CAF-Business Economics and Business and Commercial Knowledge

CA Foundation
Business Economics and

Business and Commercial
Knowledge
Prof. Sandip Sengupta

Prof. Bhavesh Rajani
Prof. Krishna Thakkar

Index
Sl. No. Chapter Name Page No.
Business Economics
1. Nature & Scope of Business Economics 01 – 15
2. Theory of Consumer Behavior 16 – 26
3. Theory of Demand 27 – 48
4. Elasticity of Demand 49 – 60
5. Demand Forecasting 61 – 65
6. Theory of Supply 66 – 75
7. Equilibrium 76 – 78
8. Theory of Production 79 – 95
9. Theory of Cost 96 – 108
10. Price Determination in Different Market 109 – 114
11. Behavioral Principles 115 – 121
12. Monopoly 122 – 128
13. Monopolistically Competitive Market 129 – 130
14. Oligopoly 131 – 133
15. Business Cycle 134 – 140
Business and Commercial Knowledge
16. Formation of Contract of Sale 143 – 160
17. Business Environment 161 – 181
18. Business Organizations 182 – 250
19. Government Policies for Business Growth 251 – 259
20. Organizations Facilitating Business 260 – 276
21. Common Business Terminologies 277 – 307

Business Economics
Nature and Scope of Business Economics
Chapter – 01 – Nature and Scope of Business Economics
Economics is an important branch of social science, which deals with the behavior of human beings in
relation to economic activities. The term ‘Economics’ owes its origin to the Greek word ‘Oikonomia’
meaning ‘management of household’.
Economics is, thus, the study of how we work together to transform scarce resources into goods and
services to satisfy the most pressing of our infinite wants and how we distribute these goods and services
among ourselves.
In fact, out of social sciences, it is economics which has more practical applicability, hence regarded as
“Queen of Social Sciences”.
Economics, concerns itself not just with how a nation allocates to various uses its scarce productive
resources but it also deals with the process by which the productive capacity of these resources is
increased.
In the day-to-day events, we come across several economic problems like changes in price of individual
commodities as well as general price level changes; economic prosperity and higher standards of living of
some people despite general poverty of the masses; problems of unemployment of certain class of persons
or in some areas. These are some of the matters connected with economic analysis. The study of
Economics will help in analyzing the possible causes contributing to these problems and might suggest a
number of alternative courses, which could be adopted for tackling these problems.
Consider the following situation.

It is your birthday, and your mother gives you `1000 as birthday gift. You are free to spend the money as
you like. What will you do? You have many options before you, like:
Option 1: You can give a party to your friends and spend the whole money on them.
Option 2: You can buy yourself a dress for `1000.
Option 3: You can go for a movie and eat in some restaurant.
Option 4: You can buy yourself a book and save some money.
What do you notice? You have so many options before you. You will have to go for one option or a
combination of one or more options. But why can’t you have everything? Given the choice you would like
to spend not only on your friends, but would also like to see movie, eat in the restaurant, buy a dress and a
book and save some money. But you cannot. Why? Because you have only 1000 Rupees with you.
We can use our limited resources to satisfy only some of our wants, leaving many others unsatisfied.
Bhagwati Education Institute Page 1

The two fundamental facts of economics are that:

i) Human beings have unlimited wants; and
ii) The means of satisfying these wants are relatively scarce form the subject matter of
Economics.
Hence, economics is the study of how the society uses its limited resources to satisfy its infinite wants and
how these resources are distributed among different sections of the society.
Definition of Economics
Several definitions of Economics have been given by different authors. For the sake of convenience, let us
classify the various definitions into four groups:
a) Science of wealth or Classical Economics
b) Science of material well-being or Neo-classical Economics
c) Science of choice making by Lionel Robbins
d) Science of dynamic growth and development by Paul A. Samuelson
We shall examine each one of these briefly.
Science of wealth
Although the activity of acquiring and increasing material wealth is as old as civilization, a disciplined
study of the wealth producing activities commenced back in 1776 when Adam Smith, the father of
Economics, published “The Nature and Causes of Wealth of Nations”. He defined Economics as: “An
inquiry into the nature and causes of wealth of nations.”
Many other classical economists also defined Economics:
According to J B Say, Economics is a “Science which deals with wealth”
According to J.S. Mill, economics is “The principal science of production and distribution of
wealth”.
Science of material well-being

Under this group of definitions, the emphasis is on welfare as compared with wealth in the earlier group.
According to Alfred Marshall
“Economics is a study of mankind in the ordinary business of life. It examines that part of
individual and social action which is most closely connected with the attainment and with
the use of the material requisites of well-being. Thus, it is on the one side a study of wealth
and on the other and more important side a part of the study of man.”
This definition was propounded by Prof. Alfred Marshall in his book “Principles of Economics”, published
in 1890. This definition lays emphasis on welfare as compared to wealth.
Prof. Marshall clearly points that economics is first, a study of human welfare and only then is the
emphasis given on wealth. According to Prof. Alfred Marshall, wealth is a “mean” and welfare is an “end”.

According to A.C. Pigou “The range of our inquiry becomes restricted to that part of social
welfare that can be brought directly or indirectly into relation with the measuring rod of
money”.
Science of choice making

Prof. Lionel Robbins of the London School of Economics gave a new definition to Economics in his
famous book “Nature and Significance of Economics” which he brought out in 1931.
Robbins gave a more scientific definition of Economics.
His definition is as follows:

“Economics is the science which studies human behavior as a relationship between ends and scarce
means which have alternative uses”.
a) Economics is a science: Economics studies human behaviour scientifically. It studies how human
beings use the scarce resources optimally under given constraints.
b) Human behaviour: this definition shifted the focus of economics on study of human behaviour
bringing to life the reasons behind as to when and how decisions are made by individuals in the quest
of satisfying their wants.
c) Unlimited ends: Ends refer to wants. It is a general human tendency that when one want is satisfied,
another want crops up. Thus, a choice has to be made between more important and less important
wants.
d) Scarce means: Means refer to resources. Resources may be natural (oil, mineral ore) or man-made
(capital goods, consumer goods). Wants are unlimited, but the resources (means) to satisfy these
wants are limited.
Example: A construction firm wants to produce steel, iron and cement. It also wants to diversify
geographically, but the amount of capital it has is limited. The labour force is also limited. Availability
of steel and iron is also scarce. Hence, it has to restrict itself to the scarce means.
e) Alternative uses: Resources are not only scarce, but they can also be put to many uses. Thus, a choice
has to be made between the most urgent and the less urgent needs.
Example: coal can be used as a fuel for the production of industrial goods, it can be used for running
trains, and it can also be used for domestic cooking purposes and for so many other purposes.
It follows from the definition of Robbins that Economics is a science of choice. An important thing
about Robbin’s definition is that it does not distinguish between material and non material, and
between welfare and non-welfare. Anything which satisfies the wants of the people would be studied
in Economics. Even if a good is harmful to a person, it would be the subject matter of Economics if it
satisfies his wants.
Science of dynamic growth and development.

Although the fundamental economic problem of scarcity in relation to needs is undisputed, it would not
be proper to think that economic resources - physical, human, financial-are fixed and cannot be increased
by human ingenuity, exploration, exploitation and development.

According to Prof. Samuelson “Economics is the study of how men and society choose, with or
without the use of money, to employ scarce productive resources which could have
alternative uses, to produce various commodities over time and distribute them for
consumption now and in the future amongst various people and groups of society”.
Samuelson’s definition is known as a modern definition of economics. It is a combination of wealth,

welfare and scarcity definition. It includes choice making in the present and in the future. Although the
fundamental economic problem of scarcity remains undisputed, Samuelson goes a step further and
discuss how a society uses limited resources for producing goods and services for present and future
consumption of various people or groups.
Business Economics may be defined as the use of economic analysis to make business decisions
involving the best use of an organization’s scarce resources.
Joel Dean defined Business Economics in terms of the use of economic analysis in the formulation of
business policies. Business Economics is essentially a component of Applied Economics as it includes
application of selected quantitative techniques such as linear programming, regression analysis, capital
budgeting, break even analysis and cost analysis.
Microeconomics
The term Microeconomics is derived from the Greek word ‘mikros’, meaning “small”. In Micro-Economics
we study the economic behavior of an individual, firm or industry in the national economy. It is thus a
study of a particular unit rather than all the units combined. It is basically concerned with the mechanism
of allocation of given resources. Further, it is a partial equilibrium analysis as it seeks to determine price
and output in an industry independent of those in other industries. We mainly study the following in
Micro-Economics:
i) Product pricing;
ii) Consumer behaviour;
iii) Factor pricing;
iv) Economic conditions of a section of the people;
v) Study of firms; and
vi) Location of industry.
Thus, when we are studying how a producer fixes the prices of his products, we are studying Micro-
Economics. Similarly, when we are studying why an industry is located at a particular place, we are
studying Micro-Economics.
Example:
a) Study of lock out at TELCO, finding causes of failure of A & Co.
b) How does the change of price of a good influence a family’s purchasing decisions? If wages rise, will
the person be inclined to work more hours or less hours?

Macro Economics
The term Macro Economics is derived from the Greek word ‘makros’, meaning “large”.
It is the study of overall economic phenomena or the economy as a whole, rather than its individual parts.
Thus, in Macro-Economics, we study the economic behaviour of the large aggregates such as the overall
conditions of the economy such as total production, total consumption, total saving and total investment.
It includes:
i) National income and output;
ii) General Price level;
iii) Balance of trade and payments;
iv) External value of money;
v) Saving and investment; and
vi) Employment and economic growth.
Thus, when we study why we continue to have balance of payments deficits, or why the value of rupee vis
à-vis dollar is falling or why saving rates are high or low in a particular country, we are studying Macro-
Economics.
Micro approach Macro approach
1. Studies a particular part or a component of the Studies the economy as a whole
economy
2. It is known as “Price Theory” It is known as “Income Theory”
3. Makes assumptions while studying an economy Doesn’t make any assumptions
4. It gives a worm’s eye view of an economy It gives a bird’s eye view of an economy
5. It is unrealistic study It is more realistic study
Example: Study of per capita income of India, under-employment in the agriculture sector, savings of
India causes of inflation, etc.
It may be noted that the classification of Economics into micro and macro-economics is purely for
analytical purpose. In fact, there is really no opposition between micro and macroeconomics. Both are
absolutely vital, and, in most cases, they play a complementary role, e.g. national income cannot grow
unless the production in individual firms and factories rises.
It is difficult to distinguish between the two terms as belonging to water-tight compartments.
What is macro from the national standpoint is micro from the world point of view. Similarly, what is
micro from a national angle becomes macro from a regional angle. Unless we define what is the whole, we
cannot say about a phenomenon whether it is micro or macro.
Nature of Business Economics

The economic world is extremely complex as there is a lot of interdependence among the decisions and
activities of economic entities. Economic theories are hypothetical and simplistic in character as they are

based on economic models built on simplifying assumptions. Therefore, usually, there is a gap between
the propositions of economic theory and happenings in the real economic world in which the managers
make decisions. Business Economics enables application of economic logic and analytical tools to bridge
the gap between theory and practice.
The following points will describe the nature of Business Economics:

a) Business Economicsisa Science: Science is a systematized body of knowledge which establishes cause
and effect relationships. Business Economics integrates the tools of decision sciences such as
Mathematics, Statistics and Econometrics with Economic Theory to arrive at appropriate strategies
for achieving the goals of the business enterprises. It follows scientific methods and empirically tests
the validity of the results.
b) Basedon Microeconomics: Business Economics is based largely on Micro-Economics. A business
manager is usually concerned about achievement of the predetermined objectives of his organisation
so as to ensure the long-term survival and profitable functioning of the organization. Since Business
Economics is concerned more with the decision making problems of individual establishments, it
relies heavily on the techniques of Microeconomics.
c) Incorporates elements of Macro Analysis: A business unit does not operate in a vacuum. It is affected
by the external environment of the economy in which it operates such as, the general price level,
income and employment levels in the economy and government policies with respect to taxation,
interest rates, exchange rates, industries, prices, distribution, wages and regulation of monopolies. All
these are components of Macroeconomics. A business manager must be acquainted with these and
other macroeconomic variables, present as well as future, which may influence his business
environment.
d) Use of Theory of Markets and Private Enterprises: Business Economics largely uses the theory of
markets and private enterprise. It uses the theory of the firm and resource allocation in the backdrop
of a private enterprise economy.
e) Pragmatic in Approach: Micro-Economics is abstract and purely theoretical and analyses economic
phenomena under unrealistic assumptions. In contrast, Business Economics is pragmatic in its
approach as it tackles practical problems which the firms face in the real world.
f) Interdisciplinary in nature: Business Economics is interdisciplinary in nature as it incorporates tools
from other disciplines such as Mathematics, Operations Research, Management Theory, Accounting,
marketing, Finance, Statistics and Econometrics.
g) Normative in Nature: Economic theory has developed along two lines – positive and normative. A
positive or pure science analyses cause and effect relationship between variables in an objective and
scientific manner, but it does not involve any value judgement. In other words, it states ‘what is’ of the
state of affairs and not what ‘ought to be’. In other words, it is descriptive in nature in the sense that it
describes the economic behavior of individuals or society without prescriptions about the desirability
or otherwise of such behavior. As against this, a normative science involves value judgements. It is

prescriptive in nature and suggests ‘what should be’ a particular course of action under given
circumstances. Welfare considerations are embedded in normative science.
Business Economics is generally normative or prescriptive in nature. It suggests the application of

economic principles with regard to policy formulation, decision-making and future planning.
However, if the firms are to establish valid decision rules, they must thoroughly understand their
environment.
This requires the study of positive or descriptive economic theory. Thus, Business Economics
combines the essentials of normative and positive economic theory, the emphasis being more on the
former than the latter.
Scope of Business Economics

The scope of Business Economics is quite wide. It covers most of the practical problems a manager or a
firm faces. There are two categories of business issues to which economic theories can be directly applied,
namely:
1. Microeconomics applied to operational or internal Issues
2. Macroeconomics applied to environmental or external issues
Therefore, the scope of Business Economics may be discussed under the above two heads.
1. Microeconomics applied to operational or internal Issues
Operational issues include all those issues that arise within the organization and fall within the
purview and control of the management. These issues are internal in nature. Issues related to choice
of business and its size, product decisions, technology and factor combinations, pricing and sales
promotion, financing and management of investments and inventory are a few examples of
operational issues. The following Microeconomic theories deal with most of these issues.
a) Demand analysis and forecasting: Demand analysis pertains to the behavior of consumers
in the market. It studies the nature of consumer preferences and the effect of changes in the
determinants of demand such as, price of the commodity, consumers’ income, prices of related
commodities, consumer tastes and preferences etc.
Demand forecasting is the technique of predicting future demand for goods and services on the
basis of the past behavior of factors which affect demand. Accurate forecasting is essential for a
firm to enable it to produce the required quantities at the right time and to arrange, well in
advance, for the various factors of production viz., raw materials, labour, machines, equipment,
buildings etc. Business Economics provides the manager with the scientific tools which assist him
in forecasting demand.
b) Production and Cost Analysis: Production theory explains the relationship between inputs
and output. A business economist has to decide on the optimum size of output, given the
objectives of the firm. He has also to ensure that the firm is not incurring undue costs. Production

analysis enables the firm to decide on the choice of appropriate technology and selection of least -
cost input-mix to achieve technically efficient way of producing output, given the inputs. Cost
analysis enables the firm to recognize the behavior of costs when variables such as output, time
period and size of plant change. The firm will be able to identify ways to maximize profits by
producing the desired level of output at the minimum possible cost.
c) Inventory Management: Inventory management theories pertain to rules that firms can use to
minimize the costs associated with maintaining inventory in the form of ‘work-in-process,’ ‘raw
materials’, and ‘finished goods’. Inventory policies affect the profitability of the firm. Business
economists use methods such as ABC analysis, simple simulation exercises and mathematical
models to help the firm maintain optimum stock of inventories.
d) Market Structure and Pricing Policies: Analysis of the structure of the market provides
information about the nature and extent of competition which the firms have to face. This helps in
determining the degree of market power (ability to determine prices) which the firm commands
and the strategies to be followed in market management under the given competitive conditions
such as, product design and marketing. Price theory explains how prices are determined under
different kinds of market conditions and assists the firm in framing suitable price policies.
e) Resource Allocation: Business Economics, with the help of advanced tools such as linear
programming, enables the firm to arrive at the best course of action for optimum utilization of
available resources.
f) Theory of Capital and Investment Decisions: For maximizing its profits, the firm has to
carefully evaluate its investment decisions and carry out a sensible policy of capital allocation.
Theories related to capital and investment provide scientific criteria for choice of investment
projects and in assessment of the efficiency of capital. Business Economics supports decision
making on allocation of scarce capital among competing uses of funds.
g) Profit Analysis: Profits are, most often, uncertain due to changing prices and market
conditions. Profit theory guides the firm in the measurement and management of profits under
conditions of uncertainty. Profit analysis is also immensely useful in future profit planning.
h) Risk and Uncertainty Analysis: Business firms generally operate under conditions of risk and
uncertainty. Analysis of risks and uncertainties helps the business firm in arriving at efficient
decisions and in formulating plans on the basis of past data, current information and future
prediction.
2. Macroeconomics applied to environmental or external issues

Environmental factors have significant influence upon the functioning and performance of business.
The major macro-economic factors relate to:
a) the type of economic system
b) stage of business cycle
c) the general trends in national income, employment, prices, saving and investment.

d) Government’s economic policies like industrial policy, competition policy, monetary and fiscal
policy, price policy, foreign trade policy and globalization policies
e) working of financial sector and capital market
f) socio-economic organizations like trade unions, producer and consumer unions and cooperatives.
g) social and political environment.
Business decisions cannot be taken without considering these present and future environmental
factors. As the management of the firm has no control over these factors, it should fine-tune its
policies to minimize their adverse effects.
Central Economic Problems

Human wants are unlimited and productive resources such as land and other natural resources, raw
materials, capital equipment etc. with which goods and services are produced to satisfy those wants are
scarce. The problem of scarcity of resources is felt not only by individuals but also by the society as a
whole. This gives rise to the problem of how to use the scarce resources to attain maximum satisfaction.
This is generally called ‘the economic problem’. Every economic system, be it capitalist, socialist or mixed,
has to deal with this central problem of scarcity of resources relative to wants for them. The central
economic problem is further divided into four basic economic problems. These are:
i) What to produce?
ii) How to produce?
iii) For whom to produce?
iv) What provisions (if any) are to be made for economic growth?
What to produce?
As human wants are unlimited and resources are scarce and have various alternatives, an important
decision as to what goods are to be produced among various alternatives available and how much is to be
produced should be taken by the society so that there can be optimum utilization of scarce resources.
What to produce means, what type of goods to be produced? Whether to produce high quality or low
quality goods? Whether to produce more durable goods or perishable goods? Whether to produce more of
consumer goods or capital goods? This fundamental question to be decided, because resources are scarce.
If resources were abundant, we might have produced all type of goods, without any worries.
How to produce?
After deciding what and how much to produce, the society has to decide the method of production i.e.,
whether it would use labour intensive techniques or capital intensive techniques. This decision is based on
the availability of the factors of production, or we can say inputs i.e., labour and capital. How to produce
involves three sub problems. They are: What resources to be used? Which technology to be used and
where to be produce it?
Note:
- Labour intensive technique refers to the use of more labour in the production process.

- Capital intensive technique refers to the use of more number of machines compared to labour in the
production process.
For whom to produce?

Another important decision which a society has to take is for whom to produce. The society cannot satisfy
all wants of all the people. Therefore, it has to decide who should get how much of the total output of
goods and services. In other words, it has to decide about the shares of different people in the national
cake of goods and services.
Market provision are to be made for economic growth.

A society should not use all of its scarce resources for current consumption only, without making any
provision for the future as the society’s production capacity would not increase. So, the economy has to
decide how much to save and investment for future growth. Nowadays we speak about sustainable
development, wherein which, the economy concentrates on satisfying the needs of the present
generations, without compromising with the needs of the future generation.
Types of economies
An economic system refers to sum total of arrangements for the production and distribution of goods and
services in a society. We divide all the economies into three broad classifications based on their mode of
production, exchange, distribution and the role which government plays in economic activity. These are:
- Capitalist economy
- Socialist economy
- Mixed economy
Capitalist economy
A capitalist economy is an economic system in which the production and distribution of commodities take
place through the mechanism of free markets. Hence, it is also called market economy or free trade
economy or laissez-faire. Each individual, be it a producer, consumer or resource owner, has considerable
economic freedom. In a market economy, there is no Government interference in economic affairs.
Example: The United States of America, Brazil, Japan etc.
The salient features of market economy are as follows:

- Right to private property: The various factors of production viz., land, labour, capital and
enterprise should be under private ownership. Inputs can be used by the owner as per their
requirement. However, the government is free to put restrictions for the benefit of the society.
- Freedom of enterprise: This means that any individual is free to engage in any economic activity
of his choice. He is also free to start a new enterprise.
- Freedom to choose: This highlights consumer power. Consumers have the freedom to make
choice. Hence, producers should take utmost care to ensure that they produce only those goods which
the consumers are willing to buy.

Note: Consumer sovereignty means people are free to spend their income as they like.
- Profit motive: It is the main objective of a firm which induces people to work and to produce.
- Competition: There always exists competition among sellers to sell their goods and among buyers to
obtain those goods that satisfy their wants. Advertisements and discounts are tools used to handle
competition.
- Inequalities of income: Due to unequal distribution of wealth, there exists a wide gap between the
rich and the poor.
A capitalist economy’s solutions:

In the absence of a central planning authority to solve the problems, a capitalist economy uses the forces
of demand and supply or price mechanism to solve its problems.
- Deciding what to produce: The main motive of an entrepreneur is to earn profit. Therefore, to
earn more profit, and entrepreneur produces only those goods that are demanded by the consumers.
In a free market economy, allocation of resources is determined by consumer preference.
Example: If consumers want more motorcycles, then there will be an increase in price due to an
increase in demand, which will lead to more profit. This will induce the producers to produce more
motorcycles.
- Deciding how to produce: To earn more and more profits, the entrepreneur will use the technique
of production in such a manner that the cost of production is minimal. There are two techniques or
methods of production.
- Labour intensive method: are primarily used in labour rich countries.
- Capital intensive method: used primarily in capital rich countries.
- Deciding for whom to produce: In the capitalist economy goods and services are produced based
on the capacity of the buyer. The capacity will be based on the income. The higher the income, the
higher will be buying capacity.
Example: AUDI cars are not manufactured for the middle class of the society. It is manufactured for
the upper class of the society.
- Deciding about consumption, savings and investment: Entrepreneurs invest, and consumers
save and consume. But consumer’s savings depends on interest rates. More savings is possible when
the interest rates are high on saving. Investment decisions depend upon the rate of return on capital.
The greater the profit expectation (i.e., the return on capital), the greater will be the investment in a
capitalist economy.
Advantages of a capitalist economy:

- Increase in productivity: In a capitalist economy, ever farmer, trader or industrialist can hold
property and use it in any way he likes. He increases the productivity to meet his own self-interest.
This, in turn, leads to an increase in income, savings and investment.
- Welfare maximization: It is claimed that there is efficiency in production and use of resources to
optimum level. The self-interest of individuals also promotes the society’s welfare.

- Flexible system: The shortages and surpluses in the economy are generally adjusted by the forces of
demand and supply. Thus, it operates automatically through the price mechanism.
- Non-interference of the state: The State (government) has a minimum role to play. There is no
conflict between the individual interest and the society. The economic institutions function
automatically without the interference of the Government.
- Low cost and quality products: The consumers and producers have full freedom and therefore, it
leads to production of quality products at low costs.
- Technological improvement: The element of competition under capitalism drives the producers
to innovate something new to boost sales and thereby bring about progress.
- Awards men for dynamism: A capitalistic economy fosters research leading to better quality
products.
Disadvantages of a capitalist economy:

- Inequalities: Capitalism creates extreme inequalities in income and wealth. The producers, land-
lords, and traders reap huge profits and accumulate wealth. Thus, the rich become richer, and the
poor becomes, poorer. The poor with limited means are unable to compete with the rich. Thus,
capitalism widens the gap between the rich and the poor, thus creating inequality.
- Leads to monopoly: Inequality leads to monopoly. Mega corporate units replace smaller units of
production. Firms combine to form cartels, trusts and in this process, bring about a reduction in the
number of firms engaged in production. They ultimately emerge as multinational corporations
(MNCs) or transnational corporations (TNCs). They often hike prices against the welfare of
consumers.
- Depression: There is over-production of goods due to heavy competition. The poor are not able to
take advantage of the production and hence, are exploited. At another level, over production leads to
glut in the market and hence, to depression. This leads to economic instabilities.
- Mechanization and automation: Capitalism encourages mechanization and automation. This will
result in unemployment, particularly in labour surplus economies.
- Welfare Ignored: Under capitalism, private enterprise produces luxury goods which yield higher
profits and ignore the basic goods required which yields less profit. Thus, the welfare of the public is
ignored.
- Exploitation of labour: Stringent labour laws are enacted to prevent the damages of capitalists.
Hire and fire policy will become the order of the day. Such laws also help to exploit the labour by
keeping their wage rate at its minimum level or subsistence level.
- Basic social needs are ignored: There are many basic social needs such as literacy, public health,
poverty, drinking water, social welfare and social security. As the profit margin in these sectors is low,
capitalists will not invest in these sectors. Hence, most of these vital human issues will be ignored in a
capitalist system.

Socialist economy
In a socialistic economy, the means of production are owned and operated by the State. All decisions
regarding production and distribution are taken by the central planning authority. Hence, the socialist
economy is also called as a planned economy or command economy. The government plays an active role
social welfare is given importance; hence, equal opportunity is given to all.
Note: In today’s world there is no country which has controlled economy.
Features of a socialist economy:

- Social welfare motive: In socialist economies, social or collective welfare will be the prime motive.
Unlike capitalism, profit will not be the aim of policy making. The decisions will be taken keeping the
maximum welfare of the people in mind.
- Limited right to private property: The right to private property is limited. All properties of the
country will be owned by the State. That is, the ownership is collective in nature. Hence, no individual
can accumulate excessive property as is the case of capitalism.
- Central planning: Most of the decisions on economic policies will be taken by a centralized
planning authority. Each and every sector of the economy will be directed by well-designed planning.
- No market forces: In a centralized planned system of development, market forces have a limited
role to play. Production, commodity and factor prices, consumption and distribution will be governed
by development planning with welfare motive.
Advantages of a socialist economy:

- Effective use of resources: The resources are utilized to produce socially useful goods without
taking the profit margin into account. Production is increased by avoiding wastage due to
competition.
- Economic stability: A socialist economy is free from business fluctuations. Government plans well
in advance, and everything is well coordinated to avoid over-production or unemployment. There is
stability because the production and consumption of goods and services are well-regulated.
- Maximization of social welfare: All citizens work for the welfare of the State. Everybody receives
his or her remuneration. The State concentrates on the production of basic necessaries instead of
luxury goods. The State provides free education, cheap and congenial housing, public health
amenities and social security for the people.
- Absence of monopoly: The elements of corporation and monopoly are eliminated since there is an
absence of private ownership. The state is a monopoly but produces quality goods at reasonable
prices.
- Basic needs are met: In socialist economies, basic human needs like water, education, health,
social security, etc. are provided. Human development is more in socialist economies.
- No extreme inequality: As social welfare is ultimate goal, there is no concentration of wealth.
Extreme inequality is prevented in a socialist system.

Disadvantages of a socialist economy:

- Bureaucratic control: A socialist economy is operated under a centralized command and control
system. People here work out of fear of higher authorities. It does not give any initiative for the people
to work hard.
- No freedom: There is no freedom of occupation. Allocation of factors of production is not done
rationally. Jobs are provided by the State. Place of work is also provided by the State. The consumer’s
choice is very limited.
- Absence of technology: Work is monotonous, and no freedom is provided. Any change in the
production process will alter the entire plan. Hence, any innovation cannot be enforced easily.
Everything is rigid and technological changes are limited.
- Absence of competition: Absence of competition makes the system inefficient.
- Less choice for consumer: As the production and distribution is in hands of the state, consumers
have less freedom of choice. Consumers have to choose from whatever the states produce.
Mixed economy
In a mixed economy, both public and private institutions exercise economic control. The public sector
functions as a socialistic economy and the private sector, as a free enterprise economy. All decisions
regarding what, how and whom to produce are taken by the state. The private sector produces and
distributes goods and services. Cost-benefit analysis is used to answer the fundamental questions – what,
how and for whom to produce?
Example: India
Features of a mixed economy:

i) Co-existence of private and public sector: The first important feature of a mixed economy is the
co-existence of both private and public enterprise. In fact, in a mixed economy, there are three sectors
of industries:
a) Private sector: Production and distribution in this sector are managed and controlled by
private individuals and groups. Industries in this sector are based on self-interest and profit
motive. The system of private property exists, and personal initiative is given full scope.
However, private enterprise may be regulated by the government directly and/or indirectly by a
number of policy instruments.
b) Public sector
Industries in this sector are not primarily profit-oriented but are set up by the State for the
welfare of the community.
c) Combined sector
A sector in which both the government and the private enterprises have equal access, and join
hands to produce a commodity, leading to the establishment of joint sectors.
ii) Existence of Economic Planning: A mixed economy is a planned economy, i.e., an economy in
which the government has a clear and definite economic plan. Public sector enterprises have to work
according to a plan and to achieve the objectives laid down. The government has also to create
necessary atmosphere for the private sector to develop on its own. Thus, it must prepare plans of
development for both the private and the public sector enterprises.
Allocation of resources in a mixed economy should be better since it attempts to combine the
productive efficiency of capitalism and distributive justice of socialism.
iii) Positive role of the government: In a mixed economy, balanced regional development is
expected. Public sector enterprises may be located in the backward regions so as to ensure their
development. Further, by way of subsidies and other incentives private sector may be lured to
establish and develop industries in backward regions.
iv) Administered Pricing: In a mixed economy, a dual system of pricing exists. In the private sector,
prices of goods and factors of production are determined through the free play of market forces of
demand and supply. In the public sector, the state determines the prices of various products. The
state may also fix the prices of certain essential commodities which are used by common man. For
example, in India, the prices of essential commodities like diesel, LPG, etc. are fixed by the
government. Overall planning is done by the State Authority called Planning Commission in countries
like India who have adopted mixed economy.
Merits of Mixed Economy

1. Mixed economy secures the merits of both capitalism and socialism while avoiding the evils of both.
2. 2. Mixed economy protects individual freedom. Under the system, individuals have the freedom of
consumption, choice of occupation, freedom of enterprise and freedom of expression.
3. Price mechanism is allowed to operate under mixed economy.
4. Reducing the inequalities of wealth and class struggle is one of the aims of mixed economy.
5. Economic fluctuations can be avoided due to the presence of a centrally planned economy.
6. Mixed economy helps under-developed countries to have rapid and balanced economic development.
Demerits of Mixed Economy

1. Mixed economy is difficult to operate. Balancing and adjusting the public and private sectors is often
difficult.
2. Excessive controls and heavy taxes are likely to prevail under mixed economy. These will discourage
production in the private sector.
3. Problems of red-tapism, nepotism, favoritism, officialdom, etc. are also found in this type of economic
system.

Theory of Demand
Chapter – 02 – Theory of Demand
This theory shows how consumer preferences determine consumer demand for commodities. Moreover
an insight into this topic will help us understand reasons behind a number of phenomenon occurring in
the real world scenario.
Meaning of demand- Demand refers to the quantity of a good or service that the consumers are willing
and able to purchase at various prices during a period of time.
Demand, in Economics, is something more than desire to purchase though desire is one element of it. A
beggar, for instance, may desire food, but due to lack of resources to purchase it, his demand is not
effective.
Thus, effective demand for a thing depends on
i) Desire for the goods/service
ii) Means to purchase and
iii) Willingness to use those means for that purchase.
Unless demand is backed by purchasing power or ability to pay, it does not constitute demand.
Two things are to be noted about quantity demanded of a commodity.

a) One is that quantity demanded is always expressed at a given price. At different prices different
quantities of a commodity are generally demanded.
b) The second thing is that quantity demanded is a flow concept. We are concerned not with a single
isolated purchase, but with a continuous flow of purchases and we must therefore express demand as
so much per period of time – one thousand dozens of apples per day, seven thousand dozens apples
per week and so on.
A more comprehensive look at the concept can be reveals: By demand, we mean the various
quantities of a given commodity or service which consumers would buy in market over a given period of
time, at various prices, or at various incomes, or at various prices of related goods.
Demand for a good is determined by the following

factors Price of commodity: Ceteris paribus i.e., other
things being equal, the demand for a commodity is inversely
related to its price. Thus, if price increases, demand decreases
and vice-versa. This is mainly due to income effect and
substitution effect. This phenomenon is known as the law of
demand. Thus, when price a commodity effects its demand
there would be a movement along the demand curve better known as change quantity in demand. It
is also termed as “price demand”.

Theory of Demand
Price of related commodities:

There are two types of related goods:
Complementary goods: Consumption of complementary goods
takes place simultaneously i.e., they are jointly used. For
example: pen and ink, tea and sugar etc. If the price of one of the
goods falls, the demand for the other will rise and vice-versa.
Price of one commodity and demand for another commodity are
indirectly related.
(Cars are the commodity in question)

Example: If the price petrol (a complementary commodity to cars) increases, then the demand will fall
moreover it will also lead to a fall in demand for cars.
Note- A further analysis reveals a shift in the demand curve of Car and a movement along the
demand curve of petrol. The effect of a change in price of complementary goods will bring about a
shift in the demand curve of the commodity in question.
Substitute goods: Here, the commodities are used in place of

another as alternative. A rise in the price of one commodity will
lead the consumers to shift to the purchase of the other
commodity. If the price of a commodity rises, it becomes
relative expensive compared to other commodities. So, the
consumers shift to the purchase of the cheaper commodity in
place of the commodity, the price of which has not changed.
Such goods are also known as substitutes. Price of one commodity and demand for another commodity
are directly related.
Example: If the price of Coke (a substitute of Pepsi) rises, relative to the price of Pepsi, consumers will
shift to the purchase of Pepsi from coke, since it has now become comparatively cheaper. Thus we notice
an increase in demand of Pepsi due to a change in price of its substitute coke. Coke and Pepsi are also
known as substitute goods.

Theory of Demand
(Commodity in question is Pepsi)
Note- A further analysis reveals a shift in the demand curve of Pepsi and a movement along the
demand curve of coca cola. The effect of a change in price of substitute commodity will bring about
a shift in the demand curve of the commodity in question. The impact of related goods on the
demand of a commodity is termed as “cross demand”.
Consumers’ income: Generally, higher the income of a consumer, higher is his purchasing power and
thus, higher is the quantity demanded. Thus, if the income of a consumer increases, he will demand more
of the good. However, there are certain commodities the demand of which falls with an increase in
income. These goods are called inferior goods. In case of necessities, the demand will rise initially, but will
gradually stabilize. This is because, people will become richer and their demand shifts from necessities to
other durable goods like T.V., house, car etc. We generally discuss two types of Income: (a) Money income
and (b) Real income. Money income deals with income of an individual in terms of money or cash. Real
income deals with the purchasing power of money income. The change in demand of a commodity due to
income of the consumer is termed as “income demand”
Normal goods Necessities Inferior goods
Tastes and preferences: Consumers’ tastes and preferences for various goods keep changing, thus
changing the demand for those goods. Demand would be high for those goods whose tastes and
preferences are greater. Change can also be due to changes in fashion. Goods which are in fashion have
greater demand compared to those which are not. ‘Demonstration effect’ plays an important role in

Theory of Demand
determining the demand for a product. Demonstration effect refers to a change in demand by seeing
another person use a particular product or commodity.
Example: People now prefer to buy LED’s, when they want to buy TV.
Age factor: The age composition, for instance, plays a vital role in determining demand. Generally, a
country with higher youth population spends more and saves lesser than a country with a greater
population of the old. On the other hand, if the population of a country has more number falling under
young age (below 14), then demand for toys, baby food, nursery, etc. increases.
Other Factors:
These factors effect the market demand for a commodity. These are:
Size of population: Size of the population of a country is an important determinant of market demand.
For instance, larger the population more will be the demand for certain goods like food grains, and pulses
etc. When the number of consumers increases, there will be greater demand for goods.
Distribution of income: Distribution of income affects consumption pattern and hence, the demand
for various goods. The wealth of a country may be so distributed that there are a few very rich people
while the majority are very poor. Then under such scenario propensity to consume of the country will be
relatively less, for the propensity to consume of the rich people is less than that of the poor people.
Consequently, the demand for consumer goods will be comparatively less. If the distribution of income is
more equal, then the propensity to consume of the country as a whole will be relatively high indicating
higher demand for goods.
Demographic structure of the market: If the market consists of a large proportion of children,
demand for toys, baby food, etc. increases. On the other hand, if the population consist of old people,
demand for walking sticks, and reading glasses would be high.
Innovation: When there is a change in the technology people generally prefer new version than the old
one. So, change in the technology changes the demand for a product.
Change in money supply: When money supply in the country increases it in turn increases the
demand for goods. On the other hand, when the money supply decreases demand also comes down.
Season or climatic condition: Seasonal goods like umbrella. Raincoat will be more demanded in the
rainy season than any other season.
Note- A change in price brings a movement along the demand curve. Whereas a change in
other factors brings about a shift in the demand curve.
Demand Function: The demand for any commodity mainly depends on the price of that commodity.
The other determinants include price of related commodities, the income of consumers, tastes and

Theory of Demand
preferences of consumers, and the distribution of income in the country. Hence, the demand function can
be written as:
Dx = f (Px , Pr , Y, T, Yd) , where
Dx = demand for good X
Px = price of good X
Ps = price of related goods
Y = income
T = tastes and preferences of the consumers
Law of Demand: The law of demand is one of the most important laws of economic theory. According
to law of demand, other things being equal, if the price of a commodity falls, the quantity demanded of it
will rise and if the price of a commodity rises, its quantity demanded will decline. Thus, there is an inverse
relationship between price and quantity demanded, other things being same.
Assumptions of the law:

- No change in the consumer’s income
- No change in consumer’s tastes and preferences
- No changes in the prices of other goods
- No new substitutes for the goods have been discovered
- Consumers have perfect knowledge of the market
- Consumers are rational human beings
Thus, the constancy of these other factors is an important assumption of the law of
demand.
Demand schedule: A tabular representation of the relationship between price and quantity demanded
is known as the demand schedule. A demand schedule is drawn upon the assumption that all the other
influences remain unchanged. It thus attempts to isolate the influence exerted by the price of the good
upon the amount sold. Demand schedule may be of two types: individual demand schedule and
market demand schedule.
Individual demand schedule: It shows the quantity of the commodities that a consumer will buy at a
selected price. We can take a hypothetical data of an individual consumer for a list of prices and the
corresponding quantities demanded of commodity X. It is also called household demand.
Price (Rs.) Quantity (Units)
50 2
45 3
30 7
25 12
20 18

Theory of Demand
When price of commodity X is `50 per unit, a consumer purchases 2 units of the commodity.
When the price falls to `45, he purchases 3 units of the commodity. Similarly, when the price further falls,
the quantity demanded by him goes on rising until at price `20, the quantity demanded by him rises to 18
units. The above table depicts an inverse relationship between price and quantity demanded; as the price
of the commodity X goes on falling, its demand goes on rising.
Demand curve: We can now plot the data from Table on

a graph with price on the vertical axis and quantity on the
horizontal axis. In the figure, we have shown such a graph
and plotted the five points corresponding to each price-
quantity combination shown in Table. We now connect
these points. The curve is called the demand curve for
commodity ‘X’. The curve shows the quantity of ‘X’ that a
consumer would like to buy at each price; its downward
slope indicates that the quantity of ‘X’ demanded increases
as its price falls.
Market Demand Schedule: When we add up the various quantities demanded by the number of
consumers in the market we can obtain the market demand schedule. Suppose there are three individual
buyers of the goods in the market. The Table shows their individual demands at various prices.
Note: In the above table we are able to notice that as price decreases new buyers join the market.
Market Demand Curve: If we plot the market demand

schedule on a graph, we get the market demand curve. The
Figure shows the market demand curve for commodity. The
market demand curve, like individual demand curve, slopes
downwards to the right because it is nothing but the lateral
summation of individual demand curves. Besides, as the price of
the good falls, it is very likely that new buyers will enter the
market which will further raise the quantity demanded of the
good.

Theory of Demand
Reasons for downward slope of demand curve: Why does demand curve slope downwards?
Different economists have given different explanations for the operation of law of demand.
These are given below.
1) Law of diminishing marginal utility: According to Marshall, people will buy more quantity at
lower price because they want to equalize the marginal utility of the commodity and its price. If the
consumer is at MUx = Px and the price falls then the equation would change to MUx > Px, thus in
such a scenario the consumer has to purchase more units of a commodity in order to reach MUx = Px.
He is induced to buy additional units in order to maximize his satisfaction or utility. The diminishing
marginal utility and equalizing it with the price is the cause for the downward sloping demand curve.
2) Income effect: When the price of a commodity falls, the consumer can buy the same quantity of the
commodity with lesser money or he can buy more of the same commodity with the same amount of
money. In other words, as a result of fall in the price of the commodity, consumer’s real income or
purchasing power increases. This increase in the real income induces him to buy more units of that
commodity. Thus, quantity demanded for that commodity (whose price has fallen) increases. This is
called income effect.
3) Substitution effect: Hicks and Allen have explained the law in terms of substitution effect and
income effect. When the price of a commodity falls, it becomes relatively cheaper than other
commodities. It induces consumers to substitute the commodity whose price has fallen as against
other commodities (substitute commodity) which have now become relatively expensive. The result is
that the total quantity demanded for the commodity whose price has fallen increases (commodity in
question). This is called substitution effect.
PRICE EFFECT = INCOME EFFECT + SUBSTITUTION EFFECT
4) Arrival of new consumers: When the price of a commodity falls, more consumers start buying it
because some of those who could not afford to buy it previously may now afford to buy it. This raises
the number of consumers of a commodity at a lower price and hence the quantity demand for the
commodity in question increases.
5) Different uses: Certain commodities have multiple uses. If their prices fall they will be used for
varied purposes and quantity demanded for such commodities will increase. When the price of such
commodities rises they will be put to limited uses only. Thus, different uses of a commodity make the
demand curve slope downwards reacting to changes in price.
Expansion and contraction of demand

Other things being equal the law of demand, show an inverse relationship between price of the commodity
and quantity demanded. If demand for a particular commodity changes as a result of changes in its price
alone, we denote is as expansion and contraction of demand. Thus, we see that expansion or contraction
of demand takes place as a result of changes in price, while all other factors influencing demand remain
constant.

Theory of Demand
- When the quantity demanded of a good rises due to a fall in price, it is called expansion of demand.
- When the quantity demanded of good decreases due to a rise in price, it is called contraction of
demand.
Scenario A Scenario B
Combination Price (Y) Quantity (X) Combination Price (Y) Quantity (X)
A 80 10 A 60 15
B 70 12 B 70 12
The phenomena of expansion and contraction of demand are shown in the above Figure. The figure which
is based on Scenario A Shows that when price is `80 quantity demanded is 10, given other things equal.
As the price decreases to `70, the quantity demanded increases to 12, we say that there is ‘an
increase in quantity demanded’ or ‘expansion of demand’ or ‘a downward movement on
the same demand curve’.
Similarly, in Scenario B as a result of increase in price to `70, the quantity demanded falls to 12, we say
that there is ‘contraction of demand’ or ‘a fall in quantity demanded’ or ‘anupward movementon the same
demand curve.’
Increase and decrease in demand

Till now we have assumed that other determinants remain constant when we are analyzing demand for a
commodity. It should be noted that expansion and contraction of demand take place as a result of changes
in the price while all other determinants of Demand viz. income, tastes and price of related goods remain
constant. These other factors remaining constant means that the position of the demand curve remains
the same and the consumer moves downwards or upwards on it.
When all the other factors influencing demand also change, there is an increase or decrease in demand
and the demand curve shifts either to its right or left. If the income of a consumer rises, he would be able
to purchase more number of units of a commodity which he earlier could not afford. This would result in
increase in demand and therefore, the demand curve shifts to the right. If, on the other hand, the goods
are out of fashion, the demand of that good will decline, resulting in the shift of the demand curve to the
left.

Theory of Demand
Demand may also increase and decrease due to the following reasons
Increase in demand - Rise in income
(A shift in the demand curve towards the right) - Rise in the price of substitutes
- Fall in the price of a complement
- Favourable change in taste towards the
commodity
- Increase in population
Decrease in demand - Fall in income
(A shift in the demand curve towards the left) - Fall in the price of substitutes
- Rise in the price of a complement
- Unfavourable change in taste towards the
commodity
- Decrease in population
A rightward shift in the demand curve: When demand changes not because of price but because of
change in other determinants of demand, it is a case of either increase or decrease in demand. “Increase
in demand means more demand at same price”. In case of increase in demand, the demand curve shifts to
the right hand side or shifts away from the origin.
A leftward shift in the demand curve: When

demand changes not because of price but because of
change in other determinants of demand, it is a case of
either increase or decrease in demand.“Less demand
and same price”. In case of decrease in demand, the
demand curve shifts towards the origin or to the left
hand side.
Movements along demand curve vs. Shift of curve

It is important in Economics to make a distinction between movements along a demand curve and a shift
of the whole demand curve.
A movement along the demand curve indicates changes in the quantity demanded because of price
changes, other factors remaining constant. A shift of the demand curve indicates that there is a change in
demand at each possible price because one or more other factors, such as income, taste or the price of
some other goods, have changed.
Thus, when an economist speaks of an increase or a decrease in demand, he refers to a

shift of the whole curve because one or more of the factors which were assumed to remain constant
earlier have changed. When the economist speaks of change in quantity demanded he means movement

Theory of Demand
along the same curve (i.e., expansion or contraction of demand) which has happened due to fall or rise in
price of the commodity other things remaining constant.
Exceptions to the Law of Demand

According to the law of demand, more of a commodity will be demanded at lower prices than at higher
prices, other things being equal.
The law of demand is valid in most cases; however there are certain cases where this law does not hold
good. The following are the exceptions to the law of demand.
i) Conspicuous goods: Articles of prestige value or snob appeal or articles of conspicuous
consumption are demanded only by the rich people and these articles become more attractive if their
prices go up. Such articles will not conform to the usual law of demand.
This was found out by Thorsten Veblen in his doctrine of “Conspicuous Consumption” and hence this
effect is called “Veblen effect” or prestige goods effect. Veblen effect takes place as some consumers
measure the utility of a commodity by its price i.e., if the commodity is expensive they think that it has
got more utility. As such, they buy less of this commodity at low price and more of it at high price.
Diamonds & gold are often given as example of this case.
ii) Giffen goods: Sir Robert Giffen, an economist, was surprised to find out that as the price of bread
increased, the British workers purchased more bread and not less of it. This was something against
the law of demand. Why did this happen? The reason given for this is that when the price of bread
went up, it caused such a large decline in the purchasing power of the poor people that they were
forced to cut down the consumption of meat and other more expensive foods. Since bread, even when
its price was higher than before, was still the cheapest food article, people consumed more of it and
not less when its price went up.Thus, this is a clear exception to the law of demand hence, the demand
curve has a positive slope.
Such goods which exhibit direct price-demand relationship are called ‘Giffen goods’.
For a commodity to qualify as a “giffen good”
a) The goods are inferior goods
b) The goods form a substantial part of consumer’s budget
c) The household is poor with limited income
It is to be understood that all inferior goods do not show such trend as they may not qualify for the
other requisites. Hence all giffen goods are inferior goods but all inferior goods are not necessarily
giffen goods.
Examples of giffen goods are coarse grains like bajra, low quality rice and wheat etc.
iii) Conspicuous necessities: The demand for certain goods is affected by the demonstration effect of
the consumption pattern of a social group to which an individual belongs. These goods, due to their
constant usage, have become necessities of life.

Theory of Demand
Example: Demand for refrigerator, TV sets etc. does not fall even if their price rises. This is because
they have become necessities of life due to continuous usage.
iv) Future expectations about prices: It has been observed that when the prices are rising,
households expecting that the prices in the future will be still higher, tend to buy larger quantities of
the commodities.
For example, when people expect that prices of petrol would rise in future. They demand greater
quantities of petrol as their pricesare on a rise.
It is to be noted that here it is not the law of demand which is invalidated but there is a change in one
of the factors which was held constant while deriving the law of demand, namely change in the price
expectations of the people.
v) Imperfect knowledge: The law has been derived assuming consumers to be rational and
knowledgeable about market-conditions. However, at times consumers tend to be irrational and make
impulsive purchases without any rational calculations about price and usefulness of the product and
in such contexts the law of demand fails.
vi) Emergency: In case of emergency, people will buy the goods no matter how high the prices are.If there
is a scenario of emergency in a country, people will tend to buy goods required even if their prices are
high.
vii) Demand for necessaries: The law of demand does not apply much in the case of necessaries of life.
Irrespective of price changes, people have to consume the minimum quantities of necessary
commodities.
viii) Speculative goods: In the speculative market, particularly in the market for stocks and shares, more
will be demanded when the prices are rising and less will be demanded when prices decline.
When there is an exception to the law of demand we would be generally coming up with an upward
sloping demand curve.

Theory of Consumer Behavior
Chapter – 03 – Theory of Consumer Behavior
All desires, tastes and motives of human beings are called wants in Economics. Wants may arise due to
elementary and psychological causes. Since the resources are limited, we have to choose between the
urgent wants and the not so urgent wants.
Characteristics of wants.
1. Wants are unlimited: Human wants are unlimited. They are never completely satisfied. When one
want is satisfied, another want will crop up to take its place.
2. Every want is satiable: Wants, in general, are unlimited. But a single or a particular want is
satiable. We can completely satisfy a single want.
3. Wants are competitive: wants generally compete with each other. We all have a limited amount of
money at our disposal. Therefore, we must choose some things and reject the others.
Example: Mr. X has `1000. With this amount, he has to choose between buying a book or having
food. Thus a utility maximizing consumer will choose the more urgent wants and distribute his
income on several goods in such a manner so as to get maximum satisfaction.
4. Wants are complementary: It is a common experience that we wants things in groups. A single
article out of a group cannot satisfy human wants by itself.
Example: A motor-car needs petrol and oil to start working. Thus, the relationship between motor-
car and petrol is complementary.
5. Wants are alternative: There are several ways of satisfying a particular want. If a person wants a
chair, he may opt for either wooden or plastic chair. The final choice depends upon the availability of
money and the relative prices. These alternative goods are also called ‘substitutes’.
6. Wants vary with time, place and person: Wants are not always the same. They vary from one
individual to another. People want different things at different times and in different places. We
require hot tea or coffee in winter and cold drinks in summer. People of England require warn
woollen suits and raincoats. People of India require more of cotton cloths. The wants of a villager are
different from that of a businessman living in metropolitan city. So, wants vary with generation,
culture, society, geographical location and the extent of economic development.
7. Some wants are recurring: Some wants are recurring in nature. There are wants which get
satisfied but tend to recur time and again.
Example: We require food and water recurrently.
8. Wants become habits and customs: There are certain goods which do not form necessaries are
consumed on regular basis as the consumer is into a habit of consuming the same.
Example: Smoking of cigarette and alcohol
Classification of wants
The existence of human wants is the basis of all economic activities in a society.
In Economics, wants are classified into three categories, viz., necessaries, comforts and luxuries.

Necessaries:
Necessaries are those which are essential for living. Man cannot do well with the barest necessaries of life
alone. Necessaries of efficiency helps a consumer to keep him fit for taking up productive activities. There
are other types of necessaries called conventional necessaries. By custom and tradition, people require
some wants to be satisfied.
Comforts:
Comforts refer to those goods and services which are not essential for living, but which are required for a
happy living. They lie between ‘necessaries’ and ‘luxuries’.
Luxuries:
Luxuries are those wants which are superfluous and expensive. They are not essential for living, however,
they may add efficiency to the consumer.
From time to time, different theories have been advanced to explain consumer behavior and thus to
explain his demand for the product. Predominantly the theory of consumer has been ruled by the
following two approaches.
a) Cardinal approach
b) Ordinal approach

Cardinal Approach Ordinal Approach

This approach was developed by Alfred Marshall This approach was developed by J. R. Hicks and R. J.
D. Allen
This analysis assumes that satisfaction that a This analysis condemns cardinal measurability of
consumer derives from various goods and utility and argues that satisfaction can’t be measured
services could be expressed in terms of cardinal in terms of numbers but only could be
numbers. arranged/ranked in the order of preference
Concepts covered under this approach: Concepts covered under this approach:
-Marginal Utility Analysis - Indifference Curve Analysis
a) Law of Diminishing Marginal Utility.
b) Consumer’s Equilibrium with Single
Commodity
c) Law of Equi-Marginal Utility.
d) Consumer Surplus
Marginal Utility Analysis

This theory which is formulated by Alfred Marshall, a British economist, seeks to explain how a consumer
spends his income on different goods and services so as to attain maximum satisfaction.
Important Terms
Utility: Utility is the want satisfying power of a commodity. Demand for a commodity depends
on the utility it offers to the consumer. Utility means the level of satisfaction which people derive from the
consumption of a commodity.
Features of utility
a) It is a subjective entity and varies from person to person and moreover differs from time to time for
the same person.
b) It should be noted that utility is not the same thing as usefulness. Even harmful things like liquor,
may be said to have utility from the economic stand point because people want them. Thus, in
Economics, the concept of utility is ethically neutral.
c) Utility is the anticipated satisfaction by the consumer, and satisfaction is the actual satisfaction
derived.
Modes of creation of utility

Time utility- satisfaction derived from receiving the commodity at the right time. In other words the
consumer would derive a higher level of satisfaction if he is able to procure the commodity when he wants
it.
Place utility- satisfaction derived by receiving the commodity at the right place. Utility discussed here is
in the form of convenience derived by the consumer in procuring the commodity.

Form utility- satisfaction derived by receiving the commodity in the right form. Getting the commodity
in a form usable by the consumer is another type of utility.
Types of utility
Marginal utility: It is the additional utility derived from the consumption of an additional unit of a
commodity. In short, Marginal utility = the addition made to the total utility by the addition of
consumption of one more unit of a commodity.
Total utility: It is the sum of utility derived from different units of a commodity consumed by a
consumer. In other words, Total utility = the sum total of all marginal utility.
Assumptions of Marginal Utility Analysis

a) The Cardinal Measurability of Utility: According to this theory, utility is a cardinal concept i.e.,
utility is a measurable and quantifiable entity. Thus, a person can say that he derives utility equal to
10 utils from the consumption of 1 unit of commodity A and 5utils from the consumption of 1 unit of
commodity B. Since, he can express his satisfaction quantitatively, he can easily compare different
commodities and express which commodity gives him greater utility or satisfaction and by how much.
According to this theory, money is the measuring rod of utility. The amount of money
which a person is prepared to pay for a unit of a good rather than go without it, is a
measure of the utility which he derives from the good.
b) Constancy of the Marginal Utility of Money: The marginal utility of money remains constant
throughout when the individual is spending money on a good. This assumption, although not
realistic, has been made in order to facilitate the measurement of utility of commodities in terms of
money.
c) Independent units of a commodity have independent Utility: The total utility which a person
gets from the whole collection of goods purchased by him is simply the sum total of the separate
utilities of the goods. The theory ignores complementarity between goods.
Law of Diminishing Marginal Utility (LDMU)

One of the important laws under Marginal Utility analysis is the Law of Diminishing Marginal Utility.
The law of diminishing marginal utility is based on an important fact that while total wants of a person are
virtually unlimited, each single want is satiable i.e., each want is capable of being satisfied.
Since each want is satiable, as a consumer consumes more and more units of a good, the intensity of his
want for the good goes on decreasing and a point is reached where the consumer no longer wants it.
The Law of Diminishing Marginal Utility is one of the very important and fundamental laws of
consumption. This is also known as “Gossen’s 1 st Law of Consumption”, named after an Austrian
economist Gossen’s who introduced it. This law is based on one of the important characteristic of human
want i.e., “Some Human wants could be satisfied”. Prof. Alfred Marshall has further developed LDMU.

Marshall stated the law as follows: “The additional benefit which a person derives from a given
increase in stock of a thing diminishes with every increase in the stock that he already
has.”
In other words, as a consumer increases the consumption of any one commodity keeping constant the
consumption of all other commodities, the marginal utility of the variable commodity must eventually
decline.
It is to be noted that it is the marginal utility and not the total utility which declines with
the increase in the consumption of a good.
Assumptions to Law of Diminishing Marginal Utility (LDMU):

The LDMU is based on certain assumptions. They are
a) Homogeneous units: The different units of a particular commodity consumed by a person
should be identical or same in all respect i.e., color, size, quantity, taste, etc., The Units must be
similar.
b) No time gap in consumption: In the process of consumption the successive units must be
consumed successively one after the other. If there is a long interval between the consumption of
one unit and the other unit, then LDMU will not hold good.
c) No changes in the taste, habits and the income of the consumer: During the course of
consumption there should not be any change in the taste, habits and income of the consumer. If
there is any change, this law will not hold good.
d) Cardinal measurability of utility: According to this theory, a person can express the
satisfaction he derives from the commodity in quantitative cardinal terms. In other words, utility
can be expressed in the form of numbers. The amount of money which a person is
prepared to pay for a unit of a good rather than go without it, is a measure of the
utility which he derives from the good.
e) Constancy of the Marginal Utility of money: This is an important assumption without
which Marshall could not have measured Marginal Utilities of goods in terms of money. It states
that the Marginal Utility of money remains constant throughout the period when the individual is
spending money on a commodity.
f) Independent units have independent utility: This assumption states that the Total Utility
which a person derives from a collection of goods purchased is simply the sum total of the
separate utilities of goods i.e., separate utilities of different goods can be added to obtain the total
sum of the utilities of all the goods purchased.
g) Rationality: Here the consumer is assumed to be rational. The consumer will prefer to spend
money on the commodity from which he will derive maximum utils.

Number of cups of tea TU MU – TUn - TUn-1

1 50 50
2 75 25
3 95 20
4 110 15
5 120 10
6 120 0
7 100 -20
Let us illustrate the law with the help of an example. Consider the above table, in which we have presented
the total utility and marginal utility derived by a person from tea consumed by him. When one tea is taken
per day, the total utility derived by the person is 30 utils (unit of utility) and the marginal utility derived is
also 30 utils. With the consumption of 2nd tea per day the total utility rises to 50 but marginal utility falls
to 20. We see that as the consumption of tea increases to 10 tea, marginal utility from the additional tea
goes on diminishing (i.e., the total utility goes on increasing at a diminishing rate). However, when the tea
consumed increases to 11, instead of giving positive marginal utility, the eleventh tea gives negative
marginal utility (it may cause him sickness).
Here, we may note that TU increases with the consumption of every successive units but at a diminishing
rate. On the other hand MU goes on diminishing with the consumption of every successive unit. When
MU = 0, the TU will be the maximum. If a consumer goes on consuming beyond this point, the TU goes
on decreasing and MU will be negative.
Graphically we can represent the relationship between total utility and marginal utility
From the above table, we can conclude the three important relationships between total utility and
marginal utility
a) When total utility rises, the marginal utility diminishes.
b) When total utility is maximum, the marginal utility is zero.
c) When total utility is diminishing, the marginal utility is negative.
As will be seen from the figure provided below, the marginal utility curve goes on declining throughout
and the total utility curve increases initially. Till MU remains positive TU keeps on rising. As more units of
the commodity is consumed the TU keeps on increasing till the point MU becomes 0, at this point TU is
maximum. Thereafter we are able to see a fall in the TU as MU becomes negative.
Exception to the Law

The law of diminishing marginal utility has the following exceptions.
Rare Collections: The law of LDMU is not applicable to some of the rare collections like stamps, coins,
rare currency, antique goods etc. because our satisfaction increases with every increase in the stock of
these goods.

