs:
(а) The difference in total costs resulting from a contemplated change in policy.
(b) The addition to costs resulting from a change in the nature and the level of business activity.

5. Sunk Costs:
Sunk costs are the costs that are not altered by a change in quantity and cannot be recovered e.g.,
depreciation. This may also be defined as the cost for which the expen-diture has been incurred
in the past and which will not be affected by the particular decision. These are the parts of the
outlay (actual) costs.

4. B) Discuss meaning of risk. Explain the decision making under risk in detail.
In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty
about the effects/implications of an activity with respect to something that humans value (such
as health, well-being, wealth, property or the environment), often focusing on negative,
undesirable consequences. Many different definitions have been proposed. The international
standard definition of risk for common understanding in different applications is “effect of
uncertainty on objectives”.

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Decision-Making Under Risk
There are times when you need to make decisions even when you don’t have adequate or credible
information or when the information obtained from different sources doesn’t match up.

This happens when you don’t know for sure how each of the alternatives will pan out and whether
you will be able to achieve the goal by taking a particular decision. However, you have enough
understanding to know how likely each option is to be successful.

It is this likelihood or probability of each of the options that a manager needs to take into account
and apply experience, expertise, and gut feeling to the process of decision-making.

Q. 4 A) Explain composition and function of money market in India.

The money market is not a single homogeneous market. It consists of a number of sub-markets
which collectively constitute the money market. There should be competition within each sub-
market as well as between different sub-markets. Indian money market was highly regulated and
was characterized by limited number of participants. The limited variety and instruments were
available. Interest rate on the instruments was under the regulation of Reserve Bank of India. The
sincere efforts for developing the money market were made when the financial sector reforms
were started by the government.

Money markets are the markets for short-term, highly liquid debt securities. Examples of these
include bankers’ acceptances, repos, negotiable certificates of deposit, and Treasury Bills with
maturity of one year or less and often 30 days or less. Money market securities are generally very
safe investments, which return relatively; low interest rate that is most appropriate for temporary
cash storage or short-term time needs.

Functions of Money Markets

The instruments of this market are liquid when we compare it with other financial instruments.
We can convert these instruments into cash easily. Thus, they are able to address the need for the
short-term surplus funds of the lenders and short-term fund requirements of the borrowers.

The major functions of such market instrument are to cater to the short term financial needs of
the economy. Some other functions are as following:
1. It helps in effective implementation of the RBI’s monetary policy.

2. This market helps to maintain demand and supply equilibrium with regard to short-term funds.
3. It also meets the need for short-term fund requirement of the government.

4. It helps in maintaining liquidity in the economy.One important consideration about money

market investment is that retail investors have very limited scope for directly participating in it.
Recently with NSE being offering some instruments of the money market for retail investors.
However, due to the large ticket size of trade and low liquidity, it is out of reach of retail investors.
But nothing to worry much on this front. As retail investors of India, you can passively invest in
any of such instruments through money market mutual funds.

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4. B) Discuss the role of Securities and Exchange Board of India (SEBI) in monitoring
regulating capital market in India.
SEBI is a regulating body for the capital market in India. It is set up by the government of India
and act as a watchdog for the capital market. It issues guidelines for the functioning of stock
exchanges and aims at reducing all malpractices from the trading world. It avoids all speculative
activities and insider trading from securities trading business.

1. Organizational Structure of SEBI

SEBI consists of a chairman and six members, which are nominated by the Central Government.
There are two members who are officers from central ministries. SEBI also consists of one
member from the Reserve Bank of India and two members nominated by the Central
Government. The SEBI headquarters are located in Mumbai, with branch offices in the remaining
metros of India, namely Delhi, Kolkata and Chennai.SEBI was formed with an initial capital of
7.5 crore INR in 1988. The funding was provided by the promoters - IDBI, ICICI and IFCI. This
amount was invested, and the interest generated on the same is usually used for all day-to-day
expenses of the department. All statutory powers for regulating the Indian capital markets are
vested with SEBI.

2. Functions of SEBI
Let us now discuss about the functions performed by the Securities and Exchange Board of India.
The key functions of SEBI include:

1. Regulating the Capital Markets by undertaking suitable measures

2. Safeguarding the interest of investors

3. Regulating the functioning of stock exchanges and security markets

4. Regulating the functioning of Stockbrokers and transfer agents, merchant bankers etc.
5. Registration of Brokers, Investment Advisors and other entities

6. Encouraging Self-Regulatory Organizations (SRO)

7. Eliminating the loopholes and malpractices in the security markets

8. Ensuring investor’s education

9. Management of Complaint and Redressal System for investors (SCORES)

10. Ensuring systematic dealings and supervising the overall functioning of the system.These are
some of the key functions which are performed by SEBI. There are various other functions as
well which the regulator looks after.

