INTRODUCTION TO BUSINESS AND ECONOMICS

The term ‘business’ means to be ‘busy’ or ‘occupied’. In practice, business includes

certain economic activities in which people are busy or engaged. Such activities relate
to production, distribution, trading or exchange of goods and services to satisfy the
needs of people so as to earn income or profit.
Business refers to the economic activities concerned with the production and
exchange of goods and services, primarily pursued with the objective of earning profi ts.
A business (or firm) is an enterprise that provides products or services desired
by customers. Along with the large, well-known businesses such as – The Coca-Cola
Company and IBM, there are many thousands small businesses that provide employment
opportunities and produce products or services that satisfy customers.
Definition of Business
“Business may be defined as human activity directed towards or acquiring wealth
through buying and selling of goods.” – Lewis H. Haney
“Business may be defined as an activity in which different persons exchange
something of value, whether goods or services, for mutual gain or benefit” – Peterson
and Plowman
“Business is an enterprise engaged in the production and distribution of goods
for sale in the market or rendering service for a price.” – R. N. Owens
“Business is an institution organized and operated to provide goods and services
to society under the incentive of private gain.” —B.O. Wheeler.
“All the activities including the production and sale of goods or services may be
classified as business activities.” —William Spriegel

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."
According to Dicksee, "Business refers to a form of activity conducted with an
objective of earning profits for the benefit of those on whose behalf the activity is
conducted."
Lewis Henry defines business as, "Human activity directed towards producing or
acquiring wealth through buying and selling of goods."
Feature of business
1. Exchange of goods and services: All business activities are directly or indirectly
concerned with the exchange of goods or services for money or money's worth.
2. Deals in numerous transactions: In business, the exchange of goods and
services is a regular feature. A businessman regularly deals in several
transactions and not just one or two transactions.
3. Profit is the main objective: The business is carried on with a motive to earn a
profit. The profit is a reward for the services of a businessman.
4. Business skills for economic success: Anyone cannot run a business. To be a
good businessman, one needs to have good business qualities and skills. A
businessman needs experience and skill to run a business.
5. Risks and Uncertainties: 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.
6. Buyer and Seller: Every business transaction has a minimum of two parties that
is a buyer and a seller. Business is nothing but a contract or an agreement
between buyer and seller.
7. Connected with production: The business activity may be connected with the
production of goods or services. In this case, it is called as industrial activity. The
industry may be primary or secondary.
8. Marketing and Distribution of goods: The business activity may be concerned
with marketing or distribution of goods in which case it is called a commercial
activity.
9. To satisfy human wants: The businessman also desires to satisfy human wants
through the conduct of business. By producing and supplying various
commodities, businessmen try to promote consumer's satisfaction.
10. 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.
 BUSINESS STRUCTURE

Business structure refers to the legal structure of an organization that is recognized

in a given jurisdiction. An organization’s legal structure is a key determinant of the activities
that it can undertake, such as raising capital, responsibility for obligations of the business, as
well as the amount of taxes that the organization owes to tax agencies.

Sole Proprietorship

Sole Proprietorship in simple words is a one-man business organisation. Furthermore, a sole

proprietor is a natural person(not a legal person/entity) who fully owns and manages this type
of entity. In fact, the business and the man are the same, it does not have a separate legal entity.
In addition, a sole proprietorship usually does not have to be incorporated or registered. Thus,
it is the simplest form of business structure and the ideal choice to run a small business or
medium scale business. Let us look at some important features of a proprietorship.

Features of Sole Proprietorship

1] Lack of Legal Formalities: A sole proprietorship does not have a separate law to govern it.
And so there are not many special rules and regulations to follow. Furthermore, it does not
require incorporation or registration of any kind. In fact, in most cases, we need only the license
to carry out the desired business.
And just like in its formation, there is hardly any legal process involved in its closure. All in all, it
allows for ease of doing business with minimum hassles.
2] Liability: Since there is no separation between the owner and the business, the
personal liability of the owner is also unlimited. So if the business is unable to meet its own
debts or liabilities, it will fall upon the proprietor to pay them. For instance, he may have to sell
all of his personal assets (like his car, house, other properties etc) to meet the debts or liabilities
of the business.
3] Risk and Profit: The business owner is the only risk bearer in a sole proprietorship. Since he
is the only one financially invested in the company. As a result, he must also bear all the risk. In
other words, if the business fails or suffers losses he will be the one affected.
However, he also enjoys all the profits from the business. He does not have to share his profits
with any other stakeholders since there are none. So he must bear the full risk in exchange for
enjoying full profits.
4] No Separate Identity: In legal terms, the business and the owner are one and the same. No
separate legal identity will be bestowed upon the sole proprietorship. So the owner will be
responsible for all the activities and transactions of the business.
5] Continuity: As seen above the business and the owner has one identity. So a sole
proprietorship is entirely dependent on its owner. The death, retirement, bankruptcy. insanity,
imprisonment etc will have an effect on the sole proprietorship. In such situations, the
proprietorship will cease to exist and the business will come to an end.
6] All Profits or Losses to the Proprietor: Being the sole owner of the enterprise, the
proprietor enjoys all the profits earned and bears the full brunt of all losses incurred by the
enterprise.

Advantages:
1. Simple Form of Organisation: Proprietorship is the simplest form of organisation. The
entrepreneur can start his/her enterprise after obtaining license and permits. There is no need
to go through the legal formalities. For starting a small enterprise, no formal registration is
statutorily needed.
2. Owner’s Freedom to Take Decisions: The owner, i.e. the proprietor is free to make all decisions
and reap all the fruits of his labour. There is no other person who can interfere or weigh him
down.
3. High Secrecy: Secrecy is another major advantage offered by proprietorship. This is because
the whole business is handled by the proprietor himself and, as such, the business secrets are
known to him only. Added to it, the proprietor is not bound to reveal or publish his accounts. In
present day business atmosphere, the less a competitor knows about one’s business, better off
one is. What the competitors can make is guesstimates only.

4. Tax Advantage: As compared to other forms of ownership, the proprietorship form of

ownership enjoys certain tax advantages. For example, a proprietor’s income is taxed only

once while corporate income is, at occasions taxed twice, say, double taxation.
5. Easy Dissolution: In proprietorship business, the entrepreneur is all in all. As there are no co-
owners or partners, therefore, there is no scope for the difference of opinion in the case the
proprietor/entrepreneur-wants to dissolve the business. It is due to the easy formation and
dissolution, proprietorship is often used to test the business ideas.
Disadvantages:
1. Limited Resources: A proprietor has limited resources at his/her command. The proprietor
mainly relies on his/her funds and savings and, to a limited extent, borrowings from relatives
and friends. Thus, the scope for raising funds is highly limited in proprietorship. This, in turn’
deters the expansion and development of an enterprise.
2. Limited Ability: Proprietorship is characterised as one-man show. One man may be expert in
one or two areas, but not in all areas like production, finance, marketing, personnel, etc. Then,
due to the lack of adequate and relevant knowledge, the decisions taken by him be imbalanced.
3. Unlimited Liability: Proprietorship is characterised by unlimited liability also. It means that
in case of loss, the private property of the proprietor will also be used to clear the business
obligations. Hence, the proprietor avoids taking risk.

4. Limited Life of Enterprise Form: The life of a proprietary enterprise depends solely upon

the life of the proprietor. When he dies or becomes insolvent or insane or permanently

incapacitated, there is very likelihood of closure of enterprise. Say, enterprise also dies with

its proprietor.

PARTNERSHIP

A partnership is created when two or more people come together intending to operate a
business and decide to share the profits, risks, and liabilities. It exists even if the parties involved
don’t have a written contract and might not even be aware that they’ve created a partnership.

A partnership is a kind of business where a formal agreement between two or more people

is made who agree to be the co-owners, distribute responsibilities for running an

organization and share the income or losses that the business generates.

In India, all the aspects and functions of the partnership are administered under ‘The Indian

Partnership Act 1932’. This specific law explains that partnership is an association between

two or more individuals or parties who have accepted to share the profits generated from

the business under the supervision of all the members or behalf of other members.
Features of Partnerships

1. Agreement
The definition of the partnership itself makes it clear that there must exist an agreement
between partners to work together and share profits amongst them. Partners may make such
an agreement either orally or in writing. If it exists in written form, we refer to such an
agreement as a partnership deed.

Such written or oral agreement between partners must ensure that they are clear on
their status as partners of their firm. This includes details pertaining to their work as partners,
the firm’s businesses, their profit and loss sharing ratio, etc.

2. Business
The existence of a business is an essential feature of partnerships. There can be no formal
partnership under the Partnership Act if the partners carry out charitable activities. Section 2
says that business includes any trade, profession or occupation. What is essential is that the
firm must work with the intention of earning profits.
3. Profit sharing
A partnership does not exist unless partners share the profits of their firm. A person who works
for the partnership business without having a share in its profits may be an employee, but not
a partner. It is noteworthy to point out that the law only requires the sharing of profits amongst
partners. Consequently, all partners need not share losses as well.