Tu
C
B
Tu
Not applicable to items of habit formation: The level of intoxication

of the drinker increases with every additional drink of liquor.
No applicable for money or asset class: The LDMU is not applicable

for money or other asset class. With every increase in the stock of money or
asset class, the greed goes on increasing.
Criticisms of Law of Diminishing Marginal Utility (LDMU):

The main criticisms of the LDMU are as follows:
a) Cardinal measurability of utility is not possible. Nobody can express their utility in terms of numbers.
b) Constancy of marginal utility is an irrational assumption because as the stock of money with a person
keeps on decreasing then utility of the money left with him keeps on increasing.
c) The LDMU is a single commodity model.
d) It does not consider complementarity of goods into account. This approach propounds that individual
units provide separate level of satisfaction which is not possible with all classes of commodities.
Example: car has hardly any utility without petrol and also the other way round.
e) The Law fails in the case of prestigious goods, the law may not apply to articles like gold, cash where a
greater quantity may increase the lust for it.
f) Continuous Consumption is another irrational assumption under the LDMU states that there should
be no time gap or interval between the consumption of one unit and another unit i.e. there should be
continuous consumption.
Application of the Law of Diminishing Marginal Utility:

LDMU concept is used to explain “Value Paradox”: This “Value Paradox” was developed by Prof.
Adam Smith. This concept is also known as ‘Diamond –water paradox’. He says that water is more useful
than diamond, but it is priced low and diamond is less useful than water and it is priced high. This is
because more is the quantity or the stock of a product the marginal utility for such commodity is low and
if the availability of a product is less, marginal utility will be high.
Useful for Government to fix the Tax Rate: The value of additional money for a rich person is
relatively less. But whereas the value of the same additional money to a poor person is more. Hence the

government follows ‘Progressive Tax System’. Government levies high rate tax on rich people and low tax
on poor people. This approach of taxation is also based on LDMU.
To explain ‘Law of Demand’: The Law of diminishing marginal utility helps us to understand how a
consumer reaches equilibrium in case of a single good. It states that as the quantity of a good with
consumer increases, marginal utility of the good decreases. In other words, the marginal utility curve is
downward sloping. Now, a consumer will go on buying a good till the marginal utility of the good becomes
equal to the market price. In other words, the consumer will be in equilibrium (will be deriving maximum
satisfaction) in respect of the quantity of the good where marginal utility of the good is equal to its price.
Here his satisfaction will be maximum.
What happens when there is a change in the price of the good? When the price of the good falls, the
equality between marginal utility and price is disturbed. The consumer will consume more of the good so
as to restore the equality between marginal utility and price. When he consumes more of the good, the
marginal utility from the good will fall. He will continue consuming more till the marginal utility becomes
equal to the new lowered price.
On the other hand, when price of the good increases he will buy less so as to equate the marginal utility to
the higher price. We can say that the downward sloping demand curve is directly derived
from marginal utility curve.
Used to explain Consumer Surplus: Consumer surplus might be defined as the difference between
the price, what consumer is actually prepared to pay (MU) and the price that he actually pays. Initially a
consumer will be ready to pay more price for a product, gradually as the consumer consumes more
number of units of a commodity he will be ready to offer less price for the same product. This is because
law of diminishing marginal utility.
Consumer’s equilibrium with one commodity:

In an economy, where the commodities are available freely, the consumer will go on consuming a
commodity, till marginal utility becomes zero. At the point consumer gets maximum satisfaction and will
be in equilibrium.
But in an economy, where consumer has to pay, he will be in equilibrium, when Marginal Utility is equal
to Price. At this point consumer gets maximum satisfaction and will be in equilibrium. How many units of
commodity, that the consumer buys to get maximum satisfaction depends on the price of the commodity.
A consumer continues to demand a commodity till Marginal Utility that he gets is greater than Price. He
stops when Marginal Utility is equal to Price. This concept could be explained with an example:
Market Price of
Units M. Utility Derived
commodity MU > Price
1 20 30Utils

2 20 25Utils
3 20 20Utils MU = Price
4 20 15 Utils
MU < Price
5 20 10 Utils
Assumptions of the example:

a) Market Price of the commodity remains constant.
b) Law of Diminishing Marginal Utility operates.
c) No substitutes available. The consumer has to buy the same product.
In the above diagram, Marginal Utility curve slopes downward and market price remains constant. If the
consumer purchases2 units of commodity, at this level MUx >Px and this will induce him to purchase
more. If the consumer purchases 3units of commodity, at this level MUx = Px, consumer gets max
satisfaction and will be in equilibrium. If the consumer purchases 5unitsof commodity, at this level
MUx<Px, consumer will move into a negative zone.
The Law of Equi-Marginal utility (LEMU):

The idea of equi-marginal utility was first mentioned by H. H. Gossen (1810-1858) of Germany. Hence, it
is called Gossen’s second Law of consumption. Alfred Marshall made significant refinements to this law in
his ‘Principles of Economics’.
According to this law, the consumer will try to maximize his satisfaction when there are substitutes
available in the market. So, he will substitute one item in place of the other such that his Marginal Utility
is proportional to the price. The law of equi-marginal utility explains the behavior of a consumer when he
consumes more than one commodity. Wants are unlimited, but the income which is available to the
consumer to satisfy all his wants is limited. This law explains how the consumer spends his limited
income on various commodities to get maximum satisfaction.

According to Alfred Marshall, “Other things being equal, a consumer gets maximum satisfaction when he
allocates his limited income to the purchase of different goods in such a way that the Marginal Utility
derived from the last unit of money spent on each item of expenditure tend to be equal”.
Assumptions to Law of Equi-Marginal Utility (LEMU):

a) The consumer is rational, so he wants to get maximum satisfaction
b) The utility of each commodity is measurable
c) The Marginal Utility of money remains constant
d) The income of the consumer is given
e) The prices of the commodities are given
f) The law is based on the law of diminishing marginal utility.
Explanation of Law of Equi-Marginal Utility (LEMU)

Suppose there are two goods, A and B, on which a consumer has to spend a given income, the consumer
being rational, will try to spend his limited income on goods A and B to maximise his Total Utility or
satisfaction. Only at that point of maximum satisfaction, the consumer will be in equilibrium. According
to the law of equi-marginal utility, the consumer will be in equilibrium at the point where the utility
derived from the last rupee spent on each item is equal.
Symbolically, the consumer will be in the equilibrium when:-
MU x Px
= = MU m per unit of money income
MU y Py
Or
MUx MUy
= = MUm per unit of money income
Px Py
Where,
MUx = Marginal Utility of commodity X
MUy = Marginal Utility of commodity Y
Px = Price of commodity X
Py= Price of commodity
MUm = Marginal Utility of money
Let us illustrate the law of equi marginal utility with the help of the following table:
Suppose a lady has a budget of `40 with her, which she wishes to spend on two commodities, chocolates
and ice creams. The marginal utility derived from both these commodities is as under:

MU of Chocolates MU of Ice creams

Units MUx/Px MUy/Py
(X) (Y)
1 80 8 35 7
2 70 7 30 6
3 60 6 25 5
4 50 5 20 4
5 40 4 15 3
6 30 3 10 2
7 20 2 5 1
8 10 1 0 0
Note-if the consumer has unlimited budget then the most ideal scenario would be a combination of 8
units of X and 7 units of Y as it would satisfy the condition of equilibrium assuming there is no constraint
of resources.
A rational consumer would like to get maximum satisfaction from `40.
Px = `10 and Py= `5. She can spend this money in three ways:
a) `40 may be spent on chocolates only.
b) `40 may be utilized for the purchase of ice creams only
c) Some amount may be spent on the purchase of chocolates and some on the purchase of ice creams.
If the prudent consumer spends `40 on the purchase of chocolates, she gets 260utils by consuming 4
units of chocolate.
If she spends `40 on the purchase of ice creams, the total utility derived is 140 utils by consuming 8 units
of ice cream. Which is lesser than utility derived from consumption of chocolates.
In order to make the best of the available budget, she can purchase the following combinations as per the
law of equi marginal utility.
Combination Budget utilized Total utility
A= 2X + 1Y 25 185
B= 3X + 2Y 40 275
Any combination above combination B would require more than the budget available. Thus, following the
MUx MUy
rule of equi marginal utility of =
Px Py
The best possible combination available to the consumer with the limited budget available would be B =
3X + 2Y. With this available combination the consumer would be generating maximum total utility of 275
than any other option.

Law OfEqui Marginal Utility
Limitations of Law of Equi-Marginal Utility (LEMU)

a) Rational behavior: It is true that consumer is irrational sometimes. It is behavior is greatly
influenced by habits, advertisements etc. Moreover a consumer has to keep a complete record of
income and continuously calculate the marginal utilities which is practically not possible.
b) Cardinal Measurement of Utility: Critics point out that utility is an abstract term, which cannot
be measured.
c) Utility is subjective: Utility is subjective and psychological concept. It is difficult to measure.
d) Marginal Utility of Money is not constant: Marshall assumes that marginal utility of money is
constant but Hicks argues that money is also a commodity and the marginal utility also diminishes
slowly.
e) Multiplicity: Multiplicity of commodities prevent the consumer from making a rational choice. He
neither has time nor the ability to calculate marginal utilities.
f) Indivisible goods: It is not applicable to indivisible goods. There are certain goods such as fan, TV,
car etc., which cannot be divided or sub divided. If divided they will lose their utility.
g) Durable goods: It is difficult to measure the utility in respect of durable goods such as car and
machinery. For example: if the consumer purchases a car and a cup of tea, it is very difficult to
equalize the Marginal Utility of a car which lasts for several years with a cup of tea, which exhausts at
the single act of consumption.
h) Customs, fashions, ignorance, scarcity etc. Customs make the consumption of an article
compulsory irrespective of marginal utilities. Fashion of the day impede the operation of the law as
one may purchase a commodity much against his wish to tune with the fashion. Consumer does not
possess complete knowledge of all commodities and their prices in the market. Moreover prices are
subject to change. Scarcity consumer is compelled to purchase an alternative or a substitute good if
there is scarcity.
Importance of Law of Equi-Marginal Utility (LEMU)

The law of Equi-Marginal utility is not only theoretical, but also has practical application in our daily life.
Some of the areas, where it could be used are:

The Theory of Consumption: The expenditure pattern of every consumer is based on this law. The
consumer distributes his limited income among various commodities in such a way that the Marginal
Utility or the satisfaction that he gets is equal MU from the last rupee spent. At that point he stops further
consumption, because he knows that if he continues consumption, the satisfaction will be less and the
price he is going to pay is more. This helps the consumer to maximize his satisfaction.
Choice between Savings and Consumption: If the future consumption yields more satisfaction than
the present consumption, in the case the consumer will decide to save his income rather than spending it.
Scarcity aspect: This law applies to all fields of economic activity where limited resource are to be
profitably employed. Thus, the law has very wide application. Prof. Marshall puts the significance of the
law in the following words: “The application of this principle could be extended to every field of economic
enquiry”.
Consumer’s Surplus
The concept of consumer’s surplus was evolved by Alfred Marshall. This concept occupies an important
place not only in economic theory but also in economic policies of government and in decision-making of
monopolists.
It has been seen that consumers generally are ready to pay more for certain goods than what they actually
pay for them. This extra satisfaction which consumers get from their purchase of goods is called by
Marshall as consumer’s surplus.
Marshall defined the concept of consumer’s surplus as the “excess of the price which a
consumer would be willing to pay rather than go without a thing over that which he
actually does pay”, is called consumer’s surplus.”
Thus consumer’s surplus = what a consumer is ready to pay - What he actually pays.
Or
Thus consumer’s surplus = marginal utility - What he actually pays.
The concept of consumer’s surplus is derived from the law of diminishing marginal utility. As we know
from the law of diminishing marginal utility, as we purchase more of a good, its marginal utility goes on
diminishing. The consumer is in equilibrium when marginal utility is equal to given price i.e., he
purchases that many number of units of a good at which marginal utility from the last unit is equal to its
price (It is assumed that perfect competition prevails in the market). Since the price is the same for all
units of the good he purchases, he gets extra utility for all units consumed by him except for the one at the
margin.
This extra utility or extra surplus for the consumer is called consumer’s surplus.

It is often argued that the surplus satisfaction cannot be measured precisely. In case of very essential
goods of life, utility is very high but prices paid for them are low giving rise to infinite surplus satisfaction
(example- water). Further, it is difficult to measure the marginal utilities of different units of a commodity
consumed by a person.
No. of units Marginal Utility Price Consumer’s Surplus
1 30 20 10
2 28 20 8
3 26 20 6
4 24 20 4
5 22 20 2
6 20 20 0
7 18 20 –
We see from the above table that when consumer’s consumption increases from 1 to 2 units, his marginal
utility falls from `30 to `28. His marginal utility goes on diminishing as he increases his consumption of
good X. Since marginal utility for a unit of good indicates the price the consumer is willing to pay for that
unit, and since price is assumed to be fixed at `20, the consumer enjoys a surplus on every unit of
purchase till the 6th unit. Thus, when the consumer is purchasing 1 unit of X, the marginal utility is worth
`30 and price fixed is `20, thus he is deriving a surplus of ` 10. Similarly, when he purchases 2 units of
X, he enjoys a surplus of Rs 8 [`28 – `20]. This continues and he enjoys consumer’s surplus equal to `6,
4, 2 respectively from 3rd, 4th and 5th unit. When he buys 6 units, he is in equilibrium because his
marginal utility is equal to the market price thus he enjoys no surplus. Thus, given the price of `20 per
unit, the total surplus which the consumer will get, is Rs 10 + 8 + 6 + 4 + 2 + 0 = `30.
Consumer Surplus
The concept of consumer’s surplus can also be illustrated graphically. Consider the above figure, On the
X-axis we measure the amount of the commodity and on the Y-axis the marginal utility and the price of
the commodity. MU is the marginal utility curve which slopes downwards, indicating that as the
consumer buys more units of the commodity, its marginal utility falls. Marginal utility shows the price

which a person is willing to pay for the different units rather than go without them. If OB is the price that
prevails in the market, then the consumer will be in equilibrium when he buys OE units of the commodity,
since at OE units, marginal utility is equal to the given price OE. The last unit, i.e., 6 thunit does not yield
any consumer’s surplus because here price paid is equal to the marginal utility of the 6 thunit. But for units
before 6thunit, marginal utility is greater than price and thus these units fetch consumer’s surplus to the
consumer.
The total utility is equal to the area under the marginal utility curve up to point C i.e. OACE.
But, given the price equal to OB, the consumer actually pays OBCE. The consumer derives extra utility
equal to BAC which is nothing but consumer’s surplus.
Limitations
a) Consumer’s surplus cannot be measured precisely - because it is difficult to measure the marginal
utilities of different units of a commodity consumed by a person.
b) In the case of necessaries, the marginal utilities of the earlier units are infinitely large. In such case
the consumer’s surplus is always infinite.
c) The consumer’s surplus derived from a commodity is affected by the availability of substitutes.
d) There is no simple rule for deriving the utility scale of articles which are used for their prestige value
(e.g., diamonds).
e) Consumer’s surplus cannot be measured in terms of money because the marginal utility of money
changes as purchases are made and the consumer’s stock of money diminishes.
f) Marshall assumed that the marginal utility of money remains constant. But this assumption is
unrealistic.
g) The concept can be accepted only if it is assumed that utility can be measured in terms of money or
otherwise. Many modern economists believe that this cannot be done.
Indifference Curve Analysis

In order to overcome with drawback and to explain utility analysis in a more acceptable and in an
appropriate manner two economists by name R. J. D. Allen and J. R. Hicks developed an alternative
approach in 1939. That newly developed approach is known as ‘Indifference curve analysis’.
This Indifference Curve Analysis is also known as ‘Ordinal Analysis’, because in this the consumer
expresses his satisfaction in the ‘order of preference’ A very popular alternative and more realistic method
of explaining consumer’s demand is the Indifference Curve Analysis.
This approach to consumer behavior is based on consumer preferences. It believes that human
satisfaction, being a psychological phenomenon, cannot be measured quantitatively in monetary terms as
was attempted in Marshall’s utility analysis. In this approach, it is felt that it is much easier and
scientifically more sound to order preferences than to measure them in terms of money.
Based on the quality and the level of satisfaction, consumer arranges different combination of goods in the
order of preference. This kind of conceptual ordering is technically known as “Scale of Preference”.

The consumer preference approach is, therefore, an ordinal concept based on ordering of preferences
compared with Marshall’s approach of cardinality.
Indifference curve-An indifference curve is a curve which represents all those combinations of two
goods which give same satisfaction to the consumer. Since all the combinations on an indifference curve
give equal satisfaction to the consumer, the consumer is indifferent among them. In other words, since all
the combinations provide the same level of satisfaction the consumer prefers them equally and does not
mind which combination he gets.
Assumptions in Indifference Curve Approach

i) The consumer is rational and possesses full information about all the relevant aspects of economic
environment in which he lives.
ii) The consumer is capable of ranking all conceivable combinations of goods according to the
satisfaction they yield. Thus, if he is given various combinations say A, B, C, D and E he can rank them
as first preference, second preference and so on. If a consumer happens to prefer A to B, he can not
tell quantitatively how much he prefers A to B.
iii) Transitivity and consistency of choice. If there are three combinations of goods say A, B and C and if
the consumer prefers A to B and B to C, he must also prefer A to C. This is because, when a consumer
reveals that he prefers A to B, it means that he gets greater satisfaction from A as compared to B and
his preference of B over C implies that he gets more satisfaction from B as compared to C. Since the
consumer always prefers a combination, which gives him maximum satisfaction, he must prefer A to
C also and the consumer taste and preference are consistent.
iv) If combination A has more commodities than combination B, then A must be preferred to B.
Explanation of indifference curve

To understand indifference curve, let us consider the example of a consumer who has one unit of burger
and 21 units of cold drink. Now, we ask the consumer how many units of cold drink he is prepared to give
up to get an additional unit of burger, so that his level of satisfaction does not change. Suppose the
consumer says that he is ready to give up 6 units of cold drink to get an additional unit of burger.
We will have then two combinations of burger and cold drink giving equal satisfaction to consumer:
Combination A which has 1 unit of burger and 21 units of cold drink, and combination B which has 2 units
of burger and 15 units of cold drink. Similarly, by asking the consumer further how much of cold drink he
will be prepared to forgo for successive increments in his stock of burger so that his level of satisfaction
remains unaltered, we get various combinations as given below:
Indifference Schedule
Combination Burger (X) Cold drink (Y) MRSxy
A 1 21 -
B 2 15 6

C 3 10 5
D 5 6 2
E 8 3 1
F 12 1 0.50
Now, if we draw the above schedule we will get the following figure.
An indifference curve IC is drawn by plotting the various combinations of the indifference schedule. The
quantity of burger is measured on the X axis and the quantity of cold drink on the Y axis. As in
indifference schedule, the combinations lying on an indifference curve will give the consumer the same
level of satisfaction.
Hence indifference curve is a locus of points representing all those different combinations of two goods,
which yield the same level of satisfaction to the consumer. Hence it is also known as ‘Iso-Utility Curve’.
Marginal Rate of Substitution: Marginal Rate of Substitution (MRS) is the rate at which the
consumer is prepared to exchange goods X and Y. Moreover when we refer to MRSxy it indicates the
number of units of commodity Y sacrificed for gaining a unit of commodity X. Consider the above table, in
the beginning the consumer is consuming 1 unit of burger and 21 units of cold drink. Subsequently, he
gives up 6 units of cold drink to get an extra unit of burger, his level of satisfaction remaining the same.
The MRSxy here is 6. Likewise when he moves from B to C and from C to D in his indifference schedule,
the MRS are 5 and 2 respectively.
Thus, we can define MRS of X for Y as the amount of Y whose loss can just be compensated by a unit gain
of X in such a manner that the level of satisfaction remains the same. We notice that MRS is falling i.e., as
the consumer has more and more units of burger, he is prepared to give up less and less units of cold
drink. There are two reasons for this.
1) The want for a particular good is satiable so that when a consumer has more of it, his intensity of want
for it decreases. Thus, when the consumer in our example, has more units of burger, his intensity of
desire for additional units of burger decreases.

2) As the stock of particular commodity goes on depleting the consumer wants to sacrifice less of it. In
our example we noticed that as the stock of cold drink goes on decreasing the consumer is willing to
sacrifice less of it.
Properties of Indifference Curves: The following are the main characteristics or properties of
indifference curves:
i) Indifference curves slope downward to the right: This
property implies that when the amount of one good in the
combination is increased, the amount of the other good is
reduced. This is essential if the level of satisfaction is to remain
the same on an indifference curve.
ii) Indifference curve is convex to the origin: It has been observed that as more and more of one
commodity (X) is substituted for another (Y), the consumer is willing to part with less and less of the
commodity being substituted (i.e., Y). This is called diminishing marginal rate of substitution. Thus,
in our example of burger and cold drink, as a consumer has more and more units of burger, he is
prepared to forego less and less units of cold drink.
This happens mainly because the want for a particular good is satiable and as a person has more and
more of a good, his intensity of want for that good goes on diminishing. This diminishing marginal
rate of substitution gives convex shape to the indifference curves.
iii) Indifference curves can never intersect each other: No

two indifference curves will intersect each other although it is not
necessary that they are parallel to each other. In case of
intersection the relationship becomes logically absurd because it
would show that higher and lower level indifference curve show
equal level of satisfaction which is not possible.
IC1 and IC2 intersect at A. Since A and B lie on IC1, they give same satisfaction to the consumer.
Similarly since A and C lie on IC2, they give same satisfaction to the consumer. This implies that
combination B and C are equal in terms of satisfaction. But a glance will show that this is an absurd
conclusion because certainly combination C is higher and hence better than combination B because it
contains more units of commodities X and Y. Thus we see that no two indifference curves can touch or
cut each other.
iv) A higher indifference curve represents a higher level of

satisfaction than the lower indifference curve: This is because
combinations lying on a higher indifference curve contain more of
either one or both goods and more goods are preferred to less of them.

v) Indifference curve will not touch either axes Another

characteristic feature of indifference curve is that it will not touch
the X axis or Y axis. This is born out of our assumption that the
consumer is considering different combination of two commodities.
If an indifference curve touches the Y axis at a point A as shown in
the figure, it means that the consumer is satisfied with OA units of Y
commodity and zero units of X commodity. This is contrary to our
assumption that the consumer wants both commodities although in
smaller or larger quantities. Therefore, an indifference curve will not touch either the X axis or Y axis.
vi) Indifference curve cannot be upward sloping: An upward

sloping indifference curve is not possible as it indicates that the
consumer is deriving equal amount of satisfaction with higher
quantities of either good X or Y or both. As the quantity of the
commodities increase it will lead to a higher level of satisfaction.
Unusual indifference curves

Perfect substitutes: In case of perfect substitutes, we come across a straight
line indifference curve with a constant MRSxy. This is because the consumer
derives equal amount of satisfaction from commodity Y as well as X.
Perfect complements: In case of perfect complements, we come

across “L” shaped indifference curve. As the goods are perfect
complements they have to be used in pairs. Thus, if the consumer
has more units of commodity Y and one unit of X he would derive
equal amount of satisfaction had he consumed one unit of each.
Horizontal indifference curve: This type of indifference

curve is observed when the consumer does not consume one of
the commodities. Considering an example of a vegetarian who
derives no utility from meat would find no change in his level
of satisfaction if offered more units on meat. In our example
meat is a neuter commodity.
Indifference Map
The collection of indifference curves/the family of indifference curves, is known as “Indifference Map”. In
an indifference map, an Indifference curve at the extreme right represents highest level of satisfaction and
the curve at the extreme left represents lowest amount of satisfaction. Hence IC 4> IC3> IC2> IC1.

An indifference map depicts the complete picture of consumer’s tastes

and preferences. In the given figure, an indifference map of a consumer
is shown which consists of three indifference curves.
We have taken good X on X-axis and good Y on Y-axis. It should be

noted that while the consumer is indifferent among the combinations
lying on the same indifference curve, he certainly prefers the
combinations on the higher indifference curve to the combinations
lying on a lower indifference curve because a higher indifference curve signifies a higher level of
satisfaction. Thus, while all combinations of I1 give him the same satisfaction, all combinations lying on I2
give him greater satisfaction than those lying on I1.
Budget Line
Price line/budget line represents all the different combination
of two goods that can be purchased by the consumer at a given
level of income and prices of two goods.
A higher indifference curve shows a higher level of satisfaction

than a lower one. Therefore, a consumer, in his attempt to
maximize satisfaction will try to reach the highest possible
indifference curve. But in his pursuit of buying more and
more goods and thus obtaining more and more satisfaction,
he has to work under two constraints:
a) First, he has to pay the prices for the goods and,
b) Second, he has a limited money income with which to purchase the goods.
These constraints are explained by the budget line or price line. All those combinations which are within
the reach of the consumer (assuming that he spends all his money income) will lie on the budget line.
Consumer’s Equilibrium under indifference curve

A consumer is in equilibrium when he is deriving maximum possible satisfaction from the goods and
therefore is in no position to rearrange his purchases of goods.
We assume that:
a) He has a fixed money income which he has to spend wholly
on goods X and Y.
b) Prices of goods X and Y are given and are fixed.
c) All goods are homogeneous and divisible.
d) The consumer acts ‘rationally’ and maximizes his
satisfaction.

To show which combination of two goods X and Y the consumer will buy to be in equilibrium we bring his
indifference map and budget line together.
Consider the above Figure, in which IC1, IC2 and IC3, are shown together with budget line AB for good X
and good Y. Every combination on the budget line AB costs the same. Thus combinations E, F and G cost
the same to the consumer. The consumer’s aim is to maximize his satisfaction and for this, he will try to
reach highest indifference curve.
Since there is a budget constraint, he will be forced to remain on the given budget line, that is he will have
to choose combinations from among only those which lie on the given price line.
Which combination will he choose? Suppose he chooses E. We see that E lies on a lower indifference curve
IC1, when he can very well afford F lying on higher indifference curve. Similar is the case for other
combination on IC1. Again, suppose he chooses combination G lying on IC1, here again we see that the
consumer can still reach a higher level of satisfaction remaining within his budget constraints i.e., he can
afford to have combination F lying on IC2because it lies on his budget line. Now, what if he chooses
combination F? We find that this is the best choice because this combination lies not only on his budget
line but also puts him on the highest possible indifference curve i.e., IC2. The consumer can very well wish
to reach IC3 but this indifference curves are beyond his reach given his money income. Thus, the
consumer will be at equilibrium at point F on IC2. What do we notice at point F? We notice that at this
point, his budget line AB is tangent to the indifference curve IC2. In this equilibrium position (at F), the
consumer will buy OC1 of X and OC2 of Y.
At the tangency point F, the slopes of the price line AB and the indifference curve IC2are
equal. The slope of the indifference curve shows the marginal rate of substitution of X for
Y.
Therefore we can conclude that at the point of equilibrium the consumer would be having the following
equation.
Px
= MRS xy
Py
Convergence of marginal utility analysis and indifference curve analysis

A deeper understanding of the two approach reveals that they offer the same answer to the consumer
equilibrium.
MU x Px
Equilibrium as per marginal utility is arrived by the consumer at =
MU y Py
Px
Whereas equilibrium as per the indifference curve approach is attained at = MRS xy
Py
MU x Px
Thus, at the point of equilibrium = = MRS xy
MU y Py

The indifference curve analysis is superior to utility analysis:

i) It dispenses with the assumption of measurability of utility
ii) It studies more than one commodity at a time
iii) It does not assume constancy of money
iv) It segregates income effect from substitution effect.

Elasticity of Demand
Chapter – 04 – Elasticity of Demand

Till now we were concerned with the direction of the changes in prices and quantities demanded.
Now we will try to measure these changes, or to say, we will try to answer the question “by how much”?
The law of demand explains that demand will change due to a change in the price of the commodity. But it
does not explain the rate at which demand changes to a change in price. i.e., Law of Demand explains only
the direction of change but not the magnitude. Hence Law of Demand is only a qualitative statement.
Whereas the concept of ‘elasticity of demand’ measures the rate of change in demand and hence is a
quantitative statement.
The concept of elasticity of demand was introduced by Alfred Marshall. According to him, “the elasticity
(or responsiveness) of demand in a market is great or small according as the amount demanded increases
much or little for a given fall in price and diminishes much or little for a given rise in price”. Elasticity of
Demand is the “measure of responsiveness or the degree of change in quantity demanded due to changes
in one of the variables on which demand depends – these variables are price of a commodity, price of
related commodities and income of consumers”.
Types of elasticity of demand

Elasticity of demand can be broadly classified under
a) Price elasticity
b) Cross elasticity and
c) Income elasticity.
It is to be noted that when we talk of elasticity of demand, unless and until otherwise mentioned, we talk
of price elasticity of demand.
In other words, it is price elasticity of demand which is usually referred to as elasticity of demand.
Price Elasticity: Price elasticity of demand expresses the response of quantity demanded of a good to a
change in its price, assuming the consumer’s income, his tastes and prices of all other goods as constant.
Methods of measuring price elasticity of demand
- Percentage method or proportional method or Formula Method.
- Point elasticity method or Geometric Method.
- Are elasticity method
- Total outlay method or Expenditure method
Percentage method or proportional method or formula method: This is measured as percentage change in
quantity demanded divided by the percentage change in price, other things remaining equal. That is

%change in quantity demanded

Price Elasticity = E p =
%change in Price
Change in quantity
×100
Original quantity
Ep =
Change in Price
×100
Original Price
Change in Quantity Original Price

Ep = 
Original quantity Change in Price
Symbolically :
Δq p Δq p
Ep = × = ×
q Δp Δp q
Where,
Epstands for price elasticity
q Stands for quantity
p Stands for price
Δ Stands for a very small change
Since price and quantity are inversely related (with a few exceptions) price elasticity is negative. But, for
the sake of convenience, we ignore the negative sign and consider only the numerical value of the
elasticity.
Note: Thus, if a 10% change in price leads to 20% change in quantity demanded of good X
and 40% change in quantity demanded of good Y, then we get elasticity of X and Y as 2 and
4 respectively, showing that demand for Y is more elastic or responsive to price changes
than that of X. Had we considered minus signs (-2 > -4) we would have concluded that the
demand for X is more elastic than that for Y, which is not correct. Hence, by convention, we
take the absolute value of price elasticity and draw conclusions.
Example- if the price of the commodity A is 25 and the quantity demanded is 50. What would be the
elasticity of demand if the price goes up to 30 and quantity demanded goes down to 40?
Δq p
On applying the formula E p = ×
Δp q

10 25
We get- E p = × = -1
-5 50
Point elasticity or geometric method: It measures elasticity of demand at a particular point on the demand
curve. We can calculate the price elasticity of demand at a point on the linear demand curve. This method
is usually used when the change is extremely small. Formula to find out Ep through point method is
Lower segment of the demand curve from the point
Upper segment of the demand curve from the point
Point elasticity makes use of derivative rather than finite changes in price and quantity. It may be defined
as:
-dq p
Ep = ×
dp q
dq
Where is the derivative of quantity with respect to price at a
dp
point on the demand curve, and p and q are the price and quantity
at that point.
It is to be noted that elasticity is different at different points on the
same demand curve. Given a straight line demand curve DD’,
point elasticity at any point can be found by using the formula. Let
us assume DD’ to be 20cms divided into 4 equal parts of 5cms
each. In the table given below we calculate the elasticity at various
points.
Sl. Ep at different Point on the demand curve Ep = lower segment / Price
No. as seen in the figure above upper segment elasticity
R Ep at point R RD’/RD = 10/10 = 1 Ep = 1
L Ep at point L LD’/LD = 5/15 =0.33 Ep < 1
S Ep at point B SD’/SD = 15/5 = 3 Ep > 1
D’ Ep at point D’(bottom of the demand curve) D’D’/DD’ = 0/20 = 0 Ep = 0
D Ep at point D (top of the demand curve) DD’/DD = 20/0 = ∞ Ep = ∞
Arc-elasticity: When the price change is somewhat larger or when price elasticity is to be found
between two points on the demand curve, the question arises which price and quantity should be
taken as base. This is because elasticities found by using original price and quantity figures as base will be
different from the one derived by using new price and quantity figures. Therefore, in order to avoid
confusion, generally midpoint method is used i.e. averages of the two prices and quantities
are taken as (i.e. original and new) base. The arc elasticity can be found out by using the formula:
q 1 - q 2 P1 + P2
Ep = ×
p1 - p 2 q 1 + q 2

Where,
q1 = original quantity
q2 = new quantity
p1 = original price
p2 = new price
Note: If the problem is silent about the method to calculate price elasticity, then Arc method
should be used.
Example: where p1, q1 are the original price and quantity and p2, q2 are the new ones.
Thus, if we have to find elasticity of cricket bat between:
p1= `500 q1 = 100
p2 = `400 q2 = 150
q 1 - q 2 P1 + P2
So, by using the formula, E p = ×
p1 - p 2 q 1 + q 2
100 - 150 500 + 400

Ep = ×
500 - 400 100 +150
-50 900
Ep = ×
100 250
E p = -1.8
Total outlay method: This method is also known as Total Expenditure method. We can measure
elasticity though a change in expenditure on commodities due to change in price. This method provides
only the direction of elasticity rather than the exact extent of elasticity. We can only know whether
elasticity is equal to, greater than or less than 1. Formula for this method is
TE= P X Q
Changes in Types of elasticity of demand
price ep = 1 ep < 1 ep > 1
Fall in price Total outlay remains constant Total outlay falls Total outlay rises
Rise in price Total outlay remains constant Total outlay rises Total outlay falls
Example:
Price of X (P) (`) Quantity demanded Total outlay Elasticity of demand
(Q) (P  Q) (e)
10 2,000 20,000
8 3,000 24,000 > 1 Relatively elastic
4 7,000 28,000

Price of Y (P) (`) Quantity demanded Total outlay Elasticity of demand

(Q) (P  Q) (e)
20 2,000 40,000
16 2,500 40,000 = 1 Unitary Elastic
8 5,000 40,000
Price of Z (P) (`) Quantity demanded Total outlay Elasticity of demand

(Q) (P  Q) (e)
15 2,000 30,000
12 2,250 27,000 <1 Relatively inelastic
10 2,500 25,000
In the figure give we are able to notice that as the price goes down from P3 to P2 the total expenditure from
T1 to T2 denoting E>1. As the price further falls from P 2 to P1 we
notice that there is no change in total expenditure as the total
expenditure stays at T2. Thereafter when the price falls from P1 to
P then the expenditure falls from T2 to T denoting E < 1. Thus by
considering the price of the commodity and total expenditure of
the same is used by this method in order to provide direction of
elasticity.
Interpretation of Numerical Values of Elasticity of

Demand
Perfectly Elastic Demand: In this case, a very small change in

price leads to a very large change in demand. The demand curve is
a horizontal curve and is parallel to X axis. Under such a case,
consumers will buy all that they can obtain of the commodity at
the reduced price. If there is a slight increase in price, they would
not buy anything from the particular seller. This type of demand
curve is found in a perfectly competitive market and the numerical
co-efficient of perfectly elastic demand curve is ∞.
Perfectly inelastic: In this case, whatever may be the change in price

quantity demanded will remain perfectly constanti.e. when quantity
demanded does not respond to a price change. The demand curve is a
vertical straight line and is parallel to Y axis. The numerical co-efficient
of perfectly inelastic demand is 0 (Zero). This is generally seen in case
of necessary goods like water.

Unitary elastic: Any change in price brings about an equally

proportionate change in the quantity demanded. The numerical
co-efficient of unitary elastic demand is always 1. (Ep = 1). In this
case the demand curve would be rectangular hyperbola.
Relatively elastic: In this case a slight change in price leads to more than proportionate change in
quantity demanded. This can be represented by a gradually
sloping demand curve (it will be flatter). The numerical co-
efficient of relatively elastic demand is > 1. In this case the
demand curve would be flatter or wider. This holds good in
case of luxuries.
Relatively inelastic: In this case, a large change in price

leads to less proportionate change in demand. This can be
represented by a steeply sloping demand curve. The
numerical co-efficient or relatively inelastic demand is < 1.
This condition holds goods in case of necessaries.
In the given diagram we notice as the price moves from P 1 to
P2 the quantity decreases from Q1 to Q2.
Numerical measure of
Description Terminology
elasticity
Quantity demanded does not change as price
Zero Perfectly inelastic
changes
Greater than zero, but less Quantity demanded changes by a smaller
Relatively Inelastic
than one percentage than change in price
Quantity demanded changes by exactly the same
One Unit elasticity
percentage as change in price
Greater than one, but less Quantity demanded changes by a larger
Relatively Elastic
than infinity percentage than change in price
Buyers are prepared to buy all they can obtain at
Infinity some price and none at all at an even slightly Perfectly elastic
higher price

Determinants of Price Elasticity of Demand

Now an important question is: what are the factors which determine whether the demand for a good is
elastic or inelastic? We will consider the following important determinants of price elasticity.
1) Availability of substitutes: One of the most important determinants of elasticity is the degree of
availability of close substitutes. Some commodities like butter, carrot, Maruti Car, etc. have close
substitutes. There are margarine, other green vegetables, Chevrolet or other cars, respectively. A
change in price of commodity in question (the prices of the substitutes remaining constant) can be
expected to cause substitution effect– a fall in price leading consumers to buy more of the commodity
in question and a rise in price leading consumers to buy more of the substitutes.
Commodities such as salt, housing, and all vegetables taken together, have few, if any, satisfactory
substitutes and a rise in their prices may cause a smaller fall in their quantity demanded. Thus, we can
say that goods which typically have close or perfect substitutes have highly elastic demand curve
whereas lack of availability of substitutes leads to inelastic demand for a commodity.
It should be noted that while as a group a good or service may have inelastic demand, but when we
consider its various brands, we say that a particular brand has elastic demand.
Example: While demand for petrol is inelastic, the demand for Bharat Petroleum’s petrol is elastic.
2) Proportion of consumers’ budget: Goods which occupy a higher proportion of consumers’
budget or goods on which the consumers spend a major portion (like clothing, milk, provisions etc.)
of their budget have more elastic demand compared to those goods on which the consumers spend
only a small portion of their income (like salt, sugar etc.) This is because, when the price of goods
which occupy a major portion of the consumers’ budget rises, it will impact the expenses of a
consumer drastically when compared to the goods which occupy a small portion of the consumers’
budget.
3) Nature of the need that a commodity satisfies: In general, luxury goods are price elastic while
necessities are price inelastic. The consumers do not react to change in price in case of necessities
whereas they tend to reduce consumption in case of increase in price of luxuries. Thus, while the
demand for ovens is relatively elastic, the demand for food and housing, in general, is inelastic.
4) Number of uses to which a commodity can be put: The more the possible uses of a commodity
the greater will be its price elasticity and vice versa. To illustrate electricity has several uses. If its
price falls, it can be used for a variety of purposes like cooking, electric cars, vacuum cleaner. But, if its
price increases, its use will be restricted only to essential purposes like light and fan.
5) Time period: The longer the time-period higher would be the elasticity of demand for a commodity
and vice-versa. This is because of –
a) The consumers take time to adjust their taste and preferences and hence would make greater
changes in their habits over a longer period of time.
b) The supplier requires time to come out with new products and services which would be an
appropriate substitute to the existing product whose price has changed.

Example: In response to a higher petrol price, one can, in the short run, make fewer trips by car.
In the longer run, not only can one make fewer trips, but can also purchase an electric car when
the time comes for replacing the existing one. Hence, one’s demand for petrol falls more when
one has made long term adjustment to higher prices.
6) Consumer habits: Goods which are not habitually used by the consumer have more elastic demand
than those that are habitually used by the consumer.
Example: cigarettes, alcohol have less elastic demand.
7) Tied demand: The demand for those goods which are tied to others is normally inelastic as against
those whose demand is of autonomous nature. Whereas, goods which have independent demand have
more elastic demand.
Example: like pen and refill, car and petrol etc.
8) Price range: Goods which are in very high price range or in very low price range have inelastic
demand, but those in the middle range have elastic demand. As a change in the price of goods in the
very high price range would not affect the decisions of the buyer as the buyers of such goods belong to
elite class and do not respond much to changes in the prices of such premium product. Whereas
goods at a very low price range are purchased in the required quantities by those who want it and thus
a price variation in the price of such product do not bring about a substantial response from the
consumers in the form of change in quantity demanded. Thus, commodities lying in the medium price
range have greater elasticity.
9) Postponement: Goods, the use or purchase of which can be postponed, have more elastic demand
while those goods which have to be purchased immediately have less elastic demand.
Example: Purchase of car, TV can be postpone, but food or clothing cannot be postpone.
Income elasticity of demand

It is the degree of responsiveness of the quantity demanded of a commodity to a change in the income of
the consumers.
In Can be represented as:

%change in quantity demanded
Price Elasticity = Ey =
%change in income
Or
Change in Quantity
×100
Original Quantity
Ey =
Change in income
×100
Original income

Or
Change in Quantity Original income
Ey = 
OriginalQuantity Change in income
Or in symbolic terms
Δq Y Δq Y
Ey = × = ×
q ΔY ΔY q
Ey = Income elasticity of demand
Δ q = Change in demand
q = Original demand
Y = Original money income
Δ Y = Change in money income
Interpretation of income elasticity.

Elasticity greater than one (Ey> 1): If income levels increase, and the demand for certain goods
increase by more than proportionate extent. If the income elasticity for a good is greater than one, it
shows that the commodity forms a larger part of consumer’s expenditure as he becomes richer. Such
goods are called luxury goods. The income elasticity is greater than unity.
Elasticity equal to one (Ey = 1): If the proportion of income spent on goods remains the same as
income increases, then the income elasticity is equal to one. It provides a useful dividing line which helps
to divide luxuries and necessities.
Elasticity lesser than one (>0 Ey< 1): If income levels increases, and the demand for goods increase
by less than proportionate extent, such goods will be necessary goods. The income elasticity is lesser than
unity in case of necessities.
Elasticity lesser than zero (Ey< 0): If demand decreases with an increase in money income of
consumers, such goods are called inferior goods. As the consumer has more money income than before he
would substitute superior commodity in place of inferior one. The income elasticity is lesser than zero.
In other words,
- In case of inferior goods, income elasticity is < 0.
- In case of necessary goods, income elasticity is > 0 but <1
- In case of luxury goods, income elasticity is >1.
The following examples will make the above concepts clear:

a) The income of a household rises by 20%, the demand for Rice increases by 10%.
b) The income of a household rises by 10%, the demand for Refrigerator rises by 20%.

c) The incomes of a household rises by 10%, the demand for Jowar falls by 5%.
d) The income of a household rises by 10%, the demand for shirt rises by 10%.
e) The income of a household rises by 15%, the demand for salt does not change at all.
Serial Income
Commodity Interpretation
number elasticity
(ey < 1) as the income elasticity is less than 1the
10%
A Rice = 0.5 commodity in question isnormal goods and fulfills the
20%
criteria of necessaries.
15% (ey > 1) as the income elasticity is more than 1the
B Refrigerator = 1.5
10% commodity in question isa luxury.
-5% (ey < 0) as the income elasticity is negative (less than 0)
C Jowar = -0.5
10% the commodity in question is inferior commodity.
10%
D Shirt =1 (ey = 1) the income elasticity of the commodity is unitary.
10%
0%
E Salt =0 (ey = 0) the income elasticity of the commodity is 0.
15%
Note-In case of shirt the elasticity is 1 and they can be construed as normal goods. On the other hand
elasticity of salt is 0 which denote that it is an essential commodity and the consumer avoids altering its
consumption with a change in his income.
Cross elasticity of demand:

In measures the responsiveness of the quantity demanded of a commodity to a change in price of related
commodities (substitute and complements), other things remaining constant. In other words, we study
the changes in demand for one commodity in response to the change in the price of other goods. This type
of relationship is studied under ‘Cross Demand’. Cross demand refers to the quantities of a commodity or
service which will be purchased with reference to changes in price, not of that particular commodity, but
of other related commodities, other things remaining the same.
Cross elasticity of demand (Exy) can be computed as follows:

%change in demand of commodity x
E xy =
%change in price of commodity
Or
Change in Quantity of commodity x
×100
OriginalQuantity of commodity x
E xy =
Change in price of commodity x
×100
Original price of commodity y

Symbolically the formula can be represented as:

Δq x p y
E xy = ×
q x Δp y
Δq x p y
E xy = ×
Δp y q x
Exy Stands for cross elasticity

qx Stands for original quantity demanded of x
Δ qx Stands for change in quantity demanded for x
py stands for the original price of good Y
Δ py stands for a small change in the price of Y
Substitute Products: In case of the substitute products, rise

in price of substitute product will increase the demand of the
commodity in question and vice versa. In case of rise in the
price of coke, consumer will opt for substitute products like
Pepsi. In the graph given the curve slopes upward showing
more quantity of Pepsi will be demanded in case of price rise of
coke. So there is direct relationship between price of substitute
and demand for commodity in question.
Complementary Goods: In the case of complementary

goods, as shown in the figure, a change in the price of
complementary good will have an opposite reaction on the
commodity in question which is closely related or
complementary. The case with complementary goods such
as or car and petrol is that whenever there is a increase in
the price of petrol the demand for petrol due to a rise in
prices of petrol, the demand for cars will fall down, not
because the price of cars has gone up, but because the price of petrol has gone up. So, we find that there is
an inverse relationship between price of a commodity and the demand for its complementary good (other
things remaining the same).
Interpretation of cross elasticity.

a) If two goods are perfect substitutes for each other, the cross elasticity between them is infinite. (Red
pins and green pins)
b) If two goods are totally unrelated, cross elasticity between them is zero. (Shoes and butter)

c) If two goods are substitutes (like coke and Pepsi), the cross elasticity between them is positive, that is,
in response to a rise in price of one good the demand for the other good rises.
d) If two goods are complementary (tea and sugar) to each other, the cross elasticity between them is
negative so that a rise in the price of one leads to a fall in the quantity demanded of the other.
Demand classification are as follows

Producer’s goods and consumers goods: Producer’s goods are those which are used for the
production of other goods- either consumer goods or producer goods. e.g., Plant, Machines etc. The goods
which are used for a final consumption are called consumer’s goods. e.g., Food articles, Watches etc.
Durable and non-durable (perishable) goods: Consumer’s goods may be further sub-divided into
durable and non-durable goods. The goods which are durable in nature i.e., can be consumed more than
once, like watches, TV etc. The goods which are perishable in nature are called non-durable goods. Ex:
these goods cannot be consumed more than once and also cannot be stored for long time, like food items.
Derived and autonomous demand: If the demand for the good is derived from the demand of other
parent good it is called derived demand. e.g., demand for cement is derived from demand for buildings. If
the demand for a product is independent of the demand for other goods, then it is called autonomous
demand e.g., food. This distinction is purely arbitrary, and it is very difficult to find out which product is
entirely independent of other products.
Industry demand and company demand: An industry is an aggregate of firms. Industry demand
means it’s an aggregate demand of the companies of a particular industry. e.g., FMCG Industry. The
company demand is the demand of an individual company or firm.
Short run and long run demand: short run demand immediate response of demand if there is a
change in price, income etc. whereas long-run demand is that which will ultimately exist as a result of
changes in pricing, promotion or product improvement, after enough time is allowed to let the market
adjust to the new situation.
New and replacement demand: If the purchase or acquisition of an item is means as an addition to
stock it is called new demand. Ex: New plant of machinery as s measure of capacity expansion. If the
purchase of an item is meant for maintaining the old stock of capital/asset it is called replacement
demand. Ex: demand for spare parts of the machine.

Demand Forecasting
Chapter – 05 – Demand Forecasting

Forecasting, in general, refers to knowing or measuring the status or nature of an event or variable before
it occurs. Forecasting of demand is the art and science of predicting the probable demand for a product or
a service at some future date on the basis of certain past behaviour patterns of some related events and
the prevailing trends in the present. It should be kept in mind that demand forecasting is no simple
guessing, but it refers to estimating demand scientifically and objectively on the basis of certain facts and
events relevant to forecasting.
Usefulness
The significance of demand or sales forecasting in the context of business policy decisions can hardly be
over emphasized. The effectiveness of the plans of business managers depends upon the level of accuracy
with which future events can be predicted. Forecasting of demand plays a vital role in the process of
planning and decision-making, whether at the national level or at the level of a firm. The importance of
demand forecasting has increased all the more on account of mass production and production in response
to demand. A good forecast enables the firm to perform efficient business planning. Forecasts offer
information for budgetary planning and cost control in functional areas of finance and accounting. Good
forecasts help in efficient production planning, process selection, capacity planning, facility layout and
inventory management. A firm can plan production scheduling well in advance and obtain all necessary
resources for production such as inputs, and finances. Capital investments can be aligned to demand
expectations and this will check the possibility of overproduction and underproduction, excess of unused
capacity and idle resources. Marketing relies on sales forecasting in making key decisions. Demand
forecasts also provide the necessary information for formulation of suitable pricing and advertisement
strategies.
It is said that no forecast is completely fool-proof and correct. However, the very process of forecasting
helps in evaluating various forces which affect demand and is in itself a reward because it enables the
forecasting authority to know about various forces relevant to the study of demand behaviour.
Scope of Forecasting
Demand forecasting can be at the international level depending upon the area of operation of the given
economic institution. It can also be confined to a given product or service supplied by a small firm in a
local area. The scope of the forecasting task will depend upon the area of operation of the firm in the
present as well as what is proposed in future. Much would depend upon the cost and time involved in
relation to the benefit of the information acquired through the study of demand. The necessary trade-off
has to be struck between the cost of forecasting and the benefits flowing from such forecasting.
Types of forecasts
1) Macro-level forecasting deals with the general economic environment prevailing in the economy as
measured by the Index of Industrial Production (IIP), national income and general level of
employment etc.

Demand Forecasting
i) Industry- level forecasting is concerned with the demand for the industry’s products as a whole.
For example, demand for cement in India.
ii) Firm- level forecasting refers to forecasting the demand for a particular firm’s product, say, the
demand for ACC cement.
2) Based on time period, demand forecasts may be short-term demand forecasting and long-term
demand forecasting.
i) Short-term demand forecasting covers a short span of time, depending of the nature of industry.
It is done usually for six months or less than one year and is generally useful in tactical decisions.
ii) Long-term forecasts are for longer periods of time, say two to five years and more. It provides
information for major strategic decisions of the firm such as expansion of plant capacity.
Methods of demand Forecasting

There is no easy method or simple formula which enables an individual or a business to predict the future
with certainty or to escape the hard process of thinking. The firm has to apply a proper mix of judgment
and scientific formulae in order to correctly predict the future demand for a product. The following are the
commonly available techniques of demand forecasting:
i) Survey of Buyers’ Intentions: The most direct method of estimating demand in the short run is to
ask customers what they are planning to buy during the forthcoming time period, usually a year. This
method involves direct interview of potential customers. Depending on the purpose, time available
and costs to be incurred, the survey may be conducted by any of the following methods:
a) Complete enumeration method where nearly all potential customers are interviewed about their
future purchase plans
b) Sample survey method under which only a scientifically chosen sample of potential customers
are interviewed
c) End–use method, especially used in forecasting demand for inputs, involves identification of all
final users, fixing suitable technical norms of consumption of the product under study, application
of the norms to the desired or targeted levels of output and aggregation.
Thus, under this method the burden of forecasting is put on the customers. However, it would not be
wise to depend wholly on the buyers’ estimates and they should be used cautiously in the light of the
seller’s own judgement. A number of biases may creep into the surveys. The customers may
themselves misjudge their requirements, may mislead the surveyors or their plans may alter due to
various factors which are not identified or visualised at the time of the survey. This method is useful
when bulk of sale is made to industrial producers who generally have definite future plans. In the case
of household customers, this method may not prove very helpful for several reasons viz. irregularity in
customers’ buying intentions, their inability to foresee their choice when faced with multiple
alternatives, and the possibility that the buyers’ plans may not be real, but only wishful thinking.
ii) Collective opinion method: This method is also known as sales force opinion method or grass
roots approach. Firms having a wide network of sales personnel can use the knowledge, experience

Demand Forecasting
and skills of the sales force to forecast future demand. Under this method, salesmen are required to
estimate expected sales in their respective territories. The rationale of this method is that salesmen
being closest to the customers are likely to have the most intimate feel of the reactions of customers to
changes in the market. These estimates of salesmen are consolidated to find out the total estimated
sales. These estimates are reviewed to eliminate the bias of optimism on the part of some salesmen
and pessimism on the part of others. These revised estimates are further examined in the light of
factors like proposed changes in selling prices, product designs and advertisement programmes,
expected changes in competition and changes in secular forces like purchasing power, income
distribution, employment, population, etc. The final sales forecast would emerge after these factors
have been taken into account.
Although this method is simple and based on first hand information of those who are directly
connected with sales, it is subjective as personal opinions can possibly influence the forecast.
Moreover salesmen may be unaware of the broader economic changes which may have profound
impact on future demand. Therefore, forecasting could be useful in the short run, for long run
analysis however, a better technique is to be applied.
iii) Expert Opinion method: In general, professional market experts and consultants have specialised
knowledge about the numerous variables that affect demand. This, coupled with their varied
experience, enables them to provide reasonably reliable estimates of probable demand in future.
Information is elicited from them through appropriately structured unbiased tools of data collection
such as interviews and questionnaires.
The Delphi technique, developed by Olaf Helmer at the Rand Corporation of the USA, provides a
useful way to obtain informed judgments from diverse experts by avoiding the disadvantages of
conventional panel meetings. Under this method, instead of depending upon the opinions of buyers
and salesmen, firms solicit the opinion of specialists or experts through a series of carefully designed
questionnaires. Experts are asked to provide forecasts and reasons for their forecasts. Experts are
provided with information and opinion feedbacks of others at different rounds without revealing the
identity of the opinion provider. These opinions are then exchanged among the various experts and
the process goes on until convergence of opinions is arrived at. This method is best suited in
circumstances where intractable changes are occurring and the relevant knowledge is distributed
among experts. Delphi technique is widely accepted due to its broader applicability and ability to
address complex questions. It also has the advantages of speed and cheapness.
iv) Statistical methods: Statistical methods have proved to be very useful in forecasting demand.
Forecasts using statistical methods are considered as superior methods because they are more
scientific, reliable and free from subjectivity. The important statistical methods of demand forecasting
are:
a) Trend Projection method: This method, also known classical method, is considered as a
‘naive’ approach to demand forecasting. A firm which has been in existence for a reasonably long

Demand Forecasting
time would have accumulated considerable data on sales pertaining to different time periods.
Such data, when arranged chronologically, yield a ‘time series’. The time series relating to sales
represent the past pattern of effective demand for a particular product. Such data can be used to
project the trend of the time series. The trend projection method assumes that factors responsible
for the past trend in demand will continue to operate in the same manner and to the same extent
as they did in the past in determining the magnitude and direction of demand in future. The
popular techniques of trend projection based on time series data are;
a) graphical method and
b) Fitting trend equation or least square method.
b) Graphical Method: This method, also known as ‘free hand projection method’ is the simplest
and least expensive. This involves plotting of the time series data on a graph paper and fitting a
free- hand curve to it passing through as many points as possible. The direction of the curve
shows the trend. This curve is extended into the future for deriving the forecasts. The direction of
this free hand curve shows the trend. The main draw-back of this method is that it may show the
trend but the projections made through this method are not very reliable.
c) Fitting trend equation: Least Square Method: It is a mathematical procedure for fitting a line
to a set of observed data points in such a manner that the sum of the squared differences between
the calculated and observed value is minimised. This technique is used to find a trend line which
best fit the available data. This trend is then used to project the dependant variable in the future.
This method is very popular because it is simple and inexpensive. Moreover, the trend method
provides fairly reliable estimates of future demand.
The least square method is based on the assumption that the past rate of change of the variable
under study will continue in the future. The forecast based on this method may be considered
reliable only for the period during which this assumption holds. The major limitation of this
method is that it cannot be used where trend is cyclical with sharp turning points of troughs and
peaks. Also, this method cannot be used for short term forecasts.
d) Regression analysis: This is the most popular method of forecasting demand. Under this method,
a relationship is established between the quantity demanded (dependent variable) and the
independent variables (explanatory variables) such as income, price of the good, prices of related
goods etc. Once the relationship is established, we derive regression equation assuming the
relationship to be linear. The equation will be of the form Y = a + bx. There could also be a
curvilinear relationship between the dependent and independent variables. Once the regression
equation is derived, the value of Y i.e. quantity demanded can be estimated for any given value of
X.
v) Controlled Experiments: Under this method, future demand is estimated by conducting market
studies and experiments on consumer behaviour under actual, though controlled, market conditions.
This method is also known as market experiment method. An effort is made to vary separately certain

Demand Forecasting
determinants of demand which can be manipulated, for example, price, advertising, etc., and conduct
the experiments assuming that the other factors would remain constant. Thus, the effect of demand
determinants like price, advertisement, packaging, etc., on sales can be assessed by either varying
them over different markets or by varying them over different time periods in the same market. The
responses of demand to such changes over a period of time are recorded and are used for assessing
the future demand for the product. For example, different prices would be associated with different
sales and on that basis the price-quantity relationship is estimated in the form of regression equation
and used for forecasting purposes. It should be noted however, that the market divisions here must be
homogeneous with regard to income, tastes, etc.
The method of controlled experiments is used relatively less because this method of demand
forecasting is expensive as well as time consuming. Moreover, controlled experiments are risky too
because they may lead to unfavourable reactions from dealers, consumers and competitors. It is also
difficult to determine what conditions should be taken as constant and what factors should be
regarded as variable so as to segregate and measure their influence on demand. Besides, it is
practically difficult to satisfy the condition of homogeneity of markets.
Market experiments can also be replaced by ‘controlled laboratory experiments’ or ‘consumer clinics’
under which consumers are given a specified sum of money and asked to spend in a store on goods
with varying prices, packages, displays etc. The responses of the consumers are studied and used for
demand forecasting.
vi) Barometric method of forecasting: The various methods suggested till now are related with the
product concerned. These methods are based on past experience and try to project the past into the
future. Such projection is not effective where there are economic ups and downs. As mentioned
above, the projection of trend cannot indicate the turning point from slump to recovery or from
boom to recession. Therefore, in order to find out these turning points, it is necessary to find out the
general behaviour of the economy. Just as meteorologists use the barometer to forecast weather, the
economists use economic indicators to forecast trends in business activities. This information is then
used to forecast demand prospects of a product, though not the actual quantity demanded. For this
purpose, an index of relevant economic indicators is constructed. Movements in these indicators are
used as basis for forecasting the likely economic environment in the near future. There are leading
indicators, coincidental indicators and lagging indicators. The leading indicators move up or down
ahead of some other series. For example, the heavy advance orders for capital goods give an advance
indication of economic prosperity. The lagging indicators follow a change after some time lag. The
heavy household electrical connections confirm the fact that heavy construction work was
undertaken during the past with a lag of some time. The coincidental indicators, however, move up
and down simultaneously with the level of economic activities. For example, rate of unemployment.

Theory of Supply
Chapter – 06 – Theory of Supply

Introduction
The term ‘supply’ refers to the amount of a good or service that the producers are willing and able to offer
to the market at various prices over a period of time. Supply is different from stock. Stock is the total
quantity of goods, which is stored in the warehouse, but it may not be offered for sale. Hence supply is
only a part of the stock, which is offered for sale. The concept of supply should be studied from the
manufacturer point of view.
Important points to understand concept of supply:

i) Supply refers to what firms offer for sale, not necessarily to what they succeed in selling.
What is offered may not get sold.
ii) Supply is a flow concept. The quantity supplied is ‘so much’ per unit of time, per day, per week, or per
year.
iii) A given quantity is offered by sellers at a given price, hence the quantity offered by producers offer for
sale changes with the change in the price of that commodity.
Determinants of supply
Price of the commodity: If the price of a commodity increases, quantity supplied will increase and if
the price of a commodity decreases, the quantity supplied will also decrease. This is because goods and
services are produced by the firm in order to earn profits and profits rise with the rise in the price of the
product subject to other things remaining constant.
Price of the related goods: If the price of other goods rise, they become relatively more profitable to
the firm to produce and sell, than the good in question. If a farmer is producing radish as well as carrot
which are being sold at the same price then it implies, that if the price of carrot rises, the farmer may
deploy more of his land to carrot production and go away from producing radish.
Factors of production: If the cost of factors of production increase then the cost of making goods
increases and may affect the profitability. Hence the price of factors of production plays an important role
in the supply of a commodity.
Technology: Inventions and innovations tend to make it possible to produce more or better goods with
the same resources and tend to increase the supply of some products and to reduce the supply of products
that the displaced.
Government policy: Production of goods may be subject to the imposition of commodity taxes such as
excise duty, sales tax and import duties. These increase the cost of production and so the supply of a
commodity would decrease subject to the prices being stable. Subsidies, on the other hand, reduce the
cost of production and thus provide an incentive to the firm to increase supply.

Theory of Supply
Goals of the firm: If the firm aims at profit maximization then it would supply less in order to charge
higher prices of its commodity. On the other hand if the firm is attempting to maximize sales and increase
market coverage then the firm would increase supply.
Market structure: If the firm is operating in a perfect competition market then it would supply what
ever it can and on the other hand if the firm is operating under monopoly market then it would constrain
its supply.
Supply function
Supply function is a mathematical relationship between supply of a commodity and its determinants.
Sx = f (Ps, Pr, T, C, Ex, Gp)
Where,
Sx = Supply of commodity X
Px = Price of commodity X
Pr = Price of related goods, Y
T = state of technology
C = Cost of production
Ex = Expected price of commodity X
Gp = Government policy
Law of Supply
The law of supply explains the functional relationship between price of a commodity and its quantity
supplied. It states that: Other things being equal (ceteris paribus), the quantity of a good produced and
offered for sale will increase as the price of the good rises and decrease as the price falls.
Assumptions of the law of the supply:
The law of supply holds good provided:
- Price of the related goods is not changed.
- No change in technology
- Cost of production to be constant
- Government policy should remain same
Supply schedule
A tabular representation of the relationship between price and quantity supplied is known as the supply
schedule. With the help of the supply schedule, a supply curve can be drawn. A supply curve is a graphical
representation of the supply schedule.
There are two types of supply schedule:
- Individual supply schedule
- Market supply schedule
Individual supply schedule: Individual supply schedule is a list of the prices and quantities of a given
commodity offered for sale by an individual seller or producer. The following is an individual supply
Theory of Supply
schedule. It shows that as the price goes up, an individual seller increases the quantity supplied in the
market.
Combination Price of Shirt (Rs.) Quantity of Shirt (Units of good)
A 100 200
B 200 400
C 300 600
D 400 800
E 500 1000
The table shows the quantities of shirt that would be produced and offered for sale by a supplier at a
number of alternative prices. At combination A, for example, 200 units of shirts are offered for sale at
`100 per shirt. Moreover at combination C, for example, 600 units of shirts are offered for sale at `300
per shirt.
Individual supply curve

We draw a diagram below and the price is plotted on the vertical axis and quantity on the horizontal axis,
and various price-quantity combinations of the schedule above are plotted.
When we draw a smooth curve through the plotted points, what we get is the supply curve for shirts. The
supply curve slopes upwards from the left to the right i.e., it has a positive slope. Like the supply schedule,
the supply curve also shows a direct relationship between price and quantity supplied.
Market supply schedule

By adding up the quantity supplied at various prices by all the sellers in the market, we can get the market
supply schedule. Market schedule is the lateral summation of the individual supply schedules of all the
suppliers in the market. The table given below depicts various quantities of a given commodity that the
various producers are ready to produce and offer for sale at different prices. The last column is the
summation of the first three denoting the market supply schedule.