3. Decisions taken by SEBI to ensure a healthy Capital Market

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SEBI is the regulatory body for the Indian capital markets and has adopted various steps and
functions to ensure smooth and healthy functioning of the capital markets. Let us take a look at
some of them.

• Determination of Premium and Share Prices: As per the latest announcement of SEBI, all listed
Indian companies have been given a free hand in determining their stock prices and premium on
those prices. However, SEBI ensures that the determined pricing and premium is equally
applicable for all without any sort of discrimination.

• Eligibility Criteria for Under Writers: SEBI has fixed the minimum asset limit at 20 lakhs INR
to work as an under writer. Also, SEBI looks after the functioning if under writers as well and
holds the full authority to cancel their registration if any irregularity is found in the purchase of
unsubscribed part of the share issue.
• Abolishing Insider Trading: Insider Trading was one of the biggest loopholes of the Indian
Capital Markets. A recent web series has also portrayed, how insider trading was used for making
huge profits. SEBI introduced the SEBI regulation 1992 which ensures honesty and transparency
in the Capital Markets.
• The control on Mutual Funds: SEBI announced the SEBI Mutual Funds Regulation in 1993
which gave the authority to take over the direct control of all mutual funds of private sector and
government. As per the announcement, any company which floats a mutual fund should
necessarily have net assets worth over INR 5 Crores and should consist a contribution of at least
40% from the promoter.

• Control on FIIs: Foreign Institutional Investors or FIIs, now need to be registered with SEBI
before they step in the Indian Capital Markets. The directives issued by SEBI in this regard state
that every FII who is investing in Indian Capital Markets needs to have a SEBI registration.These
are some of the major directives and decisions which are undertaken by SEBI to ensure smooth
and healthy functioning of the Indian Capital Markets.

5. A) Write a note on-

I ) Difference between WTO and GATT

Basis GATT WTO

GATT can be described
Meaning as a set of rules,
multilateral trade
agreement, that came
into force, to encourage
international trade and
remove cross-country
trade barriers.
WTO is an international
organization, that came
into existence to oversee
and liberalize trade
between countries.

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 Institution It does not have any It has permanent
institutional existence institution along with a
but have a small secretariat.
secretariat.

Participant nations Contracting Members

parties
Commitments Provisional Full and Permanent
Application The rules of GATT are The rules of WTO
only for trade in goods. include services and
aspects of intellectual
property along with the
goods.

Agreement Its agreement is Its agreements are

originally multilateral, purely
but plurilateral multilateral.
agreement are added to
it later.

Domestic Legislation Allowed to continue Not allowed to continue

Dispute Settlement Slow and ineffective Fast and effective
System

II) Difference between GDP and PPP

GDP Nominal vs GDP PPP

GDP nominal is the GDP unadjusted for the GDP PPP is the GDP converted to US dollars
effects of inflation thus is at current market prices using purchasing power parity rates and divided
by total population
Underlying Concept
GDP nominal is derived based on the concept of Underlying concept for GDP PPP is differences
interest rates. in exchange rates.
Exchange Rate Variations
GDP nominal is not adjusted to reflect exchange GDP PPP is adjusted to reflect exchange rate
rate variations among countries variations
B) Define following terms in relation with Union Budget
1) Revenue Account
A revenue account is an account with a credit balance. It includes all the revenue receipts also
known as current receipts of the government. These receipts include tax revenues and other
revenues of the government.

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II) Capital Account
A capital account is an account that includes the capital receipts and the payments. It basically
includes assets as well as liabilities of the government. Capital receipts comprise of the loans or
capital that are raised by governments by different means.

III) Revenue deficit

Revenue deficit is excess of total revenue expenditure of the government over its total revenue
receipts. It is related to only revenue expenditure and revenue receipts of the government.
Alternatively, the shortfall of total revenue receipts compared to total revenue expenditure is
defined as revenue deficit.

IV) Capital deficit

A capital account deficit occurs when the equity in a business turns negative. This means that the
total amount of liabilities exceeds the total amount of assets.

V) Plan and non-plan expenditure

This is largely the revenue expenditure of the government, although it also includes capital
expenditure. It covers all expenditure not included in the Plan Expenditure