4. Principal-agency relationship
A partnership firm’s business may be conducted either by all partners together or by one
partner acting on behalf of all others. We commonly refer to such a peculiar relationship
between partners as the principle of agency.

This principle means that all partners are agents for each other. The decisions of one partner
taken in the ordinary course of business will bind other partners as well. All partners are liable
for acts of the firm individually and severally.

5.Two or More Persons: In order to manifest a partnership, there should be at least two (2)
persons possessing a common goal. To put it in other words, the minimal number of partners
in an enterprise can be two (2). However, there is a constraint on their maximum number of
people

Sharing of Profit: Another significant component of the partnership is, the accord between
partners has to share gains and losses of a trading concern. However, the definition held in
the Partnership Act elucidates – partnership as an association between people who have
consented to share the gains of a business, the sharing of loss is implicit. Hence, sharing of
gains and losses is vital.

Mutual Business: The partners are the owners as well as the agent of their firm. Any act
performed by one partner can affect other partners and the firm. It can be concluded that
this point acts as a test of partnership for all the partners.
TYPES OF PARTNER
Active or managing partner
An active partner participates in a company's management. Referred to as material
participants, active partners invest in the partnership and participate in its day-to-day
activities to maximise their returns. They typically hold some of the most important
positions and can serve in various roles, including those of a manager, advisor, organiser and
controller of the company's operations. The active partner may withdraw compensation
from the business, subject to the partnership deed's terms and conditions. Additionally, they
are completely liable for any debts.
An active partner participates in a company's management. Referred to as material
participants, active partners invest in the partnership and participate in its day-to-day
activities to maximise their returns. They typically hold some of the most important
positions and can serve in various roles, including those of a manager, advisor, organiser and
controller of the company's operations. The active partner may withdraw compensation
from the business, subject to the partnership deed's terms and conditions. Additionally, they
are completely liable for any debts.
They serve as agents and manage everyday tasks on behalf of all the other partners. Any
decision made by an active partner in the regular course of business is binding on the
company and other partners. When leaving the partnership firm, an active partner publicly
announces their intention to resign from the company to release themselves from
responsibility for the actions of the remaining partners. Without issuing public notification,
they would still be responsible for the actions of the other partners post-retirement.
2. Inactive or sleeping partner
An inactive partner is not involved in the day-to-day operations of the partnership firm. But
other partners might consult with them when making important decisions for the company.
Similar to other partners, a sleeping partner contributes a fair portion of capital to the
business and shares its gains and losses. Outsiders may not be aware of this partner's
relationship, but they invest in the company and are responsible for paying off any debts on
the company's behalf. They have limited financial obligations and liability to the business.
A person who is financially capable and interested in the company but cannot work full-time
in the business can take on the role of an inactive partner. The actions of all the other
partners are binding on them. Unlike an active partner, it is not necessary for a sleeping
partner to give public notice if they choose to leave the partnership. The firm cannot allow
them to withdraw compensation because they are not involved in the day-to-day
management of the company. If the partnership agreement does pay inactive partners, it is
not deductible under the Income Tax Act of 1961.
3. Nominal partner
A nominal partner has no substantial stake in a partnership firm. They do not participate in
the operation of the company and merely lend their name to it. They make no capital
investments in the company and hence do not share in its profits. But the nominal partner is
still responsible for the actions of any other partners when dealing with third parties and
outsiders. They are also responsible for paying the firm's debts back to its creditors.
The company might increase its sales or gain greater market credibility by leveraging the
nominal partner's name. For instance, a business can establish a partnership with a celebrity
or business tycoon. This can provide value to the company and improve its brand image by
leveraging the individual's notoriety and goodwill. The nominal partner may agree to this
arrangement in exchange for money or any other form of compensation.
4. Partner by estoppel or holding out
A partner who indicates through their words, deeds or conduct that they are a partner in the
firm is a partner by estoppel. Even if they are not actually a partner in the company, they may
have presented themselves in a way that legally binds them to become a partner by estoppel.
Also, if a company names a person as a partner and the person knows this but does not object
to or reject the partnership, people can assume their consent, and thus they legally become
a partner by estoppel for that firm. Later, they cannot deny being a partner.
Although this partner does not participate in the firm's management or capital contributions,
they are nevertheless responsible for the credits and loans the company obtains. There are
two basic requirements for establishing a partner by estoppel—the individual represents
they are a partner of a firm either orally, in writing or via their conduct, and a third party
acts with knowledge of that representation. The individual who introduces themselves as a
partner is responsible for any financial losses caused to the third party because of the
representation, provided the third party can establish it in court.
5. Partner in profits only
A partner who enters the partnership firm as a 'partner in profits only' partakes in profits
but is not responsible for any losses. Even when engaging with third parties, they are only
accountable for their profit-making activities and do not share any other liabilities. They do
not participate in firm management and are not accountable for the company's business
decisions. These types of partners often join a company for its money and goodwill.
They are accountable to third persons for their acts of gain, though. This means a third party
could hold this partner responsible if the business suffers a loss and the other partners go
bankrupt. The third party may not concern themselves with the internal arrangement of only
sharing profits because it is a private arrangement among the partners. When other partners
cannot pay up, the 'partner in profits only' becomes accountable for the firm's liabilities.
They can then reimburse the third party for their losses or contributions to the firm.
6. Minor as a partner
A minor, or someone under the age of 18, cannot be a formal partner in any partnership firm
as per the Contract Act. But, if other business partners agree, they may still be eligible for a
partnership. A minor may partake in a company's profits, but they are only liable for their
capital contribution if the company suffers a loss. After reaching maturity or turning 18, a
minor partner has six months to determine whether they want to stay on as a partner or
leave the firm. They declare this by a public notice in both situations.
They become subject to the firm's unlimited liability as of the day they gained the benefits of
a partnership if they fail to offer any notice within six months or decide to stay. Additionally,
they gain the right to actively participate in running the company's operations. If a minor
chooses not to become a partner, their liabilities and rights remain those of a minor until the
day of public notification. Any actions the company takes after the notice date are not subject
to liability for their share.
7. Secret partner
A secret partner is a partner whose affiliation with the company is unknown to the broader
public. The secret partner occupies the space between the active and sleeping partners. They
invest capital, enjoy profits, share losses, take part in business management and are subject
to unlimited liability. But they keep their membership a secret from outsiders and other
parties. A silent partner is similar to a secret partner but does not have the right to take part
in business management
PARTNERSHIP DEED
A partnership is a kind of business where a formal agreement between two or more people
is made. They agree to be co-owners, distribute responsibilities for running an organisation
and share the income or losses that the business generates. These features of partnerships
are documented in a document which is known as partnership deed.
Partnership deed is a partnership agreement between the partners of the firm which
outlines the terms and conditions of the partnership between the partners. The purpose of a
partnership deed is to provide clear understanding of the roles of each partner, which
ensures smooth running of the operations of the firm.

REGISTRATION OF PARTNERSHIP DEED:

All the rights and responsibilities of each member are recorded in a document known as a
Partnership Deed. This deed can be oral or written; however, an oral agreement is of no use
when the firm has to deal with tax. A few essential characteristics of a partnership deed are:

 The name of the firm.

 Name and addresses of the partners.
 Nature of the business.
 The term or duration of the partnership.
 The amount of capital to be contributed by each partner.
 The drawings that can be made by each partner.
 The interest to be allowed on capital and charged on drawings.
 Rights of partners.
 Duties of partners.
 Remuneration to partners.
 The method used for calculating goodwill.
 Profit and loss sharing ratio
 Joint-Stock Company

A Joint-Stock Company is co-owned by its shareholders. A shareholder’s stake depends on

the number of stocks owned by them. They are liable only to the extent of shareholding. Also,
stockholders can transfer their shares without any restriction.

This structure is chosen by a company to raise extensive capital—by issuing shares and
debentures to the public. These organizations resemble a corporate structure but, at the
same time, relish privileges of limited liability.

Joint-Stock Company Features

This ownership model differs from other structures due to its characteristics:

 Limited Liability: In this ownership model, shareholders have limited liability. Even if
the business suffers massive losses, shareholders’ personal wealth is insulated from it.
 Separate Legal Entity: The identity of the business is independent of its members.
 Voluntary Association: There is no restriction on the entry and exit of shareholders.
 Stock Transferability: Shareholders can sell their stocks to new investors—no permission
required.
 Perpetual Succession: These companies are separate legal entities; therefore, the
retirement, insolvency, or death of a member does not impact business continuity.
 Incorporation: The formation is a lengthy process—legally compliant with the Joint-Stock
Companies Act 1844. It, therefore, requires extensive documentation.
 Number of Members: The minimum number of members required is one—there is no
upper limit.
 Capital Acquisition: The company can issue shares and debentures —to raise capital.
 Types of Joint Stock Companies

Joint-stock companies are classified based on the following criteria:

1 – Based on Incorporation

 Registered Company: Any corporation incorporated under the Companies Act of a

particular state is called a registered company.
 Chartered Company: It is incorporated under the royal charter duly signed by the king of
the state where it is formed. These companies enjoy special privileges in executing
commercial business operations. The East India Company is one such example.
 Statutory Company: When the Parliament passes a special act in a company’s favor, it is
called a statutory company. These companies facilitate public utilities and amenities. The
act documents company’s rights, responsibilities, powers, and objectives.