Theory of Supply
Micro approach Macro approach

1. Studies a particular part or a component of the Studies the economy as a whole
economy
2. It is known as “Price Theory” It is known as “Income Theory”
3. Makes assumptions while studying an economy Doesn’t make any assumptions
4. It gives a worm’s eye view of an economy It gives a bird’s eye view of an economy
5. It is unrealistic study It is more realistic study
6. Has limited scope Has wider scope
Market supply curve

The market supply curve is a diagrammatic representation of the market supply schedule. The diagram
depicts three individual supply schedule plotted from the data given regarding the individual suppliers.
The market supply curve is the lateral summation of the individual supply curves.
Reasons for upward slope of the supply curve

a) Profit motive: The main objective of the suppliers is to make more profit. This is possible only
when they can sell the goods at the higher prices. That’s why supply curve shows upward trend as
suppliers supply more at higher price other things remaining constant.
b) Increasing marginal cost: The producer in order to produce more units of a commodity has to
increase the quantity of variable factors which entails higher cost. So, in order to cover the
increased costs producer have to supply at higher prices.
c) More number of suppliers: As the price of a commodity increases more number of suppliers
would join thereby leading to increase in quantity of goods supplied.
Expansion or contraction of supply:

When the supply of a good increases as a result of increase in its price, we say there is an expansion of
supply which leads to an upward movement on the supply curve. When supply of a good decreases as a
result of decrease in its price, we say there is a contraction of supply, which leads to downward movement
on the supply curve. It can be shown in the form of a diagram.
Earlier price was OP1 and quantity supplied was OQ1. When
price increases to OP2, quantity supplied also increases to
OQ2, similarly when price decreases to OP 3 supplied also
decreases to OQ3. Expansion and contraction refers to an
increase or decrease in the quantity supplied respectively.
Hence it is called as movement on the supply curve.

Theory of Supply
SHIFTS IN SUPPLY CURVE – INCREASE OR DECREASE IN SUPPLY

When the supply curve shifts to right or left as a result of a change in one of the factors that influence the
quantity supplied other than the commodity’s own price, we say there is an increase or decrease in supply.
Increase in supply - Fall in the price of substitutes

(A rightward shift in the supply curve) - Fall in the cost of production
- Favourable changes in Government policy
- Improvement in techniques of production.
Decrease in supply - Rise in the price of substitutes
(A leftward shift it the supply curve) - Rise in the cost of production
- Unfavourable changes in Government policy
- Obsolete techniques of production
Difference between movement and shift in supply curve.

Basis of difference Movement along the curve Shift of the curve
Meaning It takes place as a result of change in It takes place due to changes in
price, other things remains constant. It factors other than price, i.e. price
is also known as a change in quantity remains constant. It is also known
supplied as a change in supply
Supply curve Supply curve remains the same Supply curve shifts either to the
right or to the left
Terminology Expansion and contraction of Supply Increase and decrease in supply

Theory of Supply
ELASTICITY OF SUPPLY
The elasticity of supply is defined as the responsiveness of the quantity supplied of a good to a change in
its price. Law of supply is a qualitative statement on the other hand elasticity of supply is a quantitative
statement.
There are three ways of computing of elasticity of supply.
1) Percentage method
2) Arc method
3) Point method / Geometric method
Percentage method
%Change in Quantity Supplied

Es =
%Change in Price
Change inQuantity Supplied

Quantity Supplied
Es =
Change inPrice
Price
Symbolically-
Δq
q Δq p
Es = = ×
Δp Δp q
p
Where,
q = denotes original quantity supplied
∆q = Change n quantity supplied
p = Original price
∆p = Change in price
Note: As per the law of supply, there is a direct relationship between price and quantity
supplied. So, price elasticity of supply is positive.
Example:
Quantity (units) Price (Rs.)

50 100
80 150

Theory of Supply
Δq
q Δq p -30 100
Applying the formula: E s = = × = × = 0.40
Δp Δp q -50 150
p
Point elasticity: The elasticity of supply can be considered with reference to a given point on the supply
curve or between two points on the supply curve.
When elasticity is measured at a given point on the supply curve, it is called point elasticity.
Point-elasticity of supply can be measured with the help of the following formula:
dq p
Es = ×
dp q
dq
Where is the derivative of quantity with respect to price at a point on the supply curve, and p and q
dp
are the price and quantity at that point.
Where,
p = Price
q = Quantity
Δp = Change in price
Δq = Change in quantity
Example: The Supply function is given as q = -200 + 20p. Find the elasticity of supply using point
method, when price is Rs 30.
Applying the formula
dq p
Es = ×
dp q
dq
= 20,P = 30
dp
At price 40 the quantity supplied would be q = -200 + 20 (30)
q = 400
Es = 20 x 30/400
Es = 1.5
Arc-elasticity: When the price change is somewhat larger or when price elasticity is to be found
between two points on the supply curve, the question arises which price and quantity should be
taken as base. This is because elasticities found by using original price and quantity figures as base will be
different from the one derived by using new price and quantity figures. Therefore, in order to avoid
confusion, generally midpoint method is used i.e., averages of the two prices and quantities
are taken as (i.e., original and new) base. The arc elasticity can be found out by using the formula:

Theory of Supply
q -q p + p2
Es = 1 2 × 1
p1 - p2 q1 + q 2
Where,
P1 = original price
P2 = new price
q1 = original quantity
q2 = new quantity
Quantity (units) Price (Rs.)

250 100
280 120
Applying the formula

q -q p + p2
Es = 1 2 × 1
p1 - p2 q1 + q 2
We get
= 30 / 20 x (100 + 120) / (250 + 280)
= 0.6
Types and Interpretation of elasticity of

supply
i) Perfectly inelastic supply: If as a result of
a change in price, the quantity supplied of
good remains unchanged, we say that the
elasticity of supply is zero or the good has
perfectly inelastic supply. In the diagram as
the price increases from Rs 2 to Rs 4 the
quantity supplied remains 4 units.
Thus we notice that the quantity supplied of
the commodity does not change with a change in price. Thus, the elasticity of supply is 0.
ii) Perfectly elastic supply: Elasticity of supply

said to be infinite when nothing is supplied at a
lower price but a small increase in price causes
supply to rise from zero to a large amount
indicating that producers will supply large quantity
demanded at that price. This leads to a supply
curve which is parallel to X axis indicating infinite
elasticity of supply.

Theory of Supply
iii) Relatively less-elastic supply: If as a result of

a change in the price of a good its supply changes
less than proportionately, we say that the supply
of the good is relatively less elastic or elasticity of
supply is less than one. In the diagram provided
the price increase from `30 to `40 the quantity
supplied of the commodity increases from 15
units to 16 units. This shows that the quantity
supplied increases less than proportionately to an
increase in price of the commodity.
iv) Relatively elastic supply: If elasticity of supply is

greater than one i.e., when the quantity supplied of a
good changes substantially in response to a small
change in the price of the good we say that supply is
relatively elastic. The diagram shows that the price
increases in a lesser proportion than the increase in
quantity supplied of a commodity denoting an
elasticity greater than 1.
v) Unitary elasticity: If the relative change in the

quantity supplied is exactly equal to the relative change
in the price, the supply is said to be unitary elastic.
Here the coefficient of elasticity of supply is equal to
one. The diagram shows that as the price of the
commodity increases from `2 to `4 the quantity
supplied also increases from 2 units to 4 units denoting
a proportional change. Any straight line supply curve
passing through the origin will have an elasticity of
one.
DETERMINANTS OF ELASTICITY OF SUPPLY

a) Behavior of cost of production: elasticity of supply depends on the change in the cost of
production upon producing addition quantity of output. If the cost decreases or remains stable on
producing an additional unit of output then the supply increases (elastic) on the other hand if the cost
of producing an addintional unit increases then the supply would not increase (inelastic).
b) Time element: supply tends to relatively inelastic in the short run. However, in the long run the
supply is elastic as new plants can be set up and production capacity can be expanded.

Theory of Supply
c) Nature of commodity: supply of perishable goods tend to be less elastic as products cannot be
stored on the other hand supply of durable goods tends to be relatively elastic as they can be stored.
d) Availability of facilities for expanding output: if producers have sufficient production
facilities, they would be able to increase their supply and therefore the supply would be relatively
elastic. On the other hand if the shortage of power, fuel or raw materials, the output would expand
slowly thus being inelastic.
e) Expectations regarding future prices: if the producers expect the rise in the prices of the
commodity then the supply of the commodity in the present would be less elastic and vice-versa.

Equilibrium
Chapter – 07 – Equilibrium
Equilibrium refers to a market situation where quantity demanded is equal to quantity supplied. The
intersection of demand and supply determines the equilibrium price. At this price the amount that the
buyers want to buy is equal to the amount that sellers want to sell. Only at the equilibrium price, both the
buyers and sellers are satisfied. Equilibrium price is also called market clearing price.
The determination of market price is the central theme of micro economic analysis. Hence, micro-
economic theory is also also called price theory.
The following table explains the equilibrium price.
Supply and Demand Schedule

Price Quantity Demanded Quantity Supplied Impact on price
5 6 31 Downward
4 12 25 Downward
3 19 19 Equilibrium
2 25 12 Upward
1 31 6 Upward
The equilibrium between demand and supply is depicted in the diagram below. Demand and Supply are in
equilibrium at point E where the two curves intersect each other. It means that only at price `3 the
quantity demanded is equal to the quantity supplied. The equilibrium quantity is 19 units and these are
exchanged at price `3.
CHANGES IN DEMAND AND SUPPLY

The facts of real world, however, are such that other things (like income, tastes and preferences,
population, etc.) always change causing changes in demand and supply. The four main changes in
demand and supply are:
i) An increase (shift to the right) in demand;
ii) A decrease (shift to the left) in demand;
iii) An increase (shift to the right) in supply;
iv) A decrease (shift to the left) in supply.

Equilibrium
i) An increase in demand: In figure 2, the original

demand curve is DD and supply curve is SS. At
equilibrium price OP, demand and supply are equal to
OQ. Now suppose the money income of the consumer
increases and the demand curve shifts to D1D1 and the
supply curve remains the same. We will see that on the
new demand curve D1D1 at OP price demand increases to
OQ2 while supply remains the same i.e. OQ. Since supply
is short of a demand, price will go up to OP1. With the
higher price supply will also shoot up and new equilibrium between demand and supply will be
reached. At this equilibrium point, OP1 is the price and OQ1 is the quantity which is demanded and
supplied.
Thus, we see that, as a result of an increase in demand, there is an increase in equilibrium price, as a
result of which the quantity sold and purchased also increases.
Decrease in Demand: The opposite will happen when

demand falls as a result of a fall in income, while the
supply remains the same. The demand curve will shift to
the left and become D1D1 while the supply curve
remains as it is. With the new demand curve D1D1, at
original price OP, OQ2 is demanded and OQ is supplied.
As the supply exceeds demand, price will come down
and quantity demanded will go up. A new equilibrium
price OP1 will be settled in the market where demand
OQ1 will be equal to supply OQ1.
Thus, with a decrease in demand, there is a decrease in the equilibrium price and quantity demanded
and supplied.
Increase in Supply: Let us now assume that demand does not change, but there is an increase in
supply say, because of improved technology.
The supply curve SS will shift to the right and become
S1S1. At the original equilibrium price OP, OQ is
demanded and OQ2 is supplied (with new supply curve).
Since the supply is greater than the demand, the
equilibrium price will go down and become OP1 at which
OQ1 will be demanded and supplied. Thus, as a result of
an increase in supply with demand remaining the same,
the equilibrium price will go down and the quantity
demanded will go up.

Equilibrium
Decrease in Supply: If because of some reason, there is a

decrease in supply we will find that equilibrium price will go
up, but the amount sold and purchased will go down as shown
in figure. As S shifts to S1 we find the equilibrium E to E1
denoting an increase from P to P1 and a decrease in quantity
from Q to Q1.
SIMULTANEOUS CHANGES IN DEMAND AND SUPPLY

Till now, we were considering the effect of a change either in demand or in supply on the equilibrium
price and quantity sold and purchased. There may be cases in which both the supply and demand change
at the same time. During a war, for example, shortage of goods will often decrease supply while full
employment causes high total wage payments which increase demand.
We may discuss the changes in both demand and supply with the help of diagrams as below:
Simultaneous Change in Demand and Supply

Fig. 6 shows simultaneous change in demand and supply and its effects on the equilibrium price. In the
figure, the original demand curve DD and the supply curve SS meet at E at which OP is the equilibrium
price and OQ is the quantity bought and sold.
Fig. 6 (a), shows that increase in demand is equal to increase in supply. The new demand curve D1D1 and
S1S1 meet at E1. The new equilibrium price is equal to the old equilibrium price (OP).
Fig. 6 (b), shows that increase in demand is more than increase in supply. Hence, the new equilibrium
price OP1 is higher than the old equilibrium price OP. The opposite will happen i.e. the equilibrium price
will go down if there is a simultaneous fall in demand and supply and the fall in demand is more than the
fall in supply.
Fig. 6 (c), shows that supply increases in a greater proportion than demand. The new equilibrium price
will be less than the original equilibrium price. Conversely, if the fall in the supply is more than
proportionate to the fall in the demand, the equilibrium price will go up.

Theory of Production
Chapter – 08 – Theory of Production
A layman understands the term ‘production’ as either growing crops or manufacturing of articles or
making some material etc. In economic sense, production refers to the process of creating or adding
utility into a matter or a thing in order to make it more useful to satisfy human wants. Therefore, the work
of lawyers, teachers, accountants, etc., also account as production, since the services provided by them
provide utility and satisfy the wants of the people. In other words, production is any economic activity
which is directed towards the satisfaction of the wants of people by converting physical inputs into
physical outputs.
In fact, the performance of an economy is judged by the level of its production. Those countries which
produce goods in large quantities are rich and those which produce little of them are poor.
It should be noted that production should not be taken to mean as creation of matter because, according
to the fundamental law of science, man cannot create matter. What a man can do is only to create or add
utility. When a man produces a chair, he does not create the matter of which the wood is composed of. He
only transforms wood into a chair. By doing so, he adds utility to wood which did not have utility before.
Creation of utility
Production consists of various processes to add utility to natural resources for gaining greater satisfaction
from them by:
i) Form utility: Most manufacturing processes consist of taking raw material and transforming them
into some items possessing utility, e.g., changing the form of iron ore into a machine. This may be
called conferring utility of form.
ii) Place utility: Changing the place of the resources, from the place where they are of little or no use to
another place where they are of greater use. This utility of place can be obtained by:
1) Extraction from earth e.g., removal of coal, minerals, gold and other metal ores from mines and
supplying them to markets.
2) Transferring goods from where they give little or no satisfaction, to places where their utility is
more. Another example is: coal in coal mines have some use to farmers. But when coal is
transported to markets where human settlements are crowded like the city centers, they afford
more satisfaction to greater number of people, rather than to the miners in the coal mines.
iii) Time utility: Making available materials at times when they are not normally available e.g.,
harvested food grains are stored for use till next harvest. Canning of seasonal fruits is undertaken to
make them available during off season. This may be called conferring of utility of time.
iv) Personal Utility: Making a commodity more useful, by application of skill to goods or services. It
involves making use of personal skills in the form of services like services of doctors, interior
decorators, event organizers, lawyers, accountants etc.

The fundamental purpose of all these activities is the same, namely to create utility in some manner.
So production is nothing but the creation of utilities in the form of goods and services.
Example: In the production of a woolen suit, utility is created in some form or the other.
Firstly wool is changed into woolen cloth at the spinning and weaving mill (utility created by changing
the form). Then, it is taken to a place where it is to be sold (utility added by transporting it). Since
woolen clothes are used only in winter, they will be retained until such time when they are required by
purchasers (time utility). In the whole process, services of various groups of people are utilized (as
that of mill workers, shopkeepers, agents etc.) to contribute to the enhancement of utility. Thus, the
entire process of production is nothing but creation of form utility, place utility, time utility and/or
personal utility.
Factors of production
In the production process, a commodity has to pass through many stages before it ultimately reaches the
consumer. There are mainly four factors which help in the production process. They are:
- Land
- Labour
- Capital
- Entrepreneur or enterprise or organization
All the above factors have to be used jointly to produce the goods and services. These factors are
collectively known as the factors of production. Now, let us discuss each of these factors in detail.
Land: The term ‘land’ is used in a special sense in Economics. It does not mean soil or earth’s surface
alone, but refers to all free gifts of nature which would include besides the land, in common parlance,
natural resources, fertility of soil, water, air, natural vegetation etc. It becomes difficult at times to state
precisely as to what part of a given factor is due solely to the gift of nature and what part belongs to
human effort. Therefore, as a theoretical concept, we may list the following characteristics which would
qualify a given factor to be called land:
Characteristics of land:
a) Land is a free gift of nature: No human effort is required for the production of land. It existed
even before the evolution of mankind.
b) Supply of land is fixed: The total geographical area of land is fixed. The supply of land is fixed. It
can’t be increased or decreased according to our requirements.
c) Land is not mobile: The physical movement of land is impossible. Land can’t be shifted or moved
from one place to another place.
d) Land is indestructible: According to Ricardo, the production power of soil is indestructible in the
sense that the properties of land cannot be destroyed. Even if its fertility gets depleted, it can be
restored.

e) Land varies in quality: Land is not uniform in quality or fertility. No two pieces or plots of land are
uniform in fertility. Some lands will be more fertile and some will be less fertile.
f) Land is the primary and passive factor of production: All kind of economic activities have to
take place on land. Hence it is the primary factor of production. Left to itself, it will not produce
anything on its own, thus termed as passive factor of production.
g) It has different uses: Land is said to be a specific factor of production in the sense that it does not
yield any result unless human efforts are employed. Land varies in fertility and uses.
Labour: The term ‘labour’, means mental or physical exertion directed to produce goods or services.
Labour refers to various types of human efforts which require the use of physical exertion, skill and
intellect. It is, however, difficult to say that in any human effort all the three are not required in equal
proportion; the proportion of each might vary. Labour, to have an economic significance, must be one
which is done with the motive of some economic reward. Anything done out of love and affection,
although very useful in increasing human well-being, is not labour in the economic sense. It is for this
reason that the services of a house-wife are not treated as labour, while those of a maid servant are treated
as labour. If a person sings before his friends just for the sake of pleasure, it is not considered as labour
despite the exertion involved in it. On the other hand, if a person sings against payment of some fee, then
this activity signifies labour.
Characteristics of labour:
a) It is inseparable from the labourer: This means that only the labour is sold whereas the
producer of labour retains his capacity to work. Thus, labour cannot be separated from the labourer.
b) Labour is perishable: Labour cannot be stored. A day’s work lost cannot be recovered by working
on the subsequent day. Whatever is lost in a day cannot be recovered wholly by extra work next day.
In other words, a labourer cannot store his labour and so he has no reserve price for his labour.
c) Human Effort: Labour, as compared with other factors is different. It is connected with human
efforts whereas others are not directly connected with human efforts. As a result of this, there are
certain human and psychological considerations which may come across unlike in the case of other
factors.
d) It differs in efficiency: All labour is not equally productive. The efficiency of labour depends on
physical strength, skill, education, etc. However, efficiency can be improved by giving proper training
and motivating the labourers.
e) Labour is mobile: Labour move from one occupation to another because of several factors like
family and cultural background, educational and technical skills, life style, housing and transport
problems, language barriers, adaptability to new environments, etc.
f) Law of supply does not hold well in case of labour: Supply of labour and wage rate is directly
related i.e., as the wage rate increases, the labourer will put in more hours of work and enjoy less
hours of leisure. However, if the level of income rises beyond a certain level, the labourer reduces the

supply of labour and increase his hours of leisure i.e., he prefers to have more rest than earning
money.
g) Weak bargaining power: It is because the labourer is economically weak while the employer is
economically powerful although things have changed a lot in favour of labour during the 20th
century.
Capital: We may define capital as that part of wealth of an individual or community which is used for
further production of wealth. In fact, capital is a stock concept which yields a periodical income which is a
flow concept. It is necessary to understand the difference between capital and wealth. Whereas wealth
refers to all those goods and human qualities which are useful in production, and which can be passed on
for value, only a part of these goods and services can be characterized as capital because if these resources
are lying idle they will constitute wealth but not capital. Capital has been rightly defined as ‘produced
means of production’. This definition distinguishes capital from both land and labour because both land
and labour are not produced factors. They are primary or original factors of production, but capital is not
a primary or original factor; it is a produced factor of production. Therefore, capital may well be defined
as manmade instruments of production. Machine tools and instruments, factories, dams, canals,
transport equipment etc., are some of the examples of capital. All of them are produced by man to help in
further production of goods.
Types of Capital:
a) Fixed capital is that which exists in a durable shape and renders a series of services over a period of
time. For example, tools, machines, etc.
b) Circulating capital is another form of capital which performs its function in production in a single
use and is not available for further use. For example, seeds, raw materials, etc.
c) Real capital refers to physical goods such as building, plant, machines, etc.
d) Human capital refers to human skill and ability. This is called human capital because a good deal of
investment has gone into creation of these abilities in humans.
e) Tangible capital can be perceived by senses whereas intangible capital is in the form of certain
rights and benefits which cannot be perceived by senses. For example, goodwill, patent rights, etc.
f) Individual capital is the personal property owned by an individual or a group of individuals.
g) Social Capital is what belongs to the society as a whole in the form of roads, bridges, etc.
Capital formation: Capital formation means creating more and more capital assets and adding that to
the existing stock of capital. Hence, it can be termed as a form of investment. In order to accumulate
capital goods, some current consumption has to be sacrificed. This is because, if all that is produced is
used for current consumption and nothing is stored for the future, then the future productive capacity will
decline. It is not only required for creating additional productive capacity, but also for replacement and
renovation of existing machinery and equipment. It is prudent to cut down some of the present
consumption and direct part of it to the making of capital goods such as tools and instruments, machines

and transport facilities, plant and equipment etc. They will not only increase the efficacy of production
efforts but also will make possible the expansion of output of consumer goods in the future.
Stages of capital formation: We can say that capital can be accumulated through savings. But savings
alone is not responsible for capital formation because, if the savings of individual lie idle, no capital
formation takes place. Thus, the savings of all the individuals are accumulated and invested in a profitable
venture to fetch returns which would result in capital accumulation. Thus, capital is accumulated in three
stages.
1. Creation of savings: Savings are very essential for capital formation. However, the ability to save
depends upon various factors like:
Income of the individuals: Generally, higher the income, higher would be the ability to save.
Willingness to save: An individual may have surplus income which he can save. But he must have
the willingness to create savings. Willingness to save depends upon the interest of an individual to
have a secure future.
Savings are done by the individuals or households, and Government saves by way of tax collections
and profits of PSU’s. It has been noticed that individuals of an underdeveloped country use their
income for current consumption rather that for future consumption. Thus, the savings of an
underdeveloped country is far lesser than those of developed countries. This is why the developed
countries become richer quickly when compared to underdeveloped countries.
2. Mobilization of savings: If the savings of the individuals lie idle, they are of no use to the
economy. Thus, financial institution like banks must collect deposits of all the small investors and
make them available to the prospective investors to invest the money and create capital.
3. Utilization of savings or investment: The savings must be made available to the entrepreneurial
class who are prepared to bear the risk of the business and invests them in profitable ventures which
would create new capital assets.
Entrepreneur: Having explained the three factors namely land, labour and capital, we now turn to
the explanation of the fourth important factor, namely, the entrepreneur. It is not enough to say that
production is a function of land, capital and labour. There must be some factor which mobilises these
factors, combines them in the right proportion, initiates the process of production and bears the risks
involved in it. This factor is known as the entrepreneur.
Functions of an entrepreneur: An entrepreneur performs the following functions in general:
i) Initiating a business enterprise and resource co-ordination: The first and the foremost
function of an entrepreneur is to initiate a business enterprise. For this, he has to collect different
factors of production such as labour, capital, land etc. and bring about coordination among them.
These various other factors of production are paid fixed contractual remuneration: labour at fixed
rate of wages, land or factory building at a fixed rent for its use and capital at a fixed rate of

interest. The surplus, if any, after all the fixed costs and variable costs are met, accrues to the
entrepreneur as his reward for his efforts and risk-taking.
Thus, the reward for an entrepreneur, that is a profit, is not fixed. He may earn profits or incur
losses. Other factors get their payment irrespective of whether the entrepreneur makes profits or
losses.
ii) Risk bearing or uncertainty bearing: The ultimate responsibility for the success and survival
of business lies with the entrepreneur. What is planned and anticipated by the entrepreneur may
not come true and the actual course of events may differ from what was anticipated and planned.
The economy is dynamic and changes occurr everyday Thus, the entrepreneur has to bear these
financial risks. Apart from financial risks, the entrepreneur also faces technological risks which
arise due to the inventions and improvements in techniques of production, making the existing
techniques and machines obsolete.
These risks which cannot be insured are also called uncertainties and the entrepreneur earns
profits because he bears uncertainty in a dynamic economy where changes occur every day.
iii) Innovations: One of the important functions of an entrepreneur is to introduce innovations.

Innovations, in a very broad sense, include the introduction of new or improved production
methods, utilisation of new or improved sources of raw-materials, adoption of new or improved
forms of organisation, introduction of new or improved products, opening of new or improved
markets etc. According to Schumpeter, the task of the entrepreneur is to continuously introduce
new innovations.
Production function:
A simple words, production is a process of converting physical input into physical output. The
relationship between input and output expressed in the form of a mathematical equation is called the
production function. It states the maximum amount of output that can be produced with the given
amount of inputs or minimum inputs needed to produce a given quantity of output. Inputs refer to the
factor services which are used in production i.e. land, labour, capital and enterprise. Output refers to the
volume of goods produced. The production function is given as:
Q = f (La, L, K, O)
Where,
Q = Quantity
L = Land
L = Labour
K = Capital
O = Organization
The production function can be classified into two groups/categories.

Short run production function

Short run is a period of time which is too short for a firm to install a new capital equipment to increase
production. In the short run, production will increase when more units of variable factors are used with
fixed factors. In short run, at least one factor is fixed. Short run production function is known as “Law of
Variable Proportions”. Functions are divided into two parts. Namely:-
➢ Fixed inputs: are those factors, the quantity of which remains constant irrespective of the level of
output produced by a firm. Ex., land, building, etc.
➢ Variable inputs: are those factors, the quantity of which varies (only to a limited extent) with
variations in the levels of output produced by a firm. Ex, Wages, power, working hours of the
labourers etc.
Long run production function: Long run is a period of time in which all the factors of production are
variable. Long run production function is known as the “law of returns to scale”.
Assumptions of Production Function:

The production function is based on certain assumptions;
1. It is related to a particular unit of time.
2. The technical knowledge during that period of time remains constant.
3. The producer is using the best technique available.
Cobb-Douglas production function:

In economics, the Cobb-Douglas functional form of production functions is widely used to represent the
relationship of an output to inputs. It was proposed by Kunt Wick sell (1851-1926), and tested against
statistical evidence by Charles Cobb and Paul Douglas in 1928.
In 1928 Charles Cobb and Paul Douglas a published a study in which they modelled the growth of the
economy in manufacturing industry during the period 1899-1922. They considered a simplified view of
the economy in which production output is determined by the amount of labour involved and the amount
of capital invested. The conclusion drawn from this famous statistical study is that labour contributed
about 3/4th and capital about 1/4th of the increase in the manufacturing production. The function they
used to model production was of the form:
Q = AK  L1- 
Where,
Q = total output/production,
L = Quantity of labour,
K= Amount of labour
A & ∞ are positive constants

Law of variable proportions

This Law shows the nature of rate of change in output due to a change in only one variable factor of
production. This Law is applicable during the short-run, when a firm can change its output by changing
only the variable factor (say labour), while the fixed factors of production remain unchanged. In this case,
the factor proportion (i.e., capital/ labour, K/L) will gradually fall with an increase in L. Since K remains
unchanged.
There exists three concepts,

“Total Product”, “Average Product”, “Marginal Product”
a) Total product: It indicates the amount of a particular product produced by any firm using both
fixed & variable factors of production during any particular time period e.g., a firm may produce 30
units of a product per day by using one unit of capital (K) & 3 units of labour (L). Since the fixed
factor (K) remains unchanged during the short-run, we may call it the total product of a variable
factor. [TPL = Q]
b) Average Product: It implies output per unit of a variable factor. If total product = 30 units &
three workers are employed to produce that output, then AP = 30/3, or APL = Q/L.
c) Marginal product: It is the rate of change in total product or change in total product due to one
additional change in variable factor. MPL
During Short-run period we get three possible returns to a factor

Land Labour Total Marginal Average Returns to
(Acres) (No of works) Product Product Product factors
10 0 0 - -
10 1 5 5 5 Ist Stage
10 2 14 9 7 Increasing returns
10 3 30 16 10 to a factor
10 4 52 22 13
10 5 70 18 14
10 6 84 14 14
10 7 91 7 13 2nd Stage
10 8 96 5 12 Decreasing returns
10 9 96 0 10.6 to a factor
10 10 90 -6 3rd Stage negative returns
From the table it can be observed that initially, it shows ‘increasing returns to a variable factor
when a firm increases only variable factor, keeping other factors unchanged, the rate of increase in

output is more than that of variable factor. So MP L & APL both are increasing where as MPL > APL
(L<L*).
After a certain capacity point with increase in only variable factor, keeping other unchanged, rate of
output increases at diminishing rate & ultimately at maximum point rate of enhancement becomes zero.
For L = OL, MPL = APL. For L>OL up to L2 (MPL<APL) & at L = OL2, MPL = 0 as
Q
=0
L
Three stages of production takes place –
1st Stage: Zero to APL maximum
2nd Stage: APL maximum to MPL = 0
3rd Stage: MPL is negative
Relationship between Average Product and Marginal Product: Both average product and
marginal product are derived from the total product. Average product is obtained by dividing total
product by the number of units of variable factor and marginal product is the change in total product
resulting from a unit increase in the quantity of variable factor. The various points of relationship between
average product and marginal product can be summed up as follows:
i) When average product rises as a result of an increase in the quantity of variable input, marginal
product is more than the average product.
ii) When average product is maximum, marginal product is equal to average product. In other words, the
marginal product curve cuts the average product curve at its maximum.
iii) When average product falls, marginal product is less than the average product.
Table 1 and Figure 1 confirm the above points of relationship.

The law of variable proportions or the law of diminishing returns examines the production function with
one factor variable, keeping quantities of other factors fixed. In other words, it refers to input-output
relationship, when the output is increased by varying the quantity of one input. This law operates in the
short run ‘when all the factors of production cannot be increased or decreased simultaneously (for
example, we cannot build a plant or dismantle a plant in the short run).
The law operates under certain assumptions which are as follows:

1. The state of technology is assumed to be given and unchanged. If there is any improvement in
technology, then marginal and average product may rise instead of falling.
2. There must be some inputs whose quantity is kept fixed. This law does not apply to cases when all
factors are proportionately varied. When all the factors are proportionately varied, laws of returns to
scale are applicable.
3. The law does not apply to those cases where the factors must be used in fixed proportions to yield
output. When the various factors are required to be used in fixed proportions, an increase in one

factor would not lead to any increase in output i.e., marginal product of the variable factor will then be
zero and not diminishing.
4. We consider only physical inputs and outputs and not economic profitability in monetary terms. The
law states that as we increase the quantity of one input which is combined with other fixed inputs, the
marginal physical productivity of the variable input must eventually decline. In other words, an
increase in some inputs relative to other fixed inputs will, in a given state of technology, cause output
to increase; but after a point, the extra output resulting from the same addition of extra inputs will
become less and less.
The behaviour of output when the varying quantity of one factor is combined with a fixed quantity of
the others can be divided into three distinct stages or laws. In order to understand these three stages
or laws, we may graphically illustrate the production function with one variable factor.
In this figure, the quantity of variable factor is depicted on the X axis and on the Y-axis is measured
the Total Product (TP), Average Product (AP) and Marginal Product (MP). As the figure shows TP
curve goes on increasing up to a point and after that it starts declining. A Pand MP curves first rise
and then decline; MP curve starts declining earlier than the AP curve. The behaviour of these Total,
Average and Marginal Products of the variable factor consequent on the increase in its amount is
generally divided into three stages (laws) which are explained below.

Stage 1: The Law of Increasing Returns: In this stage, total product increases at an increasing
rate upto a point (in figure upto point F), marginal product also rises and is maximum at the point
corresponding to F and average product goes on rising. From point F onwards during the stage one,
the total product goes on rising but at a diminishing rate. Marginal product falls but is positive. The
stage 1 ends where the AP curve reaches its highest point.
Thus in the first stage the AP curve rises throughout whereas the marginal product curve first rises
and then starts falling after reaching its maximum. It is to be noted that the marginal product
although starts declining, remains greater than the average product throughout the stage so that
average product continues to rise.
Explanation of the law: The law of increasing returns operates because of following reasons
1) In the beginning the quantity of fixed factors is abundant relative to the quantity of the variable
factor. As more units of variable factor are added to the constant quantity of the fixed factors then
the fixed factors are more intensively and effectively utilised i.e., the efficiency of the fixed factors
increases as additional units of the variable factors are added to them. This causes the production
to increase at a rapid rate. This happens because, in the beginning some amount of fixed factor
remained unutilised and, therefore, when the variable factor is increased, fuller utilisation of the
fixed factor becomes possible and it results in increasing returns.
A question arises as to why the fixed factor is not initially taken in a quantity which
suits the available quantity of the variable factor. The answer is that, generally those
factors are taken as fixed which are indivisible. Indivisibility of a factor means that
due to technological requirements, a minimum amount of that factor must be
employed whatever the level of output.
Thus, as more units of the variable factor are employed to work with an indivisible fixed factor,
output greatly increases due to fuller utilisation of the latter.
2) The second reason why we get increasing returns at the initial stage is that as more units of the
variable factors are employed, the efficiency of the variable factors itself increases. This is because
with sufficient quantity of the variable factor introduction of division of labour and
specialisation becomes possible which results in higher productivity.
Stage 2: Law of diminishing returns: In stage 2, the total product continues to increase at a
diminishing rate until it reaches its maximum point H, where the second stage ends. In this stage,
both marginal product and average product of the variable factor are diminishing but are positive. At
the end of this stage i.e., at point M (corresponding to the highest point H of the total product curve),
the marginal product of the variable factor is zero. Stage 2, is known as the stage of diminishing
returns because both the average and marginal products of the variable factors continuously fall
during this stage. This stage is very important because the firm will seek to produce in its range.
Explanation of the law: The question arises as to why we get diminishing returns after a certain
amount of the variable factor has been added to the fixed quantity of that factor. As explained above,
increasing returns occur primarily because of the more efficient use of fixed factors as more units of
the variable factor are combined to work with it. Once the point is reached at which the amount of
variable factor is sufficient to ensure efficient utilisation of the fixed factor, any further increases in
the variable factor will cause marginal and average product to decline because the fixed factor then
becomes inadequate relative to the quantity of the variable factor. Continuing the above example,
when four men were put to work on one machine, the optimum combination was achieved. Now, if
the fifth person is put on the machine, his contribution will be nil. In other words, the marginal
productivity will start diminishing.
1) The phenomenon of diminishing returns, like that of increasing returns, rests upon the
indivisibility of the fixed factor. Just as the average product of the variable factor increases in the
first stage when better utilisation of the fixed indivisible factor is being made, so the average
product of the variable factor diminishes in the second stage when the fixed indivisible factor is
being worked too hard.
2) Another reason offered for the operation of the law of diminishing returns is the imperfect
substitutability of one factor for another.
Stage 3: Law of negative returns: In Stage 3, total product declines, MP is negative, average
product is diminishing. This stage is called the stage of negative returns since the marginal product of
the variable factor is negative during this stage.
Explanation the law: As the amount of the variable factor continues to be increased to a constant
quantity of the other, a stage is reached when the total product declines and marginal product
becomes negative.
1) The quantity of the variable factor becomes too excessive relative to the fixed factor so that they
get in each other’s ways with the result that the total output falls instead of rising. In such a
situation, a reduction in the units of the variable factor will increase the total output.
Stage of Operation: An important question is in which stage a rational producer will seek to
produce. A rational producer will never produce in stage 3 where marginal product of the variable
factor is negative. This being so a producer can always increase his output by reducing the amount
of variable factor.
A rational producer will also not produce in stage 1 as he will not be making the best use of the
fixed factors and he will not be utilising fully the opportunities of increasing production by
increasing, the quantity of the variable factor whose average product continues to rise throughout
stage 1.
It is thus clear that a rational producer will never produce in stage 1 and stage 3. These stages are
called stages of economic absurdity or economic non-sense.

A rational producer will always produce in stage 2 where both the marginal product and average
product of the variable factors are diminishing. At which particular point in this stage, the
producer will decide to produce depends upon the prices of factors.
Stages Terms used TP AP MP
Starts from origin,
increases at an Starts from the origin Increases, reaches a
Increasing returns to
Stage 1 increasing rate and and then increases till maximum and then
the factor
then increases at a its maximum point starts falling
diminishing rate
Increases at a
Falls continuously
Diminishing returns diminishing rate till it
Stage 2 Falls continuously till it is equal to
to the factor reaches the maximum
zero.
point
Negative returns to
Stage 3 Falls Falls continuously It is negative
the factor
Long run production function – Law of returns to scale:

We shall study the behaviour of output in response to a change in the scale. A change in scale means that
all factors of production are increased or decreased in the same proportion. Returns to scale may be
constant, increasing or decreasing. If we increase all factors i.e., scale in a given proportion and output
increases in the same proportion, returns to scale are said to be constant. Thus, if a doubling or trebling of
all factors causes a doubling or trebling of output, returns to scale are constant. But, if the increase in all
factors leads to more than proportionate increase in output, returns to scale are said to be increasing.
Thus, if all factors are doubled and output increases more than a double, then the returns to scale are said
to be increasing. On the other hand, if the increase in all factors leads to less than proportionate increase
in output, returns to scale are decreasing. It is needless to say that this law operates in the long run when
all the factors can be changed in the same proportion simultaneously.
Constant returns to scale: As stated above, constant returns to scale means that with the increase in
the scale in some proportion, output increases in the same proportion. It has been found that production
function for the economy as a whole corresponds to production function exhibiting constant returns to
scale. Also, it has been found that an individual firm passes through a long phase of constant returns to
scale in its lifetime.
Constant return to scale is otherwise called as “Linear Homogeneous Production Function”
Increasing returns to scale: As stated earlier, increasing returns to scale means that output increases
in a greater proportion than the increase in inputs. When a firm expands, increasing returns to scale are
obtained in the beginning. Another reason for increasing returns to scale is the indivisibility of factors.
Some factors are available in large and lumpy units and can, therefore, be utilised with utmost efficiency

at a large output. Returns to scale may also increase because of greater possibilities of specialisation of
land and machinery.
Decreasing returns to scale: When output increases in a smaller proportion with an increase in all
inputs, decreasing returns to scale are said to prevail. When a firm goes on expanding by increasing all
inputs, diminishing returns to scale set in. Decreasing returns to scale eventually occur because of
increasing difficulties of management, coordination and control. When the firm has expanded to a very
large size, it is difficult to manage it with the same efficiency as before.
In the table given below we take labour and capital as factors of production.
Total Output Total Output Marginal Output
1K+2L 50 50
2K+4L 110 60
3K+6L 180 70
4K+8L 250 70
5K+10L 300 50
6K+12L 335 35
Observations:
The marginal output which is most important here
➢ Increases at a rapid rate then the rate of increase in the
input – in the 1st stage. Hence it is increasing returns to
scale.
➢ Increases in the same ratio as increase in the input – in
the 2nd stage. Hence it is constant returns to scale.
➢ Increases in a lesser proportion as you employ more
and more of K & L – in the 3rd stage. Hence it is
decreasing return to scale.
Differences between law of variable portions and returns to scale:

Basis of difference Law of variable proportions Law of returns to scale
Time period Applies in the short run Applies in the long run
Variable and fixed factors Only variable factors are changed All factors are increased
units of fixed factors remain the simultaneously. No distinction
same between fixed and variable factors.
Stages There are 3 stages There are 3 stages
- Increasing returns - Increasing returns
- Diminishing returns - Constant returns
- Negative returns - Decreasing returns

PRODUCTION OPTIMISATION
Normally, a firm is interested to know what combination of factors of production (or inputs) would
minimise its cost of production. This can be known with the help of isoquants and isocost lines.
Isoquants: Isoquants are similar to indifference curves of the theory of consumer behaviour.
An isoquant represents all those combinations of inputs which are capable of producing the same level of
output. Isoquants are also called equal-product or iso-product curves. Since an equal-product curve
represents all those combinations of inputs which yield an equal quantity of output, the producer is
indifferent between them. Therefore, another name for an isoquant is production-indifference curve. The
concept of isoquant can be easily understood with the help of the following schedule.
Factor combination Factor L Factor K

A 1 12
B 2 08
C 3 05
D 4 03
E 5 02
An ISO – Quant Curve always slopes downward from left to right i.e., It should always a
Negative Slope.
This is because, if producer wants to increase the
proportion of one factor, it is possible only by
reducing the proportion of another factor because of
limited resources. The negative slope of Isoquants
implies substitutability between the inputs. It means
that if one of the inputs is reduced, the other inputs
has to be so increased that the total output remains
unaffected. To represent this concept, it should
always slope downward. An ISO- Quant will be
always convex to the origin.The Law of Diminishing
Marginal Rate of Technical Substitution (MRTS)
could be explained only if it is convex to the origin.
The rate at which one factor is substituted for another factor is known as Technical Substitution.
Iso-cost or Equal-cost Lines: Iso-cost line represents the prices of factors. It shows various
combinations of two factors which the firm can buy with given outlay. Suppose a firm has Rs. 100 to
spend on the two factors L and K. If the price of factor L is Rs. 10 and that of K is Rs. 20, the firm can
spend its outlay on L and K in various ways. It can spend the entire amount on L and thus buy 10 units of
L and zero units of K or it can spend the entire outlay on K and buy 5 units of it with zero units of X factor.
In between, it can have any combination of L and K.

Factor
Factor L Cost of L Factor K Cost of K Total cost
combination
A 0 0 5 100 100
B 2 20 4 80 100
C 4 40 3 60 100
D 6 60 2 40 100
E 8 80 1 20 100
F 10 100 0 0 100
We can show iso-cost line diagrammatically also. The X-axis

shows the units of factor L and Y-axis the units of factor K.
When entire Rs. 100 are spent on factor L we get OC/P k and
when entire amount is spent on factor K we get OC/P L. The
straight line C/Pkto C/PL will pass through all combinations of
factors L and K which the firm can buy with outlay of Rs. 100.
The line C/Pkto C/PL is called iso-cost line.
Producer’s equilibrium can be obtained by two ways:

a) Output maximization
K
b) Cost minimization (Least Cost combination)
a) Output maximization: F
Figure (5) shows different level of output by IQ, map

IQ is not permissible. Output is maximized where Ke e
two conditions are satisfied: IQ3

IQ2
Q
(1) Slope of IQ = Slope of cost line Le

IQ1
L
MPL W Fig. : 5
=
MPK r
[Necessary or 1st order condition]
(2) IQ is convex at the point of tangency
(Capital)
[sufficient or 2nd order condition]
b) Cost minimization (Least Cost

combination)
Suppose the firm has decided to produce 1,000
units (represented by iso-quant P). These can be
produced by any factor combination lying on P
such as A, B, C, D, E, etc. The cost of producing
(Labour)
1,000 units would be minimum at the factor Fig. 6

combination represented by point C where the iso-cost line MM1 is tangent to the given isoquant P.
At all other points such as A, B, D, E the cost is more as these points lie on higher iso-cost lines than
MM1. Thus, the factor combination represented by point C is the optimum combination for the
producer. It represents the least-cost of producing 1,000 units of output. It is thus clear that the
tangency point of the given isoquant with an iso-cost line represents the least cost combination of
factors for producing a given output.
Conditions of equilibrium:
(1) Slope of IQ = Slope of cost line

MPL W
=
MPK r
[Necessary or 1st order condition]
IQ is convex at the point of tangency [sufficient or 2nd order condition

Theory of Cost
Chapter – 09 – Theory of Cost
Meaning of cost
The number of resources used in the manufacturing of goods or rendering of services and expressed in
monetary terms is known as costs. These resources may be tangible like materials or intangible like
labour.
Meaning of cost analysis:

We have seen that production analysis is mainly concerned with the physical aspects of production. In
cost analysis, we study the financial aspects of production. In other words, cost analysis refers to the study
of behaviour of cost in relation to one or more production criteria, viz,. seize of output, scale of operations,
price of factors of production, etc.
Cost function:
It refers to the mathematical relationship between cost of a product and the various determinants of costs.
In cost function, the dependent variable is unit cost or total cost and the independent variables are the
prices of factor, scale of operations, technology, level of capacity utilization etc.
Symbolically, the cost function is C = f (Q).
Where C = Cost and Q = Output
Cost concept:
In order to understand the cost function, we have to understand the various concept of cost as below:
Explicit and Implicit Cost:

Explicit cost also known as direct cost, which is the actual expenditure incurred by a firm to purchase or
acquire the various inputs in needs during the production process. Explicit costs can be estimated and
calculated exactly and they can be accounted without any difficulty. E.g. Wages, rents, etc.
Implicit cost is the cost which is not recognized in the books of accounts. It is also a part of the
opportunity cost. It is the monetary reward for all factors owned by the entrepreneur himself. Implicit
cost is also known as imputed cost. Implicit costs include:
- The normal return on capital invested by the entrepreneur in his own business.
- The wages or salary not paid to the entrepreneur, but could have been earned if the services had been
sold somewhere else.
Accounting costs and economic costs:

- Accounting costs are all the payments and charges made by the entrepreneur to the suppliers of
various productive factors. Accounting costs are also explicit costs.
- Economic costs not only take the accounting costs into consideration, but also include the amount of
money which the entrepreneur could have earned if he had invested his money and sold his services

Theory of Cost
and other factors in the next best alternative uses. Thus, economic costs include both, accounting
costs and implicit costs.
The concept of economic costs is very important because an entrepreneur is said to be earning profits
only when his revenues are able to cover both, the explicit as well as implicit costs.
Note: Revenue refers to sales receipts.
Outlay costs and opportunity costs:
Outlay costs are those costs which involve financial expenditure and are recorded in the books of
accounts. These costs involve actual expenditure of funds. It is same as explicit costs.
Opportunity costs refers to the cost of the foregone opportunity. It can also be represented as the
difference between the opportunity selected and the opportunity rejected. These costs are not recorded in
the books of accounts. They are also known as alternative costs.
Example: A farmer who produces wheat can produce potatoes with the same factors. Therefore, the
opportunity cost of a quintal of wheat is the amount of output of potatoes given up. These cost help is
decision making in scarcity of resources.
Direct costs and indirect costs:

Direct costs are those costs which are readily identifiable and traceable to a particular product, service,
operation or a plant. For example, cost of raw material used in manufacture, wages paid to workers of
administration department. These costs are also known as traceable costs.
Indirect costs on the other hand are not readily identified or visibly traceable to a particular product
service, operation or plant. These are the common costs.
Example: factory rent and advertisement expenses. These costs are also known as non-traceable costs.
Fixed and variable costs:

Fixed costs refer to all the money expenses incurred by the manufacturer irrespective of the output level.
They are also known as unavoidable contractual costs as they have to be paid as long as the operations are
going on. For example, rent of a factory building, interest on loans. Fixed costs are those costs which do
not vary either with expansion or contraction of output, up to a certain level.
Variable costs refer to money expenses which vary directly and proportionately with the output.
Example: Wages and cost of raw materials. It is left to the discretion of the management whether to
incur these costs or not. E.g. – If the production process is stopped for some time, expense such as wages,
cost of raw materials would not be incurred.
Sunk costs:
Sunk costs are those that do not alter by varying the nature or level of business activity. Sunk costs are
generally not taken into consideration in decision – making as they do not vary with the changes in the

Theory of Cost
future. Sunk costs are a part of the outlay/actual costs. E.g. – Amortisation of past expenses such as
depreciation.
Book costs:
The cost that has not been incurred in actual but are recorded in the books of accounts by making the
provision in the books. They are recorded to the take the advantage of tax. E.g., Provision for taxation,
Provision for bad debt.
Out of pocket cost: The cost incurred to meet the payment of outside parties is called ‘out of pocket
cost’. They fall in the category of out of pocket costs. E.g., Rent, wages, interest.
Incremental costs: These are the cost which incurred when there is a change in the level of business
activity. They are also called avoidable or differential costs. E.g. – deleting the product from the product
line.
Short run costs:

Short run total costs:
Short run is a period of time in which at least one input is
fixed and the output can be increased or decreased by
changing only the amount of variable factors. A firm
cannot change its plant, equipment and scale of
organization. In this period, certain factors can be easily
adjusted to increase/ decrease the level of output. E.g. – If
a firm wants to expand its production, it can purchase
more raw materials.
Total Fixed Cost (TFC)

As we have already studied, fixed costs do not vary with the output. These costs are also called as sunk
costs. The total fixed cost curve is shown as a straight line parallel to the X- axis, indicating that, whatever
may be the level of production, the fixed cost remains constant. E.g. – Expenses incurred on fixed inputs
like plant, machinery and tools etc.
Total Variable Cost (TVC)

Variable costs refer to those costs which vary with the output.
The total variable cost curve is inverse S- Shaped and starts
from the origin which shows that if production is stopped,
variable costs are not incurred. As the production increases,
the total variable cost also increases. Initially, as more of the
variable factor is combined with the fixed factor, total
productivity increase at an increasing rate, and total variable

Theory of Cost
cost increases at a diminishing rate. But after this point, as more of the variable factor is combined with
the fixed factor, variable cost increases at an increasing rate. E.g. – Expenses incurred on variable inputs
like labour, raw materials, power and fuel etc.
Semi Variable cost:

There are some costs which are neither perfectly variable nor
absolutely fixed in relation to the changes in the size of output.
These are known as semi-variable costs. For example:
Electricity charges include both a fixed charge and a charge
based on consumption as shown as diagram.
Stair – Step Variable Cost:

Some cost remain fixed over certain range of output, but
suddenly jump to a new higher level when output goes
beyond given limit. For example: Salary of a foreman
remains fixed and every one extra that the foreman works,
overtime should be paid. Let it be 100/- per hour. In this
case the variable cost jumps a new higher level of output,
as shown in the following diagram.
Total Cost (TC)

It is the total amount of money spent by the manufacturer to
produce a given level of output. Thus, it is the sum total of total
fixed cost and total variable cost.
Symbolically,
TC = TFC + TVC
TC = Cost per unit x Number of units manufactured
Short run total Cost Curves
Short run Average costs:

TC = F + f(Q)
 TC = F + f(Q)  TC = TFC + TVC

Q Q Q Q Q Q
This implies AC or ATC = AFC + AVC
AFC is per unit of fixed cost & as quantity produced increases AFC keeps on decreasing In fig1. By
construction

Theory of Cost
OQ3 = 3OQ1, OQ2 = 2OQ1, OQ1 = ⅓ OQ3 & OQ1 = ½ OQ2
As one moves from Q1 to Q2 to Q3 slopes of ray keep on decreasing i.e.

AFC2 = ½ AFC1 & AFC3 = ⅓ AFC1
In Fig (2), continuing this process we can find a locus AFC, which is
downward sloped, convex to the origin & Rectangular Hyperbola.
‘AVC’ is variable cost per unit of production. AVC normally falls as output
increases from zero to normal capacity output due to occurrence of increasing
returns (where cost increases at decreasing rate). But beyond the normal capacity
output, AVC will rise steeply because of the operations of diminishing returns.
APL = Q/L, AVC = TVC/Q
i.e. AVC = W.L / Q
This implies AVC = W / APL ........ (1)
Equation (1) exhibits inverse relationship between AP L & AVC where W is constant. In fig (3) when APL is
‘dome’ shaped, AVC is ‘U’ shaped. Therefore, ‘U’ shaped AVC is due to Law of variable
proportion.
Further AC = AFC + AVC
AC can be found out by the combination of AFC & AVC. Intially, when both
AFC & AVC are falling, AC being the resultant factor also falls. The point to
be noted that even if AVC reaches minimum at point ‘A’ but AFC steadily
falls and therefore, AC is also ‘U’ shaped, where minimum point of ‘AC’ is
in further north-east of minimum point of AVC. Again, minimum point of
AVC is in further south-west of minimum point of AC.
Short - run marginal Costs:
Marginal cost is the addition made to the total cost by production of an

additional unit of output. MC is the rate of change in TC.
1) MC = TCn – TCn – 1 = TC/Q
MC = (TFCn + TVCn) – (TFCn – 1 + TVC n – 1)
MC = TFCn + TVCn – TFC n – 1 – TVC n – 1

Theory of Cost
MC = TVCn – TVC n – 1
MC = MVC [So MC depends on only variable cost during Short-run, Period]
1) Relationship between MC & MPL

ΔTC ΔTVC
MC = =
ΔQ ΔQ
Δ  wL 
 MC =
ΔQ
w  ΔL 
 MC =
ΔQ
w ΔQ
 MC = sinceMPL =
MPL ΔL
Above equation shows inverse relationship between MC & MP L where ‘w’ is constant. In fig (1), we get
‘MC’ as ‘U’ shaped, due to Law of variable proportion
Further, MC & AC relationship can be obtained by slope of the tangent of TC & slope of the
ray from the origin. In following figure we get:
(a) when AC is falling MC is below to AC :(MC <AC) (b) when AC is minimum for MC = AC
(c) when AC is rising, MC > AC: MC curve cuts the AC curve at the latter’s minimum point.
Relationship between AFC, AVC, AC & MC is shown in following table
Quantity TFC TVC TC AFC AVC AC MC

0 10 0 10 ∞ --

Theory of Cost
1 10 4 14 10 4 14 4
2 10 7 17 5 3.5 8.5 3
3 10 9 19 3.33 3 6.33 2
4 10 10 20 2.50 2.5 5 1
5 10 11 21 2.0 2.2 4.2 1
6 10 14 24 1.67 2.33 4.00 3
7 10 18 28 1.43 2.57 4.00 4
8 10 24 34 1.25 3.00 4.25 6
9 10 32 42 1.11 3.55 4.66 8
10 10 42 52 1.00 4.2 5.2 10
• Initially, when MC falls, AC follows. This means, when the two are falling, the rate of fall in MC is
greater than rate of fall in AC. Because the rate of fall in MC is attributed to a single unit, whereas, in
AC, the fall in MC is distributed over the entire output. Therefore, AC decreases at a lower rate
than MC.
• When MC increases, there is a phase where AC is still falling. This is because, the rate of growth in MC
is small and this is enough only to reduce the rate of decrease in AC.
• After a point as MC increases at a higher rate, AC also increases. again, MC leads in the rise and
AC follows. This indicates that when MC increases, AC also rises but at a slower pace.
• The MC curve intersects AC at its minimum point. This is so because they are obtained from the same
TC function.
Long run average cost curve (LAC curve)

Long run is a period of time during which the firm can vary all its inputs. Thus, all the factors in the long
run are variable, unlike the short run, where one variable factor is fixed and others are variable. For
instance, in the short run, the firm’s location is fixed, but in the long run, the firm can move from one
place to another. A long run cost curve represents the functional relationship between output and the long
run cost of production. A long run average cost curve is made up of many short run average cost curve as a
business in long run will be able to change all its inputs. Let us understand this with the help of a diagram.

Theory of Cost
To understand how long run average cost curve is derived we consider three short run average cost curves.
Short run cost curves are also called as plant curves. In the short run the firm can be operating on any
short run average cost curves given the size of the plant. Given the size of the plant, the firm will be
increasing or decreasing its output by changing the amount of the variable inputs. But in the long run, the
firm chooses with which size of plants or on which short average cost curve it should operate to produce a
given level of output so that total cost is minimum. This may be depicted in the form of a diagram.
As firm changes its output from short run to long run it moves from one short period to another by
changing the plant size.
• In each period, it uses a SAC curve that is relevant to that plant size.
• Thus, by expanding the plant size, the firm tries to produce a larger output with minimum
possible average cost.
• SAC1, SAC2 SAC3 are short-run Average costs curves of 3 periods. These 3 periods at a
stretch become a long period for the firm.
These SACs are constituents of a LAC curve

• Each point on the LAC curve is tangent a SAC curve.
• Hence, the LAC curve represents not a few plant curves but it represents as many plant
curves as there are points on the LAC curves.
• A point on the LAC curve shows the plant size, output and the average cost.
As a whole, LAC is envelope of all SACs & where

each point on the curve shows least possible cost
for producing the corresponding level of output.
Therefore, LAC is called ‘planning curve’ &
Saucer Shaped. It is to be noted that LAC curve
is not a tangent to the minimum points of the SAC
curves. When LAC curve is declining it is tangent
to the falling portions of the short run cost curves
& when the LAC curve is rising it is tangent to the rising portions of the short-run cost curves.
Theory of Cost
Thus for producing output-less than OQ* at the lowest possible unit cost of the firm will
construct the relevant plant & operate it at less than its full capacity, i.e., at less than its
minimum average cost of production. On the other hand, for output larger than OQ*, the firm will
construct a plant & operate it beyond its optimum capacity. OQ* is the optimum output. This is
because ‘OQ*’ is being produced at the minimum point of LAC & corresponding SAC i.e., SAC 2. Other
plants are either used at less than full capacity or more than their full capacity – only SAC2 is being
operated at the minimum point. As a whole, LAC is ‘planning curve’ & helps the firm in the
choice of the size of the plant for producing a specific output at the least possible cost & it is
flatter “U” shaped due economies & diseconomies of scale.
Problem on cost:
1. Calculate TFC, TVC, AVC, AFC, AC and MC from the following information.
Units Total cost (TC)
0 50
1 130
2 180
3 190
4 220
5 270
Solution:
Units TC TFC TVC AFC AVC AC MC
0 50 50 0 0 0 0 0
1 130 50 80 50 80 130 80
2 180 50 50 25 25 90 50
3 190 50 10 16.67 3.3 63.33 10
4 220 50 30 12.5 7.5 55 30
5 270 50 50 10 10 54 50
The long run average cost curve initially falls with increase in
output and after a certain point it rises making a boat shape.
Long-run Average cost (LAC) curve is also called the planning
curve of the firm as it helps in choosing an appropriate a plant
on the decided level of output. The long-run avearge cost
curve is also called “Envelope curve”, because it envelopes or
supports a family of short run average cost curves from below.
The figure depicting long-run average cost curve is arrived at

on the basis of traditional economic analysis. It is flattened ‘U’

Theory of Cost
shaped. This type of curve could exist only when the state of technology remains constant. But, the
empirical evidence shows that the state of technology changes in the long-run.
Therefore, modern firms face ‘L-shaped’ cost curve than ‘u-shaped’. The L shaped cost curve is given
below. According to the diagram, over AB range, the curve is perfectly flat. Over this range all sizes of
plant have the same minimum cost.
ECONOMIES AND DISECONOMIES OF SCALE
The Scale of Production

Production on a large scale is a very important feature of modern industrial society. As a consequence, the
size of business undertakings has greatly increased. Large-scale production offers certain advantages
which help in reducing the cost of production. Economies arising out of large-scale production can be
grouped into two categories; viz., internal economies and external economies. Internal economies are
those economies of production which accrue to the firm when it expands its output, so that the cost of
production would come down considerably and place the firm in a better position to compete in the
market effectively. Internal economies arise purely due to endogenous factors relating to efficiency of the
entrepreneur or his managerial talents or the type of machinery used or the marketing strategy adopted.
These economies arise within the firm and are available exclusively to the expanding firm. On the other
hand, external economies are the benefits accruing to each member firm of the industry as a result of
expansion of the industry.
Internal Economies and Diseconomies: We saw that returns to scale increase in the initial stages
and after remaining constant for a while, they decrease. The question arises as to why we get increasing
returns to scale due to which cost falls and why after a certain point we get decreasing returns to scale due
to which cost rises. The answer is that initially a firm enjoys internal economies of scale and beyond a
certain limit it suffers from internal diseconomies of scale. Internal economies and diseconomies are of
the following main kinds:
i) Technical economies and diseconomies: Large-scale production is associated with economies
of superior techniques. As the firm increases its scale of operations, it becomes possible to use more
specialised and efficient form of all factors, specially capital equipment and machinery. For producing
higher levels of output, there is generally available a more efficient machinery which when employed
to produce a large output yields a lower cost per unit of output. The firm is able to take advantage of
composite technology whereby the whole process of production of a commodity is done as one
composite unit. Secondly, when the scale of production is increased and the amount of labour and
other factors become larger, introduction of greater degree of division of labour and specialisation
becomes possible and as a result cost per unit declines. There are some advantages available to a large
firm on account of performance of a number of linked processes. The firm can reduce the
inconvenience and costs associated with the dependence on other firms by undertaking various
processes from the input supply stage to the final output stage.

Theory of Cost
However, beyond a certain point, a firm experiences net diseconomies of scale. This happens because
when the firm has reached a size large enough to allow utilisation of almost all the possibilities of
division of labour and employment of more efficient machinery, further increase in the size of the
plant will bring about high long-run cost because of difficulties of management. When the scale of
operations becomes too large, it becomes difficult for the management to exercise control and to bring
about proper coordination.
ii) Managerial economies and diseconomies: Managerial economies refer to reduction in

managerial costs. When output increases, specialisation and division of labour can be applied to
management. It becomes possible to divide its management into specialised departments under
specialised personnel, such as production manager, sales manager, finance manager etc. If the scale of
production increases further, each department can be further sub-divided; for e.g. sales can be split
into separate sections such as for advertising, exports and customer service. Since individual activities
come under the supervision of specialists, management’s efficiency and productivity will greatly
improve. Decentralisation of decision making and mechanisation of managerial functions further
enhance the efficiency and productivity of managers. Thus, specialisation of management enables
large firms to achieve reduction in managerial costs.
However, as the scale of production increases beyond a certain limit, managerial diseconomies set in.
Communication at different levels such as between the managers and labourers and among the
managers become difficult resulting in delays in decision making and implementation of decisions
already made. Management finds it difficult to exercise control and to bring in coordination among its
various departments. The managerial structure becomes more complex and is affected by greater
bureaucracy, red tapism, lengthening of communication lines and so on. All these affect the efficiency
and productivity of management and that of the firm itself.
iii) Commercial economies and diseconomies: Production of large volumes of goods requires large
amount of materials and components. A large firm is able to place bulk orders for materials and
components and enjoy lower prices for them. Economies can also be achieved in marketing of the
product. If the sales staff is not being worked to full capacity, additional output can be sold at little or
no extra cost. Moreover, large firms can benefit from economies of advertising. As the scale of
production increases, advertising costs per unit of output fall. In addition, a large firm may also be
able to sell its by-products or process it profitably; something which might be unprofitable for a small
firm. There are also economies associated with transport and storage.
These economies become diseconomies after an optimum scale. For example, advertisement
expenditure and other marketing overheads will increase more than proportionately after the
optimum scale.

Theory of Cost
iv) Financial economies and diseconomies: A large firm has advantages over small firms in matters
related to procurement of finance for its business activities. It can, for instance, offer better security to
bankers and avail of advances with greater ease. On account of the goodwill enjoyed by large firms,
investors have greater confidence in them and therefore would prefer their shares which can be
readily sold on the stock exchange. A large firm can thus raise capital at lower cost.
However, these costs of raising finance will rise more than proportionately after the optimum scale of
production. This may happen because of relatively greater dependence on external finances.
v) Risk bearing economies and diseconomies: It is said that a large business with diverse and
multi- production capability is in a better position to withstand economic ups and downs, and
therefore, enjoys economies of risk bearing. However, risk may increase if diversification, instead of
giving a cover to economic disturbances, increases these.
External Economies and Diseconomies: Internal economies are economies enjoyed by a firm on
account of use of greater degree of division of labour and specialised machinery at higher levels of
output. They are internal in the sense that they accrue to the firm due to its own efforts. Besides
internal economies, there are external economies which are very important for a firm. External
economies and diseconomies are those economies and diseconomies which accrue to firms as a result
of expansion in the output of the whole industry and they are not dependent on the output level of
individual firms. They are external in the sense that they accrue to firms not out of their internal
situation but from outside i.e. due to expansion of the industry. These are available to one or more of
the firms in the form of:
1. Cheaper raw materials and capital equipment: The expansion of an industry may result in
exploration of new and cheaper sources of raw material, machinery and other types of capital
equipments. Expansion of an industry results in greater demand for various kinds of materials
and capital equipments required by it. The firm can procure these on a large scale at competitive
prices from other industries. This reduces their cost of production and consequently the prices of
their output.
2. Technological external economies: When the whole industry expands, it may result in the
discovery of new technical knowledge and in accordance with that, the use of improved and better
machinery and processes than before. This will change the technical co-efficient of production
and enhance productivity of firms in the industry and reduce their cost of production.
3. Development of skilled labour: When an industry expands in an area, the labourers in that
area are well accustomed with the different productive processes and tend to learn a good deal
from experience. As a result, with the growth of an industry in an area, a pool of trained labour is
developed which has a favourable effect on the level of productivity and cost of the firms in that
industry.
4. Growth of ancillary industries: Expansion of industry encourages the growth of a number of
ancillary industries which specialise in the production and supply of raw materials, tools,

Theory of Cost
machinery, components, repair services etc. Input prices go down in a competitive market and the
benefits of it accrue to all firms in the form of reduction in cost of production. Likewise, new units
may come up for processing or recycling of the waste products of the industry. This will tend to
reduce the cost of production in general.
5. Better transportation and marketing facilities: The expansion of an industry resulting
from entry of new firms may make possible the development of an efficient transportation and
marketing network. These will greatly reduce the cost of production of the firms by avoiding the
need for establishing and running these services by themselves. Similarly, communication
systems may get modernised resulting in better and speedy information dissemination.
6. Economies of Information: Necessary information regarding technology, labour, prices and
products may be easily and cheaply made available to the firms on account of publication of
information booklets and bulletins by industry associations or by governments in public interest.
However, external economies may cease if there are certain disadvantages which may neutralise
the advantages of expansion of an industry. We call them external diseconomies. External
diseconomies are disadvantages that originate outside the firm, especially in the input markets.
An example of external diseconomies is rise in various factor prices. When an industry expands
the requirement of various factors of production, such as raw materials, capital goods, skilled
labour etc. increases. Increasing demand for inputs puts pressure on the input markets. This may
result in an increase in the prices of factors of production, especially when they are short in
supply. Moreover, too many firms in an industry at one place may also result in higher
transportation cost, marketing cost and high pollution control cost. The government may also,
through its location policy, prohibit or restrict the expansion

Price Determination in Different Market
Chapter – 10 – Price Determination in Different Market
Meaning of market:
Market refers to an arrangement where buyers and sellers come into close contact with each other for the
purpose of exchanging their goods and services. A market need not be a place or a locality where the
commodities in question are exchanged but there has to be a contact between the buyers and sellers so
that goods and services are bought and sold at an agreed price.
Communication between the buyers and sells can also take place through telephone, fax, telegram,
internet, etc. In such cases too, a market is said to exist.
Example: Tele marketing channels sells many products and buyers across the country purchases them.
The Good would be dispatched to the buyer right at their doorstep and buyer needs to pay only after the
receipt of the goods.
Thus, the essential features of a market are as follows:

- Two parties in a market i.e., buyers and sellers.
- Contact between them (either directly or indirectly)
- A product which is demanded and sold
- Price of the commodity
- Willingness and ability to buy and sell.
Types of Market:
Markets can be classified on the basis of:
- Area
- Time
- Transaction
- Volume of business
- Status of sellers
- Competition
On the basis of area

On the basis of area, the market can be classified as follows:
Local Market: A local market for a product exists when buyers and sellers of a commodity carry on
business in a particular locality or village or area where the demand and supply conditions are influenced
by local factors only.
Example: Perishable goods like fruits and vegetables and huge commodities as required in construction
like bricks and stones.
Regional Market: Semi-durable commodities that are demanded and supplied over a region have
regional market.

National Market: When commodities are demanded and supplied throughout the country, there is a
national market. This is a market for durable goods and industrial items.
Example: Wheat, rice, cotton, motor bikes.
International Market: When demand and supply conditions are influenced at the global level, there is
an international market.
Example: Gold, silver, cell phones, handicrafts.
On the basis of time

Very short period market:
During this period, the supply of goods in the market is given and fixed. The period lasts for a day or two.
So, in a very short period, the market supply is perfectly inelastic because skilled labour, capital and
organization are fixed. The price of the commodity wholly depends on the demand for the product.
Consequently, supply of the product in this period cannot be varied in response to changes in demand.
For example: market for flowers, milk, vegetables and other perishable products.
Short period market:

During the short period, the firm can adjust its output to changes in demand with the existing plant and
machinery. If demand increases, the firm will increase its output with intensive utilization of plant and
machineries. But the time is not sufficient to increase the size of the plant. If the demand declines, the
firm will adjust its output with less intensive utilization of its equipment’s. Only variable factor can be
varied, and fixed factors remain unaltered. As the time is too short, new firms cannot enter into the
industry or the existing one’s can’t leave the industry.
Long period market:

Long period may be defined as the period sufficiently long enough to enable the industry to adjust
production and supply completely to a change in demand. The time is adequate to permit new firm to
enter into the industry or existing firms to leave the industry. A total adjustment of demand and supply is
possible, as all factors of production are variable in long run. The long run normal price is the result of
long run demand and supply of the industry.
Very long period market:

During this period, there will be sufficiently long time to introduce any kind of changes in production
system. Over a long period (Secular period), new sources of supply are discovered a new methods of
production are perfected. Hence long run prices will be relatively lower. In the very long period, the
equality between supply and demand will determine the equilibrium price. Contrary to very short period,
in the very long period, supply plays a more role in determining the price.
On the basis of the nature of transaction.

Spot Market: Spot market refers to a market where goods are physically transacted on the spot.

Future market: It is a market related to those transactions that involves contract of a future date. Good
and services are exchanged at some future date as per the predetermined price.
On the basis of regulation

Regulated market:
In this market, there a vigil check on the transactions and in case of any fraudulent transaction, stringent
measures are taken. The transactions in such a market are statutorily regulated so as to put an end to
unfair practices. Such a market may be for specific products or groups of products.
Example: Stock Market
Unregulated market:
It is called as free market as there are no restrictions on the transactions.
On the basis of the volume of business

Wholesale market:
It is a market in which commodities are bought and sold in large quantities. Usually, distributors and
wholesalers buy in huge quantities and sell to retailers.
Retail Market:
It is a market in which commodities are bought and sold in small quantities. It is a market for ultimate
consumers.
On the basis of competition

Types of market structure:
The market structure depends upon the number of sellers in the market. There are different situations in
a market. Sometimes, there are large numbers of sellers, sometimes, a few and sometimes, there is only
one seller. Based on the number of sellers in a market, the market structure can be classified as follows:
Perfect competition: Under this system, many sellers sell identical products to many buyers.
Example: Food grains, vegetable market
Monopoly:
It is a type of market in which there is a single seller of a product which has no substitutes.
Example: Railways, water transport
Oligopoly:
Under this, there are a few sellers selling homogeneous or similar products to many buyers.
Example: cold drinks, pharmaceutical products.
Duopoly:
This form of market consists of only two sellers selling identical products.

Monopolistic competition:
In this type of market, a large number of sellers sell differentiated products which are close, but not
perfect substitutes, to a large number of buyers.
Example: Market for soaps and detergents, cosmetics, biscuits, ice-creams.
Perfect Monopolistic
Basis Monopoly Oligopoly
competition competition
Number of sellers Many One Many A few
Homogeneous Close but not
Differentiation No substitutes Differentiated
products perfect substitutes
Free Entry and
Entry and exit Free entry/ exit Restricted Restricted
Exit
Control over price None Absolute control Some extent Small
Small Negative
Demand curve Horizontal Negative slope Kinked curve
slope
Concept of total revenue, average revenue and marginal revenue:

Meaning of revenue:
The amount of money which the firm receives by the sale of its output in the market is known as its
revenue. It is also known as ‘Sales Receipts’. There are three types of Revenue.
Total Revenue:
Total revenue refers to the total amount of money that a firm receives from the sale of its products.
Mathematically, TR = P × Q
Where,
TR = Total Revenue
P = Price
Q = Quantity sold
Example: If the shopkeeper sold 10 boxes of chocolates each at `500/- then his total revenue would be
TR = P× Q
= 500 x 10
TR = 5,000 Rs.
Average revenue:
Average revenue is the revenue per unit of the commodity sold. It is calculated by dividing the total
revenue by the number of units sold.
AR = TR / Q
Where,
AR = Average Revenue
TR = Total Revenue

Q = Quantity
Or
AR = P × Q/Q
Where
AR = Average Revenue
P = Price
Q = Quantity sold
Or,
AR = P
Thus, average revenue means price of the product.
Example: If the seller made revenue of `25000 selling 10 sarees, then the average revenue per saree is
AR = TR / Q
= 25000 / 10
AR = Rs. 2,500/-
Marginal Revenue:
Marginal revenue is the addition made to the total revenue by selling one more unit of a commodity
MR = Change in TR ÷ Change in Q
Or,
MR = TRn – TRn-1
Where,
Q = number of units
MRn = Marginal revenue of the nth unit
TRn = Total revenue of n units
TRn-1 = Total revenue of n-1 units
Example: If the total revenue of a merchant by selling 50 mobile phones is `5,00,000 and by selling 51
mobiles phones, it is `5,20,000, then MR is
MR51 = TR at 51 – TR at 50
= 5,20,000 – 5,00,000
MR = `20,000
Relationship between Total revenue, Marginal revenue, Average revenue

Total revenue is the product of price & quantity sold.
TR = P X Q [ P = price of the commodity sold, Q = amount of product sold]
Marginal revenue is the rate of change in total revenue or, change in total revenue due to one
additional change in quantity sold.
ΔTR
MR = = TR n – TR n – 1
ΔQ

Average revenue is per unit of revenue earned or price of the commodity sold.
TR P.Q
AR = = =P
Q Q
[AR is the demand curve of firm]
The relationship between MR, AR & ep
 1 
MR = P  1 –  - - - - - - - (1)
 ep
 
In fig (1), when ep = 1, MR = 0 i.e.,
for Q = Q* Further, when ep<1,
MR = negative, i.e. for Q>Q*. Again, for e p>1, MR = positive, i.e. for Q<Q*.
A rational producer always prefers elastic portion of demand curve, i.e. for Q<Q*.

Behavioral Principle
Chapter – 11 – Behavioral Principle
- A firm should not produce at all, if total revenue from its product does not equal or exceed its total
variable cost.
- If any unit of production adds more to revenue than to cost, it will increase profits. On the other hand,
if it adds more to cost, it will decrease the profits. Profits will maximum at the point where additional
revenue from a unit equal its additional cost. Thus, marginal cost curve should cut the marginal
revenue curve from below.
Price – Output determination under different market forms

We have studied the various types of market forms in the previous unit. In this unit, we shall see how the
price and output are determined under each of the market forms.
Perfect competition market:

As the name itself suggests perfect competition refers to the market situation where the competition
among the buyers and sellers will be in the most perfect form. As a market situation it is quite distinct
from other types and exhibits certain distinct peculiarities of its own. One thing that government has to
note that perfect competition market situation is only a theoretical concept ad it is not found practically
anywhere in the world. It is only a myth.
The important characteristics of perfect competition may be listed out as follows:
Large number of buyers and sellers:

This is an important characteristic of perfect competition. Since there are large number of buyers and
sellers in the market, each buyer buys so little and each seller sells so little that none of them are in a
position to influence the price in the market. Individual seller or buyer’s contribution to the total demand
or supply is negligible. Both have to sell and buy the goods at the prevailing prices.
Hence in the perfect competition price is determined by the combined actions of all the buyers and sellers
in the market.
Existence of homogeneous product:

This characteristic implies that the product being sold by all the sellers in the market are identical from
the buyers’ point of view. The products are homogeneous/ identical in the sense that are perfect
substitutes. Hence no seller can change a price even slightly above the ruling market price. If he does so,
he will lose all his customers. This condition ensures a single/ uniform price for a particular product
throughout the market.
Free entry and free exit of firms:

This characteristics implies that there should be absolute freedom for the firms either to enter or to exit. If
the industry is making super normal profit then new firms will enter and on the other hand new firms will

quit the industry if there are losses. Hence in the perfect competition, firms can enjoy only normal profit
in the long run.
Perfect competition market:

All the sellers and buyers have the perfect knowledge of the market. The buyers and the sellers are fully
aware of the prices that are being offered and accepted in different parts of the market. Hence there is no
necessary of incurring any expenditure on publicity or advertisement. This condition ensures a single
uniform price throughout the market.
Perfect mobility of the factors of production:

Perfect competition implies perfect mobility of the factors of production in between places and
employment, which they consider profitable and highly remunerative. This perfect mobility ensures
uniform cost of production, which in turn ensures a single uniform price throughout the market.
Absence of transport cost:

This condition becomes very essential in order to have a single uniform price. A single uniform price can
not exist under perfect competition, if transport costs are taken into account.
Sometimes a distinction is observed between pure competition and perfect competition. The American
economists are particularly fond of using the term ‘Pure competition’. Many British economists prefer to
use the term ‘Perfect competition’. However the term pure competition is used in a narrow sense. The
fulfilment of the first three conditions stated above ensures pure competition, where as for perfect
competition all the six characteristics stated above need to be fulfilled.
Price and output determination under perfect competition:

Equilibrium of the industry:
Industry consists of large number of independent firms. Each such firm in the industry produces
homogeneous products. When the total output of the industry is equal to the total demand and when it
has no incentive to expand or contract production, we say that the industry is in equilibrium.
Under equilibrium condition the equilibrium price for a given product is determined by ‘Price
mechanism’. That is the interaction of the forces of demand and supply.
Determination of price:
In an open competitive market, it is the interaction between demand and supply that determines prices.
This can be shown by the following schedule and diagram.
Price of commodity X Demand for commodity X
`1 50 Units
`2 35 Units
`3 15 Units
Market demand schedule is inversely related to the price. Hence the demand curve slopes downwards
from left to right.

Market Supply Schedule:

Price of commodity X Supply of commodity X
`1 15 Units
`2 35 Units
`3 50 Units
Market supply schedule is directly related to the price. Hence the supply curve slopes upwards from left to
right.
The above two tables if put together, gives use an idea of equilibrium price and output.
Price of commodity X Supply of commodity X Demand of commodity
`1 15 Units 50 Units
At `2 the quantity demanded is equal to quantity supplied. It is called as the Equilibrium Price.
The market demand and supply curves intersect each other at point
E, where the quantity demanded is equal to quantity supplied. At
any other point, either quantity demanded is greater than quantity
supplied or quantity supplied is more than quantity demanded.
Accordingly price will move up or come down till it secures a balance
between the two opposite forces. `2 is the equilibrium price and 35
units is the equilibrium quantity.
Equilibrium of a business firm:

A business firm is said to be in equilibrium when it maximizes its profit and has no intension either to
increase or decrease its output. Business firms in a perfect competition market are ‘Price takers’. This is
because there are large number of firms in the market who are producing identical or homogeneous
product. As such these firms cannot influence the price in their individual capacity. They have to accept
the price fixed by the industry. A competitive firm thus is not a price determinator but an output adjuster.
A business firm will produce that much output, where its profits are maximum. In perfect competition
whether the output is large or small, price per unit will remain the same. It is a peculiar feature of such a
market. Prices being fixed for all the units, the firms price will be equal to average and marginal revenue
{Price = Average revenue = Marginal revenue}. This can be shown in the following table:
Average Marginal
Quantity sold Price per unit Total revenue
revenue revenue
8 2 16 2 2
10 2 20 2 2
12 2 24 2 2

14 2 28 2 2
16 2 32 2 2
Total Revenue = Price X Quantity {Total sales receipt}

Average Revenue = Total revenue / Quantity {revenue selling a single unit}
Marginal Revenue = Total revenuen-1. {n = Present unit, n-1 = previous unit} [Revenue
from selling an additional unit]
They cannot increase the price OP individually because of the fear of losing customers to other firms. They
do not try to sell the product below OP because they do not have any incentive for lowering it. They will
try to sell as much as they can at price OP. As such, P-line acts as demand curve for the firm. Thus, the
demand curve facing an individual firm in a perfectly competitive market is a horizontal one at the level of
market price set by the industry and firms have to choose that level of output which yields maximum
profit.
Profit maximization condition of perfectly Competitive firm:

Under perfectly competitive structure, due to product homogeneity, TR curve is upward linear as in fig 1.
At zero level of production. Profit = negative of F. With increase in production & sale the gap of
− Pr ofit  = C − R keeps on decreasing. For Q = Q 1

breakeven point is attained where Profit = R(Q) –
C(Q) = 0 i.e., R(Q) – C (Q) = O i.e., R(Q) = C(Q). At Q = Q*, Profit is maximized, complying the following
two conditions.
(i) Slope of TR = Slope of TC

ΔTR ΔTC
 =
ΔQ ΔQ
i.e., MR = MC [1st Order condition or necessary
condition]
ΔMC ΔMR
(ii) >
ΔQ ΔQ
i.e., Slope of MC > Slope of MR

[2nd Order condition or sufficient condition].

So equilibrium of firm can be obtained when it maximizes profit. The output which gives maximum profit
to the firm is called equilibrium output as it gives no incentive to the firm to increase or decrease output.
In fig 2a, industry determines the price & due to product homogeneity & large no of buyers & sellers firm
cannot have influence on price & quantity & therefore, firm is a price taker. On the basis of that firm sets the
selling curve AR (which is parallel to the horizontal axis & converges to MR).
A rational firm maximizes profit till that point where last rupee spent on factor adds more to revenue than
to cost i.e. profit maximises at e2 point where two conditions are complied with:
i) Slope of TR = Slope of TC
ΔTR ΔTC
 =
ΔQ ΔQ
ΔMC ΔMR
ii) >
ΔQ ΔQ
a) Perfectly competitive firm may enjoy super-normal profit: In fig 1a, industry determines the price &
each firm has to accept the determined price to find out its profit maximizing output. OP1 is the price & by
complying the conditions of equilibrium, the output is ‘OQ1’.
TR = OP1e1Q1, TC = OC1L1Q1
i.e., Profit = OP1e1Q1 – OC1L1Q1 = C1P1e1L1 [Shaded zone in Fig 1b]
P>AC i.e., P.Q>AC. Q, i.e., TR>TC, i.e., TR – TC>O, which implies Profit > 0, Super - normal
Profit
b) Perfectly competitive firm may enjoy normal profit: Due to

change in overhead cost AC may increase or due to decrease in price
by the industry super-normal profit can be decreased. There will be a

situation where firm enjoys normal profit or firm breaks even. In this case, AR curve becomes tangent
to AC. i.e P = minAC
P.Q = AC. Q, TR = TC, TR - TC = 0, Profit = 0
It is no profit & no loss Situation is known as ‘Break – Even point’.
Perfectly competitive firm incurs loss but continues

production: Normal profit is that part which is hidden in terms of
fixed cost. And perfectly competitive firm continues production until P =
min AVC
Here, P < AC > AVC i.e. P.Q. < AC. Q > AVC.Q
i.e. TR< TC > TVC
i.e. Though loss but money earned is greater than minimum variable cost.
So it sustains until P = min AVC.
AS a whole, we get five situations
a) P > min AC - Super normal profit
b) P = min AC - Normal Profit or Breakeven point
c) P < min AC > min AVC - Loss but continues production
d) P = min AVC -Shut down p pint
Short – run supply curve of perfectly competitive firm
Short – run is a period where some factors are fixed & firm operates on the same capacity point.
P = min AVC is origin of supply. For P < min Avc, firm is not able to cover the minimum variable cost &
then it will not continue production. Plotting different combinations of price & quantity supplied as P =
min AVC & P > min AVC, A, B, C points are obtained, each shows one-is-to-one relationship
between price & quantity supplied.
n n
a)  Si = 0 for
i=l
P  MinimumAVC b)  Si  0 for
i=l
P  MinimumAVC
The short-run supply curve is identical to positive portion of SMC curve.

Long run equilibrium of perfectly competitive firm
Long run is a period where all factors are variable in nature. Firm is able to change its existing capacity or
plant size. If existing firm enjoys super-normal profit, attracted by this new firms take entry & industry
supply keeps on increasing. Price decreases & this mechanism continues until super-normal profit is
wiped out.

[e5 point exhibits P = MR = AR = SAC = SMC = LMC = Min LAC]
At price = P1, perfectly competitive firm enjoys super- normal profit to the tune of C1P1e1L1 as shown in fig 1b.
Influenced by this, outsiders take entry. Industry supply curve shifts towards horizontal axis. This mechanism
continues until P = MR = AR = SAC = SMC = LMC = Min LAC. So, both industry as well as firm are in
equilibrium in long run, where firm enjoys normal profits.
Note: Perfect competition is a myth as:
i) Practically price does not remain constant.
ii) Perfect knowledge of the product or price is hardly found in the buyers & sellers.
iii) Customers may develop an irrational preference about certain product & sellers which may curtail
the perfect competition.
In real, free entry & exit are rarely found. Patents, huge investments, economies of large scale of
production etc. bound the entry

Monopoly
Chapter – 12 – Monopoly
The term ‘Monopoly’ is derived from two Greek words namely: Mono – Single and Poly – Seller. If there is
only one seller in the market, it is called as monopoly. This market situation is at the opposite pole of
perfect competition market. Monopoly can be defined as “A market situation, where there is only one
seller, who controls the entire supply of his product, which has no close substitutes”. Pure monopoly is
never found in practice. However, in public utilities such as Railway transport, water and electricity, etc.
we generally find monopoly.
Feature of the monopoly market:

A Single Seller: Monopoly means a single seller. It may be a person of a group of persons united
together in the form of cartels, pools, trusts, syndicates, associations etc., For example: OPEC
(Organization of petroleum exporting countries). This monopolist will have to complete control over the
supply of his products. Hence, monopoly market is known as “One firm industry”.
No close substitutes: There will be no close substitutes for the products of the monopolist. No other
firm in an industry will be producing a similar product. The cross elasticity of demand for the monopolist
product is zero. The consumer will not have any other alternatives under monopoly. Hence in Monopoly,
there will be absence of competition.
He is the price-maker: The Monopolist is the price-maker. He decides the price of his good or service.
Since he is the only seller and there is no close substitute. Hence, he decides the price. The consumers are
either to buy the goods and services at the price fixed by the monopolist or to go without it. A monopolist
has dual power – both a price maker and output adjuster. But he cannot exercise both these powers
simultaneously / together, as he has no control over the market demand.
Price discrimination: A monopolist in order to attract all range of consumers, practices price
discrimination. Charging different prices to the different buyers for a similar kind of product is called as
price discrimination. For example: A doctor may charge `250 for richer patients and `100 for poorer
patients for the same treatment.
Entry barriers: The entry of other firm is highly restricted in monopoly market situation. Some of the
important factors which acts as entry barriers are:
Natural factors: The nature itself has differentiated in allocating resources. For example: petroleum
products are available only in Arab countries. Jute can grow only in West Bengal.
Legal restrictions: Some companies through Law, posses the monopoly. For example: Possessing
Patents, Trademarks and Copyrights etc. The reasons to issue these is to encourage innovations and
creativity.

Monopoly
Business formation: Some business firms through forming business organizations like Cartels, Pools,
Syndicates, Trusts creates monopoly markets.
Investment factors: Some large players through their massive investments create monopoly. For
instance: TATA and MITTAL have made huge investments in the production of iron and steel. Any new
firm wants to enter in that field, will not be able to invest on par with them.
Existence of super normal profit:

In monopoly, the seller always enjoys the super-normal profit. The price charged by him will always be
more than the cost of production. Hence, he always enjoys the super-normal profit.
Monopoly power: It is the power of seller in setting the price in the market. Monopoly power is
influenced by the following characters:
- Barrier to entry
- Degree of product differentiation
- Number of competitors
Pure monopoly is rare because it is abstract to say that a thing has no substitutes. Generally, everything
has a substitute – may be close or remote.
Types of monopoly:
Perfect monopoly: It is the kind of monopoly where only one seller operates in the market with having
no close substitutes. Here there is absolutely no competition. This type of monopoly in real market is very
rare.
Simple monopoly: Here also single seller operates through the market with no close substitutes. But,
some remote substitutes can be found in the market. Here, seller will have very small competition.
Discriminating monopoly: Here the monopolist charges different price to different consumers for the
same product. It prevails in more than one market.
Monopolist’s Revenue Curves:

Since the monopolist firm is assumed to be the only producer of a particular product, its demand curve
also shows the quantity that the monopolist will be able to sell.
Example: XYZ company is the single producer of a product, it faces the entire market demand and hence
the downwards sloping demand curve. i.e. in order to increase the sales, a firm is reducing its price.
It can be better understood through the following table:
Quantity Price = AR Total Revenue Marginal Revenue
0 11 0 0
1 10 10 10
2 9 18 8
3 8 24 6

Monopoly
4 7 28 4
5 6 30 2
6 5 30 0
7 4 28 -2
8 3 24 -4
- In order to increase the sales, a firm is reducing its price.

Hence AR falls.
- As a result of fall in price, total revenue increases but at a
diminishing rate.
- Total Revenue will be highest when Marginal revenue is zero.
- Total Revenue falls when Marginal revenue becomes negative.
- Average Revenue and Marginal Revenue both declines but fall
in Marginal revenue is greater than fall in Average Revenue.
- The Average Revenue curve of the firm and the demand curve
of the buyer is one and same. It slopes downwards from left to
right indicating that the seller can sell larger quantities only at reduced prices.
- The Marginal Revenue curve is similar to that of Average Revenue curve. But Marginal revenue is less
than Average Revenue. It lies below the Average Revenue curve, which is half way between Average
revenue curve and the Y axis, i.e., it cuts the horizontal line between Y axis and AR into two equal
parts.
- Average Revenue cannot be zero but Marginal Revenue can be zero or even negative.
- If the seller wishes to charge `11, he can’t sell any unit alternatively, if he wishes to sell 7 units, his
price can’t be higher than `4.
Profit maximizing conditions of monopoly

Sole objective is to maximize profit.
In monopoly, price is variable and therefore, total revenue curve is dome-
shaped. Profit maximizing conditions can be obtained both by ‘TR – TC’
approach & by ‘Marginalistic View’.
In fig 1, profit at zero level of production is - ‘F’ (tune of fixed cost). With
increase in production and sale monopolist decreases gap between cost &
revenue & for Q = Q1, it breaks even (here profit = TR = TC = 0).
Profit is maximized where two conditions are satisfied:

(i) Slope of TR = Slope of TC
ΔTR ΔTC
 =
ΔQ ΔQ
i.e., MR = MC [1st Order condition or necessary conditions]

Monopoly
ΔMC ΔMR
(ii) >
ΔQ ΔQ
i.e., Slope of MC > Slope of MR
[ 2nd Order condition or sufficient condition].
The marginalist principle can be obtained in fig2 where equilibrium is attained at ‘F’ point, complying the
same conditions. Monopolist’s demand curve or AR curve, P = a – bQ
2
i.e., TR = P.Q = aQ – bQ MR = a – 2bQ. MR is downward sloped with slope – 2b’ & profit maximizing
point is attained where MC cuts MR from below.
Step – 2: Different short run equilibrium of monopoly

Complying the two conditions MR = MC & slope of MC>Slope of MR we can find out different situations
of monopoly where it may or may not enjoy profit.
a) Monopolist with abnormal profit:
Monopolist may earn super-normal profit or abnormal profit if
P= AR > AC
 P. Q= AR.Q> AC.Q
 TR – TC > O
 Profit > O.
In fig 1 at Q = Q1 , price is greater than AC & the amount of super-normal
profit earned by monopolist is C1P1L1S1, as in Fig 1.
b) Monopolist may earn normal profit:

Monopolist may face the situation in short run, where it breaks even. In
fig. 2 equilibrium is attained at P = AC,
 P.Q = AC. Q  TR – TC = O  Profit is zero i.e., its total revenue is
equal to summation of fixed & variable cost, as in fig 2.
c) Monopolist may incur loss but continues production:

In short run, monopolist may outflow loss where the total revenue
earned is not sufficient to cover both fixed & variable cost. i.e., P<AC
 TR < TC  Profit < O. But it continues production as it covers
average variable cost, and it would go for zero production when P <
AVC.

Monopoly
Step – 3: Long – run equilibrium of monopolist

Long run is a period long enough to allow the monopolist to adjust
his plant size or use his existing plant at any level that maximises
profit. Since there are barriers to entry, new firms cannot take
entry & in the absence of competition, the monopolist need not
produce at the optimal level. He can make equilibrium at any point
of LAC. A to B shows under utilised portion, B exhibits full-
utilised point & ‘BC’ or upward LAC displays over-utilised
portion.
In fig2, longrun equilibrium is attained at ‘e’ point (which is

under utilised portion of LA(c). Conditions of equilibrium. i)
SMC (= LM(c) = MR ii) Slope of SMC (= slope of LM(c) >
slope of MR. He will not stay in business if he makes losses in
the long run. The plant site & degree of utilisation will depend
upon the Market Demand.
Step – 4: Price Discriminating Monopoly

Price discrimination exists when the same product is sold at different prices to different consumers.
We take the case of identical product, produced at the same cost, which is sold at different prices,
depending on the preference of buyers, their income, their location & the case of availability of
substitutes. These factors give rise to demand curves with different elasticities in the various sectors of
the market of a firm. Different examples are:
a) Doctors charge lower price from poor & higher from rich.
b) Domestic electric meter has one charge whereas commercial meter has different charge.
c) Universities charge higher tution fees for evening class for working students than day class from
general students.
d) Telephone bill has price-blocking as per unit consumed.
e) A higher price for vegetables sold in posh localities than in general.
f) Railways separate high – value or relatively small – bulk commodities which can bear higher
freight charges from other categories of goods.
g) Some countries dump goods at low prices in foreign markets to capture them
h) A lower subscription is charged from student readers in case of certain journals.
Objectives of price discrimination:

− To earn maximum profit
− To dispose off surplus stock
− To enjoy economies of scale
− To capture foreign markets

Monopoly
− To secure equity through pricing
The necessary conditions of price-Discriminating monopolist are:

i) The market must be divided into sub-markets with different prices
ii) There must be effective separation of the sub-markets, so that no reselling can take place.
iii) The seller should have some control over then supply of his product i.e. monopoly power in
some from is necessary to discriminate price.
b) The profitability condition is: The price elasticity for the two different markets should be
different so that prices would be charged different.
There exists three degree of discrimination.
a) 3rd degree discrimination
b) 2nd degree discrimination
c) 1st degree discrimination
For 3rd degree discrimination, monopolist charges two prices in two sub-markets.
Due to difference in elasticities marginal revenues are dissimilar in two sub-markets. In

fig 3 (= MR1 + MR2). Equilibrium output produced by price-discriminating monopolist is OQm
& is distributed to two sub-markets in such a manner that less elastic market charges higher price
& more elastic market charges lower price.
Here MR1 = MR2 , which implies the followings
1 1
P1 (1 - ) = P2 (1 - )
e1 e2
1
(1 -
)
P1 e2
 =
P2 (1 - 1 )
e1
1)When → e 1 = e 2 → P1 = P2 → (NoDiscrimination)
2)When → e1 > e 2 → P1 < P2 → (Profitable)
3)When → e1 < e 2 → P1 > P2 → (Profitable)

Monopoly
So, price discriminating monopolist exercises ‘3rd degree discrimination as he could charge more
price in less elastic demand & lower price in more elastic demand.
Further, ‘3’ discriminations can be shown by consumer’s surplus.
a) In 3rd degree discrimination we can observe two prices are charged & as a result, part of
consumer’s surplus is wiped out.
b) In 2nd degree discrimination we can observe that more than two prices are charged
commonly known as ‘price blocking’. More consumer’s surplus can be extracted.
c) In ‘1st degree discrimination’, monopolist charges ‘Reservation price’, or ‘Take-it-or-leave-it’
price i.e. consumers do not have any other alternate but to consume at that determined price.
So monopolist is able to wipe out entire consumer’s surplus.
These ‘3’ situations can be shown by following figures

Monopolistically Competitive Market
Chapter – 13 – Monopolistically Competitive Market
Concepts & features

The assumption of a homogeneous product & single product do not always fit the real world. Advertising
& other selling activities, practices widely used by businessmen, could not be explained either by pure
competition or by monopoly. Firms can charge different prices as per different cost which results in
‘imperfect competition’. The monopolistic competition is the important part of ‘imperfect
competition’. The idea of monopolistic competition was popularized by Prof Edwin H. Chamberlin
(1933) ‘The Theory of Monopolistic Competition’: ‘A Reorientation of the Theory of value’.
The features of monopolistic competition are.

1) There are large number of buyers & sellers
2) Freedom of entry & exit
3) The principal goal is to maximize profits.
4) Firms also try to compete on the basis other than price ‘known as
‘non-price competition’ e.g., advertising, product development,
after sales service, better distribution arrangement etc.
5) The products sold by the sellers are differentiated, yet they are
close substitutes. i.e., in a monopolistic competitive market, the products of different sellers are
differentiated on the basis of brands. These brands are generally so much advertised that a consumer
starts associating the brand with a particular manufacturer and type of brand loyalty is developed.
Product differentiation gives rise to an element of monopoly to the producer over the competing
product. As such, the producer of an individual brand can raise the price of his product knowing that
he will not lose all the customers to other brands because of absence of perfect substitutability. Due to
product differentiation, we get, unlike any other market two selling curve Perceived or Planned
selling curve or demand curve & Actual or Market
demand curve. Perceived or planned demand curve is flatter in nature, i.e., eP>1 where selling is
responsive to change in price & ‘Actual dd curve’ is steeper in nature which is obtained by the effect of
market.
Step – 2: Short – run equilibrium of monopolistically

competitive firm
During short-run firm operates within the existing capacity. The objective
is to maximize profit, which can be obtained at point ‘e’ where three
conditions are complied with:
1) MC = MR
2) Slope of MC > Slope of MR
3) Perceived demand curve intersects Actual demand curve
at equilibrium price (L1)

Monopolistically Competitive Market
In this figure we get ‘e’ as equilibrium point where the above three conditions are satisfied. The
monopolistically competitive firm fixes equilibrium price OP 1 where the total revenue = OP1L1Q1 and
total cost = OP1L2Q1.
The total profit earned by monopolistically competitive firm is C1P1L1L2.
Long run equilibrium of monopolistically competitive firm

During long run period, as per Prof Chamberlin, both ‘new entry’ & price competition’ take place.
As a result, the same quantity would be available at a lower price. Thus, the perceived demand curve shifts
to the downward direction. If price competition continues, then a situation may arise when the perceived
demand curve falls below the LAC (i.e., LAC>P), & each firm would incur loss. Hence, some loss making
firms would leave the market & actual market-share of the remaining firms will rise. Hence, at a given
price, the remaining firms begin to perceive that they can sell more than before. So, perceived demand
curve would also shift upward. This mechanism would continue until equilibrium reaches at ‘e’ point
where monopolistically competitive firm enjoys normal profit & the long-run equilibrium conditions
are:
1) SMC = LMC = MR
2) Slope of SMC = Slope of LMC > Slope of MR
3) Perceived dd curve intersects actual dd curve at
equilibrium price
4) 4.Equilibrium is attained with excess capacity.

Oligopoly
Chapter – 14 – Oligopoly
Oligopoly is an important form of imperfect competition. It is often described as ‘competition among a

few’. When there are a few sellers in a market, oligopoly is said to exist.
Prof. Stigler defines oligopoly as “that situation in which a firm bases its market policy in part on the
expected behaviour of a few close rivals”.
Example: Cold drink industry, automobile industry
Types of oligopoly:
Pure/perfect and differentiated/imperfect oligopolies. Pure oligopoly is when the product is homogeneous
in nature.
Example: Aluminium industry
Differentiated or imperfect oligopoly is based on product differentiation. Example – automobile industry.
Open and closed oligopolies:

In open oligopoly, there is free entry and exit firms. Whereas, in closed oligopoly, entry is restricted.
Collusive and competitive oligopolies:

When firms of an oligopolistic market come to a common understanding or act in collusion with each
other in fixing price and output, it is collusive oligopoly. On the other hand, when there is a lack of
understanding between the firms and they compete with each other, it is known as competitive oligopoly.
Partial or full oligopolies:

When there is one dominating leader firm, it would be the price leader and is known as partial oligopoly.
In full oligopoly, the market will be conspicuous by the absence of price leadership.
Partial or full oligopolies:

When there is one dominating leader firm, it would be the price leader and is known as partial oligopoly.
In full oligopoly, the market will be conspicuous by the absence of price leadership.
Characteristics of oligopoly:
A few sellers: Oligopoly comprises of a few sellers. It is different form monopoly which has one seller,
monopolistic competition which has many sellers and perfect competition which has many sellers and
perfect competition which has innumerable sellers.
Interdependence: There exists a close interdependence among firms. A single firm cannot take
independent decisions without considering the rivals’ reactions. This is because, if the oligopolist lowers
the price, his rivals will also lower their prices. On the other hand, if he increases the price, the rivals will
not, and therefore, he will lose customers.
Selling costs and advertisement: Under oligopoly, rival firms employ aggressive and defensive
marketing weapons. The purpose of this is to gain a greater share in the market or to maximize its profits

Oligopoly
and minimize its losses. Firms incur expenditure on advertising a sales promotion measures. The rivalry
is related to non-price factors only. The objective of an oligopolist is not necessarily to maximize profit. It
is to capture a larger part in the share of the market.
Group behaviour: Firms may realise the importance of mutual cooperation. They will have a tendency
of collusion. At the same time, the desire of each firm to earn maximum profit may encourage competitive
spirit. Thus, co-operative and collusive trend as well as competitive trend would prevail in an oligopolistic
market.
Price rigidity: Another important feature of oligopoly is price rigidity. Price is sticky or rigid at the
prevailing level due to the fear of reaction from the rival firms. If an oligopolistic firm lowers its price, the
price reduction will be followed by the rival firms. As a result, the firm loses its customers. Expecting the
same kind of reaction, if the oligopolistic firm raises the price, the rival firms will not follow. This would
result in losing customers. In both ways, the firm would face difficulties. Hence, the price is rigid.
Price & Output determination in oligopoly market

There are different types of oligopolistic behaviour, & different formulation & different famous models are
provided by eminent economists like Prof Augustin Cournot
(Model of zero conjectural variation), Prof Stackelbarg
(Output leadership model), Prof Fellner (Cartel or
‘Fraudulent secret understanding), Prof Nash (By Game
theoretic Approach) Prof Paul. A Sweezy (Kinked demand
Model).
Our, Scope is ‘kinked demand model’. Prof Paul A. Sweezy, in “Demand Under Conditions of
‘Oligopoly’ Journal of Political Economy has given the concept of ‘kinked demand model’ In this
case, product is homogeneous & each oligopolist believes that if he lowers the
price, his rivals will also lower the prices & that if he raises the price, they will
maintain their prices at the existing level. So price remaining ‘sticky’ at a
‘determined level’ (OPe) in fig 1 & the AR has two slopes AL (e p>1, Price
unmatched zone) & LAR (Price matched zone) eP<1.
Due to ‘kinked’ AR curve, MR is discontinuous in nature & length of

discontinuity depends on difference in elasticities at point ‘L’.
In fig (2) at ‘L’ pt, MR is discontinuous to the tune of ‘AB’.
Equilibrium of oligopoly under kinked demand model can be obtained by the combination
of MR, AR, SAC & SMC, as in fig (3).

Oligopoly
The equilibrium is obtained at ‘e1’ point where, SMC curve passes
through the discontinuous portion of MR. So profit is maximized if

quantity is, fixed at OQe, i.e., as per rigid price OPe.
In fig (3), oligopolist enjoys super-normal profit to the tune of

C1PeL1S1 as price is fixed at ‘kink’ situation. That is why kinked
demand model is also known as ‘Rigid price’ or ‘Sticky Price’

model.

Business Cycle
Chapter – 15 – Business Cycle
Introduction
The rhythmic fluctuations in aggregate economic activity that an economy experiences over a period of
time are called business cycles or trade cycles. A trade cycle is composed of periods of good trade
characterised by rising prices and low unemployment percentage, altering with periods of bad trade
characterised by falling prices and high unemployment percentages. In other words, business cycle refers
to alternate expansion and contraction of overall business activity as manifested in fluctuations in
measures of aggregate economic activity, such as, gross national product, employment and income.
A noteworthy characteristic of these economic fluctuations is that they are recurrent and occur
periodically. That is, they occur again and again but not always at regular intervals, nor are they of the
same length. It has been observed that some business cycles have been long, lasting for several years while
others have been short ending in two to three years.
Phases of Business Cycle

We have seen above that business cycles or the periodic booms and slumps in economic activities reflect
the upward and downward movements in economic variables. A typical business cycle has four distinct
phases. These are:
1. Expansion (also called Boom or Upswing)
2. Peak or boom or Prosperity
3. Contraction (also called Downswing or Recession)
4. Trough or Depression
Figure1 Phases of Business Cycle
Expansion: The expansion phase is characterised by increase in national output, employment, aggregate
demand, capital and consumer expenditure, sales, profits, rising stock prices and bank credit. This state
continues till there is full employment of resources and production is at its maximum possible level using
the available productive resources. There is altogether increasing prosperity and people enjoy high

Business Cycle
standard of living due to high levels of consumer spending, business confidence, production, factor
incomes, profits and investment. The growth rate eventually slows down and reaches its peak.
Peak: The term peak refers to the top or the highest point of the business cycle. In the later stages of
expansion, inputs are difficult to find as they are short of their demand and therefore input prices
increase. Output prices also rise rapidly leading to increased cost of living and greater strain on fixed
income earners. Consumers begin to review their consumption expenditure on housing, durable goods
etc. Actual demand stagnates.
Contraction: The economy cannot continue to grow endlessly. As mentioned above, once peak is
reached, increase in demand is halted and starts decreasing in certain sectors. During contraction, there is
fall in the levels of investment and employment. Producers do not instantaneously recognise the pulse of
the economy and continue anticipating higher levels of demand, and therefore, maintain their existing
levels of investment and production. The consequence is a discrepancy or mismatch between demand and
supply. Supply far exceeds demand. Initially, this happens only in few sectors and at a slow pace, but
rapidly spreads to all sectors. Producers being aware of the fact that they have indulged in excessive
investment and over production, respond by holding back future investment plans, cancellation and
stoppage of orders for equipments and all types of inputs including labour. This in turn generates a chain
of reactions in the input markets and producers of capital goods and raw materials in turn respond by
cancelling and curtailing their orders. This is the turning point and the beginning of recession.
Decrease in input demand pulls input prices down; incomes of wage and interest earners gradually
decline resulting in decreased demand for goods and services. Producers lower their prices in order to
dispose off their inventories and for meeting their financial obligations. Consumers, in their turn, expect
further decreases in prices and postpone their purchases. This process gathers speed and recession
becomes severe.
Trough and Depression: Depression is the severe form of recession and is characterized by extremely
sluggish economic activities. During this phase of the business cycle, growth rate becomes negative and
the level of national income and expenditure declines rapidly. Demand for products and services
decreases, prices are at their lowest and decline rapidly forcing firms to shutdown several production
facilities. Since companies are unable to sustain their work force, there is mounting unemployment which
leaves the consumers with very little disposable income. A typical feature of depression is the fall in the
interest rate. With lower rate of interest, people’s demand for holding liquid money (i.e. in cash)
increases.
Recovery: The economy cannot continue to contract endlessly. It reaches the lowest level of economic
activity called trough and then starts recovering. Trough generally lasts for some time and marks the end
of pessimism and the beginning of optimism. This reverses the process. The process of reversal is initially
felt in the labour market. The spurring of investment causes recovery of the economy. This acts as a
turning point from depression to expansion. As investment rises, production increases, employment

Business Cycle
improves, income improves and consumers begin to increase their expenditure. Increased spending
causes increased aggregate demand and in order to fulfil the demand more goods and services are
produced.
Examples of Business Cycles

Great Depression of 1930: The world economy suffered the longest, deepest, and the most widespread
depression of the 20th century during 1930s. It started in the US and became worldwide. The global GDP
fell by around 15% between 1929 and 1932. Production, employment and income fell. As far as the causes
of Great Depression are concerned, there is difference of opinion amongst economists. While British
economist John Maynard Keynes regarded lower aggregate expenditures in the economy to be the cause
of massive decline in income and employment, monetarists opined that the Great Depression was caused
by the banking crisis and low money supply. Many other economists blamed deflation, over-
indebtedness, lower profits and pessimism to be the main causes of Great Depression. Whatever may be
the cause of the depression, it caused wide spread distress in the world as production, employment,
income and expenditure fell. The economies of the world began recovering in 1933. Increased money
supply, huge international inflow of gold, increased governments’ spending due to World War II etc., were
some of the factors which helped economies slowly come out of recession and enter the phase of
expansion and upturn.
Information Technology bubble burst of 2000: Information Technology (IT) bubble or Dot.Com
bubble roughly covered the period 1997-2000. During this period, many new Internet–based companies
(commonly referred as dot-com companies) were started. The low interest rates in 1998–99 encouraged
the start-up internet companies to borrow from the markets. Due to rapid growth of internet and seeing
vast scope in this area, venture capitalists invested huge amount in these companies. Due to over-
optimism in the market, investors were less cautious. There was a great rise in their stock prices and in
general, it was noticed, that companies could cause their stock prices to increase by simply adding an "e-"
prefix to their name or a ".com" to the end. These companies offered their services or end products for free
with the expectation that they could build enough brand awareness to charge profitable rates for their
services later. As a result, these companies saw high growth and a type of bubble developed. The "growth
over profits" mentality led some companies to engage in lavish internal spending, such as elaborate
business facilities. These companies could not sustain long. The collapse of the bubble took place during
1999–2001. Many dot-com companies ran out of capital and were acquired or liquidated. Nearly half of
the dot –com companies were either shut down or were taken over by other companies. Stock markets
crashed and slowly the economies began feeling the downturn in their economic activities.
Recent Example of Business Cycle: Global Economic Crisis (2008-09): The recent global economic
crisis owes its origin to US financial markets. Following Information Technology bubble burst of 2000,
the US economy went into recession. In order to take the economy out of recession, the US Federal
Reserve (the Central Bank of US) reduced the rate of interest. This led to large liquidity or money supply
with the banks. With lower interest rates, credit became cheaper and the households, even with low
Business Cycle
creditworthiness, began to buy houses in increasing numbers. Increased demand for houses led to
increased prices for them. The rising prices of housing led both households and banks to believe that
prices would continue to rise. Excess liquidity with banks and availability of new financial instruments led
banks to lend without checking the creditworthiness of borrowers. Loans were given even to sub-prime
households and also to those persons who had no income or assets. Houses were built in excess during the
boom period and due to their oversupply in the market, house prices began to decline in 2006. Housing
bubble got burst in the second half of 2007. With fall in prices of houses which were held as mortgage, the
sub - prime households started defaulting on a large scale in paying off their instalments. This caused
huge losses to the banks. Losses in banks and other financial institutions had a chain effect and soon the
whole US economy and the world economy at large felt its impact.
Features of Business Cycles

Different business cycles differ in duration and intensity. But there are certain features which they
commonly exhibit:
a) Business cycles occur periodically although they do not exhibit the same regularity. The duration of
these cycles vary. The intensity of fluctuations also varies.
b) Business cycles have distinct phases of expansion, peak, contraction and trough. These phases seldom
display smoothness and regularity. The length of each phase is also not definite.
c) Business cycles generally originate in free market economies. They are pervasive as well. Disturbances
in one or more sectors get easily transmitted to all other sectors.
d) Although all sectors are adversely affected by business cycles, some sectors such as capital goods
industries, durable consumer goods industry etc, are disproportionately affected. Moreover,
compared to agricultural sector, the industrials sector is more prone to the adverse effects of trade
cycles.
e) Business cycles are exceedingly complex phenomena; they do not have uniform characteristics and
causes. They are caused by varying factors. Therefore, it is difficult to make an accurate prediction of
trade cycles before their occurrence.
f) Repercussions of business cycles get simultaneously felt on nearly all economic variables viz. output,
employment, investment, consumption, interest, trade and price levels.
g) Business cycles are contagious and are international in character. They begin in one country and
mostly spread to other countries through trade relations. For example, the great depression of 1930s
in the USA and Great Britain affected almost all the countries, especially the capitalist countries of the
world.
h) Business cycles have serious consequences on the wellbeing of the society.
Causes of Business Cycles

Business Cycles may occur due to external causes or internal causes or a combination of both. The 2001
recession was preceded by an absolute mania in dotcom and technology stocks, while the 2007-09
recession followed a period of unprecedented speculation in the U.S. housing market.

Business Cycle
Internal Causes: The Internal causes or endogenous factors which may lead to boom or bust are:
Fluctuations in Effective Demand: According to Keynes, fluctuations in economic activities are due
to fluctuations in aggregate effective demand (Effective demand refers to the willingness and ability of
consumers to purchase goods at different prices). In a free market economy, where maximization of
profits is the aim of businesses, a higher level of aggregate demand will induce businessmen to produce
more. As a result, there will be more output, income and employment.
Thus, increase in aggregate effective demand causes conditions of expansion or boom and decrease in
aggregate effective demand causes conditions of recession or depression. (You will study about these
concepts in detail at Intermediate level in Economics for Finance.
Fluctuations in Investment: According to some economists, fluctuations in investments are the prime
cause of business cycles. Investment spending is considered to be the most volatile component of the
aggregate demand. Investments fluctuate quite often because of changes in the profit expectations of
entrepreneurs. New inventions may cause entrepreneurs to increase investments in projects which are
cost-efficient or more profit inducing. Or investment may rise when the rate of interest is low in the
economy. Increases in investment shift the aggregate demand to the right, leading to an economic
expansion. Decreases in investment have the opposite effect.
Variations in government spending: Fluctuations in government spending with its impact on

aggregate economic activity result in business fluctuations. Government spending, especially during and
after wars, has destabilizing effects on the economy.
Macroeconomic policies: Macroeconomic policies (monetary and fiscal policies) also cause business
cycles. Expansionary policies, such as increased government spending and/or tax cuts, are the most
common method of boosting aggregate demand. This results in booms. Similarly, softening of interest
rates, often motivated by political motives, leads to inflationary effects and decline in unemployment
rates. Anti- inflationary measures, such as reduction in government spending, increase in taxes and
interest rates cause a downward pressure on the aggregate demand and the economy slows down. At
times, such slowdowns may be drastic, showing negative growth rates and may ultimately end up in
recession.
Money Supply: According to Hawtrey, trade cycle is a purely monetary phenomenon. Unplanned
changes in supply of money may cause business fluctuation in an economy. An increase in the supply of
money causes expansion in aggregate demand and in economic activities. However, excessive increase of
credit and money also set off inflation in the economy. Capital is easily available, and therefore consumers
and businesses alike can borrow at low rates. This stimulates more demand, creating a virtuous circle of
prosperity. On the other hand, decrease in the supply of money may reverse the process and initiate
recession in the economy.

Business Cycle
Psychological factors: According to Pigou, modern business activities are based on the anticipations of
business community and are affected by waves of optimism or pessimism. Business fluctuations are the
outcome of these psychological states of mind of businessmen. If entrepreneurs are optimistic about
future market conditions, they make investments, and as a result, the expansionary phase may begin. The
opposite happens when entrepreneurs are pessimistic about future market conditions. Investors tend to
restrict their investments. With reduced investments, employment, income and consumption also take a
downturn and the economy faces contraction in economic activities.
External Causes: The External causes or exogenous factors which may lead to boom or bust are:
Wars: During war times, production of war goods, like weapons and arms etc., increases and most of the
resources of the country are diverted for their production. This affects the production of other goods -
capital and consumer goods. Fall in production causes fall in income, profits and employment. This
creates contraction in economic activity and may trigger downturn in business cycle.
Post War Reconstruction: After war, the country begins to reconstruct itself. Houses, roads, bridges
etc. are built and economic activity begins to pick up. All these activities push up effective demand due to
which output, employment and income go up.
Technology shocks: Growing technology enables production of new and better products and services.
These products generally require huge investments for new technology adoption. This leads to expansion
of employment, income and profits etc. and give a boost to the economy. For example, due to the advent
of mobile phones, the telecom industry underwent a boom and there was expansion of production,
employment, income and profits.
Natural Factors: Weather cycles cause fluctuations in agricultural output which in turn cause instability
in the economies, especially those economies which are mainly agrarian. In the years when there are
draughts or excessive floods, agricultural output is badly affected. With reduced agricultural output,
incomes of farmers fall and therefore they reduce their demand for industrial goods. Reduced production
of food products also pushes up their prices and thus reduces the income available for buying industrial
goods. Reduced demand for industrial products may cause industrial recession.
Population growth: If the growth rate of population is higher than the rate of economic growth, there
will be lesser savings in the economy. Fewer saving will reduce investment and as a result, income and
employment will also be less. With lesser employment and income, the effective demand will be less, and
overall, there will be slowdown in economic activities.
Relevance of Business Cycles

Business cycles affect all aspects of an economy. Understanding the business cycle is important for
businesses of all types as they affect the demand for their products and in turn their profits which
ultimately determines whether a business is successful or not. Knowledge regarding business cycles and
their inherent characteristics is important for a businessman to frame appropriate policies. For example,
Business Cycle
the period of prosperity opens up new and superior opportunities for investment, employment and
production and thereby promotes business. In contrast, a period of recession or depression reduces
business opportunities and profits. A profit maximising firm has to consider the nature of the economic
environment while making business decisions, especially those related to forward planning.
Business cycles have tremendous influence on business decisions. The stage of the business cycle is crucial
while making managerial decisions regarding expansion or down-sizing. Businesses have to
advantageously respond to the need to alter production levels relative to demand. Different phases of the
cycle require fluctuating levels of input use, especially labour input. Firms should exercise the capability
to expand or rationalize production operations so as to suit the stage of the business cycle. Business
managers need to work effectively to arrive at sound strategic decisions in complex times across the whole
business cycle, managing through boom, downturn, recession and recovery.
Economy-wide trends can have significant impact on all types businesses. However, it should be kept in
mind that business cycles do not affect all sectors uniformly. Some businesses are more vulnerable to
changes in the business cycle than others. Businesses whose fortunes are closely linked to the rate of
economic growth are referred to as "cyclical" businesses. These include fashion retailers, electrical goods,
house-builders, restaurants, advertising, overseas tour operators, construction and other infrastructure
firms. During a boom, such businesses see a strong demand for their products but during a slump, they
usually suffer a sharp drop in demand. It may also happen that some businesses actually benefit from an
economic down turn. This happens when their products are perceived by customers as representing good
value for money, or a cheaper alternative compared to more expensive products.
Overcoming the effects of economic downturns and recessions is one of the major challenges of sustaining
a business in the long-term. The phase of the business cycle is important for a new business to decide on
entry into the market. The stage of business cycle is also an important determinant of the success of a new
product launch. Surviving the sluggish business cycles require businesses to plan and set policies with
respect to product, prices and promotion.

Business and Commercial
Knowledge
Business and Commercial Knowledge – An Introduction
Chapter – 01 – Business and Commercial Knowledge – An

Introduction
Introduction
Humans work to earn an income, spend (and also save) the income for the sustenance of self and family
and to do so we engage socially. Business and commerce comprises of an array of activities for production,
distribution and exchange (buying and selling) of goods and services. Now, whether we work as
employees or free lancers or as entrepreneurs, our world of work is made of business organisations. And
even if we do not work for a business organisation, much of our spending takes place buying various
goods and services that have been produced or provided by business organisations. In all probability,
most of the goods that we buy, we do not buy these straight from the producer, but indirectly from second,
third or even later intermediary or reseller.
Domains Of Business and Commercial Knowledge (BCK)

Oxford online dictionary defines the term ‘domain’ as ‘a specified sphere of knowledge. Domain in simpler
terms means, a subject. Following that, the sphere of knowledge/ the subject about business and
commerce is vast, eclectic and ever evolving and expanding.
BCK is Vast: The universe of business is vast. It has numerous activities, all interrelated and spread in
wide areas.
Take for example the range of business activities. It includes manufacturing, trading and all sorts of
services.
BCK is Eclectic (Multidisciplinary): BCK is eclectic i.e., it derives from various disciplines e.g.,
marketing, accounting & finance, operations, human behaviour (psychology, sociology), laws, economics,
ethics etc. Business is not just about selling a product or service; it includes various fields of study within
itself.
BCK adapts the vocabulary of these diverse fields like military and even unrelated fields as biology!
BCK Vocabulary Original Discipline Description
Strategy Military Just as the armies at war develop strategies
to outsmart each other, likewise businesses
draw their strategies to beat their
competitors.
Logistics Military In military, logistics means movement of
troops, military supplies and equipment. In
business it implies the detailed coordination
of a complex operation involving many
people, facilities, or supplies. Typically,

inbound logistics imply the movement of

inputs and the outbound logistics means the
movement of outputs.
Bulls Biology (Animal Psychology) Because bulls throw up their enemies in
combat, like wise bulls imply the stock
market players who raise the stock prices
through building a buy pressure. Being
bullish implies optimistic expectations that
the economy/market/business is likely to do
well
Bears Biology (Animal Psychology) Bears have the tendency to embrace and
push downwards their enemies in a combat.
Thus, bears are the stock market players that
have pessimistic expectations.
BCK is Ever Evolving and Expanding: BCK domains are ever evolving and expanding. An important
aspect of this evolution is the decline and demise of old businesses and old ways of doing business and the
emergence of new businesses and newer ways of doing the businesses. These changes may be aided or
impeded by changes in the technology, society, economy, etc. collectively referred to as business
environment.
Importance Of BCK For Chartered Accountants

The Chartered Accountants are the custodians of a nation’s resources. They are responsible for putting in
place a credible system of truthful and fair accounting and reporting of the society’s resources, their
deployment and utilisation. Business and commercial sector comprises a large share of their
work arena. Each business has its own peculiarities and associated variations in notions of
product, inventory, revenue, profit, etc.
Understanding business and its complexities is of utmost importance to work as a valuable contributor to
the economy in any form of service a Chartered Accountant wishes to work. The Chartered
Accountants shall be able to conduct the audit diligently, take decisions, strategize, make
plans and budgets, and work closely with various business teams. Only when they
understand the nuances of the business, they can add value to their work.
Human Activities- Economic and Non-Economic

Economic Activities: Activities conducted to earn a living. Attributed by livelihood motive. Driven
by rationality and self-interest.
Non-Economic Activities: Activities driven by a variety of motives viz., concern for fellow beings,
affection & love for family, passion about some hobby or cause such as animal rights, forest/ nature

conservation, underprivileged youth, etc. Driven by emotional or sentimental reasons or altruism

i.e., selfless concern for the welfare of others.
Non-economic activities have an economic dimension, as time, money and material resources
are needed to make these happen - both in terms of large initial expenditure as well as their day today
operations and management. However, neither the investors nor those who volunteer to work in these
activities seek any material gain or regular income from these activities. In fact, the motive or the
intent behind any activities is such a singularly strong determinant of the economic and
non-economic dichotomy. E.g.: Cooking for one’s family vs. cooking for others in exchange
of money.
Distinguishing Characteristics of Economic Activities

Economic activities are income generating:
Income earned by rendering personal time, physical and psychic energy, in other words through one’s
sweat and intellect is called earned income.
The income earned by letting out one’s property is called property income.
“Factors of production’ are labour, land, capital and entrepreneurship. The corresponding income
characterisations in exchange of or compensation for their factor services are wages (& salaries), rent,
interest and profit. Income can be earned in cash and kind too. The factors earn according to
their contribution to the production. In other words, income is generated in the process of
production.
Economic activities are productive:

Production essentially is the process of creation of need satisfying goods and services. As a corollary,
earning a livelihood implies participation in the process of production. Production here refers
to both goods and services.
Activities such hunting the animals and gathering the fruit and firewood in earlier times is an example
of productive activities. Farming, crafts, generation of electricity, manufacture of automobiles and
writing of software programs, teaching, medicine, law, accountancy are all productive
activities.
Production may be done either for subsistence i.e., self-consumption or for market.
Production represents the supply side of economics, more so if it is for selling.
It includes entire range of activities and occupations devoted to delivering the products/services produced
to the markets - transport, warehousing, intermediaries (e.g., wholesalers/ dealers, retailers etc.) and so
on.