2 – Based on the Number of Members

 Private Company: A private limited company satisfies three conditions: a) It limits the
number of members—specified in the relevant Companies Act b) It restricts the right to
transfer shares and c)prohibits any invitation to the public—issuance of shares
or debentures.
 Public Company: Generally, there is no upper limit on the number of members in
a publicly-traded company. Shareholders are free to purchase and sell company shares.
In addition, these companies can issue shares or debentures to the public.

3 – Based on Liability

 Unlimited Liability Company: In such a company, shareholders’ liabilities extend to

personal property and assets.
 Limited Liability Company: This is the most common business ownership model. The
liability is limited to the extent of the value of shares held by shareholders.
 Company Limited by Guarantee: The shareholders have to pay a fixed amount in the
event of liquidation. The specific amount is documented in the Memorandum of
Association.

4 – Based on Ownership

 Government Company: It is a company in which not less than 51% of the shares are held
by the central or state government or a combination of central or state governments.
 Non-Government Company: The majority stake is owned by private individuals or
institutions.
 Advantages

A Joint-Stock Company structure has the following merits:

 Capital Accumulation: The company issues shares and debentures to the public—
considerable capital is raised. The funds are used for business operations and expansion.
 Limited Liability of Members: In limited liability companies, shareholders are protected.
Business losses cannot impact shareholders’ personal property or assets.
 Share Transferability: The stockholders can sell off their shares to the other investors
without any restrictions.
 Shareholders’ Rights: Stockholders have the right to elect the Board of Directors—they
have a say in decision-making.
 Transparency: These companies disclose their financial reports and records to the
public—to ensure complete transparency.

Disadvantages

This ownership structure has the following demerits:

 Excessive Legal Formalities: The incorporation and administration of a joint-stock

company involve elaborate legal formalities.
 Costly Affair: The cost of formation and administration is quite high.
 Conflict of Interest: There may be disagreements and conflicts of interest between the
stakeholders (owners, employees, the Board of Directors, lenders, etc.).
 No Confidentiality: Financial reports must be disclosed to the public. There is a lack of
discretion.
 Double Taxation: Since the company’s profits and dividends (when declared) are taxable,
shareholders are subject to double taxation.

MEANING OF CORPORATION:

A corporation is a legal entity that is separate and distinct from its owners or stockholders.
It is an artificial being, created operation of law, having the right of succession and the
powers, attributes, and properties expressly authorized by law or incident to its existence.

The corporation is indeed a constitutionally formed company that has the ability to possess
possessions and borrow money. It’s a group of people who are currently expected to operate
as if they’re a single entity, with relevant provisions that are distinct from the groups that
make up the business.

Legalists is a term that is typically used to describe companies. This implies that companies,
like citizens, can enter into agreements, make loans funds, possess goods, bring lawsuits,
collect income, and initiate or suffer proceedings. Companies are in a number of different
forms, but the most proportion was employed for commercial purposes. The corporate
framework legislation, often known as community legislation, is by far the most special niche
of an organization.
Characteristics of Corporation
 A corporation is an artificial being with a personality separate and apart from its
individual shareholders or members.
 It is created by the operation of law. This means it cannot come into existence by mere
agreement of the parties as in the case of business partnerships. Corporations require
special authority or grant from the State, either by a special incorporation law that
directly creates the corporation or by means of general corporation law.
 It enjoys the right of succession. A corporation has the capacity for continued
existence regardless of the death, withdrawal, insolvency or incapacity of the
individual shareholders or members. The transfer of ownership of shares of stock
does not dissolve the corporation.
 It has the powers, attributes and properties expressly authorized by law or incident to
its existence. For example, an investment by a transportation company in an insurance
corporation designed to reduce insurance costs, may be interpreted as an act that is
reasonably requisite and necessary to carry out the business of land transportation.
It is because insurance costs from part of the legitimate expenses of a transportation
owner.

Advantages of a Corporation
 The corporation has the legal capacity to act as a legal entity.
 Shareholders have limited liability.
 It has continuity of existence.
 Shares of stock can be transferred without the consent of the other shareholders.
 Its management is centralized in the board of directors.
 Shareholders are not general agents of the business.
 Greater ability to acquire funds.

Disadvantages of a Corporation
 A corporation is relatively complicated in formation and management.
 There is a greater degree of government control and supervision.
 It requires a relatively high cost of formation and operation.
 It is subject to heavier taxation than other forms of business organizations.
 Minority shareholders are subservient to the wishes of the majority.
 In large corporations, management and control have been separated from ownership.
 Transferability of shares permits the uniting of incompatible and conflicting elements
in one venture.

TYPES OF CORPORATIONS

Publicly Held Corporation

A publicly held corporation is a corporation whose stock is sold to and owned by the public
instead of private investors. The shares of such corporations are traded on a public stock
exchange (e.g., the New York Stock Exchange or NASDAQ in the United States).
Closely Held Corporation
A closely held corporation is a corporation whose shares of common stock are owned by
relatively few individuals and are generally unavailable to outsiders.

Limited Liability Company (LLC)

A form of business organization with the liability-shield advantages of a corporation and
the flexibility and tax pass-through advantages of a partnership.

S Corporation
An S corporation is a special structure of business ownership by which the business can
avoid double taxation because it is not required to pay corporate income tax on the profits
of the company. All profits/losses are passed on directly to the shareholders of the
company. Unlike a C Corporation, an S Corporation must not have more than 100
shareholders and must have only one class of stock.

Professional Corporation
A professional corporation is a corporation consisting of professionals who are licensed to
practice a particular profession such as accountants, lawyers and doctors. These
professionals can form a corporation and take advantage of the various benefits of the
corporate structure such as limited liability of shareholders, continuity of life and
centralized management. However, shares in a professional corporation can only be
transferred to other individuals licensed to practice in the same profession.

Nonprofit Corporation
A nonprofit corporation is an organization formed for serving a purpose of the public other
than for the accumulation of profits. These corporations enjoy tax-exempt status; however,
specific requirements and limitations are imposed on their activities. Nonprofit
corporations are generally those that serve a scientific, literary, education, artistic or
charitable purpose that benefits the public.

LIMITED LIABILITY COMPANY: meaning

A limited Liability Company is a type of business company where owners don’t have to pay
for the company’s liability and debt. It is not a corporation, and it falls in the category of
hybrid entities. It means that LLC has the characteristics of both corporations and sole
proprietorship. It provides the advantage of limited responsibility like corporations and
single taxes like the partnership and sole proprietorship.

Characteristics of Limited Liability Company

Separate Legal Entity
As a separate legal entity means that LLC is legally divided and separate from its owners. In
simple words, LLC can run its business operations and carry on even if all the members have
withdrawn from it. When then do, it would recruit and hire new people, buy and sell assets,
and other stock of the company. In case of any misconduct, LLC would defend itself in the
court of law.
Protect Limited Liability
One of the most popular characteristics of LLC is the limited liability of its members. If the
company is involved in any kind of litigation or found guilty of bankruptcy, then its members
don’t have to pay from their income and assets. Its members won’t be responsible for the
company’s action. Banks and creditors can’t accuse its members of the company’s default
and come after its members.

LLC members will be liable and have to take responsibility for the misconduct and
wrongdoings of other LLC members. It is not like a partnership, where every partner is liable
for the actions of other partners.

Flexible Taxation
The characteristics of LLC that we have discussed so far provide the advantages of a
corporation. Taxation is one of those things that don’t go well with corporations, because
they have to pay double taxes. IRS doesn’t have a specific provision for the LLC, whether to
tax like corporation or partnership.

If you’re planning to tax like a partnership, then you have to pass the taxes through the
personal tax return of its members. That’s how you would be able to avoid double taxes,
because LLC doesn’t pay income taxes.

Operation & Management Flexibility

When we talk about the functionality of corporations, then there are so many formalities are
involved like an annual board meeting, shareholders meetings, and other meetings where
corporations are legally bound to record every minute of the meetings.

The functionality of LLC is much simpler and easier where it doesn’t have to conduct
meetings and record every minute of it. Management of record and other operations are also
much simpler than the corporation. The roles of members are also flexible comprising of
casual day to day activities. But it’s important to be familiar with the LLC laws of the country
before starting it.

Types of Limited Liability Company

Single Member LLC
Single Member LLC, as the name implies, is comprised of only one member. However, the
law doesn’t treat single-member LLC a separate legal entity. Therefore, its income has to pass
through the tax return of its member for taxes.

Multi-member LLC
Multi-member LLC is comprised of more than one member. Unlike single-member LLC, the
law treats multi-member LLC a separate legal entity. Therefore, they can enjoy the
advantages of corporations and partnerships.
Non-profit LLC
As the name implies, such companies are not for profit. Therefore, they can enjoy the no tax
benefits like churches and can have limited liability and flexibility like partnerships and
corporations. But some countries do not allow the formation of non-profit LLC.

Professional Limited Liability Company

People having a professional license like the doctor, engineer, architect, or lawyer can create
PLLC. The purpose of creating professional LLC is to provide medical, legal, and other
services.

Advantages of Limited Liability Company

Tax Option
LLC has an option of taxation that whether they want to be taxed like a partnership or
corporation; single taxes or double taxes depending on their choice. Usually LLC prefers
single taxes.

Unlimited Members
LLC doesn’t have a restriction on the number of its members. They can have as many
members as they want. They also have flexibility over the membership style like trusts,
estate, organization, etc.

Flexible Management
The management of LLC also has the flexibility of choosing the management style whatever
they choose. Like corporations, they don’t have to follow the pre-decided set of rules.

Fewer Formalities
Another for the flexible management style of LLCs that they involve fewer formalities. They
don’t have to conduct monthly and annual meetings, prepare reports, calling all the
shareholders for the meetings, and record and documenting everything.

Safe Personal Asset

One of the most important benefits of LLCs, that your assets like house, car, and bank balance
remain safe like corporate shareholders. In case of bankruptcy like sole proprietorship and
partnership, you have to liquidate your asset to meet the demands of creditors. But it doesn’t
happen in the case of LLC.

Disadvantages of Limited Liability Company

Expensive
Although LLC has many tax and liability benefits; but it is very difficult to raise capital for the
company. People prefer investing their capital in corporations rather than LLC because they
see LLC as a risky investment.

Ownership Transfer
It’s very difficult to transfer your ownership in LLC than corporations. That’s why people
prefer corporations, where transferring ownership is much easier.
Limited Life
Factors like no board of directors and difficulty in transferring ownership make the life of
LLC limited.

THEORIES OF THE FIRM

Profit Maximisation Theory

Business is for profit; so the golden rule of business is that, one who takes risks will reap
profits. This seems logical, doesn’t it? This is the most conventional thought, and also the
most widely accepted objective of a firm. Traditionally economists assumed that generation
of the largest amount of absolute profit over a period of time is the single most important
objective of a business organisation. This thought is based on the belief that an individual
would risk one’s capital and time for uncertain returns, only with the expectation of
generating profits. Thus, traditionally the efficiency of a firm is measured in terms of its profit
generating capacity; profit is the only internal source of funds; even the market value of a
firm is largely dependent upon profits earned. Another argument in favour of this objective
is that, profit is must for long-term survival of any business. Normally profit may be stated
as following:

Profit = Total Revenue – Total Cost …(1)

Nobel Laureate Milton Friedman supported profit maximisation on the ground that its
validity cannot be judged by opinions of some executives; rather its ultimate test of validity
is that it has greater ability to predict future business trends and practices. Others argue that
whatever may be stated as the objective of firm, the bottom line of balance sheet will always
be important, that is the profit earned. However, certain pertinent questions arise in
accepting profit maximisation as the objective of the firm. First of all, which measure of profit
to consider among gross profit, net profit, net profit after tax, and net profit before tax? The
list would go on. Another question is which period of time to take into account among current
year, next year, next five years, and next 10 years? When we talk of future profit then concept
of time value of money comes in. Often managers have reported that the pressure to focus
on short-term profit has led them to take such decisions which ultimately have adversely
affected the long-term growth of the company. At the same time, validity of profit
maximisation may also be questioned in competitive markets, because it may be simply
impossible to maximise profits in modern times of high customer awareness and highly
competitive markets

As is clear from the above discussion, accepting maximisation of profit as the objective of the
fi rm leaves various questions unanswered, and may even lead to a situation that answers to
all of these questions would vary from fi rm to fi rm. All these, and similar questions gave
rise to another objective of firm, namely maximisation of sales revenue. This objective finds
particular relevance in firms which face tough competition and in which ownership is
segregated from managers.
 2. Baumol’s Theory of Sales Revenue Maximisation
Baumol raised serious questions on the validity of profit maximization as an objective of
the fi rm. He stressed that in competitive markets, firms would rather aim at maximizing
revenue, through maximization of sales. According to him, sales volumes, and not profi t
volumes, determine market leadership in competition. He further stressed that in large
organizations, management is separate from owners. Hence, there would always be a
dichotomy of managers’ goals and owners’ goals. Manager’s salary and other benefits are
largely linked with sales volumes, rather than profits.
Baumol hypothesised that managers often attach their personal prestige to the company’s
revenue or sales; therefore they would rather attempt to maximize the firm’s total revenue,
instead of profits. Moreover, sales volumes are better indicator of firm’s position in the
market, and growing sales strengthen the competitive spirit of the fi rm. Since operations of
the firm are in the hands of managers, and managers’ performance is measured in terms of
achieving sales targets, therefore it follows that management is more interested in
maximising sales, with a constraint of minimum profit. Hence, the objective is not to
maximise profit, but to maximise sales revenue, along with which, firms need to maintain a
minimum level of profit to keep shareholder satisfid. This minimum level of profit is
regarded as the profit constraint. However, empirical evidence to support above arguments
of Baumol is not suffi cient to draw any definite conclusion. Whatever research has been
done is based on inadequate data; hence the results are inconclusive.
3. Marris’ Hypothesis of Maximisation of Growth Rate:
Working on the principle of segregation of managers from owners, Marris proposed that
owners (shareholders) aim at profits and market share, whereas managers aim at better
salary, job security and growth. These two sets of goals can be achieved by maximising
balanced growth of the firm (G), which is dependent on the growth rate of demand for the
firm’s products (GD) and growth rate of capital supply to the firm (GC). Hence, growth rate
of the firm is balanced when the demand for its product and the capital supply to the firm
grow at the same rate.
Marris further said that firms face two constraints in the objective of maximisation of
balanced growth, which are as follows:
(i) Managerial Constraint: Among managerial constraints, Marris stressed on the importance
of the role of human resource in achieving organisational objectives. According to him, skills,
expertise, efficiency and sincerity of team managers are vital to the growth of the fi rm. Non
availability of managerial skill sets in required size creates constraints for growth;
organisations on their high levels of growth may face constraint of skill ceiling among the
existing employees. New recruitments may be used to increase the size of the managerial
pool with desired skills; however new recruits lack experience to make quick decisions,
which may pose as another constraint
(ii) Financial Constraint This relates to the prudence needed in managing financial
resources. Marris suggested that a prudent financial policy will be based on at least three
financial ratios, which in turn set the limit for the growth of the fi rm. In order to prove their
discretion managers will normally create a trade off and prefer a moderate debt equity ratio
(r1), moderate liquidity ratio (r2) and moderate retained profit ratio (r3). (Let us mention
here that the ratios used in the financial constraint are dealt with in detail in any standard
textbook on Financial Management and are beyond the scope of this book). However, a brief
description is given hereunder:
(a) Debt equity ratio (r1) This is the ratio between borrowed capital and owners’
capital. High value of debt equity ratio may cause insolvency; hence, a low
value of this ratio is usually preferred by managers to avoid insolvency.
However, a low value of r1 may create a constraint to the growth of the firm in
terms of dependence on high cost capital, i.e., equity.
(b) Liquidity ratio (r2) This is the ratio between current assets and current
liabilities and is an indicator of coverage provided by current assets to current
liabilities. According to Marris, a manager would try to operate in a region
where there is sufficient liquidity and safety and hence would prefer a high
liquidity ratio. But a high r2 would imply low yielding assets, since liquid
assets either do not earn at all (like cash and inventory), or earn low returns
(like short-term securities).
(c) Retention ratio (r3) This is the ratio between retained profits and total profits.
In other words, it is the inverse of dividend payout ratio, i.e., the retained
profits are that portion of net profit which is not distributed among
shareholders. A high retention ratio is good for growth, as retained profits
provide internal source of funds. However, a higher r3 would imply greater
volume retained profits, which may antagonize the shareholders. Hence,
managers cannot afford to keep a very high value of retention ratio.