Even consumption is an economic activity:

Consumption represents the demand side of economics, i.e., the goods & services on which the
people will spend their income. Production is organised in response to the demand. Different products
compete for buyer’s attention and spending. Every unit of demand is like a vote in favour of a product and
a signal to its producer. Economic activity includes consumption as well.
Savings, Investment and Wealth:

Production of goods and services generates income. This income is spent to buy those goods and services.
The unspent income of people comprises their savings. The financial sector- banks, non-banking financial
companies, mutual funds, dealers in stock markets, real estate, gold, etc. are the channels through which
the savings are converted into investments and the wealth. The corporate sector and the government
borrow these savings via shares, debentures, bonds, etc. and invest these into creating and operating civil,
military and business infrastructure and other productive pursuits for the country. Thus, all in all
economics activities add to savings, investments and wealth in the economy.
Business as an Economic Activity that market oriented production (other than the production for
self-consumption) represents supply side of economics. It is common to refer to shift from subsistence
driven production towards market driven production as commercialization of production or production
on a commercial scale.
The three-tier definition of business:
1. Business may be defined as an economic activity comprising the entire spectrum of activities
pertaining to production, distribution and trading (exchange) of goods and services.
2. As such it refers to the aggregate of all the businesses and functions related to businesses of all sizes –
industry (construction and manufacturing), trading or service enterprises; state-owned / Public
Sector or private enterprises; proprietary or corporate sector enterprises; micro, small, medium, or
large enterprises; domestic or multinational enterprises
It is usual to classify business into industry, trade and commerce; wherein commerce includes all the
industry/ trade related services or auxiliaries / aids to trade such as banking, general insurance,
transport, warehousing, etc.
Here a question arises: Is agriculture an industry and hence a business? Its answer is “it
depends.”
In India, much of the agriculture is subsistence agriculture. Moreover, agriculture income, under the
Income Tax Act, is characterised separately (from income from Business & Profession) and is exempt
from tax. Thus, for our purpose agriculture does not comprise industry and hence business.
However, the industries where agriculture produce is processed (like pulses, spices, wheat to flour,
processed oils, etc.) and whose key material ingredient is agricultural produce do comprise an industry.
For example, the extraction of edible oil from rice bran, mustard, coconut, soybean etc., represents agro-
based industries.
From the medium perspective, business refers to a particular type of activity or industry such as Retail
Business, Real Estate Business, and IT Business, Iron & Steel Industry, Transport Business, etc. Thus, a
firm may introduce itself as follows: “we are a food processing” unit.
From a narrow perspective business may be defined as one’s usual occupation of creating, owning and
actively operating an economic organisation i.e., a firm. The phrase ‘usual occupation’ is important for
infrequent, isolated transactions even if these might result in profit or loss, cannot be called business.
Thus, one-time profit earning transactions cannot be termed as business, they have to
executed on a regular basis.
Distinguishing Characteristics of Business Vis-à-vis Other Economic Occupations
Employment:
Employment is a contract of service between the employee and the employer. The contract elaborates
job description and the periodic compensation known as wages & salaries (the term wages usually
denote factory workers; salary denotes office staff, managers, etc.). One has to undergo a detailed process
of Recruitment & Selection for one’s engagement in employment. Usually minimum qualifications -
educational/ technical/ professional and prior work experience are prescribed to take up an employment.
Freshers may be initially recruited as interns and required to undergo training. And one is expected to
perform as per the terms of employment and the performance targets assigned to them from time
to time. There is a minimum assured income, tenure certainty and reasonable opportunities for
career progression via promotions.
Profession:
Profession is rendering of services of a specialised nature, necessitating prescribed
qualifications, for a fee under a Certificate of Practice from an established certification
/accreditation / examination & assessment body that also imposes a code of conduct. Professions can
be pursued as independent practice or under a contract of employment too. Accountancy,
Architecture, Designing, Engineering, Law, Medicine and increasingly even Management are
assuming the attributes of a profession.

S. No. Basis of distinction Business Profession Employment

1 Meaning Entire spectrum Independent Rendering of
of market rendering of services services under a
oriented of specialized nature contract of
activities coming based on prescribed employment for
under industry, qualifications under wages/salaries.
trade and the aegis of a Also, called wage-
commerce. professional body that employment.
also prescribes a code
of conduct.
2 Mode of establishment Entrepreneur’s Membership of a Letter of
decision and professional body and Appointment and
other legal certificate of practice. service agreement.
formalities, if
necessary
3 Source of livelihood Profit Professional Fee. Wages & Salaries.
4 Prescribed qualifications None Strictly prescribed Minimum
qualifications for
each type of job
5 Ethical guidance Founder’s values Professional codes Employer’s codes
6 Investment Substantial Some requirement e.g. None
requirement Office/Chamber/Clini
c
7 Personal The most-you are Quite a bit Not much
autonomy/freedom your own boss
8 Popular psychological Economic Service to the Livelihood
motive achievement clients/society
9 Certainty of income Least. However, Quite a bit The most.
either way. Contractually
determined
periodic income
10 Stability of Uncertain Quite certain Quite certain
tenure/Durability of
occupation
11 Transfer of Possible Not possible Not possible
interest/succession

Distinguishing Characteristics of Business:

Job creator, not job seeker: Business as an institution is a source of sustenance directly to the
business owners and employees and indirectly to all those who derive opportunities from it.
Provides momentum to economic growth and development: What is economic growth is

persistent increase in a country’s Gross Domestic Product (GDP). What is GDP? It is the value of all the
final goods & services produced in a country during a particular period.
Business output comprehensively contributes towards the GDP and thus, the economic growth. Economic
growth merely implies increase in GDP numbers whereas economic development implies diversification
of an economy’s capabilities and improvement in the quality of lives of its people. Business, through
research & development, education, and training & development of employees and by sheer guts and
courage of experimenting and innovation, brings about economic development.
Entrepreneur in common parlance, the terms ‘businessperson’ and ‘entrepreneur’ are

synonymous. Even we shall be using these two terms interchangeably. However, entrepreneurs are
better characterised more by their problem solving, new opportunity seeking behaviour
that draws on their creativity and innovation.
Investment intensive: Starting a business requires a sizeable investment of funds. Accommodation,

plant & machinery, inventories, etc. In accounting, investment requirements are estimated as the sum of
fixed assets and net current assets. Indeed, investments are necessary for technological upgradation,
modernisation and expansion. However, size of investment usually varies with the scale of business. That
is why in India Micro, Small, Medium and Large Enterprises are defined with respect to the size of
investment - more specifically investment in Plant & Machinery for manufacturing enterprises and
investment in Equipment for service enterprises. The lack of investible funds or capital is a strong barrier
to start a business.
Gestation and uncertainties: Investment takes time to fructify or investment takes time to bring in
profits. And it is uncertain whether it will yield the returns as expected.
Risk can be calculated in advance, uncertainty cannot. Moreover, risk is a characteristic of

uncertainty itself.
Systematic, organised, efficiency oriented activity: Business is not a random, stray, unorganized
and occasional activity. It is a consciously created system of production (of both goods and services).
Thus, firm infrastructure needs to be in place, supply chain of materials needs to be developed, these
materials need to be processed or transformed, products need to be marketed and sold, payments need to
be collected, etc. All these tasks have to be divided into specialised functions, means of coordination need
be devised so that the business is able to deliver the promised products and services on day-to-day basis
efficiently - on time, of consistent quality and exceeding performance expectations. It is a well drafted and
executed system wherein various functions work interdependently as well as independently to achieve a
common motive, majorly profits. Business is systematic in the literal sense of the term system - an
integrated, unified whole comprising of interrelated, interdependent and interacting parts just as an
automobile system.
Viewed thus, for the business to perform well, it needs be ensured that all the parts perform their
respective functions well and in sync with each other - be it production, sales, marketing and the like.
Moreover, whilst each function performs its task it is important that one does not lose sight of the overall
objective of the firm. Unlike an automobile, however, business is an open system as it interacts with the
environment. For example, business has to interact with the customers to get the vital feedback, product
modification and win their continuing patronage.
Objective oriented/ purposeful: Profit is said to the defining motive behind business. In economics,
objective of the firm is set as maximisation of profits. Profit is earned by entrepreneurs for organizing
production, undertaking risks and bearing uncertainty. Whereas the purpose of business is to through
its entrepreneurial endeavours brings about a qualitative change called development. Entrepreneurial
businesspersons are efficiency seekers, problem solvers and innovators.
Idealistically, business must lead the world

toward more egalitarian, participative and collective
prosperity that is sustainable for generations. This
ideal corresponds to the ideal of sustainable
development, that at business level may be
interpreted as simultaneous pursuit of
profitability, people well-being and planet
sustainability.
Considerations
1. Interdependence. Business draws its factors of production from the society and is dependent on it for
the sale of its goods & services.
2. Multiple stakeholders. A firm is not only the owners. It is as much other investors /lenders,
employees, customers, suppliers, competitors, the community and the larger society and the ecology
of which business is a part
3. Amount of profit. Profit is just about that much and that less an objective of business as is eating for
living. Do we eat to live or live to eat? Likewise, profit is a minimum concept, in fact a cost, cost of
being in and cost of staying in business.
4. Primacy of Customer. If at all there is a single purpose of business, it is the creation and maintenance
of customers through product quality, service, and delivering value for money.

5. Performance is the precursor to profits. To be able to earn profit, the firm has to excel in all its
functionalities, viz., procurement, production, sales & marketing, accounting & finance. Thus, even if
profit is the objective, it has to be broken down to the relevant objectives for each of these areas
Legal, Ethical and
Economic Social
Organic Objectives Environmental
Objectives Responsibilities
Objectives
Sales, profits, return Survival, health (age of Community service, Respect for law in
on investment, assets, fitness of human education, health, letter and spirit, fair
efficiency (resource resources, reserves- sanitation, heritage practices,
conservation, capital, general and conservation, transparency,
achieving more from contingency) growth, community support truthfulness, honesty &
less) economic value diversification of during calamities & integrity. Green
added (profits in capabilities disasters, etc. technologies, products-
excess of cost of capital Specific responsibilities usage & disposal, lower
invested in business), toward employees, emissions, effective
market share investors, customers, waste handling and
suppliers, competitors, disposal, preservation
etc. of air, water and soil
quality
Responsible businesses: wishful thinking or meaningful enterprise?

Asbah-India’s first ITC-The Greenest Hotel Lemon Tree Hotels- Hindustan Unilever
social enterprise Chain in the Word providing gainful Ltd.’s Project Shakti for
focused on women employment to persons Empowerment of Rural
with disabilities Women
The plurality of the objectives of business suggests that businesses must be assessed not only in
terms of their economic returns but also their social and ecological returns.
Forms of Business Organisation

Business ownership is a bundle of rights: Ownership is a bundle of rights. These rights accrue
because a person has invested money in it. First such right is the titular exclusiveness. If you own a book,
no one else can claim its ownership (others may own their respective copies). You may use it that is derive
benefit from. You may also lend it or sell it or donate it on your will. Likewise, business ownership occurs
by investment of capital. Profits earned and losses incurred belong to the owners.

Business owners also have a right to run the business that is manage and operate it on a day-to-day basis.
However, in certain forms of business ownership can be separated from management. Another right to
dispose off and transfer the ownership of business. It also includes transfer of ownership by succession
after the owner’s death.
Business may be owned singly or jointly: A business may be owned singly i.e., as a sole
proprietorship concern. Else it be organised as a partnership or even a larger collective such as a
cooperative. When owned singly, if all the profits belong to the single owner, so do the losses.
Shared ownership by pooling of capital will facilitate undertaking large projects and also divide the risks.
Joint family business – a concept legally covered under Hindu Undivided Family Act in India – views
business as a family property and vests its ownership among the members of the family. Here the sharing
of ownership is guided not as much by the possibility of raising large sums of capital or diffusion of
business risks as it is guided by the consideration of equitable distribution of ownership rights among the
family members.
The limitation of no proper ownership separation is overcome by the idea of limited liability as in other
forms of business there is no distinction between the businessperson and business and in case business
liabilities are more than business assets, their personal wealth would be utilised for meeting the business
liabilities.
(Limited Liability Partnership - LLP).

Business may be organised as a proprietary or a corporate concern: In proprietary concerns,
business owners actively participate in the day-to-day working of the enterprise. Known as owner
managers, businesspersons / entrepreneurs are thus not passive providers of investment capital alone.
Business, thus, automatically becomes subservient to the self-interests of its owners. Obviously, such a
situation would be more feasible when there are 4-5 co-owners and the nature and size of business is such
that it can draw on their competencies and capabilities. Businesses where number of persons holding a
share in the capital of the enterprise is large (in hundreds, thousands and hundreds of thousands) who are
also geographically dispersed. In such cases a separation of ownership from management would be
inevitable. The managers act as the agents of and in the interest of the share owners (the principals).
A serious limitation of proprietary businesses is that the life of the business is entwined with the health
and life of the owners. Corporate form does away with this limitation as well, because a company exists as
a separate person distinct from its owners in the contemplation of law. As a separate legal person, it has a
life of its own, independent of the lives of its share owners.
Sole Proprietorship
It can be regarded as the easiest and the earliest form of business as a human occupation. One may
The sole entrepreneur is regarded as an economic hero, an autonomous individual who organizes
production, uses creativity and ingenuity in innovation, bears risks and uncertainty. The sole
entrepreneur is not merely the composer and director of the enterprise orchestra but also a one-person
band.
When the business grows such an autonomous behaviour becomes a limiting factor, as the entrepreneur/
sole-proprietor is required to share decision-making and let go control over the business.
The business undertaken could be on such a small-scale that it may be hardly distinguished from self-
employment.
It may not be even registered as a micro or a small-scale business enterprise or industry. A very high
proportion of micro and small businesses in India are unregistered. Usually these enterprises, more so
local retailers and street vendors are so well integrated with the communities that they enjoy people’s
trust and provide personalised services. Together, these comprise the unorganised or informal
sector of the economy. Numerically these enterprises are the largest. Their collective
contribution to GDP, Employment and even exports is very impactful. This impact is even more
considerable when we take into account their indirect contribution as suppliers to larger and even
multinational enterprises. On the flip side, products from such enterprises are often derogatorily
called “local” (to distinguish from branded). In common perception, working conditions in these
enterprises are poor. These enterprises are believed to follow hire and fire policy, there is lack of
employee welfare measures and they lack systems to effectively deal with social and
environmental concerns. Fate of the enterprise is linked with the personal well-being of
the owner. This adversely affects consistency of operations of such enterprises as the suppliers to large
and multinational enterprises. It also adversely affects those desirous of long-term contracts with these
enterprises. For these above reasons, large and multinational enterprises prefer to transact business with
corporate entities.
In sole (sole = single individual) proprietorship, the individual essentially relies on personal savings
and assets (e.g., room of the house; home furniture; personal bicycle/ vehicle) to pool in the initial
capital of the business (Note: investment of cash or in kind by the owner is called capital). However, in a
modern economy where the financial system is fairly developed, it is often possible to obtain micro-
finance (loans in small denominations, say in amounts within thousands) and bank finance. While in a
more developed financial system where the importance of entrepreneurship and business is recognised,
there may be business facilitators who may assist the individual in obtaining finance and other help.
All the profits of the enterprise accrue to the sole proprietor and so do the risks of business.
Features Whether merit or limitation and how
Autonomy of being one’s own Merit. Because of freedom from the restrictions of paid employment.
boss Ample scope for experimentation and expression of one’s creativity and
innovativeness.
Sole provider of capital Limitation. This limits the size of business. Yes, bank and lenders may

provide additional resources. However, borrowing capacity too is

determined by capital adequacy. This feature also limits the capacity to
grow.
Visibility of the owner and Merit. For example, the personal rapport with the customers
personalized services engenders trust and loyalty.
Sole bearer of risks Limitation. This arises from being the sole provider of capital. If all
the profits belong to her, so do the losses.
Unlimited liability Limitation. It is a common limitation of proprietary from of business
organisations. In the event of insolvency i.e., Liabilities > Assets, the
owners’ personal assets are invoked up the deficit.
Fate as a going concern Limitation. Sole proprietary entities going concern status depends on
(going concern = enduring the owner’s personal health and life span. And, after his death upon the
life of business in the willingness and the ability of the heirs/successors in the family.
foreseeable future)
Succession of ownership By will [aka. Testament] or application of the law of inheritance. A will
or testament is a legal document by which a person, the testator,
expresses their wishes as to how their property is to be distributed at
death, and name one or more persons, the executor, to manage the
estate until its final distribution. If the will is non-existent [i.e., for
intestate succession] the applicable law of inheritance will come into
force. For example for the Hindus, Parsis, Buddhists, Jains, and Sikhs,
The Hindu Succession Act, 1956 is applicable.
Hindu Undivided Family (HUF) Business

HUF is an entity formed automatically by members of the common ancestry including their wives and
daughters. An HUF cannot be formed by a group of people who do not constitute a family. As such, a joint
Hindu family in India is, in fact and by default, an HUF. An HUF enjoys a separate entity status
under the Income Tax Act. The Income Tax Act considers HUF as a separate entity, if, the joint family
wishes to register itself as such for reporting income under the following heads:
• Profits and gains from business or profession.
• Income from house property.
• Capital gains.
• Income from other sources
Joint Hindu Family Business (JHF) or Hindu Undivided Family (HUF) Business cannot earn income
from salary. Three successive generations of an undivided family are known as HUF. The
definition of HUF includes Buddhist, Jain and Sikh families as well.
For the purposes of understanding HUF’s features as a business entity, another important
relevant law is the Hindu Succession Act, 1956.


Formed by birth in a Hindu Merit. Family members may naturally join each other in business. In
(Buddhist, Jain and Sikh) contrast, in a Muslim family if the siblings wish to associate in a
family business, they will have to do it contractually e.g., Partnership
Agreement
Family pool of resources Merit. It is possible to start / expand a large business. Moreover, the
common pool of capital may be utilised to diversify business in sync
with the aspirations of the members of the successive generations of
the family.
Social capital through family Merit. There is an instant trust among the family members as
involvement compared with the situation of partnership with strangers. Family
members toil hard to build the family business. Moreover, they may
specialise in different business functions for greater complementarity
of the mutual skills.
The family members are the Limitation. Ownership in family business is an ascribed rather than
automatic co-owners (called earned status. It can actually be quite frustrating for the outsiders
co-parceners) by birth e.g., hired managers who help build the business
Decision making is quick Merit. In the absence of other active major members of the family,
the head of the family known as Karta takes all the decisions.
Subsequently decisions are taken by and in the family. Prevalence of
mutual trust, informality of communication makes decision-making
quick.
Unlimited liability of the Karta Limitation. It is a common limitation of proprietary forms of business
organisations. In the event of insolvency i.e., Liabilities > Assets, the
owner's (here the Karta) personal assets are invoked to make up the
deficit. However, the liability of the other family members is limited
to the extent of their share in the co-parcenry.
Fate as a going concern (going Limitation. Few family businesses last beyond third generation. Often
concern= enduring life of family feuds result in business splits. In India the splits in the
business in the foreseeable business houses of Birla, Modi, Goenkas and more recently the split
future) in the second generation of Ambanis are instances to this effect.
Succession of ownership By will [aka. Testament or application of the law of inheritance. A will
or testament is a legal document by which a person, the testator,
expresses their wishes as to how their property is to be distributed at
death, and names one or more persons, the executor, to manage the
estate until its final distribution. If the will is non-existent [i.e., for
intestate succession] the applicable law of inheritance will come into
force. For example, for the Hindus, Parsis, Buddhists, Jains and

Sikhs, The Hindu Succession Act, 1956 is applicable.
Partnership
Partnership implies contractual co-ownership of a business. It is a relationship between two or more
persons who agree to share the profits as well as losses of a business. The business may be carried on by
all or by some of the partners (called active partners) for and on behalf of all. The contract - an agreement
enforceable at law - called 'deed is the essence of a partnership, called the Partnership Deed. It may be
verbal or written. It specifies the bases of association of the persons in a partnership business e.g., capital
contribution, profit sharing, etc. The deed may be registered in India, under the Indian Partnership Act,
1932. The liability of partners in a partnership is unlimited. They can be called upon to pay the
partnership’s liabilities from their personal wealth.
Agreement Merit. The agreement makes possible co ownership of business by
persons who do not share a common ancestry of a family.
Two or more persons Merit. Partnership allows raising of funds beyond the resources of an
individual / sole proprietor. In fact, even a company, being an
artificial person can be admitted as a partner!
Limitation. There is a cap on the maximum number of persons. It is
10 for a banking firm and 20 for other firms. The reasons for a cap on
the maximum number of persons in partnership or for that matter
any other non-corporate association is the difficulty in tracing the
owners/ their heirs during such circumstances as insolvency of the
firm. Let's remember, partnership enjoins unlimited liability on the
partners.
Profit sharing Merit. For there is risk sharing too. However, whilst profit sharing is
an essential feature of partnership, loss sharing is not. Certain
partners may be admitted only in the profits of the firm e.g. minor
partners.
Business object quite wide Merit. A partnership cannot be formed for non-business purpose.
However, the word business here includes every trade, occupation
and profession. For example, many accounting/ auditing and legal
firms are organised as partnership firms.
Mutual agency Merit. Mutual agency – that is one for each other and for all ensures
that all the partners work in the common interest and in the interest
of the firm.
Limitation. A partner's misdeeds impact all the partners and the fate
of the firm. For example, if a partner in an auditing firm becomes a
party to a corporate scam, its impact may be disastrous for the firm.

Unlimited liability Limitation. It is a common limitation of proprietary forms of business

organisations. In the event of insolvency i.e. Liabilities > Assets, the
partners' personal assets are invoked to make up the deficit. Owing to
the mutual agency, the liability of all the partners is both joint and
several.
Fate as a going concern (going Limitation. Since partnership arises out of contract, it also ceases in
concern= enduring life of the same way. A partner may serve a notice of severance to the firm
business in the foreseeable and the partnership comes to an end. The remaining partners may
future) is uncertain agree to carry on the business of the firm; however, the severance cost
and the loss of momentum makes partnership a vulnerable form of
business organisation.
Succession of ownership Limitation. Ownership is not easily transferable. A new partner can
be admitted only if other partners consent.
Limited Liability Partnership (LLP)

In LLP form of business organisation the liability of the partners is limited. It has to be
mandatorily incorporated /registered under the Limited Liability Partnership Act, 2008. The
Ministry of Corporate Affairs, the apex body of regulation of the company form of business organisation in
India oversees the governance of the LLP too. For the purposes of compliance with the regulations thus
imposed, the LLP Act provides for designated partners. Thus, an LLP has well designated partners. Upon
incorporation, LLP becomes a separate legal entity and has an identity (name and identification
number) as well as life of its own, much the same way as is perpetual succession for a company.
The features of:
a) Mandatory incorporation and
b) Separate legal entity of the LLP
makes it a hybrid form of business organisation i.e., containing the features of both the corporate form as
well as proprietary form of business organisation. These two features do away with the twin limitations of
the traditional partnership, viz., unlimited liability and the uncertainty as a going concern
Comparison with Whether merit or
Features
Traditional Partnership limitation and how
Limited liability. No personal Unlimited personal liability of Merit. This does away with a
liability of partner, except in each partner for dues of the major limitation of traditional
case of fraud. partnership firm. Personal assets partnership
of each partner also liable.
Incorporation is mandatory. Partnership is registered under Merit. The mandatory
partnership Act. Registration is registration brings the firm
not mandatory. under the regulatory purview of
the Ministry of Corporate

Affairs. This increases its

credibility.
It is a legal entity separate from Not a legal entity separate from Merit. This does away with the
its partners. its partners. uncertainty of the firm's
existence as a going concern.
Minimum 2 and no limit on Minimum 2 and maximum 20 Merit. The upper limit in the
maximum under of partners. partners traditional partnership
restricted the scope of business
and future expansion plans.
ROC is the administrating The registrar of firms (of Merit. There is body to control
authority. respective states) is the that brings credibility in the
administering authority eyes of stakeholders.
Statutory compliances Not many Limitation. Designated partners
to ensure the compliances.
However, in comparison with
the companies, the compliances
are fewer and simpler.
Every partner of LLP is only Every partner of firm is agent of Merit. Absence of mutual
agent of firm firm and also of other partners agency enhances freedom at one
hand, and, on the other hand
frees the other partners of the
burden of responsibility of the
acts of a partner
Company
Company form of business organisation is the flag bearer of corporate businesses. Company indeed is a
body corporate, having an existence independent of all its members. It exists in the contemplation of law,
has a distinct name, address (Registered Office) & identification number. Some recently introduced
concepts in company form of business are:
One Person Company (OPC) - In fact, the OPC has been the most recently introduced form of
business organisation in India vide The Companies Act, 2013. It is still in an emerging status.
Yet it is being hailed asa likely catalyst in unleashing the entrepreneurial spirit in India.
In addition, the Companies Act 2013 also provides for the incorporation of a small company in
acknowledgment of the role of small-scale enterprises in India.
The Act also provides for the incorporation of a dormant company that may be created for a future
project or to hold an asset or intellectual property and has no significant accounting transaction.
Types of companies:

 Private Companies
 Public Companies
In order to make the system of diffused ownership of the joint stock companies and their management
work, an elaborate system of corporate functioning and the regulation of capital market has
to be in place. The Companies Act, 2013 focuses on the former; and the Securities & Exchange Board of
India Act, 1992 focuses on the latter. A company has to file a Memorandum of Association (MoA) and
Article of Association (AoA) along with application for incorporation. The MoA, among other things,
spells out the objectives of the company and its business. The AoA focuses on its internal regulation. The
company solicits capital contribution, it calls for people to invest in its shares and buy part of ownership,
by issue of a prospectus. There are elaborate provisions in the Companies Act and the SEBI Act to
ensure that the prospectus contains such true and correct information as may enable the public to form an
informed judgment on whether or not to invest in a company. A common man can avail the services of
investment advisors in this regard.
Further, there is a requirement of the statutory audit of the accounts of a company and publication of
its quarterly results to keep the investors well informed. The SEBI also oversees the subsequent trading
of the company shares and the contract of listing by which the shares of a company are put up for trading
on a stock exchange. The listing agreement, among other things, also enjoins upon the companies to carry
on business in an ethical, transparent and accountable manner.
Publicly traded / listed companies, the ones whose shares are traded on the stock exchange, have to meet
stringent criteria of both the Companies Act and the SEBI. This increases the cost of compliance. In
contrast, private companies have lesser compliances to meet and have greater flexibility in their internal
functioning. The law provides these privileges to the private companies because these are closely held
and the owners have greater opportunity to exercise control over the management of these companies
The Indian corporate sector is numerically dominated by private limited companies. In
fact the world over there has been a distinct trend toward “privatisation” of such public
limited companies in view of growing costs of compliance.
Features of Private
Features of Public Company Comparative Assessment
Company
Minimum number of members: 07 Lower number of minimum
02 members too eases of formation
Maximum number of members: No limit No upper limit on the members
200 of public company puts on its
disposal enormous funds.
There are restrictions on The shares may be freely tradable Listing of the shares of a public
transfer of shares on stock exchange via listing company adds to their liquidity
so that the investors may encash

the shares whenever needed
Minimum number of directors: 03 Not of much consequence.

02 Smaller board size adds to the
internal efficiencies.
Private companies are exempted These committees are to be More liberal a governance
from constituting such mandatorily constituted regimen of private companies
committees of the Board of exists because common man's
Directors as Audit Committee, money is not on stake in their
CSR Committee, Stakeholder share capital
Committee and the Nomination
and Remuneration Committee
It can start business upon A public limited company is Fewer formalities add to the
incorporation required to obtain Certificate of attractiveness of private limited
Commencement of Business in companies, more 80
addition to the Certificate of corporatisation of proprietary
Incorporation concerns e.g. partnership firms.
Albeit, now there is also an
option for the partnership firms
to convert to LLP
Summary
Business and Commercial Knowledge (BCK) is a vast, eclectic and an ever evolving and ever expanding
universe of knowledge. An economic activity is distinguishable from employment and profession. It
focuses on production not for self-consumption but for markets. It is characterised by investment
intensity and employment generation potential. It spurs economic growth via entrepreneurial initiative
and creativity. We have also described the meaning of business ownership and the various forms it may
take - single or sole and joint; proprietary and corporate. We have seen how unincorporated enterprises,
more so sole-proprietorship comprise the informal sector, individually not as powerful but collectively an
economic force to reckon with. The ownership of such enterprises is fraught with the fallouts of unlimited
liability and their status as going concerns with fragility. Hindu Undivided Family businesses comprise a
distinct Indian form of business organisation. The growing corporatisation of the economic system
necessitated the development of a comprehensive system of incorporation, accounting, audit and
accountability of the corporations toward the various stakeholders.

Business Environment
Chapter – 02 – Business Environment
Introduction
To survive for a long term, a company must have two capabilities:
 The ability to prosper and
 The ability to change What is the most surprising is the amount of change going on around us! And
we notice, at the same time, how some organizations change very tittle
Environment influences businesses and also gets influenced by it.
Meaning of Business Environment

Business environment represents all external forces, factors or conditions that exert some degree of
impact on the business decisions, strategies and actions taken by the firm. The business must
continuously monitor and adapt itself to the environment if it is to survive and prosper.
According to Gluek and Jauch: “The environment
includes factors outside the firm which can lead to
opportunities for, or threats to the firm. Although,
there are many factors, the most important of the
factors are socio-economic, technological, supplier,
competitors, and government.”
Modern authors include both Internal and external forces that influences business
policies and actions as integral elements of business environment.
Characteristics Of Business Environment

Characteristics Explanation Example
COMPLEX The environment consists of a number of Mobile phones making music system,
factors, events, conditions and influences computers books obsolete. Cold War
arising from different sources. Easier to amongst countries, or changing
understand in parts but difficult to grasp international tax laws are complex to
in totality understand the respond to for a
business. Eg: PubG ban in India
DYNAMIC Due to the many and varied influences The film industry generates revenue

operating, there is dynamism in the from ring tones / caller tunes rather
environment causing it to continuously than sale of music CD.
change its shape and character. Robotics is changing the way
industries used to operate, thus the
old ways are going out of business
MULTI-FACETED A particular change in the environment, LCD and Plasma TV’s giving way to
or a new development, may be viewed LED and now LED’s giving way to 3D
differently by different observers. Same TV’s. Atamnirbhar Bharat initiative is
development is welcomed as an a new opportunity for domestics
opportunity by one company while business but it is a challenge for
another company perceives it as a threat. global companies working in India.
Thus, the changing environment is
multi-faceted.
FAR REACHING The environment has a far reaching An organisation like Aditya Birla
IMPACT impact on organizations. The growth and Group has moved from textile to
profitability of an organization depends cement to retail and to financial
critically on the environment in which it services as well as telecom due to
exists. Any environmental change has an changing circumstances
impact on the organization in several
different ways
Importance of Business Environment

i) Determining Opportunities and Threats
ii) Giving Direction for Growth
iii) Continuous Learning
iv) Image Building
v) Meeting Competition:
Relationship Between Organization and Its Environment
Exchange of information:
Information generated from scanning external environment is used planning, decision-making and
control purpose. Information is to be gathered on economic activity and market conditions, technological
developments, social and demographic factors, political, governmental policies, the activities of other
organizations and so on. Both current and projected information is important for the organization. The
organization itself transmits information to several external agencies either voluntarily, inadvertently or
legally.
 Exchange of resources:
The resources received as inputs by the organization are often categorised as 5 M’s Men, Money,
Method, Machine, Material. The organization competes sometimes and collaborates sometimes with
other organizations to ensure a consistent supply of inputs.
The organization is dependent on the external environment to disposal its products and services. This
is also an interaction process—perceiving the needs of the external environment and catering to
them.
 Exchange of influence and power

The external environment holds power as it is more inclusive as well as provides resources,
information and other inputs. It offers a range of opportunities, incentives and rewards on the one
hand and a set of constraints, threats and restrictions on the other. In both ways, the organization is
conditioned and constrained. The external environment is also in a position to impose its will over the
organization and can force it to fall in line.
Sometimes, organisations are also in position to wield considerable power and influence over some of
the elements of the external environment by virtue of its command over resources and information.
More the power, more autonomy and freedom of action lay with the organization.
Reality Bite: Any Data having commercial importance is Information. For Example: Change in the
Government Law for new vehicles engine norms is data for a biscuit manufacturer but an information for
an Automobile Manufacturer.
Reality Bite: FMCG company Patanjali endorsed by Baba Ramdev’s is now a big player in the industry
and is giving a tough competition to the well-established FMCG players like HUL, Godrej, Dabur, P&G
etc. Now people prefer ayurvedic products over chemical products. Patanjali’s success has taken it to a
position where it can influence the market surely.
Patanjali gathers the information from the market, competitors, etc. about the public preferences and
demands and then uses it to fulfill them through modification in the existing products or launching new
products.
The nature of relationship depends on the size of the organization, its age, the nature of
business, the nature of ownership, degree of professionalism of management, etc.

Environmental Influences on Business

“Environment factors or constraint are largely if not totally, external and beyond the control of individual
industrial enterprises and their managements. These are essentially the 'givers' within which firms and
their managements must operate in a specific country and they vary, often greatly, from country to
country."
Barry M. Richman and Melvyn Copen
CADBURY’S SITUATION
 Complains received across India of worms in chocolates few years back
 Quality of the product became questionable
 Sales dropped
 Regulatory authority probe ordered
CADBURY’S FIGHTBACK
 In house quality investigation to find out the cause
 New improved packaging in record 90 days in the market
 Created a special Visi-cooler along with Voltas to keep chocolates in good and hygienic condition till
the last POP (point of purchase) i.e., final consumer
LESSON LEARNT
 Respect of the complaint and taking note of the fact that chocolates had worms
 Adapting to change the packaging in a record breaking time
 Managing the crisis at the company properly and keeping employee morale high
 Influenced the market with great come back Ad campaign
Business functions as a part of broader environment.

It receives inputs from environment and these inputs when converted into output which is exchanged
with customers. It brings in profit, goodwill, etc. which could be stored and used for further development
and growth.
Framework To Understand the Environmental Influences

 Firstly, understanding the nature of environment-static or changes; simple or complex.
 Secondly, auditing of environmental influences, identify the influencing factors and relate it to their
possible effects.
 The final step an explicit consideration of the immediate environment of the organization - for
example, the competitive arena in which the organization operates.

Why environmental analysis?

When the company does not react to the demands of the environment by changing its strategy, the result
is declining performance of the company in the market. A business cannot operate in isolation from its
environment.
Utility of Environmental Analysis

• To anticipate opportunities and to plan optimal responses to these opportunities.
• To develop an early warning system to prevent threats or to develop strategies which can turn a threat
to the firm's advantage.
• To take better managerial decisions
• The managers can concentrate on these few crucial events, instead of all the environmental
influences.
Purpose of Environmental Analysis

 First, the analysis should provide an understanding of current and potential changes taking place in
the environment. It is important that one must be aware of the existing environment. At the same
time one must have a long term perspective about the future too.
 Second, environmental analysis should provide inputs for strategic decision making. Mere collection
of data is not enough. The information collected must be useful for and used in strategic decision
making.

 Third, environment analysis should facilitate and foster strategic thinking in organizations - typically
a rich source of ideas and understanding of the context within which a firm operates. It should
challenge the current wisdom by bringing fresh viewpoints into the organization.
Environmental Scanning
Environmental scanning can be defined as the process by which organizations monitor their relevant
environment to identify opportunities and threats affecting their business for the purpose of taking
strategic decisions.
The factors which are an outcome of environmental scanning are events, trends, issues and
expectations of the different interest groups. These factors are explained below:
 Events are important and specific occurrences taking place in different environmental sectors.
Events are certain happening in the internal or external organisational environment which can be
observed and tracked. For example, if a big politician who announced a big urbanisation project
passes away, all the business which were anticipating profits from it would need to revise their
strategy due to this EVENT.
 Trends are the general tendencies or the courses of action along which events take place. Trends are
grouping of similar or related events that tend to move in a given direction, increasing or decreasing
in strength of frequency of observation; usually suggests a pattern of change in a particular area. For
example, teenagers are very fond of online gaming, which is a TREND that can help businesses to
identify new markets and services.
 Issues are the current concerns that arise in response to events and trends. Identifying an emerging
issue is more difficult. Emerging issues start with a value shift, or a change in how an issue is viewed.
For example, Ban of Chinese applications in India created issues for users who were dependable
on those applications. Indian businesses/companies had to scan this ISSUE from the environment
and bring a solution to gain market trust.

 Expectations are the demands made by interested groups in the light of their concern for issues.
For example, from the above example of application developers, the EXPECTATIONS of the
consumers can only be understood when one scans the environment and finds what the consumer
actually wants.
Components of Business Environment
Internal Environment
Internal environment is composed of multiple elements existing within the organization, including
management, current employees and corporate culture. Internal environment is the conditions, people,
events and factors within an organization that influence its activities and choices, particularly the
behaviour of the employees as well as organization’s mission statement, leadership styles and its
organizational culture.
External Environment
The factors that happen outside the business are known as external factors or influences. These will affect
the internal functions of the business and also the objectives of the business and its strategies.
Types of external environment:

i) Microenvironment
ii) Macro Environment
The four environmental influences:

1) A strength is an inherent capacity which an organization can use to gain strategic advantage over its
competitors. An example of strength is superior research and development skills which can be used
for new product development so that the company gains competitive advantage.
2) A weakness is an inherent limitation or constraint which creates a strategic disadvantage. An
example of weakness is over dependence on a single product line, which is potentially risky for a
company in times of crisis.

3) An opportunity is a favourable condition in the organization's environment which enables it to

consolidate and strengthen its position. An example of an opportunity is growing demand for the
products or services that a company provides.
4) A threat is an unfavourable condition in the organization's environment which creates a risk for, or
causes damage to, the organization. An example of a threat is the emergence of strong new
competitors who are likely to offer stiff competition to the existing companies in an industry.
Strength and weakness are internal aspects of business while opportunities and threats
come from outside the business.
SWOT Analysis
Business firms undertake SWOT analysis to understand the external and internal environment. The
strengths and weaknesses existing within an organization can be matched with the opportunities and
threats operating in the environment, so that an effective strategy can be formulated. It analyses both,
internal and external environment.
Micro and Macro Environment
The external environment of business can be broadly categorised into two: micro-environment
and macro environment.
Micro-environment is related to small area or immediate periphery of an organization. It influences an
organization regularly and directly. Within the micro or the immediate environment in which a firm
operates we need to address the following issues:
 The employees of the firm, their characteristics and how they are organised.
 The customer base on which the firm relies for business.
 The ways in which the firm can raise its finance.
 Who are the firm suppliers and how are the links between the two being developed?
 The local community within which the firm operates.
 The direct competition and how they perform.
This last point might act as a convenient linking point as we move towards the macro issues influencing
the way a firm reacts in the marketplace.
Microenvironment: consist of suppliers, consumers, marketing intermediaries, etc. These are specific
to the said business or firm and affect it’s working on short term but regular basis.
Macro environment has broader dimensions. It mainly consists of economic, technological, political,
legal and socio-cultural factors. The issues concerning an organization in terms of macro environment
are:
 What are its threats from the competitive world in which it operates and why?
 Which areas of technology might pose a threat to its current product range and how?
 The bargaining power/dominance of suppliers and customers.
Macro Environment consists of demographics and economic conditions, socio-cultural factors, political
and legal systems, technological developments and global trends, etc. These constitute the general
environment, which affects the working of all the firms in a common way and are not regular in affecting
decision making. They occur over long term period.

Elements Of Microenvironment
Consumers/Customers
According to Peter Drucker the main aim of business is to create and retain customers. Customers are the
people who pay money to acquire an organization's products. The organization cannot survive without
customers. Customer may or may not be a consumer. Consumer is the one who ultimately
consumes or uses the product or service.
For example, a father may buy a product as a customer for his daughter who will be a consumer.
A consumer occupies the central position in the marketing environment. The marketer has to closely
monitor and analyse changes in consumer tastes and preferences and their buying habits.
 Who are the customers/consumers?
 What benefits are they looking for?
 What are their buying patterns i.e. what do they prefer more?
Competitors
Competitors are the other business entities that compete for resources as well as markets. It is necessary
to analyse:
 Who are the competitors?
 What are their business objectives and strategies?
 Who are the most aggressive and powerful competitors?
Competition may be direct or indirect. Direct competition is between organizations, which are in same
business activity, selling the same kind of product, products which are related to each other or are exactly
the same. For example: Companies selling shampoo sachet.
Indirect competition example, competition between a holiday resort and a car manufacturing
company for available a discretionary/spendable income of affluent customers is indirect competition.
Here the products/services are so different yet the consumer to whom the business wants to sell are the
same, thus, Indirect Competition.
Organization
In microenvironment analysis, nothing is important as self-analysis by the organization of itself i.e.
understanding its own strengths and capabilities The objectives, goals and resource availabilities of a firm
occupy a critical position in the micro environment.
“We have met the enemy and he is us” - Pogo.
Organisations are made up of various groups of people who work towards a common goal. These are:
 Owners: They are individuals, shareholders, groups, or organizations who have a major stake in the
organization.

 Board of Directors: Board of directors are the top management group of people in companies
formed under the Companies Act, 1956. They are elected by the shareholders and are charged with
overseeing the general management of the organization to ensure that it is being run in a way that
best serves the shareholders' interests.
 Employees: Employees are the people who execute plans and strategies in an organization.
Market
The market is larger than customers. Customers together make market. People who buy goods are
customers, while all those to whom the business believes it can sell are the market.
Important issues to study market are:
 Cost structure of the market.
 The price sensitivity of the market.
 Technological structure of the market.
 The existing distribution system of the market.
 Is the market mature?
Suppliers
Suppliers provide raw materials, equipment, services and so on. Suppliers with their own bargaining
power/ ones who can dominate the prices, affect the cost structure of the industry. Organizations take a
major decision on “outsourcing” or “in-house” production depending on this supplier environment.
Wherein, outsourcing is getting things done from the outside while in-house is doing things on your own.
Reality Bite: Whenever you purchase a packet of biscuit and take a closer look at the pack, you will
realise that, the company selling the biscuit and the company actually making the biscuit is actually
different, for example, if you take a look at the image below of the biscuit packet. You will see the
difference. Here, Parle is marketing the biscuit and others are making on its behalf. This is called
outsourcing.

Intermediaries
Intermediaries act as a link between customers and manufacturers. Example: Big Bazaar or Pantaloons,
which have products from various companies at a single place.
Elements of Macro Environment

It is largely external to the enterprise and thus beyond the direct influence and control of the organization.
The external environment of the enterprise consists of individuals, groups, agencies, organizations,
events, conditions and forces with which the organization comes into frequent contact in the course of its
functioning.
Demographic Environment
The term demographics denotes characteristics of population in an area, district, country or in the world.
It includes factors such as race, age, income, educational attainment, asset ownership, home ownership,
employment status and location.
Factors such as general age profile, sex ratio, education, growth rate affect the business with different
magnitude. India has relatively younger population as compared to some other countries. China on the
other hand is having an aging population. India constitutes approximately sixteen percent of the world’s
population which makes it an attractive destination for multinationals.
Issues to consider:
 What demographic trends will affect the market size of the industry?
 What demographic trends represent opportunities or threats?
i) Population Size:
Among the most important changes in a population's size are:
• Changes in a nation's birth rate and/or family size;
• Increases or declines in the total population;
• Effects of rapid population growth on natural resources or food supplies.
Changes in a nation's population growth rate and life expectancy can have important implications for
companies. For Example, a company that sells baby products, it would want to come to India as the
number of births here are the highest in the world.
ii) Geographic Distribution: Population shifts may have an impact on a company's strategic
competitiveness.
Issues that should be considered include:
• The attractiveness of a company's location may be influenced by governmental support.
• Availability of qualified workforce.
• Work culture i.e. the concepts of working-at-home and commuting electronically on the
information highway may imply changes in recruiting and managing the workforce.
iii) Ethnic Mix: This reflects the changes in the ethnic make-up of a population and has implications
both for a company's potential customers and for the workforce. Issues that should be addressed
include:
• What do changes in the ethnic mix of the population imply for product and service design and
delivery?
• Will new products and services be demanded or can existing ones be modified?
• Are the managers prepared to manage a more culturally diverse workforce?
• How can the company position itself to take advantage of increased workforce heterogeneity?
Reality Bite: Shampoo companies sell their product in bottles in residential area/malls while the same
product is sold in sachets in hostel/rural areas. This is done because in hostels or rural areas the pocket
money/disposable income is less as compared to residential areas where people prefer buying in large
quantity.
iv) Income Distribution: The levels of individual and group purchasing power and discretionary
income often result in changes in spending (consumption) and savings patterns. Tracking,
forecasting, and assessing changes in income patterns may identify new opportunities for companies.
Economic Environment
Economic environment refers to the nature and direction of the economy in which a company competes
or may compete. It includes general economic situation in the region and the nation, conditions in
resource markets (men, money, material, machine, method) which influence the supply of inputs to the
enterprise, their costs, quality, availability and reliability of supplies.
Economic environment determines the strength and size of the market. The purchasing power in an
economy depends on current income, prices, savings, circulation of money, debt and credit availability.
Income distribution pattern determines the marketing possibilities.
Factors that Affect the Economic Environment

1. Economic Systems
i) Capitalism: A capitalist economy is an economy where the laws of demand and supply operate
freely. It is characterized by private ownership of the means of production, individual decision-
making, and the use of market mechanisms to carry out the decision of individual participants

and facilitate the flow of goods and services in market. For Example, in the USA, the businesses
are free to operate and charge from customers based on the laws of supply and demand.
ii) Socialism: Socialism is an economic system where the means of production are either owned or
controlled by the state and where the resources allocation, investment pattern, consumption,
income distribution, etc. are directed and regulated by the state. For Example, China, where the
government controls how the businesses operate.
iii) Mixed economy: Mixed economy is the outcome of compromise between two diametrically
opposing schools of thought. In a mixed economy, private, public and joint sectors and the like all
have some say in the major decisions that influence the functioning of the economy. These are
followed by the four important economic roles played by the government in a mixed economy viz.
regularity role, promotional role, entrepreneurial role and planning role. For Example, in
India, where some crucial sectors of the economy like agriculture and defence are looked after by
the government rest all markets are free for people to operate in.
2. Economic Conditions or Factors

Economic factors include gross domestic product, per capita income, markets for goods and services,
availability of capital, foreign exchange reserve, growth of foreign trade, strength of capital market,
interest rates, disposable income, unemployment, inflation, etc.
3. Economic Policies
Some of the important economic policies are:
i) Industrial policy: The Industrial policy of the government covers all those principles, policies,
rules, regulations and procedures, which direct and control the industrial enterprises of the
country and shape the pattern of industrial development.
ii) Fiscal policy: It includes government policy in respect of public expenditure, taxation and
public debt.
iii) Monetary policy: It includes all those activities and interventions that aim at smooth supply of
credit to the business and a boost to trade and industry.
iv) Foreign investment policy: This policy aims at regulating the inflow of foreign investment in
various sectors for speeding up industrial development and take advantage of the modern
technology.
v) Export–Import policy (Exim policy): It aims at increasing exports and bridge the gap
between export and import. Through this policy, the government announces various
duties/levies. The focus now-a-days lies on removing barriers and controls and lowering the
custom duties. Or it can also shift to making India self-reliant via Aatmanirbhar Bharat where
imports are discouraged and exports are encouraged.

Political-Legal Environment
This is partly general to all similar enterprises and partly specific to an individual enterprise. It includes
such factors as the general state of political development, the degree of politicization of business and
economic issues, the level of political morality, the law and order situation, political stability, the political
ideology and practices of the ruling party, the purposefulness and efficiency of governmental agencies, the
extent and nature of governmental intervention in the economy and the industry, Government policies
(fiscal, monetary, industrial, labour and exportimport policies), specific legal enactments and framework
in which the enterprise has to function and the degree of effectiveness with which they are implemented,
public attitude towards business in general and the enterprise in particular and so on. A business would
want to operate in an environment where there is political support for growth and the policies are stable.
There are three important elements in political-legal environment.
i) Government: Business is highly guided and controlled by government policies. Hence the type of
government running a country is a powerful influence on business. Taxes and duties are other critical
areas that may be levied and affect the business.
For Example: The Indian government is promoting manufacturing sector through campaigns like
Make in India.
ii) Legal: Businesses prefer to operate in a country where there is a sound legal system. However, in any
country businesses must have a good working knowledge of the major laws protecting consumers,
competitions and organizations. Businesses must understand the relevant laws relating to companies,
competition, intellectual property, foreign exchange, labour and so on.
For Example: New GST law will influence most of the businesses.
iii) Political: Political pressure groups influence and limit organizations. Apart from sporadic
movements against certain products, service and organizations, politics has deeply seeped into
unions. Also, special interest groups and political action committees put pressure on business
organizations to pay more attention to consumers’ rights, minority rights, and so on. Like a local
political movement to give more wages to workers in small industries can affect the cash flows and
profit margins of businesses that operate in that area.
Socio-Cultural Environment
It represents a complex group of factors such as social traditions, values and beliefs, level and standards of
literacy and education, the ethical standards and state of society, the extent of social stratification, conflict
and cohesiveness and so forth.
It differs from demographics in the sense that it is not the characteristics of the population, but it is the
behaviour and the belief system of that population.
Some of the important factors and influences operating in the socio-cultural environment are:
 Social concerns, such as the role of business in society, environmental pollution, corruption, use of
mass media, and consumerism.

 Social attitudes and values, such as expectations of society from business, social customs, beliefs,
rituals and practices, changing lifestyle patterns, and materialism.
 Family structure and changes in it, attitude towards and within the family, and family values.
 Role of women in society, position of children and adolescents in family and society.
 Educational levels, awareness and consciousness of rights, and work ethics of members of society.
The social environment primarily affects the strategic management process within the organization in the
areas of mission and objective setting, and decisions related to products and markets.
For Example, McDonald’s removed certain kinds of meat from its menu so as to not hurt the religious
sentiments of the people of India. It also introduced Masala Dosa Burger, to lure the cultural integrity of
the population and establish themselves as a company that cares for Indian consumers.
Reality Bite: Shampoo companies sell their product in bottles in residential area/malls while the same
product is sold in sachets in hostel/rural areas. This is done because in hostels or rural areas the pocket
money/disposable income is less as compared to residential areas where people prefer buying in large
quantity.
Technological Environment
Factors to consider:
 The pull of technological change.
 Opportunities arising out of technological innovation.
 Risk and uncertainty of technological development.
 Role of R&D in a country and government’s R&D budget.
Technology can act as both opportunity and threat to a business.
For example, electric vehicles disrupting the automotive industry.
Technology and business are highly interrelated and interdependent. The fruits of technological research
and development are available to society through business and this also improves the quality of life of the
society. It also drives business and manipulates how it is carried out.

 What are the technologies {both production and information technologies} used by the company?
 Which technologies are utilised in the company's business, products, or their parts?
 How critical is each technology to each of these products and businesses?
 Which external technologies might become critical and why? Will they remain available outside the
company?
 What has been the investment in the product and in the process side of these technologies? For the
company and for its competitors? Design? Production? Implementation and service?
 Which technological investments should be curtailed or eliminated?
 What additional technologies will be required in order to achieve business objectives?
 What are the implications of the technology on business portfolios?
Global Environment
The global environmental factors that should be assessed are:
 Potential positive and negative impact of significant international events such as a sport meet or a
terrorist attack.
 Identification of both important emerging global markets and global markets that are changing.
Businesses have to gauge and identify open markets to get the best deals on a global level.
 Differences between cultural and institutional attributes of individual global markets. Likewise, a
business has to be aware of the legal, cultural and all other aspects of the country it plans to operate
in. Global environment can thus, sum up all other factors in itself.
Figure: Impact of technology tree image

Pestle Analysis
It is a framework for analysis of macro environmental factors. PESTLE analysis involves identifying the
political, economic, socio-cultural, technological, legal and environmental influences on an
organization and providing a way of scanning the environmental influences that have affected or are likely
to affect an organization or its policy. ‘PESTLE analysis is replacing the traditional framework for
monitoring environment known as PEST analysis. It encourages management into proactive and
structured thinking in its decision making.
The Key Factors

 Political factors are how and to what extent the government intervenes in the economy and the
activities of business firms. It may also influence goods and services which the government wants to
provide or be provided and those that the government does not want to be provided. It also influences
health, education and infrastructure of a nation.
 Economic Interest rates, exchange rates, money supply, inflation, credit flow, per capita income,
growth rates have a bearing on the business decisions.
 Social factors affect the demand for a company's products and how that company operates.
 Technological factors can determine barriers to entry, minimum efficient production level and
influence outsourcing decisions. Furthermore, technological shifts can affect costs, quality, and lead
to innovation.
 Legal factors affect how a company operates, its costs, and the demand for its products, ease of
business.
 Environmental factors affect industries such as tourism, farming, and insurance. Growing
awareness to climate change is affecting how companies operate and the products they offer--it is
both creating new markets and diminishing or destroying existing ones.

Political Economic
 Political stability  Economy situation and trends
 Political principles and ideologies  Market and trade cycles
 Current and future taxation policy  Specific industry factors
 Regulatory bodies and processes  Customer/end-user drivers
 Government policies  Interest and exchange rates
 Government term and change  Inflation and unemployment
 Thrust areas of political leaders  Strength of consumer spending
Social Technological
 Lifestyle trends  Replacement technology/solutions
 Demographics  Maturity of technology
 Consumer attitudes and opinions  Manufacturing maturity and capacity
 Brand, company, technology image  Innovation potential
 Consumer buying patterns  Technology access, licensing, patents
 Ethnic/religious factors  Intellectual property rights and copyrights
 Media views and perception
Legal Environmental
 Business and corporate Laws  Ecological/environmental issues
 Employment Law  Environmental hazards
 Competition Law  Environmental legislation
 Health & Safety Law  Energy consumption
 International Treaty and Law  Waste disposal
 Regional Legislation 
The difference between SWOT and PESTLE Analysis is that, SWOT Analysis helps identify various factors
from the entire business environment, wherein Strength and Weakness form part of internal analysis and
Opportunities and Threats are from outside the business. PESTLE Analysis focuses only on the External
Macro Environment analysis. SWOT therefore, is much broader than PESTLE Analysis.
Strategic Responses to The Environment
a) Internal Strategic Responses
Organizations must have the capacity to monitor and make sense of their environments if they are to
respond appropriately. They must identify and attend to those environmental factors and features
that are closely related to their goal achievement and performance. Moreover, they must have the
internal capacity to develop effective responses.
Three classes of internal responses that business can opt for, are described below:

1. Administrative Response: The most common organizational responses to the environment

are administrative. These include the formation or clarification of the organization’s mission; the
development of objectives, policies, and budgets; or the creation of scanning units. These
responses can be either proactive or reactive and are aimed at defining the organization’s purpose
and key tasks in relationship to particular environments. The administrative response relates to
changing the way a business operates to meet the change in environment. Revising missions,
objective and goals, are some examples of this response.
2. Competitive Response: These are associated with for-profit firms but can also apply to non-
profits and governmental organizations. Such actions seek to enhance the organization’s
performance by establishing a competitive advantage over its rivals. To sustain competitive
advantage, organizations must achieve an external position vis-à-vis their competitors or perform
internally in ways that are unique, valuable, and difficult to imitate. For example, Apple
products enjoy a great deal of customer loyalty, which is their competitive advantage. Hence,
Apple is able to fight off changes in environment very smoothly.
3. Collective Response: Organizations can cope with problems of environmental dependence and
uncertainty through increased coordination with other organizations. Collective responses help
control interdependencies among organizations and include such methods as bargaining,
contracting, co-opting, and creating joint ventures, federations, strategic alliances, and consortia.
Contemporary organizations are increasingly turning towards joint ventures and partnerships
with other organizations to manage environmental uncertainty and perform tasks that are too
costly and complicated for single organizations to perform. When two or more businesses come
together to benefit from each other’s advantages, its termed as collective response.
Reality Bite: Pharmaceutical firm are forming strategic alliances to distribute non-competing
medications and avoid the high costs of establishing sales organizations; firms from different
countries are forming joint ventures to overcome restrictive trade barriers, and high-technology
firms are forming research consortia to undertake significant and costly research and
development.
b) Holistic Strategic Responses

Holistic strategies cover the essence of the business as a whole, unlike internal strategies which aim at
chaining or adapting from within. In holistic approach, a business needs to look at an organisation
wide setup with ample understanding of competitors, and all other environmental factors, macro and
micro, including internal environment, in this context following approaches may be noted:
i) Least resistance: Some businesses just manage to survive by way of coping with their changing
external environments. They are simple goal-maintaining units and are very passive in their
behaviour and are solely guided by the signals of the external environment. They are not
ambitious but are content with taking simple paths of least resistance in their goal-seeking and
resource transforming behaviour. For Example, BSNL chose to not compete at all and it has
survived with no strategy to change with changing times.
ii) Proceed with caution: At the next level, are the businesses that take an intelligent interest to
adapt with the changing external environment. They seek to monitor the changes in that
environment, analyse their impact on their own goals and activities and translate their
assessment in terms of specific strategies for survival, stability and strength. They regard that the
pervasive complexity and turbulence of the external environmental elements as ‘given’ within the
framework of which they have to function as adaptive-organic sub-systems. This is an admittedly
sophisticated strategy than to wait for changes to occur and then take corrective-adaptive action.
For Example, Airtel has proceeded slow and steady growing customer base in India as well as
Africa.
iii) Dynamic response: At a still higher level, are those businesses that regard the external
environmental forces as partially manageable and controllable by their actions. Their feedback
systems are highly dynamic and powerful. They not merely recognise and ward off threats; they
convert threats into opportunities. They are highly conscious and confident of their own strengths
and the weaknesses of their external environmental ‘adversaries’. For Example, Reliance Jio
has disrupted the markets and even changed the environment itself for its competitors and other
businesses.
Summary
The three basic goals of environmental analysis and business environment with its characteristics such as
complexity, dynamism, multifaceted nature and far reaching impact. The relationship between
organization and its environment is also discussed in terms of interactions between them in several major
areas.
The environment in which an organization exists could be broadly divided into two categories - external
and internal environment. The external environment is further classified into two categories micro and
macro environment. Micro environment relates to those forces that fall within immediate small periphery
of an organization. It consists of customers, competitors, organization, market, suppliers, intermediaries,
etc. Macro environment is at a distance and has broader dimensions. It consists of demographic,
economic, political-legal, socio-cultural, technological and global environment, etc. PESTLE analysis is
used to analyse the external macro environment, and it differs from SWOT analysis.

Business Organizations
Chapter – 03 – Business Organizations
Introduction
Think of your favourite product and then think about the company which offers it or think of a company
you want to work with!
The first few things that come to our minds are, “what does this company do”, “what are the
products/services of this company”, “how big is it”, “who owns this company” and many more curious
questions. A company overview is the most effective way to acquire business intelligence and gain vital
information about a company, its businesses, their products, services and processes, prospects,
customers, suppliers, competitors; etc. However, company overview requires the expertise of qualified
professionals, as it involves a detailed analysis of the company history, its structure, philosophy, portfolio
of products and services, clients, important information about finance, human capital, technological
resources, marketing capabilities etc.
In order to meet the needs of the competitive environment, with many quick and accurate tools of the
‘information age’ at their disposal, it becomes essential for business professionals such as:
 Budget analysts,
 Financial analysts,
 Management analysts, and
 Market research analysts
to analyse business practices, identify potential business problems, market requirements and provide
financial, marketing or managerial solutions.
a) Budget Analysts: Budget analysts help companies and organizations to keep their finances on track.
They prepare budgets, the plan of expenditure, and develop forecasts, future oriented planning, based
on past expenditures and economic trends. Budget analysts are vital to achieve financial goals,
maintain profitability and attain long-term growth. While they do not make final decisions regarding
budgets, their expertise is strongly valued by management leaders.
b) Financial Analysts: Financial analysts are also called security analyst, equity analyst, investment
analyst or rating analyst. As the name suggests they focus on investments and market. They offer
advice on investment decisions for external or internal financial clients as a core part of the job. A
financial analyst researches macro economic and micro economic conditions along with company
fundamentals to make business sector and industry related recommendations. They also often
recommend a course of action, such as to buy or sell a company’s stock based upon its overall current
and predicted strength.
c) Management Analysts: Management analysts are also known as management consultants. They
work with the heads of businesses to improve efficiency and, consequently, profitability. Management
Consultants work on case basis, where they are presented with a problem set and they work to find

viable solutions to it, both in terms of operations and finance. It is one of the most preferred job roles
for professional graduates around the world. Unlike the other types of analysts listed in this section,
management analysts are more likely to work as freelance consultants.
d) Market Research Analysts: Market research analysts study strength and weaknesses of
organisations, in order to advise a company about the decisions to be taken to increase its market
share and profitability. They study market conditions to examine potential trends of sales of a product
or service. They help companies understand what products, what kind of features and quality in the
product customers need, who will buy them, and at what price. They offer an overview of the market
and help the organisation to compare itself with its competitors and bring about changes and new
products to lure more customers and win over competition.
Company Overview (The Methodology)

The basic idea behind this chapter is to sensitise you about the existence of business organisations and
their importance in the overall economic system of India. It is believed that understanding an
organisation begins with understanding its history, present and future. Likewise, this chapter shall flow
you through various organisations, carefully picked to cover various industries of India that shall give you
a brief knowledge about that particular organisation/company.
The methodology used is to cover major corporations from NIFTY 50, that serve as pillars of economy in
various sectors.
Wait, we just used terms like industry, organisation, company, corporations, sector and NIFTY 50. Are
these all the same? Is there any difference between these terms?
Understand this, a company or a corporation or an organisation is one and the same. We use these words
interchangeably. Further, industry and sector can also be used interchangeably. When we talk about a
company/organisation/corporation, we actually refer to a single company, whereas, when we talk about a
group of companies in the same line of business, we term them as an industry or sector. For example, all
companies working in real estate business are together called Real Estate Industry or Real Estate Sector.
Coming to NIFTY 50, the very basis of this chapter is based on NIFTY 50. But what is NIFTY 50?
The NIFTY 50 is a benchmark Indian stock market index, means it is an indicator of performance, that
represents the weighted average of 50 largest Indian companies listed on the National Stock Exchange.
Just like a thermometer indicates your body temperature, the NIFTY 50 indicates the performance of the
top 50 largest companies whose shares are traded on the National Stock Exchange.
In this chapter, we shall study about some of these NIFTY 50 companies and understand what to know
about a company as a professional.
Further, you would observe that these companies are from different sectors/industries, like Coal Industry,
Information Technology Industry, Export and Import of Natural Resources, Petroleum Industry, Banking
Industry, E-Commerce Industry, etc.