Williamson’s Model of Managerial Utility Function

Oliver Williamson’s model is a combination of the objectives of profit maximisation and
growth maximisation. Williamson emphasized upon the fact that in modern businesses,
ownership is separate from management and modern managers have discretionary powers
to set the goals of fi rms. He further said that managers would apply their discretionary
power in such a way, as to maximise their own utility function, with the constraint of
maintaining minimum profi t to satisfy shareholders. The utility function of managers,
namely Um, is dependent upon managers’ salary (measurable); job security, power, status,
professional satisfaction (all non-measurable); and the power to influence firm’s objectives.
To formalize the model, Williamson took measurable proxy variables like perks of the
manager, office facilities like company car, and slack payments like a luxurious environment
in the office, and expenditure that takes place at the discretion of the manager, heading a
large pool of workers, which is directly related to his power and status. Slack payments are
the ones whose removal may not make the manager leave the company, but their presence
not only ensures stable and better performance, but is also preferred by the manager, as
these payments are generally far less conspicuous than monetary benefits.
Behavioural Theories
Behavioural theories of objectives of firms postulate that firms aim at satisficing behaviour,
rather than maximisation. Here we would discuss two of the most important of such models,
namely Simon’s satisficing1 model and the model developed by Cyert and March.
Herbert Simon’s research focused on decision-making in organisations and his contribution
to behavioural theories is renowned as “bounded rationality”. According to his Satisficing
Model, the biggest challenge before modern businesses is lack of full information and
uncertainty about future. Because of this, firms have to incur costs in acquiring information
in the present. In the face of both these aspects, the objective of maximising either profit, or
sales, or growth is not possible. In fact, they act as constraints to rational decision-making by
any firm, because of which, the firm has to operate under “bounded rationality” and can only
aim at achieving a satisfactory level of profit, sales and growth. Simon has suggested that
managers would set an aspiration level and then aim to achieve it. If their behaviour or
performance exceeds the aspiration level, the target is increased; if it fails to meet the aspired
level, the target is brought down and a search behaviour is adopted simultaneously to find
the deviation in the behaviour pattern from the aspiration level.
The model developed by Cyert and March is a step ahead of Simon’s theory. It added that
apart from dealing with inadequate information and uncertainty, businesses also have to
satisfy a variety of stakeholders, who have different and oft-conflicting goals. Such
stakeholders would include shareholders, employees, customers, financiers, government,
and other social interest groups. All of these groups have their own goals; hence a firm cannot
have a single objective, and has to aim at a multi-dimensional goal. In other words, firms
need to have multi goal and multi decision-making orientation. However, in order to achieve
such multiplicity of goals and decisions, firms have to face many conflicts and have to develop
means to resolve them. Thus, according Cyert and March, a firm’s behaviour is ‘satisficing
behaviour’, i.e., it aims at satisfying all stakeholders. To meet this objective, managers form
an aspiration level on basis of their past experience, past performance of the firm,
performance of other similar firms, and future expectations. These aspiration levels are
revised and modified on the basis of achievements and changes in business environment.
Cyert and March further suggest that the excess profit that firms accumulate during an
industrial boom is used to monetarily resolve conflicting demands by the following means:
i. Making cash payments in the form of bonuses, dividends, etc. ii. Side payments in the form
of general expenditure, to improve the overall work atmosphere. iii. Slack payments that
bring in a sense of happiness and satisfaction to the stakeholders. However, the Cyert March
hypothesis has been criticised on the same lines as Simon’s model, that it lacks objectivity
and cannot be used to predict a firm’s future direction. It fails to recognise interdependence
of firms, and it may not even work under dynamic business environments.
NATIONAL INCOME MEANING
National Income of any country means the complete value of the goods and services
produced by any country during its financial year. It is thus the consequence of all economic
activities that are running in any country during the period of one year. It is valued in terms
of money. In short one can say that the national income of any country is the total amount of
income that is accrued by it through various economic activities in one year. It is also helpful
in determining the progress of the country.
The meaning of national income is the aggregate income of the economy. Calculating it is a
challenging task as a lot of numbers have to be added up. It is a rather complex accounting
process and takes a lot of time. What would we know if we knew a country's national income?
Well, we would gain a better understanding of quite a few things, such as the following:
National income is the sum of all the income made in the economy on an aggregate level. It
is an essential measure of economic performance.
A nation’s income is a fundamental indicator of its economic structure. For example, if you
are an investor who wants to expand your company's horizons within the international
market, you would emphasize the national income of the country you are going to invest in.
Therefore, a country’s national income accounting is critical for its development and
planning from international and national perspectives. Calculating a nation’s income is an
effort that requires rigorous work.

Concept of National Income

National income accounting comprises of four concepts of calculations- GDP, NDP, GNP, NNP.
Here, we discuss them and other related terms in a very objective way.
1. Factor cost is the input cost that producer has to incur in the process of
production. It includes cost of capital – loan inetrest, prices of raw materials,
labour, power, rent, etc. Can be termed as Production cost.
2. Market cost is calculated after adding indirect taxes to the factor cost of the
product. It is basically the cost at which the goods reach the market. Also
termed as EX-FACTORY PRICE. In India we calculate income at factor cost
because of non-uniform taxes.
3. National Income:The sum total of factor of incomes accruing to the residents
of the country, both from their activities within and outside the economic
territory is the national income of the country.
4. National income is calculated for a particular period, normally a financial year
(In India, financial year means April 1 to March 31 of next year). Net factor
income from abroad is added to the domestic product to get the value of
National Income.
5. National Income = C + I + G + (X – M)
Where,C = Total consumption expenditure
 I = Total investment expenditure
G = Total government expenditure ; X – M = Export – Import

Gross Domestic Product (GDP)

In the contemporary world, we most often use Gross Domestic Product (GDP) as a
measurement of a nation’s income. No matter what your background is, it is highly likely that
you have come across this term at least once in your life. In a closed economy, GDP measures
the total income of every agent and the total expenditure made by every agent.

Gross Domestic Product (GDP) is the market value of all final goods and services produced
within a country’s borders in a given period of time.

Gross domestic product is the value of all final goods and services produced within the
boundary of a nation during one year. In India one year means from 1st April to 31st March
of the next year. GDP calculation includes income of foreigners in a Country but excludes
income of those people who are living outside of that country.

GDP = (P*Q)

Where,
GDP = gross domestic product
P = Price of goods and services
Q= Quantity of goods and services

GDP is made up of 4 Components

a. consumption
b. investment
c. government expenditure
d. net foreign exports of a country
GDP = C+I+G+(X-M)
Where,
C=Consumption
I=Investment
G=Government expenditure
(X-M) =Export minus import

Gross National Product (GNP): Gross national product (GNP) is another metric that
economists use to evaluate a nation’s income. It is different from GDP with some minor
points. Unlike GDP, the gross national product doesn’t limit a nation’s income to its borders.
Therefore, citizens of a country can contribute to the country’s gross national product while
producing abroad.

Gross national product (GNP) is a metric to evaluate the total market value of goods and
services made by a country’s citizens regardless of the country’s borders.

GNP can be found with a few additions and subtractions to GDP. For calculating the GNP, we
aggregate GDP with any other output produced by the citizens of the country outside of the
country’s borders, and we subtract all output made by the foreign citizens within a country’s
borders.

Is market value of final goods and services produced in a year by the residents of the country
within the domestic territory as well as abroad. GNP is the value of goods and services that
the country's citizens produce regardless of their location.

GNP=GDP+NFIA

Or

GNP=C+I+G+(X-M) +NFIA

Where,
C=Consumption
I=Investment
G=Government expenditure
(X-M) =Export minus import
NFIA= Net factor income from abroad.

Net National Product (NNP) :

All of the national income metrics are rather similar, and obviously, net national product
(NNP) is not an exception. NNP is more similar to GNP than to GDP. NNP also takes any
output outside a country’s borders into account. In addition to that, it subtracts the cost of
depreciation from GNP.
Net national product (NNP) is the total amount of output produced by a country’s citizens
minus the cost of depreciation.
 Is market value of net output of final goods and services produced by an economy during a
year and net factor income from abroad.
NNP=GNP-Depreciation
or, NNP=C+I+G+(X-M) +NFIA- IT-Depreciation
Where,
C=Consumption
I=Investment
G=Government expenditure
(X-M) =Export minus import
NFIA= Net factor income from abroad.

IT= Indirect Taxes

Symbolically or as per the formula

NI=NNP +Subsidies-Interest Taxes
or, GNP-Depreciation +Subsidies-Indirect Taxes
or, NI=C+G+I+(X-M) +NFIA-Depreciation-Indirect Taxes +Subsidies

Personal Income (PI): Is the total money income received by individuals and households of
a country from all possible sources before direct taxes. Therefore, personal income can be
expressed as follows:

PI=NI-Corporate Income Taxes-Undistributed Corporate Profits- Social Security

Contribution +Transfer Payments.

Disposable Income (DI) : It is the income left with the individuals after the payment of direct
taxes from personal income. It is the actual income left for disposal or that can be spent for
consumption by individuals.
Thus, it can be expressed as:

DI=PI-Direct Taxes

Per Capita Income (PCI): It is calculated by dividing the national income of the country by
the total population of a country.
Thus, PCI=Total National Income/Total National Population

Measurement or methods or Approach of National Income

The measurement of national income is a complex task, without a doubt. There are few ways
to measure a nation’s income, but they are more or less similar to each other. We call these
measurement tools national income metrics.

No matter what the metric used to measure the national income is, the idea behind what to
measure is more or less the same. What is a better way than following the very thing that we
use for the exchange in an economy to understand the income in an economy? In any
economy, every transfer, every flow of money leaves a trail behind. We can explain the
general flow of money with the circular flow diagram.

As demonstrated in Figure 1, there is a continuous flow of money as spending, expenses,

profits, income, and revenue. This flow happens due to goods, services, and factors of
production. Understanding this flow helps us to gauge the size and structure of the economy.
These are the things that contribute to a nation’s income.

There are three methods of measurement of the national income of a country.

o Income Method
o Product or Value Added Method
o Expenditure Method

Income Method of National Income Measurement

o The income method of national income calculation is used at the distribution level.
The national income is estimated using this method as a flow of factor incomes.
o Labor, capital, land and entrepreneurship are the four important production
components.
o Labor is compensated with wages and salaries. Capital is compensated with interest.
The land is compensated with rent, and entrepreneurship is compensated with profit.
 o Moreover, certain self-employed individuals, such as doctors, lawyers and
accountants, use their labor and capital. The earnings of such people are classified as
mixed-income.
o The Net Domestic Product (NDP) at factor costs is the sum of these factor incomes.
o National Income using the Income method is calculated as follows:

Net national income = Employee compensation + Operating surplus (w + R + P + I) + Net

income + Net factor income from abroad

Where,

o W stands for wage and salaries.

o R stands for income from rental sources.
o P stands for profit.
o I stand for mixed income.

Product/ Value Added Method of National Income Measurement

o The national income, in this case, is estimated at the production level. The national
income is estimated using this method as a flow of goods and services.
o We determine the fiscal value of all final goods and services produced in a country’s
economy for a year. The word “final goods” refers to commodities consumed right
away rather than being engaged in a subsequent manufacturing process.
o Intermediate goods are those goods that are made use of in the manufacturing
process.
o Since the value of intermediate products is already included in the value of final
goods, we do not have to consider the value of intermediate goods in national income;
if taken into account, the value of the goods would be counted twice.
o To avoid duplication in counting, we can use the value-added approach, which
computes the value-addition (i.e., the value of the final product plus the value of the
intermediate product) at every stage of production and then adds them together to
get the Gross Domestic Product.
o The sum-total is the GDP at market prices considering that the monetary value is
measured at market prices.
o National Income using Product/ Value Added method can be calculated as follows:

National Income = Gross national product – Cost of Capital – Depreciation – Indirect Taxes

Expenditure Method of Measuring National Income

o The expenditure method can determine national income during the disposition
phase. The national income is calculated using the expenditure method as a flow of
expenditure.
o The gross domestic product (GDP) is the sum of all the private consumption
expenditures.
o The factors such as government consumption expenditure, gross capital formation
(public and private) and net exports must be considered here.
 o National Income using the Expenditure technique can be calculated as follows:

National Income = National Product = National Expenditure

Importance of National Income

Setting Economic Policy: National Income indicates the status of the economy and can give a
clear picture of the country’s economic growth. National Income statistics can help
economists in formulating economic policies for economic development.

Inflation and Deflationary Gaps: For timely anti-inflationary and deflationary policies, we
need aggregate data of national income. If expenditure increases from the total output, it
shows inflammatory gaps and vice versa.

Budget Preparation: The budget of the country is highly dependent on the net national
income and its concepts. The Government formulates the yearly budget with the help of
national income statistics in order to avoid any cynical policies.

Standard of Living: National income data assists the government in comparing the standard
of living amongst countries and people living in the same country at different times.

Defense and Development: National income estimates help us to bifurcate the national
product between defense and development purposes of the country. From such figures, we
can easily know, how much can be set aside for the defense budget.

Money supply
Money supply in an economy is the total volume of currency in circulation at a particular
point in time. It can include cash and its equivalents like currency notes, coins, and bank
deposits. It is a critical concept that greatly impacts a country’s financial and economic
situation.
The supply of money is closely related to inflation and consumption. Therefore, the
government, especially a country’s central bank, controls the circulation of money through
its monetary policy. The supply of money measurement include M0, M1, M2, M3, and M4
types, based on its liquidity.
An increase in the supply implies that people are spending more, which increases the
demand for products and services in the economy. As a result, high demand contributes to a
rise in prices. Therefore, the high circulation of money will lead to higher inflation rates.
In such situations, the central banks will introduce a contractionary monetary policy to
reduce consumer spending. It is usually done by increasing interest rates on consumer loans.
Hence, customers will stop borrowing and have to cut down on spending. Thus, it reduces
money circulation.
However, prolonged periods of reduced supply are also equally harmful. If customers give
up spending altogether, the economy will become stagnant, leading to mass unemployment.
Therefore, the government will introduce an expansionary monetary policy, where the
interest rates on borrowing will be decreased. As a result, people will borrow more and
spend more. Central banks also inject additional money into the economy.

Measurement

Since the supply of money is an important economic parameter, governments constantly

monitor and regulate it. Therefore, they measure the amount of money frequently to keep it
in check. Standard measures of money supply include M1, M2, M3, and M4.

The measurement of the supply begins with the M0 or monetary base. It denotes the amount
of currency in circulation, i.e., currency bills, coins, and bank reserves.
 M1 money supply: Also called the ‘narrow money,’ it includes M0 and other highly liquid
deposits in the bank.
 M2 money supply: It is perhaps the most commonly accepted measure because it consists of
M1 in addition to marketable securities and less liquid deposits.
 M3 money supply: Known as ‘broad money,’ it constitutes M2 and money market funds
like mutual funds, repurchase agreements, commercial papers, etc.
 M4 money supply: It comprises M3 and all other least liquid assets, usually
outside commercial banks.
 Thus, the above types of money supply measurements and their formulas can be
summarized as follows:

 M0 = Currency notes + coins + bank reserves

 M1 = M0 + demand deposits

 M2 = M1 + marketable securities + other less liquid bank deposits

 M3 = M2 + money market funds

 M4 = M3 + least liquid assets

These measures of money supply usually vary depending on the country. For example, the
Federal Reserve usually focuses on M1 and M2 types to monitor the U.S. money supply,
whereas the Bank of England measures M4 types too.

Determinants of Money Supply

1. High-powered money – Cash and its equivalents available with the public and bank
deposits are included in high-powered money. Since they are highly liquid, they directly
affect the supply of money in an economy.
2. Level of commercial bank reserves – The central bank mandates commercial banks to hold a
fixed percentage of deposits as reserves in case of any emergency. Banks lend the excess
reserve amount to consumers, increasing money circulation.
3. Reserve ratio – It is the ratio of cash reserve to deposits, as instructed by the central bank. If
the central bank increases the ratio, banks will have to hold more money in reserves,
reducing banks’ lending capabilities.
4. Liquid cash held by the public – If the people have more liquid cash at home, they will only
spend a small portion required. However, if the same cash is deposited in the bank, the
supply in the economy will be high.

INFLATION MEANING

Inflation is an economic indicator that indicates the rate of rising prices of goods and services
in the economy. Ultimately it shows the decrease in the buying power of the rupee. It is
measured as a percentage.
This quantitative economic measures the rate of change in prices of selected goods and
services over a period of time. Inflation indicates how much the average price has changed
for the selected basket of goods and services. It is expressed as a percentage. Increase in
inflation indicates a decrease in the purchasing power of the economy.

This percentage indicates the increase or decrease from the previous period. Inflation can be
a cause of concern as the value of money keeps decreasing as inflation rises.

Inflation is calculated using the Consumer Price Index (CPI). Inflation can be calculated for
any product by following these steps.

 Determine the rate of the product at an earlier period.

 Determine the current rate of the product
 Use the inflation rate formula (Initial CPI – Final CPI/ Initial CPI)*100. Here CPI is the
rate of the product.
 This gives the increase/decrease percentage in the price of the product. One can use
this to compare the inflation rate over a period of time.