The information given in the chapter is representative in the sense that each of the organisation covered is
too big with large expanse of information to be fully covered here. Students are expected to have
knowledge of developments in the corporate world by reading financial papers or visiting the websites of
corporates on a regular basis.
A company overview will usually include:

 Company Introduction: What does it do?
 Philosophy: Vision and Mission
 Company History
 Core Management Team: Top Management
 Portfolio of Businesses; Its Products and Services
 Competitive Scenario: Who are the competitors
 Financial Performance: This keeps changing
 Market Position: Rankings from various global ranking magazines
 Business in News: Growth plan, mergers and acquisitions, joint ventures, future endeavours and
direct global presence, etc.
We can analyse a company through above information and gain an in-depth understanding of competing
companies and the key players in the different areas of business. With a detailed company profile, we will
be able to get an insight into its competitors’ strengths, weaknesses, strategies and performance. Armed
with this information, we will be able to identify and analyse business areas that need immediate
attention by the company's top management.
Print, electronic and social media is all important these days. It is the first thing that greets us in the
morning. One gets awareness about what is happening in all parts of the business world and its
environment. Business news focus primarily on market or policy news as it is relevant to business owners,
economists, financiers, public policy makers, business analysts, professors, researchers and students.
Similarly, there are very popular global magazines that rank companies based on various parameters. One
of the most influential magazines to do so is FORBES. Forbes comes out with an annual ranking of top
performing companies every year. Another very popular ranking is “FORTUNE 500” rankings, done by
Fortune Magazine. We have mentioned the ranking of the companies discussed in this chapter to make
you understand how huge and relevant they are globally.
Several events take place in the environment on daily basis that influence the business environment and
economy at large and give rise to trends, issues and expectations. Such events happen in the form of:
 Positive and negative business events happening in domestic as well as global markets and how they
impact companies and their businesses.
 Government’s economic and social policies and their performance, also not to forget the
announcements of new policies.

 Performance of different sectors of economy on the contemporary measures of growth and

development.
 Economic conditions, indicators or factors and their movement with positive or negative impact on
the different companies and their businesses.
 Stock market movements, their performance and fluctuations in share prices of companies or group
of companies.
 Mergers and acquisitions of businesses, Joint ventures, consortiums, future endeavours of different
companies.
 Companies going global through export or import, opening subsidiary companies or direct investment
in foreign market.
 Domestic and global markets changing or shifting from one sector to another.
 New markets emerging across the globe.
 Advertisements, tenders, expression of interest and other important announcements.
So much happens every minute in the business world that unless we keep ourselves abreast of these
changes we cannot adjust ourselves to them or move with the times successfully. Thus, it is important for
a Chartered Accountancy student to grasp the business news on a regular basis.
In the sections that follow, vital information about some of the eminent national and multinational
companies from different sectors and a wide range of industries has been given. This will give an insight
about the core management team, products and services, achievements and financial performance, etc. of
the discussed companies.
While reading the chapter you may come across the designations given to the leadership team of the given
organisations. Given below is the list for your quick reference;
Chairman: The person who owns a major portion of the company and is at the topmost level of
management.
CEO (Chief Executive Officer): Leader of all departments, takes future oriented decisions and leads
the overall management of the company.
MD (Managing Director)/ CMD (Chief Managing Director): Person who is part of the Board of
Directors and is concerned with ensuring that the decisions of Board of Directors are being implemented.
However, in government companies, Managing Director may act as CEO. And sometimes the same person
may act as both CEO and MD.
Director: Head of Operations, could be some specific department or the organisation as a whole.
Reports to CEO. However, in government companies, even a director may act as CEO.
CFO (Chief Financial Officer): Reports directly to the CEO. As the name suggests, this person is the
head of Finance for the entire organisation. Most of the organisations’ have Chartered Accountants as
their CFO.

An Overview of Selected Indian Companies

ADANI PORTS AND SPECIAL ECONOMIC ZONE LTD
Incorporation year : 1998

Ownership group : Adani Group
Headquarter : Ahmedabad, Gujarat, India
Present Head (MD) : Gautambhai Shantilal Adani
Chief Executive Officer : Karan Gautambhai Adani
Chief Financial Officer : Rakesh Shah
Company Introduction
APSEZ represents a large network of ports with India’s largest SEZ at Mundra. APSEZ Port Business is
integral to its logistics business and is India’s largest private port operator with presence across ten
locations.
Ports & Terminals

APSEZ operates ports in Mundra, Dahej, Hazira, Dhamra and Kattupalli and terminals in Murmugao,
Vishakhapatnam, Tuna-Tekra. Ennore Container Terminal and Vizinjham Port are under construction.
Industrial Land (SEZ/ DTA/ FTWZ)

Mundra is home to India’s only port-led multi-product SEZ. Mundra has accrued advantages of an
efficient private seaport, logistical connectivity, economic benefits and allied infrastructure, thereby
offering excellent investment opportunities for diversified businesses.
Information Bubble
SEZ (Special Economic Zone), is a specifically defined area setup by the government where special
benefits, like tax holidays, free electricity and water for industries, cheap lease rentals, etc., are offered,
to attract business owners. This help to increase employment and overall GDP of the country. Similarly,
DTA is Domestic Tariff Area, the area which is not SEZ is called DTA. and FTWZ is Free Trade and
Warehousing Zone, similar to SEZ, in FTWZ warehousing businesses are given benefits to setup supply
chain businesses.
Logistics
Seamless multi-modal logistics solutions are provided right to and from the customers’ premises. Our
Inland Container Depots help ports expand their hinterland connectivity while our private rakes and
strategic alliances help in seamless pan-India cargo movement.

Business in News
 APSEZ ranked 1754th on Forbes World's Largest Public Corporations List 2020.
 APSEZ ranked 276th on Forbes World's Best Employer's List 2019.
 In March, 2019, Adani Ports and Special Economic Zone Ltd. (APSEZ), India’s largest private port
operator recorded cargo movement of more than 200 million metric tonnes (MMT). It became the
India’s 1st port operator to achieve this milestone and 5th in the world.
https://www.adaniports.com/Newsroom/Media-Releases/Adani-becomes-1st-Indian-port-operator
For more information you may visit company website: www.adaniports.com
ASIAN PAINTS LTD.

Headquarter : Mumbai, India
Present Head (MD & CEO) : K B S Anand
Chief Financial Officer : Jayesh Merchant
Asian Paints operates in 16 countries. It has 26 paint manufacturing facilities in the world which serve
consumers in over 65 countries. It manufactures a wide range of paints for decorative and industrial use.
Its research and technology division has over 200 highly qualified scientists for technological
developments. It is India’s leading and Asia’s fourth largest paint company. Today, it is double the size of
any other paint company in India. The nearest rivals or competing firms of the Asian Paints Ltd. are -
Kansai Nerolac Paints Ltd., Shalimar Paints Ltd., Jenson & Nicholson (India) Ltd. and Berger Paints
(India) Ltd.
Philosophy
Asian Paints aims to become one of the top five decorative coatings companies world-wide by leveraging
its expertise in the higher growth emerging markets. Simultaneously, the company intends to build long
term value in the industrial coatings business through alliances with established global partners.
Company History
It was initially set up as a partnership firm by four friends (Champaklal H. Choksey, Suryakant C. Dani,
Arvind R. Vakil, Chimanlal N. Choksi). The company has been a market leader in paints since 1967.
Portfolio of Company; Products and Services it offers

Asian Paints manufactures wide range of paints for decorative and industrial use. In Decorative paints,
Asian Paints is present in all the four segments:
 Interior Wall Finishes,
 Exterior Wall Finishes,
 Enamels and
 Wood Finishes.
Business in News
Asian Paints ranked 1596th on Forbes World's Largest Public Corporations List 2020.
Asian Paints ranked 232nd on Forbes World's Best Employer's List 2019.
For more information you may visit company website: www.asianpaints.com
AXIS BANK LIMITED

Headquarter : Mumbai, Maharashtra, India.
Present Head (MD and CEO) : Mr. Amitabh Chaudhry
Non-executive Chairman: : Mr. Rakesh Makheja
Chief Financial Officer: : Puneet Sharma
: 1993
Axis Bank is the third largest private sector bank in India. The Bank offers the entire spectrum of financial
services to customer segments covering large and mid-corporates, Micro Small and Medium Enterprises
(MSME), Agriculture and Retail Businesses.
The overseas operations of the Bank are spread over ten international offices with branches at Singapore,
Hong Kong, Dubai (at the DIFC), Colombo and Shanghai; representative offices at Dhaka, Dubai, Abu
Dhabi, Sharjah and an overseas subsidiary in London, UK.
Company History
Axis Bank is one of the first new generation private sector banks to have begun operations in 1994. The
Bank was promoted in 1993, jointly by Specified Undertaking of Unit Trust of India (SUUTI) (then known
as Unit Trust of India), Life Insurance Corporation of India (LIC), General Insurance Corporation of India
(GIC), National Insurance Company Ltd., The New India Assurance Company Ltd., The Oriental
Insurance Company Ltd. and United India Insurance Company Ltd. The shareholding of Unit Trust of
India was subsequently transferred to SUUTI, an entity established in 2003.
Philosophy
Vision: To be the preferred financial solutions provider excelling in customer delivery through insight,
empowered employees and smart use of technology.
Core Values: Customer centricity, ethics, transparency, teamwork and ownership.


The Bank has ten wholly owned subsidiaries, Axis Capital Ltd., Axis Private Equity Ltd., Axis Trustee
Services Ltd., Axis Asset Management Company Ltd., Axis Mutual Fund Trustee Ltd., Axis Bank UK Ltd.,
Axis Securities Ltd., Axis Direct, Axis Finance Ltd., Axis Securities Europe Ltd. and Axis Treds Limited.
Segments Services
Retail Banking Personal banking, card services, Internet banking, ATM services,
depository, financial advisory services, Insurance and Non-resident Indian
(NRI) services.
Corporate Banking Credit, treasury, syndication, investment banking and trustee services.
International Banking Corporate banking, trade finance, treasury and risk management solutions
through the branches at Singapore, Hong Kong, DIFC, Shanghai and
Colombo, and also retail liability products from its branches at Hong Kong
and Colombo.
Business in News
 Axis Bank ranked 727th on Forbes World's Largest Public Corporations List 2020.
 Axis Bank ranked 232nd on Forbes World's Best Employer's List 2019.
 Axis Bank Limited, one of India’s largest private sector banks announced the opening of its Qualified
Institutions Placement (“QIP”) to raise funds of ` 12500 crores.
https://www.axisbank.com/docs/default-source/press-releases/press-release-25-09-2019-axis-
bank.pdf?sfvrsn=5016f56_6
For more information you may visit company website: www.asianpaints.com
BAJAJ AUTO LIMITED

Ownership group : Bajaj Group
Headquarter : Pune, Maharashtra, India
Chairman : Mr. Rahul Bajaj
Present Head (MD and CEO) : Mr. Rajiv Bajaj
Chief Financial Officer : Mr. Soumen Ray
Bajaj Auto Limited is an Indian two-wheeler, three-wheeler and car manufacturing company. It is one of
the world’s top manufacturer of motorcycles in India. It is the world’s largest three-wheeler manufacturer.
Bajaj Auto is India’s largest exporter of motorcycles and three-wheelers. It has operations in 50 countries
creating a line of bikes targeted to the preferences of entry-level buyers.

Company History
It was founded by Jamnalal Bajaj in Rajasthan in the 1940s. In 1959, it obtained a licence from the
Government of India to manufacture two-wheelers and three-wheelers and it became a public limited
company in 1960.
Philosophy
Vision: To attain world class excellency by demonstrating value added products to customers.
Mission:
 Focus on value based manufacturing
 Continual Improvement
 Total elimination of wastes
 Pollution free and safe environment

Segments Products
Motorcycles Avenger, CT 100, Dominar, Discover, V 12, V 15, Pulsar, etc.
Three Wheelers RE Compact, RE Compact 4S, RE Optima and RE Maxima.
Low Cost Cars Bajaj Qute, Bajaj RE60, etc.
Business in News
 Bajaj Auto ranked 1531st on Forbes World's Largest Public Corporations List 2020.
 Bajaj Auto ranked 448th on Forbes World's Best Employer's List 2019.
 Winners in the Auto Two Wheelers category by the International Advertising Association as part of
the IndIAA Awards (2019) – Advertising campaign ‘Bajaj Auto - The World's Favourite Indian’
https://www.bajajauto.com/about-us/awards-achievements
 ‘First-In-The-Industry’ status of having all its manufacturing plants certified for 'Special Award for
TPM Achievement' by Japan Institute for Plant Maintenance (JIPM) (2019)
https://www.bajajauto.com/about-us/awards-achievements
For more information you may visit company website: www.bajajauto.com
BHARTI AIRTEL LIMITED

Ownership group : Bharti Group
Headquarter : New Delhi, India
Chairman : Mr. Sunil Bharti Mittal

Present Head (MD and CEO) : Mr. Gopal Vittal

Chief Financial Officer : Mr. Nakul Sehgal
Bharti Airtel Limited is a leading global telecommunications company with operations in 20 countries
across Asia and Africa.
Airtel provides GSM, 3G and 4G LTE mobile services, fixed line broadband and voice services depending
upon the country of operation. It is the largest mobile network operator in India and the third largest in
the world with 400 million subscribers.
Company History
In 1984 Sunil Mittal started assembling push-button phones in India. By the early 1990s, Bharti was
making fax machines, cordless phones and other telecom gear. In 1992, he successfully bid for one of the
four mobile phone network licences auctioned in India. He was one of the first Indian entrepreneurs to
identify the mobile telecom business as a major growth area. His plans were finally approved by the
Government in 1994 and he launched services in Delhi in 1995, when Bharti Cellular Limited (BCL) was
formed to offer cellular services under the brand name AirTel. Within a few years, Bharti became the first
telecom company to cross the 2- million mobile subscriber mark.
Philosophy
Vision: To enrich the lives of customers. The company’s obsession is to win customers for life through an
exceptional experience.
Mission: Hunger to win customers for life.

Segments Products
Telemedia Broadband internet access through DSL, Internet leased lines, MPLS
(Multiprotocol Label Switching) solutions, IPTV and fixed line telephone
services.
Digital television Direct-to-Home (DTH) TV services
Enterprise End-to-end telecom solutions to corporate customers and national and
international long-distance services to telcos through its nationwide fibre
optic backbone, last mile connectivity in fixed-line and mobile circles,
VSATs, ISP and international bandwidth access through the gateways and
landing stations.
Mobile data service USB Modem, Airtel Datacard, etc.
Enterprise business GPRS Based Solutions like mobile applications tools for enterprise,
solutions TrackMate, automatic meter reading solutions etc. and the other is SMS
Based Solutions like interactive sms, bulk sms, inbound call centre

solutions.
Business in News
 Bharti Airtel ranked 700th on Forbes World's Largest Public Corporations List 2020.
 Airtel Business has been awarded as the “Enterprise Data Service Provider of the Year” and the
“Enterprise Telecom Service Provider of the Year” in the large enterprise segment at the 17th edition
of the Frost & Sullivan ICT Awards.
https://www.airtel.in/press-release/07-2019/airtel-bags-top-honors-at-the-frost-and-sullivan-ict-
awards
 Waybeo, a Trivandrum headquartered startup focused on deep AI based analytics for cloud telephony,
is the fifth startup to join the fast growing Airtel Startup Accelerator Program, which helps promising
startups unlock their potential.
https://www.airtel.in/press-release/09-2020/airtel-onboards-Waybeo-to-its-startup-accelerator-
program
Information Bubble
Do you know that huge companies owned by government i.e. government companies, are tagged as
Navratnas, Maharatnas, and Miniratnas, based on their revenue and size of operations. As of January
2020, there are 10 Maharatnas and 14 Navratna Companies in India.
We are about to discuss Bharat Petroleum below, which is a Maharatna Company. All government
companies that we shall discuss in the chapter are Mahratnas or Navratnas.
In the beginning we talked about NIFTY 50, all these companies are also part of NIFTY 50. Further, as
already mentioned, to learn about what Maharatnas and Navratnas are, you must be curious enough to
go and search about them.
For more information you may visit company website: www.airtel.com
BHARAT PETROLEUM CORPORATION LTD.

Ownership Group : Government of India
Headquarter : Mumbai, Maharashtra, India
Chairman, MD and CEO: : D Rajkumar
Chief Finance Officer (CFO): : Neelakantapillai Vijayagopal

Bharat Petroleum Corporation Limited (BPCL) is an Indian state-controlled oil and gas company. The
Corporation operates two large refineries of the country located at Mumbai and Kochi. Bharat Gas has
been a pioneer in more ways than one churning out several innovative customer centric offerings such as
LPG cylinders and Mini LPG cylinders. The 24X7 services provided by Bharat Petroleum Aviation Fuel
Services makes it the preferred supplier for all major domestic and international airlines in India. 40% of
the international volumes in India are fuelled by BPCL plane services. Their presence in the defence sector
is equally strong. Bharat Petroleum is the only oil company in India to have equity stake in the 1st
Greenfield Airport at Cochin International Airport Limited.
Company History
Bharat Petroleum Corporation Ltd was incorporated in 1952 as a private limited company with the name
Burma Shell Refineries Ltd. The company began its work on the marshland of Trombay at Bombay. The
refinery on 454 acres of land at village Mahul went on-stream on 30th January 1955 one year ahead of
schedule. In January, 1976 Burmah Shell Group of Companies was taken over by the Government of India
to form Bharat Refineries Ltd. In August, 1977 the company was renamed as Bharat Petroleum
Corporation Ltd. The company was also the first refinery to process newly found indigenous crude
(Bombay High) in the country.
Philosophy
Vision: Be a model corporate entity with social responsibility committed to energizing lives through
sustainable development.
Mission: Create a ‘positive impact’ in all the communities where we operate.

 To transform 150 villages from ‘water scarce to water positive’.
 To enable education of more than 10 lakh children.
 To create a resource of ‘Expert Panels’ on issues pertaining to our thrust areas.
 To encourage employee volunteering through our corporate culture and have a minimum of 10% of
employees volunteering in the next five years.
Portfolio of Businesses; Products and Services

The company business is divided in seven SBUs (Strategic Business Units), like Retail, Lubricants,
Aviation, Refinery, Gas, I&C and LPG. They have popular Loyalty Program like Petrocard, Smartfleet.
Bharat Petroleum operates the following refineries:
i) Mumbai Refinery: Located near Mumbai, Maharashtra. It has a capacity of 13 million metric tonnes
per year.
ii) Kochi Refineries: Located near Kochi, Kerala. It has a capacity of 9.5 million metric tonnes per year.
iii) Bina Refinery: Located near Bina, Sagar district, Madhya Pradesh. It has a capacity of 6 million metric
tonnes per year. This refinery is operated by Bharat Oman Refineries Limited, a joint venture between
Bharat Petroleum and Oman Oil Company.

iv) Numaligarh Refinery: Located near Numaligarh, Golaghat district, Assam. It has a capacity of 3
million metric tonnes per year.
Business in News
 BPCL ranked 601st on Forbes World's Largest Public Corporations List 2020.
 Bharat Petroleum receives special award from Shri Dharmendra Pradhan, Hon’ble Minister for
Petroleum & Natural Gas and Steel for their contribution to facilitate Bulk LPG Tank Trucks
ownership by SC/ST Entrepreneurs.
https://www.bharatpetroleum.com/about-bpcl/awards-and-accolades.aspx
 BPCL received the prestigious ‘Star PSU’ Award from Business Standard at the Annual Awards for
Corporate Excellence on 31.3.2018.
 BPCL was awarded on 25th October 2018, with ‘Golden Peacock Award 2018’ for ‘Excellent Corporate
Governance’ in a glittering event in London.
For more information you may visit company website: www.bharatpetroleum.in
CIPLA LIMITED

Chairman : Y. K. Hamied
Present Head (MD and CEO) : Umang Vohra
Chief Financial Officer : Kedar Upadhey
Cipla Ltd. is a leading medicine manufacturer in India. The company has about 1,500 pharmaceutical
products in more than 60 therapeutic categories. Some are sold domestically, while the rest reach
international markets in more than 150 countries. It offers prescription drugs for all kinds of ailments --
arthritis, cancer, depression - as well as over-the-counter drugs for colds, oral hygiene, and skin care.
Cipla leads the domestic retail pharmaceutical market. The company also makes bulk drugs,
agrochemicals, and animal products. Cipla has earned a worldwide recognition for adhering to the highest
standards of quality and has received approvals from Ministries of Health of various nations and major
international regulatory agencies.

Company History
Cipla was founded as The Chemical, Industrial, and Pharmaceutical Laboratories by Khwaja Abdul
Hamied in 1935. The name of the Company was changed to ‘Cipla Limited’ on 20 July 1984. In the year
1985, US FDA approved the company’s bulk drug manufacturing facilities.
Philosophy
Cipla has developed good positive image by providing support to cancer patients by introducing drugs at
low cost.
Slogan: Caring for life.
Vision: To be the first global biotech company to provide high quality products at affordable prices that
will enable access for millions of patients world-wide by the year 2025
Mission: Cipla’s mission is to be a leading global healthcare company which uses technology and
innovation to meet every day needs of all the patients.

Cipla sells active pharmaceutical ingredients to other manufacturers as well as pharmaceutical and
personal care products, including Escitalopram (anti-depressant), Lamivudine and Fluticasone
propionate. It is the world’s largest manufacturer of antiretroviral drugs. Cipla currently manufactures
more than 200 generic and complex Active Pharmaceutical Ingredients (APIs).
Business in News
 Meditab Specialities Private Limited, a wholly owned subsidiary of the Company acquired 75% stake
in Mabpharm Private Limited (‘Mabpharm’).
 Cipla Limited has acquired in Oct, 2019 novel and patented anti-infective product, Elores, from Venus
Remedies Limited (“VRL”) for the Indian market to further strengthen its presence in the branded
Indian critical care space and as a part of its agenda to contribute to the fight against Anti-Microbial
Resistance (AMR).
https://www.cipla.com/press-releases-statements/cipla-acquires-novel-anti-infective-elores-further-
anti- microbial
 The 82-year-old chairman of pharmaceutical major Cipla (Prominent scientist and businessman
Yusuf Hamied) has been made an Honorary Fellow of the prestigious body, comprising of many of the
world's most eminent scientists in the 2019 list of new fellows of the UK's Royal Society.
https://www.business-standard.com/article/pti-stories/cipla-chairman-hamied-receives-uk-royal-
societyhonour-119041800962_1.html
For more information you may visit company website: www.cipla.com

COAL INDIA LIMITED

Ownership group : Govt. of India
Headquarter : Kolkata, India
Present Head (CMD) and Chairman : Mr. Pramod Agrawal (IAS)
Chief Financial Officer : Mr. S. Sarkar
Coal India Limited (CIL) is an Indian state-controlled coal mining company. It is the largest coal producer
company in the world. It contributes about 84% of coal production in India. Government of India owns it
and controls the operations through Ministry of Coal. In April 2011, CIL was conferred the Maharatna
status by the Union Government. It is operating through 82 mining areas. CIL manages 200 other
establishments like workshops, hospitals etc. Further, it also owns 26 technical & management training
institutes and 102 Vocational Training Institutes. It commands nearly 74% of the Indian coal market.
Company History
Nationalization of coal industry in India in the early seventies was a fall out of two related events. In the
first instance it was the oil price shock, which led the country to take up a close scrutiny of its energy
options. A Fuel Policy Committee set up for this purpose identified coal as the primary source of
commercial energy. Secondly, the much needed investment for growth of this sector was not forthcoming
with coal mining largely in the hands of private sector.
Philosophy
Vision: To emerge as a global player in the primary energy sector committed to provide energy security
to the country by attaining environmentally & socially sustainable growth through best practices from
mine to market.
Mission: To produce and market the planned quantity of coal and coal products efficiently and
economically in an eco-friendly manner with due regard to safety, conservation and quality.
Portfolio of Company; It’s Subsidiaries

Coal India Limited (CIL) produces coal through seven of its wholly owned subsidiaries. These are:
 Eastern Coalfields Limited (ECL),
 Bharat Coking Coal Limited (BCCL),
 Central Coalfields Limited (CCL),
 Western Coalfields Limited (WCL),
 South-Eastern Coalfields Limited (SECL),

 Northern Coalfield Limited (NCL), and

 Mahanadi Coalfields Limited (MCL).
Its 8th wholly owned subsidiary Central Mine Planning and Design Institute Limited (CMPDIL) provides
exploration, planning and technical support to all the 7 production subsidiaries.
Joint Ventures: CIL has two joint ventures:

 International Coal Ventures Private Limited (ICVPL) was formed in 2009 for acquisition of coking
coal properties outside India. CIL holds 2⁄7th share in paid up capital of ICVPL.
 CIL-NTPC Urja Pvt. Ltd. is a 50:50 JV between CIL and NTPC, formed in April, 2010 for acquisition
of coal blocks in India and abroad.
Business in News
 Coal India ranked 612th on Forbes World's Largest Public Corporations List 2020.
 CIL has been awarded the ‘CSR Winner Award for Rural Development and Infrastructure’ at the 6th
CSR Impact Awards 2018-19. CIL was recognised for the Integrated Rural Development done in
Purulia.
https://www.coalindia.in/hi-
in/%E0%A4%95%E0%A4%82%E0%A4%AA%E0%A4%A8%E0%A5%80/%E0%A4%89%E0%A4%A
A%E0%A4%B2%E0%A4%AC%E0%A5%8D%E0%A4%A7%E0%A4%BF%E0%A4%AF%E0%A4%BE
%E0%A4%82.aspx
 CIL exchanged MoUs with Mr. Leonid Gennadievich Petukhov, Director General, "The Far East
Agency for Attracting Investments and Supporting Export" and "Far Eastern Mining Company"
(FEMC) of Russian Federation (Russia) in Sep. 2019
https://www.coalindia.in/DesktopModules/DocumentList/documents/CIL%20SIGNS%20MoUs%20
IN%20RUSSIA%20(1).pdf
Information Bubble
Wholly owned Subsidiary? What is it?
As the name suggests, it is a subsidiary, a sub-part organisation of the main company which is entirely
owned by the parent company. Thus, wholly owned!
For more information, you may visit company website: www.coalindia.in
DR. REDDY’S LABORATORIES LTD.

Headquarter : Hyderabad, Telangana, India

Chairman : Kallam Satish Reddy
Present Head (CEO) : Erez Israeli
Chief Financial Officer : Saumen Chakraborty
Dr. Reddy’s Laboratories is an Indian multinational pharmaceutical company. Dr. Reddy’s manufactures
and markets a wide range of pharmaceuticals in India and overseas. The company has over 190
medications, 60 Active Pharmaceutical Ingredients (APIs) for drug manufacture, diagnostic kits, critical
care, and biotechnology products. It strengthened its Indian manufacturing operations by acquiring
American Remedies Ltd. in 1999. This acquisition made Reddy’s the third largest pharmaceutical
company in India, after Ranbaxy and Glaxo (I) Ltd., with a full spectrum of pharmaceutical products,
which included bulk drugs, intermediates, finished dosages, chemical synthesis, diagnostics and
biotechnology.
Company History
Dr. Reddy’s originally launched in 1984 producing Active Pharmaceutical Ingredients (APIs). In 1986,
Reddy’s started operations on branded formulations. Within a year, it had launched Norilet, the
company’s first recognized brand in India. In 1987, the company started transforming itself from a
supplier of pharmaceutical ingredients to other manufacturers into a manufacturer of pharmaceutical
products.
Philosophy
 Bringing expensive medicine within reach.
 Addressing unmet patient needs
 Helping patients manage disease better
 Enabling and helping our patients ensure that our medicines are available where needed
 Working with patients to help them succeed

Segments Products Brand
Generic Tablets, capsules, injectables, and topical Omez (Omeprazole), Nise
creams. (Nimesulide),Ketorol (Ketorolac
Thromethamine), Stamlo
(Amlodipine Besylate) and Razo
(Rabeprazole).
Over the counter Medicines on pain management, Cetrine, Nise gel, Ibuclin and
dermatology and allergy management Novigan.
areas, and gynecology.

Business in News
 The company announced that it has entered into a definitive agreement with Wockhardt Limited to
acquire select divisions of its branded generics business in India and a few other international
territories of Nepal, Sri Lanka, Bhutan and Maldives for a consideration of `.1850 Crores.
https://www.drreddys.com/media/904665/press-release_dr-reddys-wockhardt.pdf
 Dr. Reddy Laboratories was listed among 1200 of India’s most trusted brands according to the Brand
Trust Report, 2014.
https://www.drreddys.com/media/904612/cder-press-release-ranitidine-recall-final-v3.pdf
 Dr. Reddy’s Laboratories Ltd. initiated a voluntary nationwide recall on October 1, 2019, (at the retail
level for over-the-counter products and at the consumer level for prescription products) of all of its
ranitidine medications sold in US due to confirmed contamination with N-Nitrosodimethylamine
(NDMA) above levels established by the USFDA’s. (USFDA-The Food and Drug Administration is a
federal agency of the United States Department of Health and Human Services.)
https://www.drreddys.com/media/904612/cder-press-release-ranitidine-recall-final-v3.pdf
 Dr. Reddy’s Laboratories Ltd. has entered into an agreement (April,19) to acquire a portfolio of 42
approved, non-marketed Abbreviated New Drug Applications (ANDAs) in the U.S. The value of total
addressable market for these products in the U.S. is approximately $645 million for the calendar year
ending in December 2018.
https://www.drreddys.com/media/904336/injectable_deal_april_2019_v10.pdf
For more information you may visit company website: www.drreddys.com
FLIPKART

Headquarter : Singapore (legal domicile)
Founders : Bengaluru, Karnataka, India (Operational
Headquarter)
Present Head (CEO) : Sachin Bansal and Binny Bansal
Chief Financial Officer : Kalyan Krishnamurthy
Flipkart is an E-commerce company, selling almost everything retail through its website and mobile
applications. It was founded by Sachin Bansal and Binny Bansal in 2007. The company initially focused
on book sales, before expanding into other product categories such as consumer electronics, fashion,
home essentials & groceries, and lifestyle products.
The service competes primarily with Amazon's Indian subsidiary. As of 2017, Flipkart held a 39.5%
market share of India's e-commerce industry. Flipkart is significantly dominant in the online fashion
retail (which was achieved by its acquisition of Myntra), and was described as being "neck and neck" with
Amazon in the sale of electronics and mobile phones. Flipkart also owns PhonePe, a mobile payments
service based on the Unified Payments Interface (UPI).
In August 2018, U.S.-based retail chain Walmart acquired an 81% controlling stake in Flipkart for US$16
billion.
Company History
Flipkart was founded in October 2007 by Sachin Bansal and Binny Bansal, who were both alumni of the
Indian Institute of Technology Delhi and formerly worked for Amazon. The company initially focused on
online book sales with country-wide shipping. Following its launch, Flipkart slowly grew in prominence;
by 2008, it was receiving 100 orders per day.
It expanded very quickly over the years acquiring a lot of businesses and finally sold off major stake to
Walmart in 2018.
Philosophy
Vision: To become Amazon of India
Mission: Providing delightful customer experience

The catalogue of products and services on offer on the website and mobile application range from
electronics to appliances, fashion for men, women and kids, ticket booking, flights booking, home
appliances, furniture, books, sports equipment, etc.
Flipkart and its Subsidiaries:

 Myntra, for fashion
 Jabong, for fashion
 PhonePe, online payment channel
 Ekart, logistics and retail
 Jeeves
 2GUD
Business in News
 Sachin Bansal was awarded Entrepreneur of the Year 2012–2013 from The Economic Times, a
leading Indian economic daily newspaper.
 In September 2015, the two founders entered Forbes India Rich List debuting at the 86th position
with a net worth of $1.3 billion each.

 In April 2016, Sachin Bansal and Binny Bansal were named to Time magazine's list of the 100 Most
Influential People.
 According to a report in November 2014, Flipkart was operating through a complex business
structure which included nine firms, some registered in Singapore and some in India. In 2012,
Flipkart co- founders sold WS Retail to a consortium of investors led by Rajeev Kuchhal
Source: wikipedia.org and www.flipkart.com

For more information you may visit company website: www.flipkart.com
GAIL (INDIA) LTD.

Ownership group : Ministry of Petroleum & Natural Gas
(MoP&NG)
Chairman : Shri Manoj Jain
Present Head (MD and CEO) : Shri Manoj Jain
Finance Director (CFO) : A.K. Tiwari
Gas (India) Limited (GAIL) is the largest state-owned natural gas processing and distribution company in
India. It is India’s principal gas transmission and marketing company. It has the following business
segments: natural gas, liquid hydrocarbon, liquefied petroleum gas transmission, petrochemical, city gas
distribution, exploration and production, GAILTEL and electricity generation. GAIL was conferred with
the ‘Maharatna’ status on 1st February, 2013 by the Government of India. It has more than 70% market
share in both gas transmission and marketing.
GAIL owns the country’s largest pipeline network, the cross-country 2300 km Hazira-Vijaipur-Jagdishpur
pipeline with a capacity to handle 33.4 MMSCMD gas. Today the company owns and operates more than
11000 km long cross country natural Gas Pipeline in India having presence in 22 states in the country. It
also owns and operates more than 2000 km long LPG pipelines in the country and has the pride to
operate one of the world’s longest exclusive LPG pipeline in the country from Jamnagar in Gujarat to Loni
in Uttar Pradesh.
Company History
GAIL (India) Limited was incorporated in August 1984 as a Central Public Sector Undertaking (PSU)
under the Ministry of Petroleum & Natural Gas. It was formerly known as Gas Authority India Limited.

Philosophy
Vision: To be the leading company in Natural Gas and Beyond, with Global Focus, Committed to
Customer Care, Value Creation for all Stakeholders and Environmental Responsibility.
Mission: To accelerate and optimize the effective and economic use of Natural Gas and its fractions for
the benefit of the national economy.
Portfolio of Company; It’s Subsidiaries and Joint Ventures
Subsidiaries
 GAIL Gas Limited
 Brahmaputra Cracker and Polymer Limited (BCPL)
 GAIL Global (Singapore) Pte Limited
Joint Ventures
 Aavantika Gas Limited (AGL): GAIL has 22.5% stake in the Company along with HPCL as an equal
partner.
 Bhagyanagar Gas Limited (BGL): GAIL has a 22.5% stake in the company along with HPCL as an
equal partner.
 Central U.P. Gas Limited (CUGL): GAIL has 25% stake in the Company along with BPCL as an equal
partner. CUGL has connected 200 commercial and industrial units in both the cities.
 Green Gas Limited (GGL): GAIL has a 22.5% stake in the company along with IOCL as an equal
partner.
 Indraprastha Gas Limited (IGL): GAIL has a 22.5% stake in the company along with BPCL as an equal
partner.
 Mahanagar Gas Limited (MGL): GAIL has a 49.75% stake in the company along with British Gas as an
equal partner.
 Maharashtra Natural Gas Limited (MNGL): GAIL has a 22.5% stake in the company along with BPCL
as an equal partner.
 Petronet LNG Limited (PLL): GAIL has a 12.5% equity stake in PLL, along with BPCL, ONGC and
IOCL as equal partners.
 Ratnagiri Gas and Power Pvt. Ltd. (RGPPL): GAIL has 32.88% stake in the company along with NTPC
as an equal partner.
 Tripura Natural Gas Company Limited (TNGCL): GAIL has 29% stake in the company.
 GAIL China Gas Global Energy Holdings Limited: GAIL has 50% equity interest in the company along
with China Gas as the equal partner.
Business in News
 GAIL ranked 1257th on Forbes World's Largest Public Corporations List 2020.
 GAIL ranked 290th on Forbes World's Best Employers' List 2019.

 GAIL won the Prestigious CII-National Water Awards for Excellence in Water Management-2016 in
“out of fence Category”.
 GAIL’s Petrochemical unit at Pata came 1st in 16th National Award for Excellence in Cost
 Management 2018 from ICAI, in Public Sector Manufacturing, Mega Category.
https://gailonline.com/pdf/news/2019/GAIL%20News%2001%20NOV%202019-%201.pdf
 GAIL India Ltd will invest over `45,000 crore over the next five years to expand the National Gas Grid
and city gas distribution network. Of this, `32,000 crore would go into pipeline laying and another
`12,000 crore in city gas distribution (CGD) networks for retailing of CNG to automobiles and piped
natural gas to household kitchens.
https://gailonline.com/pdf/news/2019/GAIL%20News%2021%20AUG%202019-gail.pdf
For more information you may visit company website: www.gailonline.com
HDFC BANK LIMITED

Ownership Group : HDFC Group
Chairman : Deepak S. Parekh
Present Head (MD) : Aditya Puri
Chief Financial Officer : Srinivasan Vaidyanathan
HDFC Bank Limited is an Indian banking and financial services company. The Bank’s distribution
network is run through 4,715 branches and 12,260 ATMs across 2,657 cities. HDFC is a market leader in
e-commerce. It provides a series of digital offerings like - 10 second personal loan, Chillr, PayZapp, SME
Bank, Watch Banking, 30-Minute Auto Loan, 15-minute Two-Wheeler Loan, e-payment gateways, Digital
Wallet, etc. HDFC Bank provides a number of products and services which includes Wholesale banking,
Retail banking, Treasury, Auto (car) Loans, Two Wheeler Loans, Personal loans, Loan against Property
and Credit Cards.
Company History
In 1994, HDFC Bank was incorporated, with its registered office in Mumbai, India. Its first corporate
office and a full service branch at Sandoz House, Worli was inaugurated by the then Union Finance
Minister, Manmohan Singh. The bank is the first of its kind to receive an in-principle approval from the
RBI for the establishment of a bank in the private sector.
Philosophy
Mission: To be a World Class Indian Bank.

The objective is to build sound customer franchises across distinct businesses so as to be the preferred
provider of banking services for target retail and wholesale customer segments, and to achieve healthy
growth in profitability, consistent with the bank’s risk appetite. HDFC Bank’s business philosophy is
based on five core values: Operational Excellence, Customer Focus, Product Leadership, People and
Sustainability.

HDFC Group companies are HDFC Ltd., HDFC Securities., HDFC Mutual Fund, HDFC Realty, HDFC
Life, HDFC ERGO, HDFC Pension and HDB Financial Services.
Business in News
 HDFC Bank ranked 146th on Forbes World's Largest Public Corporations List 2020.
 HDFC Bank ranked 119th on Forbes World's Best Employer's List 2019.
 HDFC Bank has been adjudged ‘India’s Best Bank’ by Euromoney Awards for Excellence 2019 for 12th
consecutive year.
https://www.hdfcbank.com/content/api/contentstream-id/723fb80a-2dde-42a3-9793-
7ae1be57c87f/9543f6fd-75ef-49fb-8e61-2638c2f03fbf?
 HDFC Bank has won top honours at the Nasscom DSCI Excellence Awards 2019. (DSCI- Data
Security Council of India)
 https://www.hdfcbank.com/content/api/contentstream-id/723fb80a-2dde-42a3-9793-
7ae1be57c87f/24ca3b2d-3898-4121-b0b8-50b13fc5294e?
 HDFC Bank was adjudged ‘Best MSE Bank’ at the 2nd SIDBI-ET India MSE Awards 2019. The Bank
has a strong MSME portfolio with advances to this segment standing at over ` 1.25 lakh crore as of
March 31, 2019.
https://www.hdfcbank.com/content/api/contentstream-id/723fb80a-2dde-42a3-9793-
7ae1be57c87f/ae2298e7-19aa-41aa-9687-30f2cd8ae4c2?
For more information you may visit company website: www.hdfcbank.com
ICICI BANK LIMITED

Ownership group : ICICI group
Chairman : Sandeep Bakshi
Present Head (MD and CEO) : Sandeep Bakshi
Chief Financial Officer : Rakesh Jha

ICICI Bank (Industrial Credit and Investment Corporation of India) is the largest private sector bank and
a multinational banking and financial services company. ICICI Bank currently has a network of 4,867
Branches and 14,367 ATM’s across India. The bank has branches in United States, Singapore, Bahrain,
Hong Kong, Sri Lanka, Qatar, Oman, Dubai International Finance Centre, China and South Africa; and
representative offices in United Arab Emirates, Bangladesh, Malaysia and Indonesia. The company’s UK
subsidiary has also established branches in Belgium and Germany.
Company History
ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian financial institution, and was its
wholly- owned subsidiary. ICICI’s shareholding in ICICI Bank was reduced to 46% through a public
offering of shares in India in fiscal 1998, an equity offering in the form of AD` listed on the NYSE in fiscal
2000, ICICI Bank’s acquisition of Bank of Madura Limited in an all-stock amalgamation in fiscal 2001,
and secondary market sales by ICICI to institutional investors in fiscal 2001 and fiscal 2002. ICICI was
formed in 1955 at the initiative of the World Bank, the Government of India and representatives of Indian
industry.
Philosophy
Vision: To be the leading provider of financial services in India and a major global bank.
Mission: ICICI will leverage our people, technology, speed and financial capital to:
 be the banker of first choice for our customers by delivering high quality, world-class products and
services.
 expand the frontiers of our business globally.
 play a proactive role in the full realisation of India’s potential.
 maintain a healthy financial profile and diversify our earnings across businesses and geographies.
 maintain high standards of governance and ethics.
 contribute positively to the various countries and markets in which we operate.
 create value for our stakeholders.

ICICI Group companies and its subsidiaries are: ICICI Prudential Life Insurance Company, ICICI
Securities, ICICI Lombard General Insurance Company, ICICI Prudential AMC & Trust, ICICI Venture,
ICICI Direct, ICICI Foundation and Disha Financial Counselling. ICICI Bank also has banking
subsidiaries in UK and Canada.
Segments Products
Funds and Investments Mutual funds, Deposits, Portfolio management services, etc.
Banking Products Saving accounts, home loans, Family wealth account, Car loans, foreign
exchange services and Demat account.

Insurance and Risk Life Insurance and General Insurance.

Protection
Credit Cards ICICI Bank Diamant Credit Card, ICICI Bank Sapphiro Credit Card and
Jet Airways ICICI Bank Sapphiro Credit Card
Banking Services Mutual Fund Transaction Platform, Lockers, iWealth, iMobile, Smart
Vault, e-Locker, i-Track, Video Banking App and Preferred Time Delivery.
Business Banking Current Account, Trade Services, Business Loans, Business Insurance and
Cash Management Services.
Business in News
 ICICI Bank ranked 255th on Forbes World's Largest Public Corporations List 2020.
 ICICI Foundation was awarded by the Ministry of Skill Development and Entrepreneurship at the
National Entrepreneurship Awards.
 ICICI Bank crossed milestone of issuing 2 million FASTag, highest in India by Oct 31,2019
https://www.icicibank.com/aboutus/article.page?identifier=news-icici-bank-crosses-milestone-of-
issuing-2-million-fastag-highest-in-india—20193110124211052
 ICICI Rural Self Employment Training Institute (ICICI RSETI), which provides free of cost vocational
training to less-privileged youth, inaugurated a new building in the Jodhpur city (INDIA) (Sep. 2019).
The building has been awarded a ‘Net Zero Energy- Platinum’ rating by the Indian Green Building
Council (IGBC), making it the first new building in the country to get the coveted certificate.
https://www.icicibank.com/aboutus/article.page?identifier=news-icici-rseti-inaugurates-indias-first-
igbc-rated-net-zero-energy-platinum-new-building-in-jodhpur-20191109150555153
 ICICI Bank launched ‘InstaBIZ’, India’s first most comprehensive digital banking platform for
MSMEs in July 2019
https://www.icicibank.com/aboutus/article.page?identifier=news-icici-bank-launches-instabiz-
indias-first-most-comprehensive-digital-banking-platform-for-msmes 20191707122800108
INDIAN OIL CORPORATION LTD.

Chairman (CMD) : Sanjiv Singh
Chief Financial Officer : Sandeep Kumar Gupta

Indian Oil Corporation Ltd. (IOC) is India’s Largest Commercial Enterprise. Indian Oil accounts for
nearly half of India’s petroleum products market share, 35% national refining capacity (together with its
subsidiary Chennai Petroleum Corporation Ltd., or CPCL), and 71% downstream sector pipelines through
capacity. The Indian Oil Group owns and operates 11 of India’s 23 refineries with a combined refining
capacity of 80.7 MMTPA (Million Metric Tonnes Per Annum). Indian Oil’s cross-country pipeline
network, for transportation of crude oil to refineries and finished products to high-demand centres, spans
over 11,220 km.
Company History
Indian Oil Corporation (IOC) was incorporated on June 30, 1959 as Indian Oil Company. The company
was renamed as Indian Oil Corporation on September 1, 1964 following the merger of Indian Refineries
(established 1958) with it.
Philosophy
Vision: A major diversified, trans-national, integrated energy company, with national leadership and a
strong environment conscience, playing a national role in oil security and public distribution.
Mission:
 To achieve international standards of excellence in all aspects of energy and diversified business with
focus on customer delight through value of products and services, and cost reduction.
 To maximise creation of wealth, value and satisfaction for the stakeholders.
 To attain leadership in developing, adopting and assimilating state-of- the-art technology for
competitive advantage.
♦ To provide technology and services through sustained Research and Development.

IOC has leading energy brands like XTRAPREMIUM petrol, XTRAMILE diesel and PROPEL
petrochemicals, Indian Oil’s SERVO lubricants and Indane LPG have earned the coveted Superbrand
status. IOC has several Refineries in Guwahati, Bongaigaon, Barauni, Gujarat, Haldia Refinery, Mathura,
Panipat and Paradip.
Indian Subsidiaries Operations
Chennai Petroleum Corporation Limited Refining of petroleum products
Indian Oil - CREDA Biofuels Limited Plantation of Jatropha and extraction of oil for Bio-
Diesels
Indian Catalyst Private Limited Manufacturing of FCC catalyst / additive
Foreign Subsidiaries Operations
Indian Oil (Mauritius) Ltd. Mauritius Terminalling, Retailing & Aviation refuelling
Lanka IOC PLC, Sri Lanka Retailing, Terminalling & Bunkering

IOC Middle East FZE, UAE Lube blending & marketing of lubricants
IOC Sweden AB, Sweden Investment company for E&P Project in Venezuela
IOCL (USA) Inc., USA Participation in Shale Gas Asset Project
Ind Oil Global B.V. Netherlands Exploration & Production
Business in News
 IOCL ranked 389th on Forbes World's Largest Public Corporations List 2020.
 Indian Oil bagged the Federation of Indian Petroleum Industry's (FIPI) 'Sustainably Growing
Corporate of the Year' award for excellence in sustainability performance and benefits extended to
society and the environment, 2019
https://www.iocl.com/aboutus/NewsDetail.aspx?NewsID=54728&tID=8
 Indian Oil won the National CSR Aaward instituted by the Ministry of Corporate Affairs, Government
of India, under Women and Child Development category for its Assam Oil School of Nursing project
at Digboi. Indian Oil has spent an amount of `490.60 crore on various CSR initiatives during 2018-19.
https://www.iocl.com/aboutus/NewsDetail.aspx?NewsID=54620&tID=8
Information Bubble
Hope you are observing the rankings from global magazines like Forbes, that we have mentioned in the
news column. This shows how well a company ranks on the global level. Forbes issues an annual list of
2000 World's Largest Public Corporations.
For more information you may visit company website: www.iocl.com
INFOSYS LTD.

Headquarter : Bengaluru, India
Chairman : Nandan Nilekani
Present Head (MD and CEO) : Salil Parekh
Chief Financial Officer : Nilanjan Roy
Infosys Technologies Limited is an Indian multinational corporation that provides business consulting,
information technology and outsourcing services. It is a global leader in technology and consulting
services. It enables 1045 clients in more than 50 countries to create and execute strategies for their digital
transformation. Globally, it has 85 sales and marketing offices and 114 development centres.

Company History
It was founded in 1981 by 7 Engineers N. R. Narayana Murthy, Nandan Nilekani, N. S. Raghavan, S.
Gopalakrishnan, S. D. Shibulal, K. Dinesh and Ashok Arora after they resigned from Patni Computer
Systems. The company was incorporated as “Infosys Consultants Pvt Ltd.” with a capital of `10,000 in
Pune. It signed its first client, Data Basics Corporation, in New York City. In 1983, the company’s
corporate headquarters was relocated from Pune to Bengaluru.
The Company changed its name to “Infosys Technologies Private Limited” in April 1992 and to “Infosys
Technologies Limited” when it became a public limited company in June 1992. It was later renamed to
“Infosys Limited” in June 2011.
Philosophy
Vision: To be a globally respected corporation that provides best-of-breed business solutions, leveraging
technology, delivered by best-in-class people.
Mission: To achieve our objectives in an environment of fairness, honesty, and courtesy towards our
clients, employees, vendors and society at large.

It provides software development, maintenance and independent validation services to companies in
banking, finance, insurance, manufacturing and other domains. One of its known products is ‘Finacle’
which is a universal banking solution with various modules for retail and corporate banking.
Its key products are:
 Mana - Knowledge based AI platform
 Infosys Information Platform (IIP)- Analytics platform
 Edge Verve Systems
 Finacle- Global banking platform by Edge Verve Systems
 Panaya Cloud Suite
 Skava
Business in News
 Infosys ranked 602nd on Forbes World's Largest Public Corporations List 2020.
 In 2019, Infosys has been Awarded the ‘Excellent Partner Award’ by Mazda (Japanese multinational
automaker based in Hiroshima, Japan)
https://www.infosys.com/newsroom/press-releases/2019/excellent-partner-award.html
 In 2019, Infosys was presented with the prestigious United Nations Global Climate Action Award in
the ‘Climate Neutral Now’ category at the UN Climate Change Conference (COP 25) in Madrid, Spain.
https://www.infosys.com/newsroom/press-releases/2019/carbon-neutral-now-category-award-
cop25.html

 Infosys has been certified by the Top Employers Institute as a 2020 ‘Top Employer’, in recognition of
its excellence in employment practices across Australia, Singapore and Japan.
https://www.infosys.com/newsroom/press-releases/2019/recognized-top-employer-2020.html
 Infosys to Acquire Award-Winning Digital Customer Experience, Commerce & Analytics Company,
Blue Acorn iCi
https://www.infosys.com/newsroom/press-releases/2020/digital-customer-experience-leader-
america.html
 Infosys Completes Acquisition of Guide Vision, a Leading ServiceNow Elite Partner in Europe
https://www.infosys.com/newsroom/press-releases/2020/completes-acquisition-guidevision.html
For more information you may visit company website: www.infosys.com
ITC LIMITED

Ownership group : ITC Group
Headquarter : Kolkata, India
Chairman : Sanjiv Puri
Present Head (MD and CEO) : Sanjiv Puri
Chief Financial Officer : Supratim Dutta
ITC Ltd. is an Indian conglomerate company. It has diversified its business in Fast-Moving Consumer
Goods (FMCG), Hotels, Paperboards and Packaging, Agri Business and Information Technology. ITC is
rated among the World’s Best Big Companies, Asia’s ‘Fab 50’ and the World’s Most Reputable Companies
by Forbes magazine and as ‘India’s Most Admired Company’ in a survey conducted by Fortune India
magazine and Hay Group. The growth of the company has been rated by a Nielsen Report to be the fastest
among the consumer goods companies operating in India.
Company History
It was established as a private company in August, 1910 as the Imperial Tobacco Company of India
Limited. It was converted into a public limited company in 1954. It was further renamed as the Indian
Tobacco Company Limited in 1970 and to ITC Limited in 1974.
Philosophy
Vision: Sustain ITC’s position as one of India’s most valuable corporation through world class
performance, creating growing value for the Indian economy and Company’s stakeholders.

Mission: To enhance the wealth generating capability of the enterprise in a globalization environment,
delivering superior and sustainable Stakeholder value.
Trusteeship, customer focus, respect for people, excellence and innovation are the core values of the ITC
Ltd.

Segments Products Brand
Fast-Moving Consumer Cigarettes and Cigars Navy Cut, Capstan, Berkeley, Bristol, Flake,
Goods (FMCG) Silk Cut, Duke & Royal, Gold Flake,
Scissors, John Player, etc.
Foods Aashirvaad, Sunfeast, Bingo!, Yippee!,
Kitchens of India, B Natural, mint-o,
Candyman and GumOn.
Personal Care Essenza Di Wills’, ‘Fiama’, ‘Vivel’, “Engage”
and
‘Superia’
Education and Stationary Classmate and Paperkraft.
Lifestyle Retailing Wills Lifestyle and John Players.
Safety Matches and Aim, I Kno and Mangaldeep.
Agarbatti
Hotels Luxury hotels and ITC Grand Bharat in Gurgaon. ITC Grand
Welcome Hotels Chola in Chennai, ITC Maurya in Delhi, ITC
Maratha in Mumbai, ITC Sonar in Kolkata,
ITC Grand Central in Mumbai, ITC Windsor
& ITC Gardenia in Bengaluru, ITC Kakatiya
in Hyderabad and ITC Mughal in Agra and
ITC Rajputana in Jaipur.
Paperboards and Papers, specialty, packaging Fine papers: Alfa Zap, Alfa Plus, Hi Brite, Hi
Packaging and Graphics Zine, Perma White, etc.
Thin Printing papers: Bible Printing,
Pharma Print, Superfine Printing, etc.
Agri Business Agri-products Feed Ingredients - Soyameal, Food Grains -
Wheat and Wheat Flour, Rice, Pulses,
Barley and Maize, Marine Products -
Shrimps and Prawns, Processed Fruits,
Coffee, etc.

Information Technology Domain-led, Data service, ITC Infotech

Design expert, Digital ready
and Differentiated delivery
Business in News
 ITC ranked 907th on Forbes World's Largest Public Corporations List 2020.
 ITC ranked 117th on Forbes World's Best Employer's List 2019.
 2019, ITC earns the Highest Global Recognition for Water Stewardship: ITC is the only company in
the world to be water positive for 17 years and its Water Stewardship Programme has cumulatively
covered 10.87 lakh acres benefiting over 3.20 lakh people in 15 states.
https://www.itcportal.com/media-centre/press-releases-content.aspx?id=2201&type=C&news=itc-
earns-the-highest-global-recognition-for-water-stewardship
 ITC in Oct,2019 launched the world's most expensive chocolate priced at `4.3 lakh per kilogram under
its Fabelle brand.
https://www.itcportal.com/media-centre/press-reports-content.aspx?id=2190&type=C&news=ITC-
unveils-costliest-chocolate-at-` -400000-per-kg
Information Bubble
Conglomerate?
Read about ITC Ltd. again. It is operating businesses in various industries, Fast-Moving Consumer
Goods (FMCG), Hotels, Paperboards and Packaging, Agri Business and Information Technology. Such
companies that are so huge that they operate in various industries rather than just one business are
called Conglomerate. Simply put, conglomerate is a combination of many businesses.
For more information, you may visit company website: www.itcportal.com
LARSEN & TOUBRO LTD.

Ownership group : L&T Group
Chairman : Anil Manibhai Naik
Present Head (MD and CEO) : S.N. Subrahmanyan
Chief Financial Officer : Mr. Shankar Raman

Larsen & Toubro is a major technology, engineering, construction, manufacturing and financial services
conglomerate, with global operations. L&T addresses critical needs in key sectors - Hydrocarbon,
Infrastructure, Power, Process Industries and Defence - for customers in over 30 countries around the
world. The Company’s manufacturing footprint extends across eight countries in addition to India. The
company has business interests in engineering, construction, manufacturing goods, information
technology, and financial services, and has offices worldwide.
Company History
It was founded in 1938 by two Danish engineers taking refuge in India.
Philosophy
Vision: L&T shall be a professionally managed Indian multinational, committed to total customer
satisfaction and enhancing shareholder value.

L&T has over 130 subsidiaries and 15 associate companies.
Segments Products and Services
Construction and Buildings and Factories, Transportation Infrastructure, Heavy Civil
Mining Infrastructure, Water & Effluent Treatment, Renewable Energy, Power
Transmission and Distribution, Smart World and Communication, etc.
Electrical and Relays, Meters, Automation Products and Systems, Low Voltage Products,
Automation Medium Voltage Products, Marinised products, Control and Automation,
Marine Switch board sand Control Systems, etc.
Heavy Engineering Process Plant, Nuclear Power Plant, Defence & Aerospace and Critical Piping
Hydraulics Hydraulic Cylinders, Swivel / Rotary Joints, High Torque Low Speed Motors,
Radial Piston Pumps and Customised Hydraulic Systems.
Hydrocarbon Offshore, Onshore, Construction Services, Modular Fabrication, Engineering
Services.
IT Consulting and L&T Infotech.
Digital Solutions
Metallurgical and Metallurgical and Material Handling.
Material Handling
Power Coal Based Power Plants, Thermal Power Projects and Gas Based Power Plants.
Rubber Processing Mechanical Tyre Curing Presses, Hydraulic Tyre Curing Presses, Tyre Building
Machinery Machines, Auxiliary Equipment, Spares, Tube Curing Presses and Bladder
Curing Presses.
Shipbuilding New Construction - Defence Shipbuilding, New Construction - Commercial
Shipbuilding, Ship Repairs and Refits & Mid-Life Upgrades.

Technology Services Industrial Products, Medical Devices, Process Industry, Telecom Consumer
Electronics and Semiconductor (TCES), Transportation, Embedded System and
Applications, Engineering Process Services, Mechanical Engineering, Product
Lifecycle Management (PLM), Consulting Services, Plant and Process
Engineering, Engineering Analytics, etc.
Business in News
 Larsen & Toubro ranked 443rd on Forbes World's Largest Public Corporations List 2020.
 Larsen & Toubro ranked 29th on Forbes World's Best Employer's List 2019.
 Larsen & Toubro in Oct. 2019, inaugurated Phase 1 of the Metro Express in the African island nation
of Mauritius by the Hon’ble Prime Minister of India, Shri Narendra Modi and the Hon’ble Prime
Minister, Mr. Pravind Kumar Jugnauth Prime Minister of Mauritius.
https://corpwebstorage.blob.core.windows.net/media/41043/2019-10-04-hon-ble-prime-ministers-
of-india-mauritius-inaugurate-phase-1-of-lt-built-light-rail-system-metro-express-in-mauritius.pdf
 L&T Construction have secured a prestigious project from the Navi Mumbai International Airport
Private Limited (NMIAPL) for the Engineering, Procurement and Construction of the greenfield Navi
Mumbai International Airport at Navi Mumbai in Sep.2019
https://corpwebstorage.blob.core.windows.net/media/40833/2019-09-03-lt-construction-awarded-
a- major-contract-to-construct-the-navi-mumbai-international-airport.pdf
Information Bubble
Why do we have “Ltd.” written after the companies’ name?
Companies that have shares which are traded in stock market are called Public Companies and the
shareholders are the owner of the company as per the number of shares they own.
The liability of these shareholders’, the owners per se, is limited to the number of shares they own.
Thus, the word “Ltd.” is used after these companies, to indicate that the liability of the company and
shareholders’ is limited.
For more information you may visit company website: www.larsentoubro.com
NTPC LTD.

Ownership group : Government of India
Chairman and CEO : Gurdeep Singh

Director of Finance (CFO) : Shri A K Singhal
NTPC Ltd. is popularly known as National Thermal Power Corporation Limited. It is a public sector
undertaking, engaged in the business of generation of electricity and allied activities. It is the top power
company of India with a commissioned capacity of 48,028MW. It feeds a fourth of India’s electricity
needs or as we say “NTPC lights up every fourth bulb in the country”. It is one of the most efficient power
companies in India, having operations that match global standards. Commensurate with our country’s
growth challenges, NTPC has embarked upon an ambitious plan to attain a total installed capacity of 130
GW by 2032. The company has also ventured into oil and gas exploration and coal mining activities.
Company History
It was founded in 1975 to accelerate power development in India. It started work on its first thermal
power project in 1976 at Shaktinagar (named National Thermal Power Corporation Private Limited
Singrauli) in Uttar Pradesh. NTPC became a Maharatna company in May 2010, one of the only four
companies to be awarded this status.
Philosophy
Vision: To be the world’s leading power company, energizing India’s growth.
Mission: provide reliable power and related solutions in an economical, efficient and environment
friendly manner, driven by innovation and agility.
Subsidiaries
1. NTPC Electric Supply Company Ltd. (NESCL)
2. NTPC Vidyut Vyapar Nigam Ltd. (NVVN)
3. Kanti Bijlee Utpadan Nigam Limited
4. Bharatiya Rail Bijlee Company Limited (BRBCL)
5. Patratu Vidyut Utpadan Nigam Limited (PVUNL)
Business in News
 NTPC ranked 497th on Forbes World's Largest Public Corporations List 2020.
 NTPC ranked 288th on Forbes World's Best Employer's List 2019.
 A term loan agreement for `5000 crore was signed by NTPC with State Bank of India on 06 th
December, 2019.
https://www.ntpc.co.in/en/media/press-releases/details/ntpc-signs-term-loan-%E2%82%B95000-
crore- state-bank-india

 NTPC Ltd, India’s largest power generation company, has been bestowed with the ‘Golden Peacock
Award for Sustainability’ 2019, during the 19th International Conference on Corporate Governance &
Sustainability held in London (U.K).
https://www.ntpc.co.in/en/media/press-releases/details/ntpc-wins-%E2%80%98golden-peacock-
award- sustainability%E2%80%99-2019
 For the financial year 2018-19, NTPC Ltd. has paid final dividend of `.2,473.64 crore, being 25% of
the paid-up equity share capital of the Company.
https://www.ntpc.co.in/en/media/press-releases/details/ntpc-ltd-pays-final-dividend-rs-247364-
crore-fy-2018-19
For more information you may visit company website: www.ntpc.co.in
OIL & NATURAL GAS CORPORATION LTD.