Types of Inflation

The three types of Inflation are Demand-Pull, Cost-Push and Built-in inflation.
 Demand-pull Inflation: It occurs when the demand for goods or services is higher
when compared to the production capacity. The difference between demand and
supply (shortage) result in price appreciation.
 Cost-push Inflation: It occurs when the cost of production increases. Increase in
prices of the inputs (labour, raw materials, etc.) increases the price of the product.
 Built-in Inflation: Expectation of future inflations results in Built-in Inflation. A rise in
prices results in higher wages to afford the increased cost of living. Therefore, high
wages result in increased cost of production, which in turn has an impact on product
pricing. The circle hence continues.
Causes of Inflation
 Monetary Policy: It determines the supply of currency in the market. Excess supply of
money leads to inflation. Hence decreasing the value of the currency.
 Fiscal Policy: It monitors the borrowing and spending of the economy. Higher
borrowings (debt), result in increased taxes and additional currency printing to repay
the debt.
 Demand-pull Inflation: Increases in prices due to the gap between the demand
(higher) and supply (lower).
 Cost-push Inflation: Higher prices of goods and services due to increased cost of
production.
 Exchange Rates: Exposure to foreign markets are based on the dollar value.
Fluctuations in the exchange rate have an impact on the rate of inflation.
Business Cycle

First, we will provide the definition of a business cycle. Business cycles refer to short-term
fluctuations in the level of economic activity in a given economy. An economy may
experience long-term growth where its national output or GDP increases. However, while
this economic growth happens, it is often interrupted momentarily by a series of business
cycles where economic activity rises or declines.
A business cycle is completed when it goes through a single boom and a single contraction
in sequence. The time period to complete this sequence is called the length of the business
cycle.
A boom is characterized by a period of rapid economic growth whereas a period of relatively
stagnated economic growth is a recession. These are measured in terms of the growth of the
real GDP, which is inflation-adjusted.
Business cycles refer to short-term fluctuations in the level of economic activity in a given
economy.
Stages or phases of the Business Cycle
In the diagram above, the straight line in the middle is the steady growth line. The business
cycle moves about the line. Below is a more detailed description of each stage in the business
cycle:

1. Expansion

The first stage in the business cycle is expansion. In this stage, there is an increase in positive
economic indicators such as employment, income, output, wages, profits, demand, and
supply of goods and services. Debtors are generally paying their debts on time, the velocity
of the money supply is high, and investment is high. This process continues as long as
economic conditions are favorable for expansion.

2. Peak

The economy then reaches a saturation point, or peak, which is the second stage of the
business cycle. The maximum limit of growth is attained. The economic indicators do not
grow further and are at their highest. Prices are at their peak. This stage marks the reversal
point in the trend of economic growth. Consumers tend to restructure their budgets at this
point.

3. Recession

The recession is the stage that follows the peak phase. The demand for goods and services
starts declining rapidly and steadily in this phase. Producers do not notice the decrease in
demand instantly and go on producing, which creates a situation of excess supply in the
market. Prices tend to fall. All positive economic indicators such as income, output, wages,
etc., consequently start to fall.

4. Depression

There is a commensurate rise in unemployment. The growth in the economy continues to

decline, and as this falls below the steady growth line, the stage is called a depression.

5. Trough

In the depression stage, the economy’s growth rate becomes negative. There is further
decline until the prices of factors, as well as the demand and supply of goods and
services, contract to reach their lowest point. The economy eventually reaches the trough. It
is the negative saturation point for an economy. There is extensive depletion of national
income and expenditure.

6. Recovery

After the trough, the economy moves to the stage of recovery. In this phase, there is a
turnaround in the economy, and it begins to recover from the negative growth rate. Demand
starts to pick up due to low prices and, consequently, supply begins to increase. The
population develops a positive attitude towards investment and employment and
production starts increasing.

CAUSES OF BUSINESS CYCLES

The cyclic pattern of changes that occurs in the economy is caused by many factors in
combination. There are internal factors within the economy that may be causing these changes.
And there are also external factors which may lead to a boom or bust of an economy. Let us take
a look at all the causes of business cycles.
Internal Causes of Business Cycles

These endogenous factors can cause changes in the phases of the firm and the economy in
general. Let us take a look at the internal causes of business cycles.

1] Changes in Demand
Keynes economists believe that a change in demand causes a change in the economic activities.
When the demand in an economy increases the firms start producing more goods to meet the
demand.

There is more output, more employment, more income, and higher profits. This will lead to a
boom in the economy. But excessive demand may also cause inflation.

On the other hand, if the demand falls, so does the economic activity. This may lead to a bust,
which if it continues for a longer period of time may even lead to depression in the economy.

2] Fluctuations in Investments
Just as fluctuations in demand, fluctuations in investment is one of the main causes of business
cycles. The investments will fluctuate on the basis of a lot of factors such as the rate of interest
in the economy, entrepreneurial interest, profit expectation, etc.

An increase in investment will lead to an increase in economic activities and cause expansion.
A decrease in investment will have the opposite effect and may cause a trough or even
depression

3] Macroeconomic Policies
The monetary policies and the economic policies of a nation will also result in changes in the
phases of a business cycle. So if the monetary policies are looking to expand economic activities
by promoting investment, then the economy booms. On the other hand, if there is an increase
in taxes or interest rates we will see a slowdown or a recession in the economy.

4] Supply of Money
There is another belief that says that business cycles are purely monetary phenomena. So
changes in the money supply will bring about the trade cycles. An increase of money in the
market will cause growth and expansion.

But too much money supply may also cause inflation which is adverse. And the decrease in the
supply of money will initiate a recession in the economy.
External Causes of Business Cycles

1] Wars
During times of wars and unrest, the economic resources are put to use to make special goods
like weapons, arms, and other such war goods. The focus shifts from consumer products and
capital goods. This will lead to a fall in income, employment, and economic activity. So the
economy will face a downturn during war times.

And later post-war the focus will be on rebuilding. Infrastructure needs to be reconstructed
(houses, roads, bridges, etc). This will help the economy pick up again as progress is being
made. Economic activity will increase as effective demand will increase.

2] Technology Shocks
Some exciting and new technology is always a boost to the economy. New technology will mean
new investment, increased employment, and subsequently higher incomes and profits. For
example, the invention of the modern mobile phone was the reason for a huge boost in the
telecom industry.

3] Natural Factors
Natural disasters like floods, droughts, hurricanes, etc can cause damage to the crops and huge
losses to the agricultural sector. Shortage of food will cause a surge in prices and high inflation.
Capital goods may see a reduction in demand as well.

4] Population Expansion
If the population growth is out of control that might be a problem for the economy. Basically of
the population growth is higher than the economic growth the total savings of an economy will
start dwindling. Then the investments will reduce as well and the economy will face depression
or a slow down.

Features of a Business Cycle

1. Occurs Periodically: The different phases of a Business Cycle occur from time to time.
Although, at certain times, these periods will vary according to the Economic
conditions of the industry. This duration may last as long as 10-12 years. The intensity
of the phases will also change depending on the Economy. For example, at times, the
firm will see massive growth followed by a short span of depression.
2. Synchronous: Another advantageous and prominent feature of the Business Cycle is
that it is synchronic. The features of a Business Cycle are not restricted to a single firm
or industry. They originate in a free Economy and are prevalent. If there is any kind
of disturbance or Business boom in one industry, it will affect the other firms too.
Since different kinds of industries are interrelated, the Business in one firm disturbs
that in another firm.
 3. Major Sectors are Affected: It’s been noticed that fluctuations occur not only at the
level of production but also in other variables such as employment, consumption,
investment, rate of interest, and price level. The investment and consumption of
durable consumer goods like houses and cars are continually affected by the
periodical fluctuations. As the process of consumption is deferred the courses of the
Business Cycle are also affected widely.
4. Profit Variation: Another significant feature of the Business Cycle is that the profits
fluctuate more than any other income source. This makes any kind of Business a
tricky and uncertain profession for many. It is difficult to predict Economic
conditions. In situations of depression, profits may even become harmful. That is why
many Businesses go bankrupt.
5. Worldwide Impact: Business Cycles are international in nature. If depression occurs
in one country, then it is bound to spread to other nations too. This happens mainly
because the countries depend on each other for import and export trades. The 1930
depression in the USA and Great Britain shook the entire world and resulted in a
recession.

Role of Business economists:

Business Economist should study the environment .he should take decision
regarding business operations
 Market Analysis: Business economists assess market conditions to identify
opportunities and threats. They analyze supply and demand dynamics, market
competition, and consumer behavior to help businesses understand their
target markets.

 Forecasting: Business economists use economic models and data to make

predictions about future economic conditions. This forecasting helps
businesses plan for changes in the business environment and make strategic
decisions.
 Cost-Benefit Analysis: They evaluate the costs and benefits of various business
decisions, such as investment projects, pricing strategies, or expansion plans.
This analysis helps companies determine whether an action is economically
viable.
 Pricing Strategies: Business economists can assist in setting optimal pricing
strategies by considering factors like production costs, competition, and
 consumer demand. They help businesses maximize profitability while
remaining competitive.
 Risk Management: They assess economic risks that may affect a company, such
as currency fluctuations, interest rate changes, or geopolitical developments.
By identifying risks, they can help companies develop strategies to mitigate
them.
 Policy Analysis: Business economists monitor and analyze government
policies, regulations, and economic trends that may impact a company's
operations. They provide insights on how to adapt to changing regulatory
environments.
 Financial Planning: Business economists help businesses make financial
decisions, including budgeting, capital allocation, and investment strategies.
They also assist in capital structure decisions, like debt vs. equity financing.
 Supply Chain Management: They analyze the global supply chain and logistics,
assessing the economic impact of supply chain disruptions and suggesting
ways to optimize operations for efficiency and cost-effectiveness.
 Competitive Analysis: Business economists study the competitive landscape
to help companies understand their position in the market. They provide
insights on how to gain a competitive advantage and sustain it over time.
 Economic Research: They conduct economic research to support various
aspects of a business, including market research, industry analysis, and
evaluating the impact of economic policies.
 Business Strategy: Business economists contribute to the formulation of
overall business strategies by providing insights into macroeconomic
conditions, industry trends, and potential challenges or opportunities.
 Communication: They present their findings and recommendations to senior
management and other stakeholders in a clear and understandable manner.
Effective communication is essential for decision-makers to act on the
economist's insights.