Headquarter : Uttarakhand, India
Present Head (CMD) : Shashi Shanker
Director Finance (CFO) : Subhash Kumar
Oil and Natural Gas Corporation Limited (ONGC) is a Public Sector Undertaking (PSU) of the
Government of India, under the administrative control of the Ministry of Petroleum and Natural Gas. It is
India’s largest oil and gas exploration and production company. It is involved in exploring for and
exploiting hydrocarbons in 26 sedimentary basins of India, and owns and operates over 11,000 kilometers
of pipelines in the country. Its international subsidiary ONGC Videsh currently has projects in 17
countries. It produces around 77% of India’s crude oil (equivalent to around 30% of the country’s total
demand) and around 62% of its natural gas. ONGC has been ranked 449th in the Fortune Global 500 list
of the world’s biggest corporations for the year 2015. It is ranked 17th among the Top 250 Global Energy
Companies by Platts.
Company History
ONGC was founded on 14 August 1956 by Government of India, which currently holds a 68.94% equity
stake. ONGC has discovered 6 of the 7 commercially producing Indian Basins, in the last 50 years, adding
over 7.1 billion tonnes of In-place Oil & Gas volume of hydrocarbons in Indian basins.

Philosophy
Vision: To be global leader in integrated energy business through sustainable growth, knowledge
excellence and exemplary governance practices.
Mission:
 World Class
 Integrated in Energy Business
 Dominant Indian Leadership
 Portfolio of Company; Products and Services it offers
Products and services: ONGC supplies crude oil, natural gas, and value-added products to major
Indian oil and gas refining and marketing companies
Business in News
 ONGC ranked 269th on Forbes World's Largest Public Corporations List 2020.
 ONGC has been declared as the Winner of ‘Golden Peacock Award for Risk Management’ for 2019, by
the Awards Jury of Institute of Directors (IOD), India.
https://www.ongcindia.com/wps/wcm/connect/en/media/press-release/golden-peacock-2019-
award- risk-management
 Oil and Natural Gas Corporation (ONGC) Limited adder another glory to its kitty bagging S&P Platts
Global Energy Award 2019 for Corporate Social Responsibility - Diversified Program. ONGC is the
only Indian company to bag honors from Platts this time across all categories.
https://www.ongcindia.com/wps/wcm/connect/en/media/press-release/ongc-bags-global-energy-
awards-2019-for-csr
 Oil and Natural Gas Corporation Ltd. (ONGC) has priced its maiden offering of USD bonds in the
aggregate principal amount of USD 300 million. The bonds will bear a coupon of 3.375% and will
mature in 2029. This is the tightest coupon for 10 year or longer tenor offering from India ever
achieved by any Indian Corporate.
 https://www.ongcindia.com/wps/wcm/connect/en/media/press-release/ongc-raises-usd300-
million-10year-bond
For more information, you may visit company website: www.ongcindia.com
POWER GRID CORPORATION OF INDIA LTD.


Headquarter : Gurugram, India
Chairman (CMD) : Shri R. N. Nayak
Director Finance (CFO) : Sriramchandra Murty Kocherlakota (KSR
Murty)
Power Grid Corporation is an Indian state-owned electric utilities company. It transmits about 50% of the
total power generated in India on its transmission network. Its transmission network consists of roughly
134,018 circuit kilometers and 214 EHVAC and HVDC substations, which provide total transformation
capacity of 278,862 MVA. POWERGRID’s interregional capacity is 63,650 MW. Initially, POWERGRID
managed transmission assets owned by NTPC, NHPC Limited (“NHPC”) and North-Eastern Electric
Power Corporation Limited. In January 1993, the Power Transmission Systems Act transferred ownership
of the three power companies to POWERGRID. All employees of the three companies subsequently
became POWERGRID employees. POWERGRID’s telecom company, POWERTEL, operates a network of
29,279 Kilometers and points of presence in 210 locations across India.
Company History
Power Grid Corporation of India Limited (POWERGRID) was incorporated on October 23, 1989 under
the Companies Act, 1956, as a public limited company, wholly owned by the Government of India. Its
original name was the ‘National Power Transmission Corporation Limited’, and it was charged with
planning, executing, owning, operating and maintaining high-voltage transmission systems in the
country. On 8 November 1990, the National Power Transmission Corporation received its Certificate for
Commencement of Business. Their name was subsequently changed to Power Grid Corporation of India
Limited, which took effect on October 23, 1992.
Philosophy
Vision: World Class, Integrated, Global Transmission Company with Dominant Leadership in Emerging
Power Markets Ensuring Reliability, Safety and Economy.
Mission: We will become a Global Transmission Company with Dominant Leadership in Emerging
Power Markets with World Class Capabilities by:
 World Class: Setting superior standards in capital project management and operations for the
industry and ourselves
 Global: Leveraging capabilities to consistently generate maximum value for all stakeholders in India
and in emerging and growing economies.
 Inspiring, nurturing and empowering the next generation of professionals.
 Achieving continuous improvements through innovation and state of the art technology.
 Committing to highest standards in health, safety, security and environment


POWERGRID’s telecom company, POWERTEL, operates a network of 29,279 Kilometers and points of
presence in 210 locations across India.
Joint Ventures
i) Powerlinks Transmission Limited
ii) Torrent POWERGRID Limited
iii) Jaypee POWERGRID Limited
iv) North-East Transmission Company Limited
v) Parbati-Koldam Transmission Company Limited
vi) Teestavalley Power Transmission Limited
vii) National High Power Test Laboratory Pvt. Limited
viii) Energy Efficiency Services Ltd
ix) Cross Border Power Transmission Company Ltd.
x) Bihar Grid Company Limited
xi) Kalinga Bidyut Prasaran Nigam Private Limited
xii) Power Transmission Company Nepal Ltd. (PTCN)
xiii) RINL POWERGRID TLT Private Ltd. (RPTPL)
Subsidiaries
Power System Operation Corporation Limited (POSOCO)
Businesses in News
 Power Grid ranked 845th on Forbes World's Largest Public Corporations List 2020.
 Power Grid ranked 341st on Forbes Best Employer's Lists 2019.
 Power Grid was adjudged winner of “National Award for Excellence in CSR & Sustainability” under
organizational category of “Best Community Development Awards” on Integrated watershed
management in Kurnool (Andhra Pradesh) and Vijayapura (Karnataka) at National CSR Leadership
Congress & Awards function organized by Zee Business in August, 2019.
https://www.powergridindia.com/accolades-awards
 Power Grid has grabbed Central Board of Irrigation and Power (CBIP) Awards, 2019 for the following
categories:
o Best Performing Power Transmission Utility’
o ‘CBIP Special Jury Award for Innovation Excellence in Power Transmission’
https://www.powergridindia.com/accolades-awards
For more information you may visit company website: www.powergridindia.com

RELIANCE INDUSTRIES LIMITED (RIL)

Ownership group : Reliance Group
Present Head (CMD & CEO) : Mukesh Ambani
Chief Financial Officer : Srikanth Venkatchari and Alok Agarwal
Reliance Industries Limited (RIL) is an Indian conglomerate holding company. Its corporate
headquarter is in Mumbai. It is one of the India’s largest private sector company. Reliance has businesses
across India and engaged in hydrocarbon exploration and production, energy, petrochemicals, textiles,
natural resources, retail, and telecommunications.
The company has more than 30 Lacs shareholders. However, Ambani family, holds approximately 52% of
the total shares whereas the remaining 48% shares are held by public shareholders.
Company History
Reliance Industries was founded by Dhirubhai Hirachand Ambani and his brother Champaklal Damani in
1960s as Reliance Commercial Corporation. In 1966, Reliance Textiles Industries Pvt. Ltd. was
incorporated in Maharashtra. It established a synthetic fabrics mill in the 1966 at Naroda in Gujarat. In
1975, the company expanded its business into textiles, with ‘Vimal’ becoming its major textile brand in
later years. The name of the company was changed from Reliance Textiles Industries Ltd. to Reliance
Industries Ltd (RIL) in 1985.
Philosophy
RIL aim is to touch the lives of people in a positive way. RIL believes in inclusive growth as a universal
concept it is also depicted in the way it conducts its business. Growth and development are often defined
conventionally in terms of net profit, revenue, and other financial performance.
Mission: To continue growing as a responsible organisation that believes in enriching the lives of those
around it. It continues undertaking social initiatives in the areas of education, healthcare, community
infrastructure, skill enhancement and social security.
Growth is Energy…..Growth is Value… Growth is Happiness… Growth is Life...

RIL has 81 subsidiary companies and 10 associate companies.
Businesses Particulars
Reliance Retail Popular Brands: Reliance Fresh, Reliance Footprint, Reliance Time Out,

Reliance Digital, Reliance Wellness, Reliance Trends, Reliance Autozone,

Reliance Super, Reliance Mart, Reliance iStore, Reliance Home Kitchens,
Reliance Market (Cash n Carry) and Reliance Jewel.
Reliance Life It works around medical, plant and industrial biotechnology. It works in
Sciences products in bio- pharmaceuticals, pharmaceuticals, clinical research services,
regenerative medicine, molecular medicine, novel therapeutics, biofuels, plant
biotechnology, and industrial biotechnology sectors of the medical business
industry.
Exploration and It is complete chain of activity starting from exploration, appraisal,
Production development and production. Its ventures are in conventional oil and gas blocks
in Krishna Godavari, Mahanadi, Cauvery Palar, Gujarat Saurashtra & Cambay
Basin and two Coal Bed Methane (CBM) blocks in Sohagpur East and West in
Madhya Pradesh.
Petroleum Refining Products: Liquefied Petroleum Gas (LPG), Propylene, Naphtha, Gasoline, Jet
and Marketing /Aviation
Turbine Fuel, Kerosene Oil, High-Speed Diesel, Sulphur, Petroleum Coke, etc.
Brands: R-Care, A1 Plaza, Quick Mart, GAPCO, Refresh, RELSTAR, Reliance
Aviation, Reliance Gas, etc.
Reliance Products: Polymers, Polyesters, Fiber Intermediates, Aromatics and
Petrochemicals Elastomers.
Brands: Recron, Relpet, Repol, Relena Eva, Relab, Relflex, etc.
Reliance Jio It is a broadband service provider which gained 4G licences for operating across
Infocomm Limited India. Jio is capable of offering a unique combination of telecom, high speed
(RJIL) data, digital commerce, media and payment services. Reliance Jio has laid more
than 2.5 lakh kilometres of fibre-optic cables, covering 18,000 cities and over
one lakh villages, with the aim of covering 100% of the nation’s population by
2018.
Network 18 It is a mass media company. It has interests in television, digital platforms,
publication, mobile apps, and films.
Brands: Viacom 18, History TV18, Viacom, A+E Networks, ETV Network,
Colors TV, CNN News18, IBN7 and IBN Lokmat.
Reliance Textiles It has a manufacturing facility at Naroda. It is one of the largest and most
modern textile complexes in the world. It supplies premium finished fabrics to
prestigious brands and export to over 58 countries.
Brand: Vimal

Competitive Scenario
RIL is a ‘conglomerate’ business which deals both related and unrelated products and businesses. Its
different companies compete with different businesses for their different products and services.
For Example: Reliance Fresh competes with Safal, Easyday, D-Mart, Spencer’s, etc. and Reliance Jewels
competes with Tanishq, Nakshatra, Gili, Moira, Karina, Riwaaz, etc.
Business in News
 Reliance Industries ranked 58th on Forbes World's Largest Public Corporations List 2020.
 RIL announces strategic investment in and partnership with Den Networks Limited and Hathway
Cable and Datacom Limited.
 RIL announces stratgic investment in Embibe to Form Indis's Laarget Artificial Intelligence (AI)
Based Education Program.
 Reliance Industries and UK's BP plc have agreed to form a new joint venture to set up 5,500 petrol
pumps and retail aviation turbine fuel to airlines in India. Reliance will hold 51 per cent stake in the
new joint venture, while BP will have the remaining 49 per cent.
https://www.ril.com/getattachment/9f9efbd7-94b3-4db9-909a-208f0ffab12a/Reliance-and-BP-
move- forward-with-Indian-fuels-par.aspx
 Saudi Aramco and reliance industries signed a non-binding letter of intent in Aug,2019 to acquire a
20% stake in the oil to chemicals (o2c) division of reliance industries limited valued at an enterprise
value of us$ 75 billion one of the largest foreign investments in India.
https://www.ril.com/getattachment/7e396e65-30eb-41a0-9763-c59e1675cd3e/Saudi-Aramco-and-
Reliance-Industries-Sign-a-Non-Bi.aspx
 Reliance and Microsoft announced a partnership to accelerate the digital transformation in India.
Under the deal, Microsoft will bring in the Azure Cloud on Jio Network targetting the enterprise and
business users seeking a technological shift.
https://www.ril.com/getattachment/84fc1633-34af-4362-927b-9e7f245ced9b/Jio-and-Microsoft-
Announce-Alliance-to-Accelerate.aspx
 Jio partners with Aeromobile to launch India’s first in-flight mobile services
https://www.ril.com/getattachment/e681db09-6bd1-4f1a-b8cc-c628211fee7b/Jio-Partners-with-
Aeromobile-to-Launch-India%E2%80%99S-Fir.aspx
 Aggregate silver lake investment of ₹ 9,375 crore further endorses Reliance retail venture’s vision to
transform Indian retail

https://www.ril.com/getattachment/6913846e-50a5-44a7-8987-b9d45c2681fa/Silver-Lake-Co-
Investors-to-Invest-Additional-%E2%82%B9-1,.aspx
For more information you may visit company website: www.ril.com
STATE BANK OF INDIA

Present Head (CMD) : Rajnish Kumar
Chief Financial Officer : Charanjit Surinder Singh Attra
State Bank of India is an Indian multinational, public sector banking and financial services government-
owned corporation. SBI is actively involved since 1973 in non-profit activity called Community Services
Banking. SBI has 14 regional hubs and 57 Zonal Offices that are located at important cities throughout
India. It has more than 14,000 branches, 58,500 ATMs, including 191 foreign offices spread across 36
countries. It is the largest banking and financial services company in India by assets. State Bank of India
is a banking behemoth and has 20% market share in deposits and loans among Indian commercial banks.
Company History
The bank traces its ancestry to British India, through the Imperial Bank of India, to the founding, in 1806,
of the Bank of Calcutta, making it the oldest commercial bank in the Indian subcontinent. Bank of Madras
merged into the other two “presidency banks” in British India, Bank of Calcutta and Bank of Bombay, to
form the Imperial Bank of India, which in turn became the State Bank of India in 1955. Government of
India owned the Imperial Bank of India in 1955, with Reserve Bank of India taking a 60% stake, and
renamed it the State Bank of India. In 2008, the government took over the stake held by the Reserve Bank
of India.
Philosophy
Vision:
 My SBI
 My Customer first.
 My SBI: First in customer satisfaction
Mission:
 We will be prompt, polite and proactive with our customers.
 We will speak the language of young India.
 We will create products and services that help our customers achieve their goals.

 We will go beyond the call of duty to make our customers feel valued.
 We will be of service even in the remotest part of our country.
 We will offer excellence in services to those abroad as much as we do to those in India.
 We will imbibe state of the art technology to drive excellence.

SBI’s major products and services are related with segments like, Personal Banking, NRI Services,
Agriculture, International Corporate, SME, Group Companies, Government Business and interest Rates
services.
SBI’s portfolio of businesses
Subsidiaries Non-banking Subsidiaries
State Bank of India (Mauritius) SBI Capital Markets Ltd.
SBI Sri Lanka SBI Funds Management Pvt. Ltd.
Indo–Nigerian Merchant Bank SBI Factors & Commercial Services Pvt. Ltd.
SBI Nepal SBI Cards & Payments Services Pvt. Ltd. (SBICPSL)
Commercial Bank of India, Moscow SBI DFHI Ltd.
PT Bank Indo Monex, Indonesia SBI Life Insurance Company Limited
SBI General Insurance
Business in News
 SBI ranked 171st in Forbes World's Largest Public Corporation List 2020.
 SBI ranked 385th in Forbes World's Best Employer List 2019.
 State Bank of India (SBI) and National Investment and Infrastructure Fund (NIIF) join hands to
provide a greater thrust to infrastructure financing. During 2018-19, SBI had extended financial
assistance of about ` 51,000 Cr to 47 infrastructure projects.
https://sbi.co.in/documents/39129/52199/NIIF-SBI+MoU+Final+Press+release.pdf
 State Bank of India (SBI) approves sale of 4% stake in SBI General Insurance to Axis New
Opportunities AIF – I and PI Opportunities Fund – I, valuing SBI General Insurance at over 12,000
crores in Sep.2018.
https://sbi.co.in/documents/39129/52199/Power_Press+release_Final+2+PM_26092018.pdf
 SBI Chairman inaugurated 'Swachh Belur Math' project.

 State Bank of India (“SBI”) announces successful pricing of its inaugural USD denominated public
green bond for USD 650 million.
https://sbi.co.in/web/sbi-in-the-news/press-releases

Information Bubble
SBI does not have Ltd. mentioned after its name. Why?
Because it is not a limited company, and it operates as per the SBI Act of 1959. Also, as it is the bank of
the government , its liability is unlimited. Hence, the word “Ltd.” is not suffixed after it’s name.
For more information you may visit company website: www.sbi.co.in
TATA SONS PRIVATE LIMITED

Ownership group : Tata Group
Headquarter : Bombay House, Mumbai, Maharashtra, India.
Present Head (CMD) : Natrajan Chandrasekaran
Chief Financial Officer : Eruch Noshir Kapadia
Tata Sons Private Limited is the conglomerate holding company of the Tata Group and holds the bulk
of shareholding in these companies. It is India’s largest conglomerate. Tata group is a global enterprise,
headquartered in India, comprising over 100 independent operating companies. The group operates in
more than 100 countries across six continents. The chairman of Tata Sons has traditionally been the
chairman of the Tata Group. Tata Sons is the principal investment holding company and promoter of Tata
companies. The chairman of Tata Sons has traditionally been the chairman of the Tata Group.
Philosophy
Tata has always been values-driven. These values continue to direct the growth and business of Tata
companies. The five core Tata values underpinning the way we do business are pioneering, integrity,
excellence, unity and responsibility.
Mission: To improve the quality of life of the communities we serve globally through long-term
stakeholder value creation based on Leadership with Trust.

There are 29 publicly-listed Tata enterprises.
Sectors Popular Brands
Communications and Nelco, Tata ClassEdge, Tata Communications, Tata Consultancy Services,
ITeS Tata Interactive Systems, Tata Teleservices, Tatanet, etc.
Services Indian Hotels, Roots Corporation, Taj Air, Tata Africa Holdings, Tata
Business Excellence Group, Tata Limited, Tata SIA Airlines (Vistara), Tata
Technologies, etc.

Financial Services Tata AIA Life Insurance, Tata AIG General Insurance, Tata Asset
Management, Tata Capital, Tata Investment Corporation.
Consumer and Retail Casa Decor, Landmark, Tata AG, Tata Global Beverages, Tata Coffee, Tata
Sky, Tata UniStore, Titan Company, Trent, etc.
Defence and TAL Manufacturing Services, TASEC, Tata Advanced Materials, Tata
Aerospace Advanced Systems, Tata Industrial Services, Tata Technologies, etc.
Manufacturing Advinus Therapeutics, Indian Steel and Wire Products, Jaguar Land Rover,
NatSteel Holdings Rallis India, Tata Autocomp Systems, Tata BlueScope
Steel, Tata Ceramics, Tata Chemicals, Tata Cummins, Tata Daewoo
Commercial Vehicle Company, Tata Hitachi, Tata Metaliks, Tata Motors, Tata
Steel, etc.
Realty and Associated Building Company, Tata Consulting Engineers, Tata Housing
Infrastructure Development
Company, Tata Power, Tata Power Solar, Tata Realty and Infrastructure,
Voltas, etc.
Business in News
 Tata Motors ranked 1037th in Forbes World's Largest Public Corporation List 2020.
 Tata Consultancy Services ranked 375th in Forbes World's Largest Public Corporation List 2020.
 Tata Steel ranked 828th in Forbes World's Largest Public Corporation List 2020.
 Tata Motors ranked 304th on Forbes World's Best Employer List 2019.
 Tata Steel ranked 391th on Forbes World's Best Employer List 2019.
 The 'Tata' brand has entered the list of top 100 most valuable brands according to the Brand Finance
Global 500, 2019 report released at the World Economic Forum in Davos. The total value of brand
'Tata' increased 37 percent to $19.5 billion in 2019 from $14.2 billion a year ago.
https://www.tata.com/newsroom/tata-only-indian-brand-among-top-100-brands-world
 Market capitalization of all 28 listed Tata group companies rose to ₹10.88 trillion as of Feb.2019
https://www.tata.com/newsroom/n-chandra-livemint-market-cap-rises-21-percent
Information Bubble
Tata Sons Private Limited, observe the words “Private Limited” mentioned after the name. This means
that the company is a private company, and it does not have any shares traded on the stock exchange. It
is owned privately by Tata Group.
For more information you may visit company website: www.tata.com

WIPRO LIMITED

Headquarter : Bengaluru, India
Present Head (Chairman & MD) : Rishad Premji
Present Head (CEO) : Thierry Delaporte
Chief Financial Officer : Jatin Dalal
Wipro Ltd is a global information technology, consulting and outsourcing company with clients in 175+
cities across 6 continents. It has over 55 dedicated emerging technologies ‘Centers of Excellence’ that
enables it to harness the latest technology for delivering business capability to clients. Wipro is globally
recognized for its innovative approach towards delivering business value and its commitment to
sustainability. Wipro champions optimized utilization of natural resources, capital and talent.
Company History
The company was incorporated on 29 December 1945, in Amalner a small town in Jalgaon district by
Mohamed Premji as ‘Western India Palm Refined Oil Limited’, later abbreviated to ‘Wipro’. It was initially
set up as a manufacturer of vegetable and refined oils in Amalner, Maharashtra, India under the trade
names of Kisan, Sunflower and Camel. The year 1980 marked the arrival of Wipro in the IT domain. In
1982, the name was changed from Wipro Products Limited to Wipro Limited.
Philosophy
Vision: To be among the Top 10 Global IT & Business Process Outsourcing Services.
Mission: To help create a new kind of professional services firm that works with both business and IT
executives to innovate and deliver, end to end solutions that create measurable value for our clients.

Products and services in which the company deals in are: analytics, digital, cloud, applications, business
outcome services, business process consulting, enterprise architecture, eco-energy, information
management, infrastructure services, internet of things, manged services, mobility, open source and
product engineering.
Wipro Group of Companies:

 Western India Products Limited
 Wipro Consumer Care & Lighting
 Wipro Infrastructure Engineering
 Wipro GE Medical Systems

Business in News
 WIPRO ranked 904th on Forbes World's Largest Public Corporations List 2020.
 WIPRO ranked 193rd on Forbes World's Best Employer's List 2019.
 It is a member of the NASDAQ Global Sustainability Index as well as the Dow Jones Sustainability
Index.
 Wipro Recognized as a Leader in Artificial Intelligence Consultancies by global research and advisory
firm Forrester Research Inc. for 2019
https://www.wipro.com/en-IN/newsroom/press-releases/2019/wipro-recognized-as-a-leader-in-
artificial- intelligence-consultancies-by-independent-research-firm/
 Wipro was ranked among the HFS Top10 Finance and Accounting Service Providers, Energy Service
Providers, and Google AI Services, 2019.
https://www.wipro.com/content/dam/nexus/en/newsroom/press-releases/2020/pdf/press-release-
wipro- q1-20.pdf
 In 2019, 32.31 crores Equity Shares of ` 2 each were bought back under the Buyback, at a price of
`325/- per Equity Share. The total amount utilized in the Buyback was `10500 crores. (appx.)
https://www.wipro.com/content/dam/nexus/en/investor/buy-back/buyback2019/stock-exchange-
intimation-extinguishment-of-equity-shares-pursuant-to-buyback.pdf
For more information you may visit company website: www.wipro.com
AN OVERVIEW OF SELECTED GLOBAL COMPANIES

AMAZON.COM, INC.

Headquarter : Seattle, Washington, U.S.
Founders : Jeff Bezos
Present Head (CEO) : Jeff Bezos
Chief Financial Officer : Brian T. Olsavsky
Amazon.com, Inc. is an American multinational technology company based in Seattle, Washington, which
focuses on e-commerce, cloud computing, digital streaming, and artificial intelligence. It is considered
one of the Big Four companies in the U.S. information technology industry, along with Google, Apple, and
Facebook. The company has been referred to as "one of the most influential economic and cultural forces
in the world", as well as the world's most valuable brand.

Amazon is known for its disruption of well-established industries through technological innovation and
mass scale. It is the world's largest online marketplace, AI assistant provider, live-streaming platform and
cloud computing platform as measured by revenue and market capitalisation. Amazon is the largest
Internet company by revenue in the world. It is the second largest private employer in the United States
and one of the world's most valuable companies.
Company History
Jeff Bezos founded Amazon in July 1994 as an online book store to buy and rent books. He chose Seattle
because of technical talent as Microsoft is located in Seattle. The company began selling music and videos
in 1998, at which time it began operations internationally by acquiring online sellers of books in United
Kingdom and Germany. The following year, the organization also sold video games, consumer electronics,
home- improvement items, software, games, and toys in addition to other items.
The company invested heavily in cloud computing and artificial intelligence, and rose to become one of
the most valuable companies in the world.
Amazon’s operations in India
Year of Operations : 2012 - 2013
Headquarter : Hyderabad, India
Present Head (CEO) : Amit Agarwal
Chief Financial Officer : Raghava Rao
Philosophy
Vision: We aim to be Earth's most customer centric company
Mission: To continually raise the bar of the customer experience by using the internet and technology to
help consumers find, discover and buy anything, and empower businesses and content creators to
maximise their success.

Amazon.com's product lines available at its website include several media (books, DVDs, music CDs,
videotapes and software), apparel, baby products, consumer electronics, beauty products, gourmet food,
groceries, health and personal-care items, industrial & scientific supplies, kitchen items, jewelry, watches,
lawn and garden items, musical instruments, sporting goods, tools, automotive items and toys & games. It
has the following services for its customers;
 Amazon Fresh
 Amazon Prime
 Amazon Web Services
 Alexa
 Appstore
 Amazon Drive
 Echo

 Kindle
 Fire tablets
 Fire TV
 Video
 Kindle Store
 Music
 Music Unlimited
 Amazon Digital Game Store
 Amazon Studios
 Amazon Wireless
Business in News
 Amazon ranked 2nd on Fortune 500 Companies List in 2020.
 Amazon ranked 22nd on Forbes World's Largest Public Corporations List 2020.
 #1 American Customer Satisfaction Index Internet Retail Category, 2020, Ranked in the top 10,
eleven years running
 #1 BrandZ Most Valuable Global Brand, 2019-2020
 #2 Fortune World’s Most Admired Companies, 2017-2020
 Jeff Bezos is currently the richest person in the world with a personal wealth of over $175 Billion.
(www.bbc.com)
Source: wikipedia.org and www.aboutamazon.com/our-company/select-awards-and-recognition
For more information you may visit company website: www.amazon.com
AMERICAN EXPRESS

Headquarter : New York City, US
Present Head (Chairman and CEO) : Stephen Squeri
Chief Financial Officer : Jeffery C. Campbell
American Express Company is an American multinational financial services corporation. The company is
best known for its credit card, charge card, and traveller’s cheque businesses. In 2016, credit cards using
the American Express network accounted for 22.9% of the total dollar volume of credit card transactions
in the US. It operates in 175 countries with 2,300 offices across the world. It is the parent organisation of
three major companies: American Express Travel Related Services (TRS), The American Express Bank
Ltd. (AEBL) and American Express Financial Advisors.
American Express in India:

In India, the company offers a wide range of travel, financial and network service products. American
Express established its first office in India in 1921 in Kolkata. Since then it has grown to become the
leading travel related services and banking organisation in the country.
American Express is considered a pioneer in offshoring processes to captive centres in India. The
company has set up global back office operations to leverage the skilled manpower available in India:
 American Express (India) Private Ltd.: This centre handles accounting and financial processes for
American Express’ businesses around the world.
 American Express Global Service Centre: This centre provides support to the company’s card,
financial services and travel-related businesses in the US and other countries.
Company History
American Express was started in 1850 as an express mail business in New York. It was founded as a joint
stock corporation by the merger of the express companies owned by Henry Wells (Wells & Company),
William G. Fargo (Livingston, Fargo & Company), and John Warren Butterfield (Wells, Butterfield &
Company).
Philosophy
Vision: To be a leading provider of payment solutions worldwide.
Mission: Leverage our local and global expertise to be a leading provider of payment solutions for our
customers by delivering high quality, innovative and world-class products and services; while maintaining
the highest standards of governance and ethics.

American Express’s products and services are:
Segments Products
Card products Consumer cards, Acceptance of American Express cards outside of the
United States, Card design, ExpressPay, Small business services (also known as
American Express OPEN), Commercial cards and services, Non-proprietary cards and
Merchant account.
Non-card Traveler’s checks, Shearson/American Express, Financial advisors, International bank,
products Travel, Publishing and Individual banking
Business in News
 American Express ranked 67th on Fortune 500 Companies in 2020.
 American Express ranked 88th on Forbes World's Largest Public Corporations List 2020.
 American Express ranked 43rd on Forbes World's Best Employer's List 2019.
 American Express (Amex) has added 6 lakh new merchants since 2017 in India.
https://www.moneycontrol.com/news/business/companies/amex-brings-6-lakh-new-merchants-in-
its- fold-since-2017-4566471.html

Information Bubble
Like in India we use Ltd. or Private Ltd. after the company’s name to identify of the company is a public
company (with shares traded on Stock Exchange) or a privately owned company. Similarly, every
country uses its own terms of to denote a company.
For example, Inc. or Corporation or Corp. or LLC is used in United States to denote public company,
while GmbH (“Gesellschaft mit beschränkter Haftung,”) is used in Germany to denote a company with
limited liability.
For more information you may visit company website: www.americanexpress.com
APPLE

Headquarter : California, US
Present Head (CEO) : Tim Cook
Chief Financial Officer : Luca Maestri
Apple is an American multinational technology company. It designs, develops, and sells consumer
electronics, computer software, and online services. Apple is the world’s largest information technology
company by revenue, the world’s largest technology company by total assets, and the world’s second-
largest mobile phone manufacturer, by volume, after Samsung. It maintains 478 retail stores in seventeen
countries. It operates the online Apple Store and iTunes Store, the latter of which is the world’s largest
music retailer.
Company History
Apple was founded by Steve Jobs, Steve Wozniak, and Ronald Wayne in April 1976 to develop and sell
personal computers. It was incorporated as Apple Computer, Inc. in January 1977, and was renamed as
Apple Inc. in January 2007 to reflect its shifted focus toward consumer electronics.
Philosophy
Vision: To produce high-quality, low cost, easy to use products that incorporate high technology for the
individual. We are proving that high technology does not have to be intimidating for non-computer
experts.
Mission: Apple is committed to bringing the best personal computing experience to students, educators,
creative professionals and consumers around the world through its innovative hardware, software and
Internet offerings.


Product Segments Brands
Mac MacBook, MacBook Air, MacBook Pro, iMac, Mac Pro, Mac mini, macOS
Sierra and Compare.
iPad iPad Pro, iPad, iPad mini 4, iOS 10, etc.
iPhone iPhone 7, iPhone 6s, iPhone SE, etc.
Watch Apple Watch Series 2, Apple Watch Nike+, Apple Watch Hermès, Apple
Watch Edition, Apple Watch Series 1 and watchOS.
TV Apple TV
Music Apple Music, iTunes and iPod
Business in News
 Apple ranked 4th on Fortune 500 Companies List in 2020.
 Apple ranked 9th on Forbes World's Largest Public Corporations List 2020.
 Apple ranked 4th on Forbes World's Best Employers List 2019.
 Apple acquired Shazam App in 2018 for an undisclosed amount. Shazam has been downloaded over 1
billion times around the world, and users identify songs using the Shazam app over 20 million times
each day.
https://www.apple.com/in/newsroom/2018/09/apple-acquires-shazam-offering-more-ways-to-
discover- and-enjoy-music/
For more information you may visit company website: www.apple.com
THE GOLDMAN SACHS GROUP, INC.

Headquarter : 200 West Street, New York, NY 10282, U.S.
Founders : Marcus Goldman and Samuel Sachs
CEO and Chairman : David M. Solomon
Chief Financial Officer : Stephen Scherr
The Goldman Sachs Group, Inc. is a leading global financial services firm providing investment banking,
securities and investment management services to a substantial and diversified client base that includes
corporations, financial institutions, governments and high-net-worth individuals. Founded in 1869, the
firm is headquartered in New York and maintains offices in London, Frankfurt, Tokyo, Hong Kong and
other major financial centers around the world.

Company History
Goldman Sachs was founded in New York City in 1869 by Marcus Goldman. In 1882, Goldman's son-in-
law Samuel Sachs joined the firm. In 1885, Goldman took his son Henry and his son-in-law Ludwig
Dreyfuss into the business and the firm adopted its present name, Goldman Sachs & Co. The company
pioneered the use of commercial paper for entrepreneurs and joined the New York Stock Exchange
(NYSE) in 1896. By 1898, the firm's capital stood at $1.6 million.
Over the years it kept acquiring its competitive firms and companies and by early 21st century, it became
the biggest investment banking enterprises in the world.
Philosophy
Mission: We are committed to a distinctive culture and set of core values. These values are reflected in
our Business Principles, which emphasize placing our clients' interests first, integrity, commitment to
excellence and innovation, and teamwork. Goldman Sachs is managed by its principal owners.

It offers services in;
 investment management,
 securities, asset management,
 prime brokerage, and
 securities underwriting.
 It also provides investment banking to institutional investors.
Business in News
 Goldman Sachs Group ranked 60th on Fortune 500 Companies List in 2020.
 Goldman Sachs Group ranked 47th on Forbes World's Largest Public Corporations List 2020.
 Global Data (May 2020): Named Top M&A financial adviser in the US for Q1
 Finance Asia Country Awards (May 2020): Named Best International Investment Bank in China and
Taiwan
 Money Management Executive Top Women in Asset Management (April 2020)
Source: wikipedia.org and www.goldmansachs.com and www.investopedia.com
For more information you may visit company website: www.goldmansachs.com
HP INC.

Chairman : Chip Bergh

Present Head (CEO) : Enrique Lores

Chief Financial Officer : Steve Fieler
Hewlett-Packard (HP) is an American multinational information technology company. It develops and
provides a wide variety of hardware components as well as software and related services to consumers,
small- and medium-sized businesses and large enterprises, including customers in the government, health
and education sectors.
Company History
The company was founded in 1939 in a one-car garage in Palo Alto by William “Bill” Redington Hewlett
and David “Dave” Packard, and initially produced a line of electronic test equipment.
Philosophy
Vision: To create technology that makes life better for everyone, everywhere — every person, every
organization, and every community around the globe.

HP’s major product lines included personal computing devices, enterprise and industry standard servers,
related storage devices, networking products, software and a diverse range of printers and other imaging
products. HP marketed its products to households, small- to medium-sized businesses and enterprises
directly as well as via online distribution, consumer-electronics and office-supply retailers, software
partners and major technology vendors.
Business in News
 In 2014, Hewlett-Packard announced plans to split the PC and printers business from its enterprise
products and services business. The split closed on November 1, 2015 and resulted in two publicly
traded companies: HP Inc. and Hewlett Packard Enterprise.
 HP ranked 109th on Fortune 500 Companies List in 2020.
 HP ranked 432nd on Forbes World's Largest Public Corporations List 2020.
 HP ranked 393rd on Forbes World's Best Employers List 2019.
 The company has committed $200 million over five or more years to develop water-based ink
technologies for printing digitally on corrugated packaging and textiles.
https://press.ext.hp.com/us/en/press-releases/2019/hp-announces-bold-industry-commitment-to-
sustainable-ink-innovation.html
 HP Inc., launched the world’s first notebook with ocean-bound plastics in Sep. 2019
https://press.ext.hp.com/us/en/press-releases/2019/hp-launches-worlds-first-pc-with-ocean-
bound-plastics.html
For more information you may visit company website: www.hp.com

IBM CORPORATION

Headquarter : New York, US
Chairman, President and CEO : Arvind Krishna
Chief Financial Officer : James J. Kovanaugh
International Business Machines Corporation (IBM) is an American multinational technology company. It
operates in over 170 countries across the globe. It manufactures and markets computer hardware,
middleware and software, and offers hosting and consulting services in areas ranging from mainframe
computers to nanotechnology.
It is a major research organization, holding the record for most patents generated by a business.
Inventions by IBM include the automated teller machine (ATM), the PC, the floppy disk, the hard disk
drive, the magnetic stripe card, the relational database, the SQL programming language, the UPC
barcode, and dynamic random-access memory (DRAM).
IBM in India: IBM India Private Limited is the Indian subsidiary of IBM. Sandip Patel is the Managing
Director of IBM India Pvt. Ltd. IBM entered India in 1992 with a Tata joint-venture, named Tata
Information Systems Ltd.
Company History
The following four historical milestones contributed in the foundation of IBM:
 Julius E. Pitrat patented the computing scale in 1885,
 Alexander Dey invented the dial recorder (1888),
 Herman Hollerith patented the Electric Tabulating Machine, and
 Willard Bundy invented a time clock to record a worker’s arrival and departure time on a paper tape
in 1889.
 On June 16, 1911, their four companies were amalgamated in New York State by Charles Ranlett Flint
forming a fifth company, the Computing-Tabulating-Recording Company (CTR) based in New York.
IBM was originated in 1911 as the Computing-Tabulating-Recording Company (CTR) and was
renamed “International Business Machines” in 1924.
Philosophy
Vision: IBM should be first and foremost on any new enterprise data centre migration shortlist.
Mission: To lead in the invention, development and manufacture of the industry’s most advanced
information technologies, including computer systems, software, storage systems and microelectronics.


Products Segments Services Segments
• Analytics • Business consulting
• Cloud • Technology services
• Cognitive (US) • Financing
• Commerce • Industry expertise
• Internet of Things (US) • Training and skills (US)
• Industry solutions
• Systems
• Mobile
• Security
• Social
Business in News
 IBM ranked 38th on Fortune 500 Companies List in 2020.
 IBM ranked 51st on Forbes World's Largest Public Corporations List 2020.
 IBM ranked 11th on Forbes World's Best Employers List 2019.
 IBM acquired Red Hat in 2019 for $190.00 per share in cash, representing a total equity value of
approximately $34 billion.
https://www.redhat.com/en/about/press-releases/ibm-closes-landmark-acquisition-red-hat-34-
billion- defines-open-hybrid-cloud-future
 IBM released a study by the IBM Institute of Business Value (IBV) on the Hybrid Cloud market in
India according to it 99% of Indian companies are set to adopt multiple Hybrid Cloud within next 3
years
https://www-03.ibm.com/press/in/en/pressrelease/55662.wss
 Tech giant IBM on January 14 said it has received record 9,262 US patents in 2019, with India being
the second-highest contributor. "IBM inventors received record 9,262 US patents in 2019, achieving a
milestone of most patents ever awarded to a US company and marking the company's 27th
consecutive year of US patent leadership," a statement said.
 In 2019, IBM was granted patents across key technology areas such as artificial intelligence (AI),
blockchain, cloud computing, quantum computing and security, it added.
 IBM inventors from India received over 900 patents, the second-highest contributor to the global
tally after the US. Few of the patents filed from India include infrastructure costs and benefit tracking,
automation and validation of insurance claims for infrastructure risks and failures in multi-processor
computing environments, and eye contact-based information transfer.

https://www.moneycontrol.com/news/business/ibm-tops-us-patent-list-for-2019-with-over-9000-
patents- india-second-highest-contributor-4817341.html
For more information you may visit company website: www.ibm.com
INTEL CORPORATION

Chairman : Omar Ishrak
Present Head (CEO) : Bob Swan
Chief Financial Officer : George Davis
Intel Corporation is an American multinational corporation and technology company. It is the world’s
largest and highest valued semiconductor chip makers based on revenue and is the inventor of the x86
series of microprocessors: the processors found in most personal computers (PCs). Intel supplies
processors for computer system manufacturers such as Apple, Lenovo, HP, and Dell.
Company History
Intel Corporation was founded on July 18, 1968, by semiconductor pioneers Robert Noyce and Gordon
Moore, and widely associated with the executive leadership and vision of Andrew Grove. The company’s
name was conceived from the words ‘integrated’ and ‘electronics’. The fact that ‘intel’ is the term for
intelligence information also made the name appropriate.
Philosophy
Mission: “Delight our customers, employees, and shareholders by relentlessly delivering the platform
and technology advancements that become essential to the way we work and live.”
Intel’s core values are Customer Orientation, Discipline, Risk-Taking, Results Orientation, Quality and
Great Place to Work.

Product Segments Brands
Devices and Systems 2 in 1 & Ultrabook™, Cable Modems, Desktops, Drones, Intel® Compute
Card, Intel® Compute Stick, Intel® NUC, Laptops, Microservers, Mini
PCs, Servers, Smart Phones, Tablets, Workstations, etc.
Processors Intel® Core™, Intel® Xeon®, Intel® Atom™, Pantium, Celeron®, etc.
Boards & Kits Intel® Curie™ SoC, Intel® Joule™, Intel® Galileo Development Board,
Intel® Quark™ D2000 Development Kit, Intel® Quark™ SE

Microcontroller C1000 Evaluation Kit, Server Motherboards, etc.

Chipsets Mobile, Desktop, Server and Embedded.
Server Products Data Center Blocks, Server Boards, Server Systems, Server Chassis,
Accelerator Cards, RAID Products and Server Management.
Networking and Ethernet Products and Fabric Products.
Communications
Wireless Cellular Modems
Others Software, Intel Gateways, etc.
Business in News
 Intel ranked 45th on Fortune 500 Companies List in 2020.
 Intel ranked 38th on Forbes World's Largest Public Corporations List 2020.
 Intel ranked 64th on Forbes World's Best Employers List 2019.
 Intel Corporation acquired Artificial Intelligence chip maker Habana Labs, an Israel-based developer
for approximately $2 billion in Dec.2019
https://newsroom.intel.com/news-releases/intel-ai-acquisition/#gs.oh1gv3
 Intel Corporation sold the majority of its smartphone modem business to Apple valued at $1 billion in
2019.
https://newsroom.intel.com/news-releases/intel-completes-sale-smartphone-modem-business-
apple/#gs.oh5k4x
For more information you may visit company website: www.intel.com
MICROSOFT CORPORATION

Headquarter : Washington, US
Chairman : John Thompson
Present Head (CEO) : Satya Nadella
Chief Financial Officer : Amy Hood
Microsoft is an American multinational technology company. It develops, manufactures, licenses,
supports and sells computer software, consumer electronics and personal computers and services. Its best
known software products are the Microsoft Windows line of operating systems, Microsoft Office office
suite, and Internet Explorer and Edge web browsers.
Microsoft in India: Microsoft Corporation India is one of the fastest growing subsidiaries of Microsoft
Corporation, the worldwide leader in software, services, and solutions. The Microsoft India story began in

1990. Microsoft runs six major business units representing entire product cycle to serve customers from
consumers to corporations, gamers to governments.
i) Microsoft Research India (MSR India)
ii) Microsoft India (R&D) Private Limited
iii) Microsoft IT India
iv) Microsoft Services Global Delivery
v) Microsoft Corporation India Pvt. Ltd. (MCIPL)
vi) Microsoft India Global Technical Support Center (IGTSC)
Company History
Microsoft was founded by Paul Allen and Bill Gates on April 4, 1975 with Gates as the CEO. Microsoft
entered the OS business in 1980 with its own version of Unix, called Xenix. However, it was MS-DOS that
solidified the company’s dominance. It rose to dominate the personal computer operating system market
with MS-DOS in the mid-1980s, followed by Microsoft Windows. Since the 1990s, it has increasingly
diversified from the operating system market and has made a number of corporate acquisitions.
Philosophy
Vision: To help individuals and businesses realize their full potential.
Mission: To empower every person and every organization on the planet to achieve more.
Microsoft’s vision statement shows the company’s target market and product value. Microsoft’s mission
statement presents the global market scope of the business and a general idea about the benefit of the
business to its customers. However, such information is still not clearly defined to represent the business.

Segments Products
Software and Services Windows, Office, Free downloads and security, Internet explorer, Microsoft
edge and MSN.
Devices and Xbox All Windows PC and tablets, PC accessories, Xbox and games.
For Business Cloud Platform, Microsoft Azure, MS Dynamic 365, Windows for business,
Office for business, Skype for business, Enterprise solutions and Volume
licensing.
For Developers and IT Microsoft Azure, MSDN, TechNet and Visual studio.
Pros
For Students and Office for students, One note in classroom and Microsoft in education.
Educators
Business in News
 Microsoft ranked 21st on Fortune 500 Companies list in 2020.
 Microsoft ranked 13th on Forbes World's Largest Public Corporations List 2020.

 Microsoft ranked 2nd on Forbes World's Best Employers List 2019.

 Microsoft Taiwan and Asia’s leading media technology company, KKBOX Group, jointly announced
the launch of a global strategic partnership that will migrate the group’s subsidiary KKBOX’s music
streaming services to the Microsoft Azure cloud platform.
https://news.microsoft.com/2019/12/20/microsoft-and-kkbox-group-launch-global-strategic-
partnership/
 KPMG expects to invest US$5 billion in digital strategy and expand Microsoft alliance to accelerate
professional services transformation.
https://news.microsoft.com/2019/12/05/kpmg-expects-to-invest-us5-billion-in-digital-strategy-and-
expand-microsoft-alliance-to-accelerate-professional-services-transformation/
For more information, you may visit company website: www.microsoft.com
NESTLE

Ownership group : Nestle Group
Headquarter : Vevey, Switzerland.
Chairman : Paul Bulcke
Chief Executive Officer : Ulf Mark Schneider
Chief Financial Officer : François-Xavier Roger
Nestle is a Swiss transnational food and drink company. It is the world’s largest food, nutrition, health
and wellness company. It has been the largest food company in the world. Nestle serves in 2000 plus
brands across the globe. It has 418 plant facilities in 86 countries with its products available in 191
countries. It has a huge work force of 3,52,000 people across the world.
Nestle invests around CHF 1.5 billion in Research and Development every year. It has a worldwide
network of 17 research, development and product testing centres. It covers over 100 different professional
areas including nutritional science, the life sciences, raw materials, ingredients and production processes.
Philosophy: A Vision
Its mission of “Good Food, Good Life” is to provide consumers with the best tasting, most nutritious
choices in a wide range of food and beverage categories and eating occasions, from morning to night.
Company History
Nestle was founded 151 years ago as an Anglo-Swiss Condensed Milk Company by a Swiss confectioner,
Henri Nestle in 1866. In August 1867, Charles and George Page established the Anglo-Swiss Condensed

Milk Company in Cham, Switzerland. In 1879, Nestle merged with milk chocolate inventor Daniel Peter.
In 1905, the companies merged to become the Nestlé and Anglo-Swiss Condensed Milk Company. Nestle
came to India in 1923.

Cookie dough, Maggi noodles, Nescafe, Kit Kat, Smarties, Nesquik, Stouffer’s, Vittel, Milkmaid,
Carnation, etc. are one of the most popular products and brands of Nestle.
Nestle’s portfolio of businesses include:

Brands Operations Products
Nestle Waters World’s leading producer of bottled It has 52 water brands which include
water, employing more than 34,000 Acqua Panna, Aquarel, Buxton,
staff at 100 production sites in 35 Perrier, Pure Life, San Pellegrino,
countries globally. Sao Lourenco, and Vittel.
Cereal Partners It is a joint venture which combines Breakfast cereals and baby foods.
Worldwide (CPW) the expertise of two companies: Nestlé Cerelac, Gerber, Gerber Graduates,
and General Mills. NaturNes, Nestum, Chocapic, Cini
Minis, Cookie Crisp, Estrelitas,
Fitness, Nesquik Cereal, etc.
Nestlé Health Science It has been engaged in advancing the Related to the health areas, such as
role for nutritional therapy in the paediatric and acute care, metabolic
management of people’s health. and obesity care, healthy ageing, and
gastrointestinal and brain health.
Example: Boost, Meritene, Nutrin
Junio, Alfameno, etc.
Nestlé Nespresso It was started in 1986 to enable anyone Nescafé, Nescafé 3 in 1, Nescafé
to create the perfect cup of espresso Cappuccino, Nescafé Classic, Nescafé
coffee. Decaff, Nescafé Dolce Gusto, Nescafé
Gold, Nespresso
Nestlé Purina It aims to develop products that deliver Purina Pro Plan, Purina ONE, Fancy
PetCare comprehensive nutrition to help Feast, Friskies, Dog Chow, Beneful,
ensure the long healthy lives of pets. Alpo, Bakers Complete, Cat Chow,
Chef Michael’s Canine Creations,
Felix, Gourmet, etc.
Nestlé Skin Health It works to enhance the quality of life Cataphil Lotion, Daylong, Emervel,
by delivering science-based solutions Mirvaso, etc.
for the health of skin, hair and nails
over the course of people’s lives

Competitive Scenario
Major competitors of Nestle in Indian sub-continent and worldwide are Unilever, Starbucks, Kraft Foods,
Mars, PepsiCo, Britannia, Walmart, Patanjali, Amul, Glaxo Smith Con, KRBL and Hatsun Agro.
Major Acquisitions by Nestle

San Pellegrino in 1997, Spillers Pet foods in1998, and Ralston Purina in 2002, Chef America in June
2002, Delta Ice Cream in December 2005, Hsu Fu Chi International Ltd. in July 2011, Vitaflo, CM&D
Pharma Ltd., Prometheus Laboratories in 2012, etc.
Major Joint Ventures by Nestle

 Cereal Partners Worldwide with General Mills (50%-50%)
 Beverage Partners Worldwide with Coca-Cola Company (50%-50%)
 Lactalis Nestle Produits Frais with Lactalis (40%-60%)
 Nestle Colgate-Palmolive with Colgate-Palmolive (50%-50%)
Business in News
 Nestle ranked 41st on Forbes World's Largest Corporation List 2020.
 Nestle ranked 79th on Forbes World's Best Employers List 2019.
 Nestlé’s Board of Directors has decided to distribute an amount of up to CHF 20 billion to Nestlé
shareholders over the period 2020 to 2022, primarily in the form of share buybacks.
https://www.nestle.com/media/pressreleases/allpressreleases/nine-month-sales-2019
 Nestlé inaugurated the Institute of Packaging Sciences, the first-of-its-kind in the food industry to
address the global challenge of plastic packaging waste.
https://www.nestle.com/media/pressreleases/allpressreleases/nestle-inaugurates-packaging-
research- institute
For more information you may visit company website: www.nestle.com
WALMART

Headquarter : Arkansas, US
Chairman : Greg Penner
Present Head (CEO) : Dough McMillon
Chief Financial Officer : Brett Biggs
Walmart, is an American multinational retailing corporation that operates as a chain of hypermarkets,
discount department stores, grocery stores and online store. It is world’s leading retailer renowned for its

efficiency and expertise in logistics, supply chain management and sourcing. Walmart is the world’s
largest company by revenue. Walmart has 11,695 stores and clubs in 28 countries, under a total of 63
banners as well as the largest private employer in the world. Walmart’s primary competitors include
department stores like Aldi, Kmart, Kroger, Ingles, Target, Shopko, and Meijer, and Winn Dixie.
Walmart in India: Wal-Mart India owns and operates 21 Best Price Modern Wholesale stores offering
nearly 5,000 items in a Cash and Carry wholesale format in 9 States across India. The first store opened in
Amritsar in May 2009. Sameer Aggarwal is the CEO, Walmart India.
On 1st July, 2014, Walmart India launched B2B e-commerce platform and extended it to its Best Price
store members (kirana stores, offices and institutions and hotels, caterers and restaurants and other
business members), providing them with a convenient online shopping opportunity. As an exclusive
virtual store for its members in 19 cities, the e-commerce platform provides a similar assortment of
products, as well as special items.
Company History
It was founded by Sam Walton in 1962 and incorporated on October 31, 1969. The company was listed on
the New York Stock Exchange in 1972.
Philosophy
Vision: To be the best retailer in the hearts and minds of consumers and employees.
Mission: Saving people money so that they can live better.
Slogan: Save money. Live better.

 Walmart sells a wide range of fresh, frozen and chilled foods, fruits and vegetables, dry groceries,
personal and home care, hotel and restaurant suppliers, clothing, office supplies and other general
merchandise items.
 Walmart’s operations are organized into four divisions: Walmart U.S., Walmart International, Sam’s
Club and Global eCommerce.
Business in News
 Walmart ranked 1st on Fortune 500 Companies List in 2020.
 Walmart ranked 19th on Forbes World's Largest Public Corporations List 2020.
 Walmart acquires 77% shares of Flipkart on May 9, 2018
 In 2017, Walmart acquired Moosejaw and Bonobos for approximately $351 million.
 In 2016, Walmart acquired jet.com for approximately $565 million.
 Walmart India & HDFC Bank announced co-branded credit card exclusively for over 1 million ‘Best
Price’ members in Dec. 2019

http://www.wal-martindia.in/2019/12/02/walmart-india-hdfc-bank-announce-co-branded-credit-
card- exclusively-for-over-1-million-best-price-members
 Walmart India Opens 25th Cash & Carry Store in India; Reiterates commitment to enable Kiranas &
Small Businesses to prosper, increase sourcing from farmers & develop MSME eco-system.
http://www.wal-martindia.in/2019/07/03/walmart-india-opens-25th-cash-carry-store-in-india-
reiterates-commitment-to-enable-kiranas-small-businesses-to-prosper-increase-sourcing-from-
farmers-develop- msme-eco-system
For more information you may visit company website: www.walmartstores.com
SUMMARY
A company overview is the most effective way to acquire business intelligence and gain vital information
about it. It becomes essential for business professionals, business analysts such as budget analysts,
financial analysts, management analysts, and market research analysts to analyse business practices,
identifying potential business problems, market requirements and providing financial, marketing or
managerial solutions.
 Budget analysts help companies and organizations keep their finances on track.
 Financial analysts offer advice on investment decisions for external or internal financial clients as a
core part of the job.
 Management analysts work with the heads of businesses to improve efficiency and, consequently,
profitability.
 Market research analysts study competitors’ and clients’ strength and weaknesses in order to advise a
company on what decisions would be most profitable.
The detailed study of some of the eminent national and multinational companies from different sectors
and a wide range of industries gave an insight about the discussed companies and industries. it would
help you to develop an understanding of how to analyse the information when received, collected or made
available from different sources for understanding, analysis, and reporting in day to day business life.
With a detailed company profile, one can get an insight into each company’s competitors’ strengths,
weaknesses, strategies and performance. Business news focuses primarily on market or policy news as
well as its position in terms of its competition, as it is relevant to business owners, economists, financiers,
public policy makers, business analysts, professors, researchers and students.

TEST YOUR KNOWLEDGE

MULTIPLE CHOICE QUESTIONS (MCQs)
1. Who is the present chairman of HDFC bank?

a) Deepak S Parekh c) Sanjiv Singh
b) M.K. Sharma d) Chandan Kumar Dey
2. When was Reliance Industries Ltd. incorporated?
a) 1965 b) 1966 c) 1978 d) 1959
3. Which pharmaceutical company has the slogan ‘caring for life’?
a) Dr. Reddy’s c) Cipla Ltd.
b) Lupin Ltd. d) Sun Pharmaceutical Industries Ltd.
4. Which gas company owns India’s largest pipeline network?
a) Gail (India) Ltd. c) Reliance Industries Ltd.
b) Bharat Petroleum Corporation Ltd. d) ONGC
5. Where are the Headquarters of ITC Limited?
a) Kolkata b) Mumbai c) Delhi d) Bengaluru
6. State Bank of India was formerly known as:
a) Bank of Madras c) Imperial Bank
b) Bank of Calcutta d) Indian Bank
7. Jayesh Merchant is the CFO of which company?
a) Asian Paints Ltd. c) Bosch Ltd.
b) Ambuja cements Ltd. d) Ultratech cement Ltd.
8. Which industrial category does Wipro Ltd. come under?
a) Pharmaceuticals & Drugs c) Media
b) Diversified d) IT- Software
9. Which of the folloing IT companies is not based in the US?
a) Microsoft Corporation c) HCL Technologies Ltd.
b) Intel Corporation d) IBM Corporation
10. NESTLE is a beverage partner with which of the following companies?
a) Coca-Cola India c) Red Bull India Pvt. Ltd
b) Pepsico India Holdings Pvt. Ltd. d) Dabur India Ltd
11. Where are the headquarters of Walmart?
a) Arkansas, US c) Newyork, US
b) California, US d) None of the above
12. Who founded Wipro Limited?
a) Azim Premji c) Champaklal H. Choksi
b) Mohamed Premji d) Chimanlal N. Choksi

13. The major textile brand ‘Vimal’ was introduced in which year?
a) 1975 b) 1965 c) 1985 d) 1986
14. Who is the present CEO of Microsoft Corporation?
a) Satya Nadella c) Brain M. Krzanich
b) Amy Hood d) Tim Cook
15. Which IT company acquired Beats Electronics in 2014?
a) Microsoft Corporation c) Intel Corporation
b) Apple d) IBM Corporation
16. Which Bank provides the digital service PayZapp?
a) Axis Bank Limited c) ICICI Bank Limited
b) HDFC Bank Limited d) SBI
17. Who is the present chairman of Bajaj Auto Ltd.?
a) Mr. Rahul Bajaj c) Jamnalal Bajaj
b) Mr. Rajiv Bajaj d) Kevin P D’sa
18. Which of the following is not a product of Bajaj Auto Limited?
a) Avenger b) Discover c) Splendor d) CT 100
19. Which of the following is a subsidiary of GAIL India Limited?
a) Central Coalfields Limited
b) Mahanadi Coalfields Limited
c) Western Coalfields Limited
d) Brahmaputra Cracker and Polymer Limited
20. Which company is ranked 1st on Fortune 500 Companies List 2020?
a) Nestle b) Walmart c) IBM Corporation d) Amazon
21. Who is the present CFO of Adani Ports and Special Economic Zone Ltd.?
a) Ravi Bhamidipaty c) Alok Kumar Agarwal
b) Karan Gautam bhai Adani d) Rakesh Shah
22. Goldman Sachs was founded in which year?
a) 1930 b) 1869 c) 1890 d) 1969
23. Which Company ranked 2nd on Forbes World's Best Employer's List 2019?
a) American Express c) Microsoft
b) Walmart d) Larsen & Toubro
24. The mission of which transnational company is ‘Good Food, Good Life’?
a) Tata Group c) Nestle
b) Reliance fresh d) Starbucks
25. When did Microsoft begin its business in India?
a) 1990 b) 1991 c) 1995 d) 1989
26. What is Intel’s rank in the Fortune 500 Companies List 2020?
a) 48th b) 43rd c) 45th d) 38th

27. Who was the founder of Walmart?

a) Sam Watson b) Bret Biggs c) Greg Penner d) Luca Maestri
28. What was the initial name of Apple Inc.?
a) Apple corporation c) Apple IT solutions
b) Apple Computer Inc. d) Apple Mac Inc.
29. Who is the current CEO of ICICI Bank’s?
a) Sandeep Bakshi c) Vijay Channdok
b) Chanda Kochhar d) Shweta Bansal
30. Indane LPG is the product of which corporation in India?
a) IOCL b) NTPC c) ONGC d) PGCIL
31. By what name are the Education and Stationary products by ITC known in India?
a) Camel b) Apsara c) Natraj d) Classmate
32. Where are the headquarters of L&T?
a) Bengaluru b) Delhi c) Mumbai d) Chennai
33. Who is the CMD of Power Grid Corporation of India Ltd.?
a) I.S. Jha b) R. N. Nayak c) Vishal Sikka d) M. D. Ranganath
34. Power System Operation Corporation Limited (POSOCO) is a subsidiary of:
a) IOCL b) NTPC c) ONGC d) PGCIL
35. ‘My customer First’ is the Vision of which Bank?
a) SBI b) Axis Bank c) HDFC Bank d) Bank of Baroda
36. What is the Global banking platform by EdgeVerve Systems(Infosys) called?
a) Mana b) Finacle c) Skava d) Panaya Cloud Suite
37. Which of the following is not a subsidiary of NTPC?
a) Kanti Bijlee Utpadan Nigam Limited
b) Patratu Vidyut Utpadan Nigam Limited
c) Bhartiya Rail Bijlee Company Limited
d) Kalinga Bidyut Prasaran Nigam Private Limited
38. Which one of the following is not an FMCG Company?
a) ITC b) Dabour c) HUL d) Maruti
39. Choose the correct statement:
a) Cipla & L&T Ltd are foreign companies
b) Nestle & IBM are foreign companies
c) Coal India Ltd is owned by the Tata Sons
d) HDFC and Axis Banks are foreign Bank
40. Which of the following is incorrect about ONGC?
a) ONGC is a public sector undertaking engaged in oil exploration activity
b) It has subsidiaries in 17 countries
c) Its headquarter is in Ahmedabad

d) It was set up in 1956

41. Which of the following cannot be categorised as PSU?
a) NTPC c) Post & Telegraph
b) BHEL d) Power Grid Corporation in India
42. Choose the correct statement:
a) Tata Sons is a Holding Company
b) Infosys, Wipro and TCS are IT Companies
c) Flipkart, Amazon, Myntra are online Trading Companies
d) All of the above are correct
43. Match the following:
Companies Product
Microsoft Coffee
Bajaj Windows
Nestle Activa
Jio Mobile phone
a) Microsoft-Activa, Bajaj-Windows, Nestle-Coffee, Jio-Mobile phone service

b) Microsoft-Windows, Bajaj-Activa, Nestle-Coffee, Jio-Mobile phone service
c) Microsoft-Coffee, Bajaj-Windows, Nestle-Activa, Jio-Mobile phone service
d) Microsoft-Windows, Bajaj-Coffee, Nestle-Activa, Jio-Mobile phone service
44. Which of the following is incorrect about SBI?
a) SBI was originally Imperial bank of India
b) It became SBI in 1955
c) It was nationalised along with 14 commercial Bank
d) 5 associated banks and Mahila Bank was merged with SBI on April 1, 2017
45. Which one of the following is not a Foreign Company?
a) Dr. Reddy’s Laboratories Ltd. c) Nestle
b) Walmart d) HP
46. Goldman Sachs is majorly involved in which business?
a) Retail Banking c) Investment Banking
b) Customer Services d) E-Commerce
47. Amazon started its operations in India in the year.
a) 20120 – 2013 c) 1999-2000
b) 2002 - 2003 d) 2014-2015
48. Flipkart has its headquarters at?
a) Bengaluru b) Hyderabad c) USA d) Singapore

Answer Keys
1 (a) 2 (b) 3 (c) 4 (a) 5 (a)
6 (c) 7 (a) 8 (d) 9 (c) 10 (a)
11 (a) 12 (b) 13 (a) 14 (a) 15 (b)
16 (b) 17 (a) 18 (c) 19 (d) 20 (b)
21 (d) 22 (b) 23 (c) 24 (c) 25 (a)
26 (d) 27 (a) 28 (b) 29 (a) 30 (a)
31 (d) 32 (c) 33 (b) 34 (d) 35 (a)
36 (b) 37 (d) 38 (d) 39 (b) 40 (c)
41 (c) 42 (d) 43 (b) 44 (c) 45 (a)
46 (c) 47 (a) 48 (d)

Government Policies for Business Growth
Chapter – 04 – Government Policies for Business Growth
INTRODUCTION
The pervasive influence of government policies on domestic and global businesses. Indeed, right from
inception of the business to its longevity, health, performance and growth – even its exit- one could
imagine an overlay of government policies and the consequential regulatory regime on every aspect of a
business’ s functioning.
Policy Framework in India – A Historical Sketch

Ancient India
In India, a lot of discourses, researches and experiments on public policies used to take place in the age-
old universities of Takhshashila, Vaishali and Nalanda.
• During the time of Emperor Chandragupta Maurya, the great intellectual guru of the emperor,
Chanyaka outlined the public policy of the state. He authored the book “Arthashastra”, a conceptual
framework of state craft and public policy.
• In Greek city states and Roman empire, public policy was centre of attraction. Philosophers like Plato
and Aristotle had a number of discourses on public policy.
• During the time when Ashoka the Great ruled Magadh, he introduced the policy of peace and
harmony.
• On the other hand, Guptas defined various policies on taxes, trade and warfare.
• In Delhi Sultanate Alauddin Khilji introduced a stringent tax reform, whereas during the time of
Akbar the Great, land reforms were introduced under the leadership of Todarmal.
In all the forms of governance, be it oligarchic, monarchy, aristocracy, tyranny or democracy, public
policies were formulated and implemented.
India Under the British

Economic policies under the colonial rule were so designed as to benefit the foreign rulers. Dadabhai
Naoroji through his seminal work ‘His book Poverty and Un-British Rule in India’ drew attention to the
drain of wealth from India into Britain. They introduced zamindari system to extract maximum revenue
from the Indian peasants. They introduced managing agency system through which it was possible for a
handful of the wealthy British to build and control vast industrial and business empires in India;
sometimes with the assistance from Indian partners. The British government in India just fulfilled the
duty of the police state that is maintenance of internal order and defence of the Indian border. Their
policies indirectly curbed the economic freedom of the Indian people, politically we were subjugated
anyways.
India Since Independence
1947 paved the way for re-chartering business growth in India.
1948 the first industrial policy

1950 Preamble to the Constitution of India was adopted and conferred on people the economic freedom
and recognised the right to carry on business and trade as a fundamental right.
1951 the First Five Year Plan was launched
1956 The Industrial Policy Resolution ushered in an era of direct ownership of government in business
through departmental undertakings, statutory corporations and government companies in the sectors
private investment was either not able or willing.
Rather than choosing either capitalistic or socialistic economic systems we deliberately chose the mixed
economy system dominated by the public sector enterprises. Further, setting up of industrial units was
brought under the regulation of licenses. A host of industrial and labour laws were put in place to ensure
the orderly development of business activities in India. This era lasted for over three decades or so.
1990s (to be precise 1991) saw a new era of economic policies in India an era that is liberalisation,
privatisation and globalisation.
Taken together the economic policies represent a departure from the policy regime based on economic
planning toward what is known as neo-liberal economic thought that placed greater emphasis on the
private, market mechanism for addressing the prevalent economic-social problems. Characteristically
therefore the policy regime of the 1990s was almost diametrically opposite to the policy regime since mid-
fifties.
Policies of the Fifties and Nineties

Bases of comparison Policy regime of mid fifties Policy regime since 1990s
Evident Nature of Mixed economy, with dominant Capitalistic economy
Economic System public sector
Dominant instrument of Economic planning Market mechanism
economic governance
Openness Orientation Closed economy policies Open economy policies –
globalization
Role of Government in Acquiring commanding heights State ownership of business as
Business through public sector undertakings exception; privatization of public
sector undertakings
Role of Government vis- Regulation and control Liberalisation of regulations
aa-vis Private Business
Spectre of government policies for business

There are policies and regulations impacting business start-ups and business registration (e.g. registration
as a partnership firm or incorporation as a company), environmental clearances, conduct of business (e.g.
policies affecting competition), dealings with consumers (consumer laws) and even exit (e.g. Insolvency

and Bankruptcy). Policies of the Central government as well as the state governments too that influence
business activities in the respective states.
Fiscal policies - that is the policies relating to government expenditure and tax and non-tax revenue
Monetary policies – that is policies relating to supply of money, credit and foreign exchange. For
example, easing of credit – the form of either access or cost- might induce the firms to step up their
investment and thereby realize business growth.
Sectoral policies pertain to the specific sectors of the economy. Government policies are for specific
industries too. For example, telecom policy, civil aviation policies address to the specific needs of and
impact the respective industries.
Macro Policy Indicators and Business Conduciveness

GDP, inflation, tax rates, interest rates, and exchange rates are the five most significant
macro policy indicators impact business. It is almost a standard recipe of business conduciveness
that growing GDP, moderate inflation, low tax and interest rates and moderate exchange rates serve as
tonic for business.
Growing GDP is an indicator of economic optimism and high demand expectations. Thus, a virtuous
cycle is activated whereby high demand expectation is interpreted as growth opportunity, greater
investment leads to greater production; greater production leads to income generation and thereby
greater demand and hence lasting growth!
Moderate inflation too arouses business optimism for rising prices serve as opportunity trigger for
higher profitability. Too low an inflation shall have a sedation effect on the economy and too high an
inflation will give rise to uncertainties, rise in costs and erosion of profits.
Lower tax rates stimulate business investment and higher tax rates repel it. Globally too, investment
tends to gravitate toward lower tax regimes.
Lower interest rates qualify the investment projects with lower return on investment and hence
companies can expand their business portfolios Investment is inversely related also with the interest
rates.