Non –Conventional sources of Finance

Non conventional sources are different from conventional sources such as owners
capital and borrowed capital, usually company use the following non conventional
sources of finance

1. Leasing
2. Franchising
3. Forfeiting
4. Peer-to-peer Platform
5. Crowd funding
6. Angel Investors
7. Venture Capitalists
Leasing

1. A lease is defined as an agreement between the lessor (owner of the asset) and the
lessee (user of the asset), wherein, the lessor purchases an asset for the lessee and
allows him to use it in exchange of periodic payments called lease rentals or
minimum lease payments (MLP).
2. The lessee is bound to pay the lease rental to the lessor for the use of the assets.
After the end of the period of the contract, the asset is transferred back to the lessor.
3. It refers to the renting of an asset for a certain period of time.
4. Parties involved include lease broker, lessor, lessee, and the lease assets.

Advantages
Lessee acquires the asset with a lower
investment
Simple documentation process
Does not dilute the capital structure
Risk of obsolescence is born by the lesser Lessee cannot become the owner of the asset
Lease rentals are deductible for
computing taxable profits
Disadvantages
May impose certain restrictions on the use of the
assets
Normal business may be impacted in the case of
non-renewal of lease
Higher payout obligation in case equipment not
found
Regular maintenance of the asset
Franchising

1. Franchising is the model in which the Company that does not have enough capital to
expand, gives its franchise rights to an individual or a company.
2. The company giving rights is called ‘franchisor’ while the company being given the
franchise is called ‘franchisee’.
3. It is an arrangement where one party grants or licenses some rights and authorities
to another party.
4. Franchising is a well-known marketing strategy to expand the business.

Advantages
Helps in expanding business
Builds a brand name and goodwill
Less efforts by franchisee for startup
Zero cost involved for training and assistance
as it is provided by the franchisor
Types of Franchise:
Disadvantages
Franchisor own goodwill may suffer in case
of failure by the franchisee
Lack of secrecy
Lack of autonomy to the franchisee
Sharing of royalty and profits with the
franchisor

1. Product franchise: An agreement where manufacturers allow retailers to

distribute their products and use names and trademarks.
2. Business format franchise: An agreement in which the franchisor provides the
franchisee with an established business, including name and trademarks for the
franchisee to run independently.
3. Management franchise: The franchisee provides the management expertise,
format and/ or procedure for conducting the business.

Forfeiting

1. It is a form of financing of receivables arising out of international business. Wherein,

a bank or financial institution undertakes the purchase of trade bills or promissory
notes without recourse to the seller.
2. Purchases are made through discounting of the documents, hence covering the
entire risk of payment failure at the time of collection.
3. All risks become the full responsibility of the purchase
4. Forfeiture pays cash to the seller after the discounting of the said notes or bills.
Advantages
Immediate funds available for the exporters
Commercial bank can gain when the currency
values appreciate
Letter of credit provides great help
Disadvantages
It is not available for deferred payments
Only selected currencies are considered for
forfeiting
No international credit agency to guarantee
in case of default

Peer-to-peer (P2P) Lending

1. Peer-to-peer lending is a form of direct lending of money to businesses or

individuals without any official participation of any financial institution as an
intermediary in the agreement
2. It is generally done through online platforms that relate lenders with potential
borrowers
3. Peer-to-peer lending offers both secured and unsecured loans. However, most of the
loans are unsecured personal loans. Secured loans are an exception and are usually
backed by luxury goods.
Advantages
High returns to the investors as
there are no middlemen involved
More accessible sources of funding
because of less complexity
Disadvantages
Credit risk because of low credit rating buyers
Government do no provide any insurance or protection
on such types of loan. It is not allowed in many countries

Services provided by P2P Platforms:

1. Finding new lenders and borrowers

2. Verification of borrower identity, bank account, income, and employment history
3. Legal compliance and reporting
4. Performing borrower credit checks and sorting out the unqualified ones
5. Servicing loans, providing customer service to borrowers, and attempting to collect
payments from borrowers who are in default

Crowdfunding

1. It is the practice of funding a project by raising money from a large group of people.
2. It is a way of raising capital using the social networking sites like Facebook or
Twitter or by using some popular crowdfunding websites
3. Crowdfunding helps improve the presence of small businesses and startups across
social media, it increases their investment base, and funding prospects.
4. Various types of crowdfunding include debt-based, equity-based, cause-based,
rewards-based, software value token, litigation, etc.
Advantages
Quick way to raise finance
Feedback and expert guidance
accompanies funding
Great way to test public reaction
Easy to track progress
Cheap source of finance
Disadvantages
Public may not show interest in all the projects
Significant resources needed for marketing
about projects
It may not result in comprehensive financing
Reputation of a business can be severely affected
Lack of project secrecy

Venture Capital

1. It refers to that capital and knowledge which are given for the formation and setting
up of companies, especially to those who possess any new methodologies or
technology.
2. It is not merely a way of acquiring funds into a new firm but also a parallel support
of the skills required to set up the firm, devising its marketing strategy, organizing,
and its management as well.

Advantages Disadvantages
Feeds wealth and expertise into the business Autonomy and control is shared with
venture capitalists
No obligation to repay the money Process is lengthy and complex
A large sum of equity finance is available Uncertain forms of financing
It provides valuable information, resources, and Benefits are available only in the long-run
technical assistance

Angel Investors

1. They are an individual or a group of individuals who invest their own money
2. They invest in the early stages of the company and in return opt for a share in the
company
3. Angel investors typically invest less money that the venture capitalists
4. They are not involved much in the functions and management of the company.
However, they may advise and ask for reports and status.

Advantages Disadvantages
No need for collateral like personal Not suitable for investments below INR 5 lakhs or above
assets INR 15 lakhs
No repayments or interest on It takes longer to find a suitable angel investor
borrowings
Better discipline due to outside Less structural support available
vigilance

Source of capital for a company

 Equity Capital: Common Stock: Companies can issue common stock to raise capital
from investors. Investors who purchase common stock become partial owners of the
company and may receive dividends and have voting rights.
 Preferred Stock: Preferred stock is a type of equity that gives investors preference
over common stockholders in terms of dividends and assets in case of liquidation.
 Debt Capital: Bank Loans: Companies can borrow money from banks or financial
institutions through various types of loans, such as term loans, revolving credit lines,
and working capital loans.
 Bonds: Companies can issue bonds in the debt market, which are essentially loans
from investors. They pay periodic interest to bondholders and repay the principal
amount at maturity.
 Private Placements: Companies can raise debt capital through private placements by
selling bonds or other debt instruments to institutional investors or private lenders.
 Convertible Debt: This is a type of debt that can be converted into equity (usually
common stock) at a specified conversion price and time.
 Retained Earnings:
 Companies can reinvest their profits (retained earnings) into the business for growth
and expansion. This is a common source of internal financing.
 Venture Capital: Startups and high-growth companies can raise capital from venture
capitalists, who provide funding in exchange for equity ownership. Venture capital is
often used to fund innovative and high-potential businesses.
 Angel Investors: Angel investors are individuals who invest their personal funds in
early-stage or startups in exchange for equity. They may also provide guidance and
mentorship to the company.
 Crowd funding: Crowd funding platforms allow companies to raise capital from a
large number of individual investors or backers. It is often used for specific projects,
products, or initiatives.
 Private Equity: Private equity firms invest in established companies, often by
acquiring a controlling stake, to facilitate growth and operational improvements.
 Grants and Subsidies: Some companies, particularly those in certain industries or
engaged in research and development, may receive grants, subsidies, or incentives
from government agencies, foundations, or non-profit organizations.
 Strategic Partnerships and Alliances: Companies can enter into partnerships or
alliances with other businesses, where they may receive capital infusion, access to
resources, or co-development opportunities.
 Asset Sales: Companies can sell non-core assets, such as real estate, subsidiaries, or
intellectual property, to generate capital.
 Initial Public Offering (IPO): Going public through an IPO involves selling shares to
the public for the first time on a stock exchange, providing access to a broader base
of investors.
 Strategic Investments: Larger corporations may invest in or acquire smaller
companies to access new technologies, markets, or synergies.