Moderate exchange rate that is moderately high external value of domestic currency stimulates
business in two major ways: one by making the imports dearer, it encourages import substituting
production; two by making the exports cheaper it enhances the international competitiveness of
domestically produced goods and services. Besides it also stimulates foreign investment as the companies
desirous of seizing market but inhibited by tariff walls can do so by setting up businesses here.
Macro Variables and Business Conduciveness
Variable Direction Meaning
GDP Rising Economic optimism; high demand expectations
Inflation Moderate Demand and profit expectations
Tax Lower Incentive for investors in the form of post-tax business income
Interest Lower Lower cost of funds
Exchange Moderate Protection to domestic production; incentive for exports
The impact of macro variables on business is contingent upon a host of factors, including a host of non-
economic factors such as politico-legal, socio-cultural institutions. In economics, it is almost imperative to
hold other things constant while assessing the impact of one variable on the economy.
The underlying causal factor, presence of other enabling factors on demand and supply side,
complimentary socio-cultural institutions and above all the overarching assumption “given other things
constant” mediate in the impact of macro-economic variables on business conduciveness. Not the least,
there always is a time lag between calibration/ recalibration of a macro-economic variable and its impact.
Policy Formulation and Impact Transmission Process

The ultimate responsibility for policy formulation lies with the concerned ministry. The ministry in turn
functions through committees, commissions and institutions. At the ground level, the recourse is taken to
a wider consultative and participative process of engagement with the stakeholders. The draft policies are
put in the public domain for comments, critique and suggestions. The policies thus framed are then
implemented and their impact is felt. There can be several ways of implementing the policies. For
example, Reserve Bank of India is the institution to implement government’s money and credit policy. It
has several instruments such as bank rate to influence the supply of money & credit. The volume and cost
of money and credit exerts its influence through the interest rates in the money market. Thus, broadly the
policy influences get transmitted through institutions and instruments and the concerned markets where
businesses operate.

It is important to note that the process is bi-directional. The real time and post implementation feedback
enables their further calibration to better serve the purpose for which these were envisaged.
TYPES OF GOVERNMENT POLICIES BY INTENDED IMPACT

 From the perspective of their impact on business we may categorise government policies into 4:
 Protective Policies
 Restrictive Policies
 Regulative Policies
 Facilitative / Developmental Policies
Protective policies aim to provide protection to the businesses so that these may sustain themselves
and grow. For example, economic policies during Mid-fifties to Eighties restricted the entry of
multinational corporations in India so that the Indian firms grew in a protective environment.
Restrictive policies put a curb on business growth lest it should become detrimental to the interest of
the consumers and public at large.
For example, growth of a firm into a monopoly or a dominant position might endow it with economic
power such that it may exploit consumers with imposing on them higher price or compromise on quality.
In India, the erstwhile Monopolies and Restrictive Trade Practices Act sought to check concentration of
economic power in a few hands. The Act was subsequently repealed and now the Competition
Commission of India looks into these aspects.
Regulatory policies While the freedom to carry on business is fundamental, yet, like coordination and
control over traffic, rules of the game must be set. It aims at putting in place an institutional set up for the
organised functioning of the relevant activity/ market. This institutional set up might comprise the
ministries e.g., Ministry of Railways, authorities within the ministries, Director General of Foreign Trade
(DGFT) or some autonomous entities.
Facilitative / Developmental policies are the ones which facilitates an activity. The conducive
policies towards the development of MSMEs (Micro- Small-Medium Enterprises), The formation of
National Skills Development Corporation (NSDC) are examples of facilitating policy. Successive
liberalisation and dispensing of the restrictive policies created a more favourable climate for business
growth. Thus, if limits on foreign capital in Indian enterprises are raised this allows the businesses to
grow; if the definitional limits of investment for micro, small and medium enterprises are raised, there is
an opportunity for the smaller firms to grow.
THE ECONOMIC CHANGE PROCESS

The economic change ushered in 1991 aimed to raise India’s growth potential. Apart from internal
liberalisation through deregulation, it sought to alter the structure of the Indian economy by increasing
the scope of private and foreign capital.

Liberalization
Liberalisation means to remove or loosen restrictions. This happens via dismantling of licensing and
permits, deregulation, easing of approvals and systematic loosening of legislative and administrative
controls over business. Restrictions included the reservation of a sizeable number of industries for public
sector, the requirement of obtaining licenses for capacity installation and augmentation, and reservation
of items for exclusive manufacture in the small-scale industries. Liberalization may be defined as a
systematic process of the enlargement and enhancement of the freedom of the private sector in the
economy.
Winds of Change: Industrial Liberalization in India
 The list of industries reserved solely for the public sector - which used to cover 18 industries,
including iron and steel, heavy plant and machinery, telecommunications and telecom equipment,
minerals, oil, mining, air transport services and electricity generation and distribution - has been
drastically reduced to three: defense aircrafts and warships, atomic energy generation, and railway
transport.
 Industrial licensing by the central government has been almost abolished except for a few
hazardous and environmentally sensitive industries such as alcohol, cigarettes, industrial
explosives, aerospace, drugs and pharmaceuticals.
 The requirement that investments by large industrial houses needed a separate clearance under the
Monopolies and Restrictive Trade Practices Act to discourage the concentration of economic power
was abolished and the act itself is to be replaced by a new competition law, which will attempt to
regulate anticompetitive behaviour in other ways.
 Indian industrial scenario has also been characterised by long standing policy of reserving
production of certain items for the small-scale sector. About 800 items were covered by this policy
since the late 1970s, which meant that investment in plant and machinery in any individual unit
producing these items could not exceed the prescribed ceiling, thus limiting their scalability. Many
of the reserved items such as garments, shoes, and toys had high export potential and the failure to
permit development of production units with more modern equipment and a larger scale of
production severely restricted India’s export competitiveness. As a result, there has been phased
de-reservation of items to unleash the growth potential of the promising industries.
Liberalization has resulted in the opening of a host of new industrial sectors for private enterprise that
were hitherto exclusive state monopolies. Moreover, doing away with industrial licensing meant ease of
entry for the new players in various industries and opportunity for expansion to the existing players. In
fact, in most cases liberalization meant greater freedom not only for domestic private sector but also for
foreign direct investment and trade. As a result, various industries have undergone a virtual
metamorphosis. Notably among these have been banking, insurance, telecom, automobile, consumer
durable and even FMCG (fast moving consumer goods) sector. We have also seen transformation in the
retail sector with the emergence of shopping malls and e-commerce.

Privatization
Privatization refers to a managerial approach of changing the ownership structure of one or more
government owned institutions. Privatization can be advantageous in terms of the higher flexibility and
scope of innovation it offers along with cost savings, many a times. However, it has an adverse impact on
the employee morale and generates fear of dislocation or termination. It looks for accountability and
quality in production and service system. Privatization can be successful, if diligent scrutiny by the
decision makers is attached to the policy concerned. In the Indian context, privatization effort was not
easy. There were hardly any takers for loss making public sector industries. On the other hand, there had
been many takers for surplus making industries like Oil drilling and Refinery companies, or the ones in
mineral extracting sectors like Steel Authority of India Limited, National Mineral Development
Corporations etc. Government decided to privatize the loss making companies fully and the profit making
ones and banks partially. The effort of privatization was accepted by the society with a lot of resistance
during the inception of economic liberalization in the nation.
Privatization helps in a big way to enhance market potencies by enhancing efficiency, quality and
competitiveness. Privatization is an essentially effective tool for rapid restructuring and reforming the
public sector enterprises. In India (also witnessed in other nations) public sector entities remained
inefficient as far as profitability and quality is concerned. They were running without a significant aim and
mission. The private sector, on the other hand is perceived to be more self-motivated, prolific and reliable
for superior quality of products and services. Though there are exceptions.
Privatization may be of conceptualized in following prominent types:

 Delegation: Government keeps hold of responsibility and private enterprise handles fully or partly
the delivery of product and services. There is active involvement by government. Delegation may
happen through contract, franchise, grant, etc.
 Divestment: Government surrenders partial ownership and responsibility and sells the majority
stake to one or more private entities in course of time.
 Displacement: The private enterprise expands and gradually displaces the government entity.
Deregulation facilitates privatisation if it enables private sector to challenge a government monopoly.
The government monopoly through BSNL and MTNL has been displaced by the private sector.
 Disinvestment: Selling a portion of ownership (stake) in a public enterprise to private parties.
Inward Foreign Direct Investment in India (IFDI)

Foreign capital is seen as an harbinger of growth. In a sense, it is like filling in the gaps between domestic
savings and investment. In the post liberalization and privatization period, India was considered a
lucrative place of FDI inflow because of its huge domestic market.
Globalization creates a wide market of goods and services. At the same time, foreign funds flow in an
economy to be invested in various industries. Foreign funding in good sense creates employment as well
as demand. For a steady flow in foreign funds, liberalization of economy is required. Liberalization is

always paired with regulations. Foreign Direct Investment (FDI) may be described as a flow of capital
investment to an enterprise in a nation by another enterprise located in a different nation by capturing
a majority stake in ownership in a company in the target country or by expanding operations of an
existing business in that country.
Permission for Foreign Direct Investment (FDI) is not uniform for all sectors. Some sectors are opened up
for 100% and in some sectors, it is allowed only upto 26%, 49% or 51%. Foreign Direct Investment (FDI)
has always remained a bone of contention and FDI in multi-brand retail, defense etc., are classic
examples. It’s often felt that areas like Media and Defense could compromise on India’s security interest
and hence no FDI should be permitted. In certain areas, the FDI limit has been capped, like the Insurance
Business. Where there is no approval through Automatic Route, the company concerned has to seek
permission from Foreign Investment Promotion Board.
Here are a few sectors where FDI is prohibited under both the Government Route as well as the
Automatic Route:
1) Atomic Energy
2) Lottery Business
3) Gambling and Betting
4) Business of Chit Fund
5) Nidhi Company
6) Agricultural (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry,
Pisciculture and cultivation of vegetables, mushrooms, etc. under controlled conditions and services
related to agro and allied sectors) and Plantations activities (other than Tea Plantations)
7) Housing and Real Estate business (except development of townships, construction of
residential/commercial premises, roads or bridges to the extent specified)
8) Trading in Transferable Development Rights (TDRs)
9) Manufacture of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes. India
has been a prominent destination for FDI flows. India generally receives FDI from US, Britain,
Singapore, Japan and the USA.
Foreign Institutional Investors (FIIs)

FIIs represent the Foreign Institutional Investors. FIIs are large foreign groups with substantial investible
funds. FIIs are registered abroad with a view to investing in other nations to invest in equity market,
hedge funds, pension funds and mutual funds. FIIs have strong research team which speculate to invest in
a country with a possibility of strong return in equity market. These funds park their funds to fuel a
bullish market. Naturally for small period the nation experience inflow of strong foreign currency in its
financial system.
Whenever the market reaches a peak and starts declining thereafter, these funds move to another nation.
So, the euphoria is short lived. No wonder, national governments look for sustainable FDI investment
over FII investment.

Investment from India Abroad (OFDI)

Policy of globalisation has favoured India not only in terms of Inward FDI but also in terms of outward
FDI or OFDI. Indian firms invest abroad too. For example, in February 2020, Bharti Airtel invested
US$ 978.92 million in its wholly owned subsidiary in Mauritius; in November 2019, PVR Cinemas, a
leading multiplex chain, launched its first property in Sri Lanka, marking its first international venture;
and in August 2019, Sun Pharma entered into a licensing agreement with China System Medical Holdings
(CMS) to develop and commercialise seven generic products in Mainland China. Data released by the
Reserve Bank of India show that Investments by Indian firms in foreign countries in January 2020 rose
by nearly 40 per cent to USD 2.10 billion on a yearly basis.
SUMMARY
The government policies in some cases help in facilitating business, whereas in many other cases they are
restrictive, controlling and regulating in nature. After Independence, India followed a mixed economic
policy. A large number of Government companies (popularly called Public Sector Undertakings or PSUs)
existed beside the private sector companies. After sticking to this controlled economic model for a long
period of time, Government of India ushered in an era of policy shift during 1991. This policy change was
popularly referred to as LPG. With this policy shift, the equity market strengthened. A lot of Foreign
Direct Investments (FDI) flown in different sectors of the Indian economy. These policy changes resulted
in the metamorphosis of the Indian economy.

Organizations Facilitating Business
Chapter – 05 – Organizations Facilitating Business
INTRODUCTION
Business facilitators is a system of arrangements that ease the doing of business. All the
auxiliaries to trade comprise an important layer of business facilitators. These are at the intermediate
layer. In the layer above, is policy making and executive agencies as the Reserve Bank of India (RBI), the
Securities and Exchange Board of India (SEBI), Competition Commission of India (CCI) and such
regulatory cum developmental agencies such as Insurance Regulatory and Development Authority
(IRDA). A layer of facilitators below that can be referred to as the Point of Contact Layer. Together, these
may be regarded as comprising what may be defined as Business Facilitation System
Point of Contact (POC) Business facilitators help the business in several ways.
 A freight forwarder i.e., a person or company who organizes shipments for the business firms to
get goods from the manufacturer or producer to a market, customer or final point of distribution
Freight forwarders network with shipping Companies/ Airlines, Railways & Roadways and
origination, transit and destination ports and warehouses [all auxiliaries / aids to trade] to provide
logistics support to the business.
 A business incubator helps create and grow young businesses by providing them with necessary
support and financial and technical services; and a business accelerator helps a budding business
quickly launch a product and put it in the fast lane of commercial success.
 A financial consultant who advises the business on the various sources of finance- domestic as well
as foreign; debt as well as equity; short-term as well as long-term and helps it mobilise its

requirements too. Merchant bankers/ financial consultants are not themselves the financing
institutions- the auxiliaries or aids to trade.
 A merchandiser who helps the business e.g., a fashion house obtains its supplies- fabrics,
accessories, etc. The term business facilitator is formally defined in the financial sector as
intermediaries performing a host of functions linking the banks / financial institutions and their
potential clients
Concept Elaboration #1: Business Facilitators in Financial Sector

Business Facilitators are intermediaries such as, NGOs/ Farmers’ Clubs, cooperatives, community based
organisations, IT enabled rural outlets of corporate entities, Village Knowledge Centres, Agri Clinics/ Agri
Business Centers, Krishi Vigyan Kendras and individuals like insurance agents, retired bank
employees/teachers etc. for providing facilitation services. Such services may include
i) identification of borrowers
ii) collection and preliminary processing of loan applications including verification of primary
information/data.
iii) creating awareness about products, provide advice on managing money and debt counselling.
iv) processing and submission of applications to NABARD Financial Services Limited (NABFINS)
v) promotion and nurturing Self Help Groups/ Joint Liability Groups/ Producers’ groups
vi) post-sanction monitoring
vii) monitoring and handholding of Self Help Groups/ Joint Liability Groups/ Credit Groups/ Producers’
groups etc.
viii) follow-up for recovery. However, they shall not engage in cash handling including disbursements,
collections etc.
Business facilitators may be distinguished from business correspondents who may be defined as ‘banks
in person’. These individuals and entities actually provide banking and financial services. Business
correspondents are more closely regulated than business facilitators who do not engage in the banking
and finance business in the sense of handling deposits, repayments etc.
Government as a Business Facilitator
1948 Industrial Policy statement
1951 Industries Development & Regulation Act. The IDRAI entrusted the government with the
responsibility of ushering in economic development via industrialisation in India.
1956 The Industrial Policy Resolution. Provides for the respective roles of the Public Sector, Large
Industries and Small Scale Industries guided the growth of business in India for more than three decades.
Initially, the public sector commanded the industrial development of India. Role of private sector was
limited to the production of consumer goods. However, with the development banks, the industrial estates
and later a developed capital market etc. took shape, the private sector has grown from strength to
strength.

1991 the New Economic Policy LPG or GPL policy (liberalisation, privatisation and
globalisation) is regarded as the watershed development in business facilitation in India.
The government facilitates business not only via formulating business friendly policies but also by
creating an institutional apparatus for the implementation of those policies.
NON-FUNDING INSTITUTIONS FOR BUSINESS FACILITATION IN INDIA (INDIAN

REGULATORY BODIES)
The institutions such as
• the Reserve Bank of India, which is the central bank of the country,
• the Securities and Exchange Board of India which is the apex body of securities exchanges and
• the Competition Commission of India which is the rule setter for fair play in business provide the
supra context of business facilitation.
Then there are industry specific business facilitators too such as
• the Insurance Regulatory and Development Authority,
• Telecom Regulatory Authority of India and the like. These institutions do not invest in businesses and
as such are called non funding institutions.
Several other non-funding institutions that facilitate businesses right from pre-formation to product and
process testing, training of manpower and a host of business extension services:
• The National Institute of Entrepreneurship and Small Business Development (NIESBUD) focuses on
training the trainers in entrepreneurship development.
• Entrepreneurship Development Institute (EDI) is the national level apex organization for
entrepreneurship development. T
• 30 Micro, Small and Medium Enterprises Development Institutes and 28 Branch MSME-DIs
(formerly SISIs) set up in State capitals and other industrial cities all over the country for providing a
host of services to the entrepreneurs / small businesses. These institutes render consultancy services,
prepare state industrial profiles and conduct district level industrial potential surveys. Besides, these
institutes prepare project profiles and facilitate quality control and upgradation in these enterprises.
Several commodity boards and export promotion councils that assist businesses in their international
forays which aim to enhance India’s image as a sourcing partner and investment destination.:
• India Trade Promotion Organization
• India Brand Equity Foundation
Government’s schemes help furthering and facilitating Indian businesses
• Make in India
• Startup India
Reserve Bank of India (RBI)

I) Introduction
1935 April 1, RBI was established on in accordance with the provisions of the RBI Act,1934

1934 Reserve Bank of India Act

1937 The Central Office was initially established in Calcutta but was permanently moved to Mumbai
1949 RBI was nationalized. It is fully owned by the Government of India (originally privately owned).
RBI’s affairs are governed by a central board of directors. The board is appointed by the Government
of India in keeping with the RBI Act.
II) Role of RBI

The Reserve Bank of India is the Central Bank of our country. Its role is summarized in the following
points:
• The RBI is the apex monetary institution of the highest authority in India. Consequently, it plays
an important role in strengthening, developing and diversifying the country’s economic and
financial structure.
• It is responsible for the maintenance of economic stability and assisting the growth of the
economy.
• It is given the responsibility for controlling the country’s monetary policy.
• It acts as an advisor to the government in its economic and financial policies, and it also
represents the country in the international economic forums.
• It also acts as a friend, philosopher and guide to commercial banks. In fact, it is responsible for
the development of an adequate and sound banking system in the country and for the growth of
organized money and capital markets.
• The RBI has to keep inflationary trends under control and to see that main priority sectors like
agriculture exports and small scale industry get credit at cheap rates.
• It has also to protect the market for government securities and channelize credit in desired
directions.
III) Functions of RBI

The Preamble of the Reserve Bank of India describes its basic functions as: “...to regulate the
issue of Bank Notes and keeping of reserves with a view to securing monetary
stability in India and generally to operate the currency and credit system of the
country to its advantage.”
i) Issue of currency: The RBI is the sole authority for the issue of currency in India other than
one rupee coins and notes and subsidiary coins, the magnitude of which is relatively small.
ii) Banker to the government: As a banker to the government, the RBI performs the following
functions:
a) It transacts all the general banking business of the Central and State Governments. It accepts
money on account of these governments and makes payment on their behalf and carries out
other banking operations such as their exchange and remittances.

b) It manages public debt and is responsible for issue of new loans. It actively operates in the
gilt-edged market and advises the government on the quantum, timing and terms of new
loans.
c) It also sells Treasury Bills on behalf of the Central Government in order to wipe away excess
liquidity in the economy.
d) The RBI also makes advances to the Central and State Governments which are repayable
within 90 days from the date of advance.
e) The RBI also acts as an adviser to the government not only on policies concerning banking
and financial matters but also on a wider range of economic issues including those in the
field of planning and resource mobilisation. It has a special responsibility in respect of
financial policies and measures concerning new loans, agricultural finance and legislation
affecting banking and credit and international finance.
iii) Banker’s Bank: The RBI has been vested with extensive power to control and supervise
commercial banking system under the Reserve Bank of India Act, 1934 and the Banking
Regulation Act, 1949. All the scheduled banks are required to maintain a certain minimum cash
reserve ratio with the RBI against their demand and time liabilities. This provision enables the
RBI to control the credit position of the country. The RBI provides financial assistance to
scheduled banks and state cooperative banks in the form of discounting of eligible bills and loans
and advances against approved securities. The RBI also conducts inspection of the commercial
banks and calls for returns and other necessary information from banks.
iv) Custodian of Foreign Exchange Reserves: The RBI is required to maintain the external
value of the rupee. For this purpose, it functions as the custodian of nation’s foreign exchange
reserves. It has to ensure that normal short-term fluctuations in trade do not affect the exchange
rate. When foreign exchange reserves are inadequate for meeting balance of payments problem,
it borrows from the IMF.
The RBI has the authority to enter into exchange transactions on its own account and on account
of government. It also administers exchange control of the country and enforces the provisions
of Foreign Exchange Management Act.
v) Controller of Credit: Credit plays an important role in the settlement of business transactions
and affects the purchasing power of people. The social and economic consequences of changes in
the purchasing power are serious; therefore, it is necessary to control credit. Controlling credit
operations of banks is generally considered to be the principal function of a central bank. The
RBI, like any other Central Bank, possesses power to use almost all qualitative and quantitative
methods of credit controls.
vi) Promotional Functions: Apart from the traditional functions of a Central Bank, the RBI also
performs a variety of developmental and promotional functions. It is responsible for promoting

banking habits among people and mobilizing savings from every corner of the country. It has
also taken up the responsibility of extending the banking system territorially and functionally.
Initially, it had also taken up the responsibility for the provision of finance for agriculture, trade
and small industries. But now these functions have been handed over to NABARD, EXIM Bank
and SIDBI respectively. The Reserve Bank is responsible for overall credit and monetary policy
of the economy.
vii) Collection and publication of Data: It has also been entrusted with the task of collection
and compilation of statistical information relating to banking and other financial sectors of the
economy.
IV) RBI’s Role in Business Facilitation

• Currency Policy: The RBI is responsible for the monetization of the economy (and in the recent
context of demonetisation or remonetisation too). Adequate money supply is critical for the
functioning of the economy. All the factor incomes in a modern economy are in fact money
incomes. Business’s revenue too is monetized. Moreover, the RBI also oversees the availability of
foreign currency to facilitate overseas business transactions. It plays an important, albeit an
indirect role in the determination of exchange rates i.e., the rates at which the domestic currency is
exchanged with foreign currencies and vice versa.
• Credit Policy: The RBI does not fund the business or for that matter any activity. However, its
policies have a major impact on channelization of the banking resources for business, generally as
well as specifically for certain sectors. A small reduction in the Statutory Liquidity Ratio (SLR),
Cash Reserve Ratio (CRR) or Bank Rate can put huge funds at the disposal of the commercial banks
for lending to the business and other sectors financial. Basis points: One per cent is equivalent to
100 basis points. To illustrate if current bank rate is 7.75% and RBI decreases it by 25 basis point,
then new rate will be 7.50% as 25 basis point will be equal to 0.25%) SLR and CRR are
quantitative measures of credit policy; these affect funds availability to all the sectors.
RBI qualitative measures of credit control too through which it influences the credit
availability to a particular sector. As an instance in sector specific impact of the RBI’s credit
policy, there is provision of Priority Sector Lending (PSL). Every bank is required to comply with
this requirement by lending a specified percentage of its resources to the industries/ activities
included in PSL. For example, loans to Micro, Small and Medium Enterprises (MSME) qualify as
PSL. This policy of the RBI has tremendously benefited the MSME Sector in India.
An inevitable part of the credit policy is the interest rate. Reserve Bank of India influences the
interest rates through such policy instruments as bank rate. Since RBI provides loans to the banks
either by direct lending or by rediscounting (buying back) the bills of commercial banks and
treasury bills, it is also known as discount rate. Bank rate is the rate of interest at which the RBI
lends to banks, it reflects the cost of funds to the banks who in turn adjust their lending rates

accordingly. To illustrate, higher bank rate will translate to higher lending rates by the banks. The
concept of bank rate is often compared with repo rate and reverse repo rate
Concept Elaboration #2: Bank Rate Related Concepts

Repo Rate. The rate at which banks borrow money from the RBI against pledging or sale of
government securities to RBI is known as “Repo Rate.” Repo rate is a short form of Repurchase
Rate. Generally, these loans are for short durations up to 2 weeks.
Repo Rate differs from Bank Rate with respect to the time horizon. Repo Rate is a short-
term measure, and it refers to short-term loans. On the other hand, Bank Rate is a long-term
measure and is governed by the long-term monetary policies of the RBI.
Reverse Repo Rate. It is the rate of interest offered by RBI, when banks deposit their surplus
funds with the RBI for short periods.
• Development of the Financial System: A well-developed financial system is regarded as the

sine qua non (an absolute imperative) for economic development. The financial system typically
comprises financial institutions, financial instruments and financial markets. RBI may be regarded
as the heart of the financial system. It overseas the functioning and outreach of the commercial
banks as well as non-banking finance companies. The funds that RBI usurps via stipulating SLR
and CRR are channelized to development finance institutions, called Development Banks in India.
• Funds Transfer and Payments Mechanism: In a modern economy one may envisage paper
based and digital payments and funds transfer mechanisms. Paper based mechanisms would
include for example currency, cheques and bills of exchange. Digital payments would include Card
Swiping, Internet Banking and so on. Reserve bank of India presides over the system and sets the
rules of the game.
Securities and Exchange Board of India (SEBI)

I) Introduction
1988 SEB was established by the Government of India on 12th April
1992 SEBI was given statutory powers with SEBI Act, 1992 being passed in the Parliament.
1992 The SEBI Act,1992 came into force with effect from 30th January, 1992
1947 Controller of Capital Issues has been repealed by the SEBI, an authority under Capital Issue
(Control) Act, 1947.
1988 In April 1988, the SEBI was constituted as the regulator of capital markets in India under a
resolution of the Government of India.
SEBI is an authority to regulate and develop the Indian capital market and protect the interest of
investors in the capital market. SEBI has its headquarters at the business district of Bandra Kurla
Complex in Mumbai, and has Northern, Eastern, Southern and Western Regional Offices in New
Delhi, Kolkata, Chennai and Ahmedabad, respectively. Controller of Capital Issues (CCI) was the
regulatory authority before SEBI came into existence; it derived authority from the Capital Issues
(Control) Act, 1947.
The SEBI is managed by a board, which consists of following:

 A Chairman, who shall be appointed by Central Government, and he shall be a person of ability,
integrity and standing in the field of securities market, law, finance, accountancy, economics,
administration, etc.
 Two members from amongst the officials of the Ministry of the Central Government dealing with
Finance and administration of the Companies Act, 2013, who shall be nominated by the Central
Government.
 One member from amongst the official of RBI, who shall be nominated by RBI.
 Five other members out of which atleast three members shall be whole-time members, who shall
be appointed by Central Government, and they shall be persons of ability, integrity and standing
in the field of securities market, law, finance, accountancy, economics, administration, etc.
II) Functions and Responsibilities of SEBI

The Preamble of the Securities and Exchange Board of India describes the basic functions of the
Securities and Exchange Board of India as “...to protect the interests of investors in securities
and to promote the development of, and to regulate the securities market and for
matters connected there with or incidental there to”.
SEBI has to be responsive to the needs of three groups, which constitute the market:
 the issuers of securities
 the investors
 the market intermediaries.
SEBI has three functions rolled into one body which are as follows:
 Quasi-legislative: SEBI drafts regulations in its legislative capacity.
 Quasi-judicial: SEBI passes rulings and orders in its judicial capacity.
 Quasi-executive: SEBI conducts investigation and enforcement action in its executive function.
Though this makes it very powerful, there is an appeal process to create accountability. There is a
Securities
Appellate Tribunal which is a three-member tribunal and is headed by Mr. Justice J P Devadhar, a
former judge
of the Bombay High Court. A second appeal lies directly to the Supreme Court. SEBI has taken a very
proactive role in streamlining disclosure requirements to international standards.
III) Powers of SEBI

For the discharge of its functions efficiently, SEBI has been vested with the following powers:
1. To approve by−laws of stock exchanges.
2. To require the stock exchange to amend their by−laws.
3. To inspect the books of accounts and call for periodical returns from recognized stock exchanges.
4. To inspect the books of accounts of a financial intermediary.
5. To compel certain companies to list their shares in one or more stock exchanges.
IV) SEBI’s Role in Business Facilitation

SEBI is responsible for the development of India’s capital market i.e., market for the corporate issues
of capital.
For example, it facilitates public offering of capital by the company. It also oversees the subsequent
trading of their shares on the floor of the stock exchanges. It even facilitates overseas entities
desirous of participating in Indian capital markets and the domestic capital market entities desirous
of participation in overseas markets. It coordinates with the market developers and regulators
abroadc. It is responsible for investors’ faith in the functioning of the capital markets and thus
assures the corporates of steady flow of funds.
Competition Commission of India (CCI)

I) Introduction
Competition Commission was set up to create and sustain fair competition in the economy that will
provide a ‘level playing field’ to the producers and make the markets work for the welfare of the
consumers.
Competition may be either Direct or Indirect:
i) Direct competition: Products that perform the same function compete against each other. For
Example: Fast-food restaurants McDonald’s and Burger King, Coca-Cola and Pepsi, Pizza Hut
and Dominos etc. have competition with each other.
ii) Indirect competition: Products that are close substitutes for one another compete. For
Example: A fine dining restaurant has competition with other local restaurants, but it also
competes with nearby supermarkets that offer ready-to-eat meals such as frozen parathas and eat
and serve dishes. There should be free and fair competition in the market to get the following
benefits:
a) Encourages Innovation.
b) Increases Efficiency.
c) Punishes the Laggards.
d) Boosts choice improves quality, reduces costs.
e) Ensures availability of goods in abundance of acceptable quality in affordable price.
II) The Competition Act, 2002

The Competition Act, 2002, as amended by the Competition (Amendment) Act, 2007, follows the
philosophy of modern competition laws. The Act prohibits anti-competitive agreements, abuse of
dominant position by enterprises and regulates combinations (acquisition, acquiring of control and
M&A), which causes or likely to cause an appreciable adverse effect on competition within India.

III) Features of the Competition Act, 2002

i) The competition Act, 2002 has been enacted to prevent practices having an appreciable adverse
effect on competition.
ii) To promote and sustain competition in the market and to protect the interests of consumers.
iii) To ensure freedom of trade.
iv) With the enforcement of the Competition Act, 2002 the MRTP Act, 1969 shall stand repealed and
the MRTP Commission shall be dissolved.
v) The Competition Act, 2002 provides for the establishment of Competition Commission of India
(CCI) and prescribes its duties, functions, and powers.
IV) The Competition Commission of India (CCI)

The Competition Commission of India (CCI) was established by the Central Government on 14th
October 2003. The Commission is a body corporate having perpetual succession and common seal.
CCI consists of a Chairperson and Six Members appointed by the Central Government.
The Commission is also required to give opinion on competition issues on a reference received from
a statutory authority established under any law and to undertake competition advocacy, create public
awareness and impart training on competition issues.
The Competition commission has been establishment for the accomplishment of the following
objectives:
 To prevent practices having adverse effect on competition.
 To promote and sustain competition in markets.
 To protect the interests of consumers and,
 To Ensure freedom of trade carried on by other participants in markets, in India
V) Role of CCI
The preamble to the competition act states, “An Act to provide, keeping in view of the economic
development of the country, for the establishment of a Commission to prevent practices having
adverse effect on competition, to promote and sustain competition in markets, to protect the
interests of consumers and to ensure freedom of trade carried on by other participants in markets, in
India, and for matters connected therewith or incidental thereto”.
To achieve its objectives, the Competition Commission of India endeavours to do the following:
 Make the markets work for the benefit and welfare of consumers.
 Ensure fair and healthy competition in economic activities in the country for faster and inclusive
growth and development of economy.
 Implement competition policies with an aim to effectuate the most efficient utilization of
economic resources.
 Develop and nurture effective relations and interactions with sectoral regulators to ensure
smooth alignment of sectoral regulatory laws in tandem with the competition law.

 Effectively carry out competition advocacy and spread the information on benefits of
competition among all stakeholders to establish and nurture competition culture in Indian
economy.
VI) Role of CCI as a Business Facilitator

Fair competition is key to a thriving business sector. CCI protects businesses from other businesses’
unfair practices and penalises the erring entities too. It promotes competition by preventing abuse of
dominance by a market player to the deterrent of other competitors and the consumers. As such it
ensures the co-existence of large and small enterprises.
Insurance Regulatory and Development Authority of India (IRDAI)

I) Introduction
Insurance Regulatory and Development Authority of India (IRDAI) is an autonomous apex statutory
body which regulates and develops the insurance industry in India. It was constituted under
Insurance Regulatory and Development Authority Act, 1999 and duly passed by the Parliament.
The IRDA Act, 1999 allows private players to enter the insurance sector in India besides a maximum
foreign equity of 26 per cent in a private insurance company having operations in India. The
Insurance Bill (Proposed by UPA government in July, 2013) but passed in July, 2014, raised the FDI
limit in insurance sector to 49%. It serves as an Authority to protect the interests of holders of
insurance policies, to regulate, promote and ensure orderly growth of the insurance industry and for
matters connected therewith. IRDAI role is to protect rights of policy holders and they provide
registration certification to life insurance companies and responsible for renewal, modification,
cancellation and suspension of this registered certificate.
II) Mission Statement of the Authority

 To protect the interests of and secure fair treatment to policyholders.
 To bring about speedy and orderly growth of the insurance industry (including annuity and
superannuation payments), for the benefit of the common man, and to provide long term funds
for accelerating growth of the economy.
 To set, promote, monitor and enforce high standards of integrity, financial soundness, fair dealing
and competence of those it regulates.
 To ensure speedy settlement of genuine claims, to prevent insurance frauds and other
malpractices and put in place effective grievance redressal machinery.
 To promote fairness, transparency and orderly conduct in financial markets dealing with
insurance and build a reliable management information system to enforce high standards of
financial soundness amongst market players.
 To take action where such standards are inadequate or ineffectively enforced.
 To bring about optimum amount of self-regulation in day-to-day working of the industry
consistent with the requirements of prudential regulation.

III) Duties, Powers and Functions of IRDAI

Section 14 of IRDAI Act, 1999 lays down the duties, powers and functions of IRDAI.
Subject to the provisions of this Act and any other law for the time being in force, the Authority shall
have the duty to regulate, promote and ensure orderly growth of the insurance business and re-
insurance business. The powers and functions of the Authority shall include:
 issue to the applicant a certificate of registration, renew, modify, withdraw, suspend or cancel
such registration.
 protection of the interests of the policy holders in matters concerning assigning of policy,
nomination by policyholders, insurable interest, settlement of insurance claim, surrender value
of policy and other terms and conditions of contracts of insurance.
 specifying requisite qualifications, code of conduct and practical training for intermediary or
insurance intermediaries and agents
 specifying the code of conduct for surveyors and loss assessors.
 promoting efficiency in the conduct of insurance business.
 promoting and regulating professional organisations connected with the insurance and re-
insurance business.
 levying fees and other charges for carrying out the purposes of this Act.
 calling for information from, undertaking inspection of, conducting enquiries and investigations
including audit of the insurers, intermediaries, insurance intermediaries and other organisations
connected with the insurance business.
 control and regulation of the rates, advantages, terms and conditions that may be offered by
insurers in respect of general insurance business.
 specifying the form and manner in which books of account shall be maintained and statement of
accounts shall be rendered by insurers and other insurance intermediaries.
 regulating investment of funds by insurance companies.
 regulating maintenance of margin of solvency.
 adjudication of disputes between insurers and intermediaries or insurance intermediaries.
 supervising the functioning of the Tariff Advisory Committee.
 specifying the percentage of premium income of the insurer to finance schemes for promoting
and regulating professional organisations referred to in clause (f);
 specifying the percentage of life insurance business and general insurance business to be
undertaken by the insurer in the rural or social sector; and
 exercising such other powers as may be prescribed.
IV) Role of IRDAI as Business Facilitator

IRDAI also acts as a business facilitator.
Firstly, it takes steps to regulate and develop the insurance industry in the country.

Secondly, it serves as an authority to protect the interest of the insurance policy holders in create
confidence among them.
Thirdly, IRDAI disseminates a lot of information for the benefit of policy holders and also for
educating the general public about the advantages of getting insurance policies and keeping then
alive.
IRDAI
SEBI CCI Insurance
RBI
Securities and Competition Regulatory and
Salient Facts Reserve Bank of
Exchange Board Commission of Development
India
of India India Authority of
India
Year of Setting- April 1, 1935 April 12, 1988. October 14, 2003 2000
up Given statutory
power in 1992.
The RBI Act, 1934 SEBI Act, 1992 Competition Act, IRDA Act, 1999
Underlying Act 2002
of the
Parliament of
India
Important Originally Replaces Replaces the Amends the
Precedent/s privately owned, Controller of Monopolies Insurance Act,
since Capital Issues, an Commission under 1938, the Life
nationalization in authority under and repeals the Insurance
1949, the Reserve the Capital Issue Monopolies and Corporation Act,
Bank is fully (Control) Act, Restrictive Trade 1956 and the
owned by the 1947. Practices (MRTP) General
Government of Act 1969. Insurance
India. Business
(Nationalisation)
Act, 1972.
Main Monetisation; Overseeing issues Overseeing Issuing,
Functions Ensuing adequate of capital by the anticompetitive renewing,
supply of money companies; agreements, abuse modifying,
and credit in the imposing Listing of dominant withdrawing,
economy; Integrity and Other position by suspending, or
of Payments & Disclosure enterprises and cancelling
Settlement Requirements business registration of the
mechanism e.g., (LODR) on combinations e.g., Insurance

preventing money companies for Mergers & Companies;

laundering; transparency and Acquisitions protection of the
Serving as Central accountability. (M&As). interests of the
Government’s policy holders in
treasury; such matters as
Custodian of regulation of
foreign exchange insurance
(Forex) reserves premium and
and regulation of settlement of
forex transactions. insurance claim.
Role in Direct role in Enables firm to Ensures co- Insurance is an
Business regulation of raise funds in the existence of large important aid to
Facilitation banking and non- capital market and and small business and
banking financial causes them to enterprises; IDRA ensures
intermediation institute effective prevents misuse of that this
business; mechanisms of dominant position important service
indirectly corporate in the market efficiently enables
influences the governance. against other transfer of
volume and cost of businesses. business risks.
credit to the
business firms
Essential Apex authority Apex authority for Apex authority for Apex authority
Mandate setting rules of the setting rules of the setting rules of the for setting rules
game for Money game for Capital game primarily for of the game for
Market and Market and Non-financial Market for
performance of the protection of Markets (Markets Insurance
functions of a Investor’s for goods & Products in India
Central Bank. Interests. services) for the and to protect the
protection of interests of the
Consumers’ policyholders.
Interests and the
Producers’
Freedom to Trade.
Important Statutory Liquidity Listing, Corporate Business Life Insurance,
Term/Concepts Ratio (SLR), Cash Governance. Combinations. Non-life (General
pertaining to Reserve Ratio Insurance).
Business & (CRR), Bank Rate,
Commercial Discount Rate,

Knowledge Repo Rate,

Reverse Repo
Rate.
Recent Remonetisation Issue of LODR CCI ordered IRDAI came up
Landmark (popularly known 2015 and investigation into with guidelines
Developments as demonetization) subsequent the alleged anti for Corona
that banned the regulations for competition Kavach, Cvoid 19-
currency of the fostering good practices of E- specific health
then prevalent corporate commerce majors insurance policy.
`500/- notes and governance. such as deep
introduced notes discounting,
of `2000/- preferential listing
denomination. and promotion of
certain labels and
exclusive deals on
certain products.
FUNDING INSTITUTIONS (INDIAN DEVELOPMENT BANKS)

Business’s need for finance for the day-to-day operations (Working Capital) and the need for finance for
undertaking capital expenditure (CAPEX). Working capital needs are met by trade credit and credit from
commercial banks. Financing of CAPEX may be done by recourse to capital market for the special purpose
financial institutions created in this regard.
In the first four decades since independence when the Indian capital market was rather underdeveloped
the fuelling of industrial development was entrusted to a battery of special purpose financial institutions
created toward this purpose. These special purpose financial institutions were called ‘development banks.’
1948 Industrial Finance Corporation of India (IFCI)
1955 Industrial Credit and Investment Corporation of India (ICICI)
1964 Industries Development Bank of India (IDBI)
The latter two development banks have since converted into commercial banks. And the IFCI is now a
Non-Banking Finance Company in Non-Deposit Seeking Institution category (NBFC-NDSI). These
institutions need to be restructured in view of the fact that the Indian capital market developed fairly well
and assumed capabilities to finance the large industrial projects.
Financing agricultural and rural development however continued to pose developmental challenges. This
explains the emergence of the National Bank for Agriculture and Rural Development (NABARD).
NABARD
National Bank for Agriculture and Rural Development (NABARD) is an apex development bank in India,
headquartered at Mumbai with branches all over India. The Bank has been entrusted with “matters

concerning policy, planning and operations in the field of credit for agriculture and other economic
activities in rural areas in India”. NABARD is active in developing financial inclusion policy and is a
member of the Alliance for Financial inclusion.
NABARD has been instrumental in grounding rural, social innovations and social enterprises in the rural
hinterlands. It has in the process partnered with about 4000 organisations in grounding many of the
interventions. The organisation had developed a huge amount of trust capital in its 3 decades of work with
rural communities.
1. NABARD is the most important institution in the country which looks after the development of the
cottage industry, small industry and village industry, and other rural industries.
2. NABARD, besides agricultural also reaches out to allied activities such as poultry farming, animal
husbandry etc. and supports and promotes integrated rural development.
3. NABARD discharge its duty by undertaking the following roles:
i) Serves as an apex financing agency for the institutions providing investment and production
credit for promoting the various developmental activities in rural areas
ii) Takes measures towards institution building for improving absorptive capacity of the credit
delivery system, including monitoring, formulation of rehabilitation schemes, restructuring of
credit institutions, training of personnel, etc.
iii) Co-ordinates the rural financing activities of all institutions engaged in developmental work at the
field level and maintains liaison with Government of India, state governments, Reserve Bank of
India (RBI) and other national level institutions concerned with policy formulation
iv) Undertakes monitoring and evaluation of projects refinanced by it.
v) NABARD refinances the financial institutions which finances the rural sector.
vi) NABARD partakes in development of institutions which help the rural economy.
vii) NABARD also keeps a check on its client institutes.
viii) It regulates the institutions which provide financial help to the rural economy.
ix) It provides training facilities to the institutions working in the field of rural upliftment.
x) It regulates the cooperative banks and the RRB’s and manages talent acquisition through IBPS
CWE.
NABARD’s refinance is available to state co-operative agriculture and rural development banks
(SCARDBs), state co-operative banks (SCBs), regional rural banks (RRBs), commercial banks (CBs) and
other financial institutions approved by RBI. While the ultimate beneficiaries of investment credit can be
individuals, partnership concerns, companies, State-owned corporations or co-operative societies,
production credit is generally given to individuals. NABARD has its head office at Mumbai, India.
NABARD is also known for its ‘SHG Bank Linkage Programme’ which encourages India’s banks to lend to
self-help groups (SHGs). Largely because SHGs are composed mainly of poor women, this has evolved
into an important Indian tool for microfinance.

NABARD also has a portfolio of Natural Resource Management Programmes involving diverse fields like
Watershed Development, Tribal Development and Farm Innovation through dedicated funds set up for
the purpose.
Table-2: Funding Institutions – A Ready Reckoner

Fact #1 For the first four decades or so the development banks took upon themselves the task of
facilitating the industrial development of India.
Fact #2 Development banks were mere purveyors of credit. These did not accept deposit from public the
way commercial banks do.
Fact #3 Set up in 1948, the IFCI was India’s first development bank. It was followed by the ICICI in 1955
and the IDBI in 1964.
Fact #4 IFCI later on converted into Non-Banking Finance Company and the ICICI and the IDBI
converted into Commercial Banks.
Fact #5 NABARD is the lone survivor from the era of development banking in India.
SUMMARY
The financial system in India is regulated by independent regulators in the field of banking, insurance,
capital market, commodities market, and pension funds. Government of India plays a significant role in
controlling the financial system in India by influencing these regulators. Indian regulatory bodies like
SEBI, RBI, IRDA, CCI and the Indian development banks like NABARD etc. are the key organizations that
facilitate businesses in India.
 SEBI is an authority to regulate and develop the Indian capital market and protect the interest of
investors in the capital market. Controller of Capital Issues has been repealed by the SEBI, an
authority under Capital Issue (Control) Act, 1947.
 The Reserve Bank of India (RBI) is the Central Bank of our country. Insurance Regulatory and
Development Authority of India (IRDAI) is an autonomous apex statutory body which regulates and
develops the insurance industry in India. It was constituted by a Parliament of India Act called
Insurance Regulatory and Development Authority Act, 1999 and duly passed by the Government of
India.
 Competition Commission of India is responsible for enforcing The Competition Act, 2002 and to
prevent activities that have an appreciable adverse effect on competition in India.

Common Business Terminologies
Chapter – 06 – Common Business Terminologies
Introduction
The domains of Business and Commercial Knowledge (BCK) are ever expanding and evolving and BCK
draws its vocabulary from various disciplines. In the first chapter, we spelt the strategies for keeping
oneself updated with the BCK. In the preceding chapters, we have drawn on BCK lexicon for elaborating
various concepts. In this summing up chapter, we profile the terms used in those chapters and many more
in the BCK lexicon. The format of the chapter is more of a glossary/BCK Dictionary. However, we learn
better when we contextualise these terms and use these in our conversations and communications. Thus,
we encourage you to read more, think much and write and speak these terms for better comprehension of
the world of business. This will help you in future.
Business - Many Facets of The Same Reality

In Chapter-1 we also saw that how a business may be studied from a technical (Production/Operations),
commercial (marketing), economic (financial), social (HR) and political (Legal and Administration)
perspectives. Each of these perspectives may be regarded as different windows of the same room. For a
holistic awareness of business, we need to know about all the windows, albeit depending upon our need,
we may just open one window at a time. Recall, we called business as an eclectic field of study.
Perspectives and Reality
All these perspectives have a lexicon of their own- the jargon (special words or expressions that are used
by a particular profession or group).
Technical Facet
Technically a business may be viewed as a transformation process- a huge machine- where in inputs are
subjected to the entire process for generating output. Now this interpretation of business can open us to a
host of terms in the BCK lexicon. A business’s inputs are the various commodities including industrial raw
materials- minerals and metals as well as agricultural commodities (especially for agro industries). It is
therefore desirable to know about terminologies pertaining to commodity markets.

Commercial Facet
Commercially, business is all about marketing management, that is, planning, organising, directing and
controlling a firm’s relationships with its customers/ markets. Essentially it comprises the famed Ps of
marketing- Product, Price, Place and Promotion for goods marketing and the additional Ps of People
(Sales force’s) connects with the customers, Physical Evidence e.g., hygiene in a hospital or a restaurant
and Processes e.g., customer service time, que management, etc. for services marketing. Here, BCK would
also involve the awareness of terminologies pertaining to consumer markets –domestic as well as
international.
Financial Facet
From an economic, accounting and financial perspective, business implies investment and the associated
returns and risks. Thus, this facet includes sources of business finance and the state of the development of
financial markets, maintenance of accounts, preparation of Profit and Loss Account and the Balance
Sheet. It involves estimation of cost, revenue and profits and the periodic reporting of the firm’s
performance.
HR Facet
From an HR perspective, a business organisation is all about people occupying different job positions and
performing their respective roles, responsibilities and functions. People are said to be an organisation’s
most precious assets, albeit these assets do no figure in its balance sheet. Their competencies, character,
individual motivation and collective morale are believed to have a decisive effect on the organisation’s
performance. Thus, all the organisational processes and the associated vocabulary of attracting and
retaining talented, energetic enthusiastic and ethical human resources is also an integral part of BCK
lexicon.
Administrative Facet
Administratively, BCK pertains to the forms of business organisation, regulations, approvals and
clearances needed to start and carry on business. It also refers to the internal management and
governance processes
The above mentioned perspectives might enable you to identify and place the BCK terminologies within a
framework. Feel free and encouraged to read and make sense of the reports in business newspapers and
magazines. It’s quite possible that you will come across many terms not mentioned here. Be advised to
prepare a dictionary for yourself. What is even more exciting is the use of signage and symbol in business
and commerce.
Sign Language and Symbols in Business

An important caveat about the foregoing discussion of the various perspectives of contextualising the BCK
terminologies is necessary. We have stated these facets separately just for the sake of simplicity and
clarity. In practice there will be a lot of overlap. Please read the emphasis in the title ‘Business- many
facets of the same reality.’ The emphasis is on the ‘same reality.’ For example, take the technical and the
commercial facets.
Whether in-bound or out-bound, order processing, inventory management, deliveries, payments and the
associated terminologies would be common. Whether one is purchasing the raw materials or selling the
goods, the signs and symbols stated above would be the same.
Secondly, we have already stated the fact that BCK lexicon like the BCK itself is vast and ever evolving and
expanding. You may focus on the terms mentioned in the BCK Material thus far (Chapters 1-5) and the
terms mentioned in the present chapter.
Finally, we have clubbed finance, stock and commodity market terminologies for overcoming the overlaps
and utilised the Other Business Terminologies for including those terms that might pertain to HR,
Administrative, Technical and other perspectives not covered in the previous classifications.
Finance, Stock and Commodity Market Terminology

Agent: A brokerage firm is said to be an agent when it acts on behalf of the client in buying or purchasing
of shares. At no point of time in the entire transaction the agent will own the shares.

Amortize: To amortize is to charge a regular portion of an expenditure over a fixed period of time. For
example: If something cost `1,00,000 and is to be amortized over ten years, the financial reports will
show an expense of `10,000 per year for ten years. Intangible assets such as patents and trademarks are
amortized in to profit and loss account.
Annuity Due: An annuity whose payments occur at the beginning of each period.
Annuity: A series of payments of an equal amount at fixed intervals for a specified number of periods.
Appreciation: Appreciation is an increase in value. If a machine cost `5 lakh last year and is now
worth`7 lakh, it has appreciated in value by `2 lakh
Arbitrage: Arbitrage is the simultaneous purchase and sale of two identical commodities or instruments.
This simultaneous sale and purchase is done in order to take advantage of the price variations in two
different markets. For example: Purchase of gold in one nation and the simultaneous sale in another.
Asset: Asset means an economic resource that is expected to be of benefit in the future.
Probable future economic benefits obtained as a result of past transactions or events. Anything of value to
which the firm has a legal claim. Any owned tangible or intangible object having economic value useful to
the owner. In other words, an asset may be a physical property such as a building, or an object such as a
stock certificate, or it may be a right, such as the right to use a patented process. These can be:
i) Current Assets: Current Assets are those assets that can be expected to turn into cash within a year
or less. For example: Cash, marketable securities, accounts receivable, and inventory.
ii) Fixed Assets: Fixed Assets cannot be quickly turned into cash without interfering with business
operations. These are valuable items that last more than one year. For example: Land, buildings,
machinery, vehicle, equipment, furniture, and long‐term investments.
iii) Intangible Assets: Intangible Assets are items such as patents, copyrights, trademarks, and other
kinds of rights or things of value to a company, which are not physical objects. Often, they do not
appear on financial reports.
Ask/Offer: The lowest price at which an owner is willing to sell his securities. The offer is higher than the
bid.
Audit: Audit is a careful review of financial records of an organisation to verify their accuracy.
Bad debts: Bad debts are amounts owed to a company that are not going to be paid. An account
receivable becomes a bad debt when it is recognized that it won’t be paid. Sometimes, bad debts are
written off when recognized.

Balance sheet: Balance Sheet is a statement of the financial position of a company at a single specific
time (often at the close of business on the last day of the month, quarter, or year.) The balance sheet
normally lists all assets on the left side or top while liabilities and capital are listed on the right side or
bottom.
Bond: Bond is a type of long-term Promissory Note. Bonds can either be registered in the owner’s name
or are issued as bearer instruments. It is a written record of a debt payable in the future. The bond shows
amount of the debt, due date, and interest rate. It is a promissory note issued by companies or
government to its buyers. It speaks about specified amount held for a specified time period by the buyer.
Book Value: Total assets minus total liabilities means book value of Shareholder’s equity. Book value
also means the value of an asset as recorded on the company’s books or financial reports. Book value is
often different than true value. It may be more or less.
Breakeven point: It is the amount of revenue from sales which exactly equals the amount of expense.
Breakeven point is often expressed as the number of units that must be sold to produce revenues exactly
equal to expenses. Sales above the breakeven point produce a profit and below produces loss.
Budget: Budget is a detailed plan for the future, usually expressed in formal quantitative terms. It is also
a detailed plan for the acquisition and use of financial and other resources over a specified time period.
Bears: These stock-market players are pessimists, they expect share prices or any other type of
investment to fall. In a ‘bear market’ the general sentiment is that prices are going to go lower and
majority of dealers will sell as quickly as possible for fear of holding shares which diminish in value.
Base Price: This is the price of a security at the beginning of the trading day which is used to determine
the Day Minimum/Maximum and the Operational ranges for that day.
Basket Trading: Basket trading is a facility by which investors are in a position to buy/sell all 30 scrips
of Sensex in the proportion of current weights in the Sensex, in one go.
Bear Market: A market in which stock prices are falling consistently.
Badla: Carrying forward of transaction form one settlement period to the next without effecting delivery
or payment. Badla involves carrying forward of a transaction from one settlement period to the next. The
carry- forward is done at the making up price, which is usually the closing price of the last day of
settlement. A badla transaction attracts the following payments / charges:
a) ‘margin money’ specified by the stock exchange board; and

b) contango or badla charges (interest charges) determined on the basis of demand and supply forces.
Blue Chips: Blue Chips are shares of large, well established and financially sound companies with an
impressive record of earnings and dividends. Generally, Blue Chip shares provide low to moderate current
yield and moderate to high capital gains yield. The price volatility of such shares is moderate.
Beta: It is a measurement of relationship between stock price of any particular stock and the movement
of whole market.
Bid: It is the highest price a buyer is willing to pay for a stock. It is opposite of ask/offer.
Broker/Brokerage Firm: A registered securities firm are called broker/brokerage firm. Broker’s acts
as an advisor for purchase and sell of listed stocks, they do not own the securities at any point of the time.
But they charge a commission for their service.
Bull Market: A market in which the stock price is increasing consistently.
Business Day: Days on which stock markets are open. Monday to Friday, excluding public holidays.
Call: The demand by a company or any other issuer of shares for payment. It may be the demand for full
payment on the due date, such as, for example, with a rights issue. It may, alternatively, be the demand
for a further payment when the total amount is payable by instalments. A call by a company should not be
confused with a call option.
Bonus: A free allotment of shares made in proportion to existing shares out of accumulated reserves. A
bonus share does not constitute additional wealth to shareholders. It merely signifies recapitalization of
reserves into equity capital. However, the expectation of bonus shares has a bullish impact on market
sentiment and causes share prices to go up.
Book Closure: Dates between which a company keeps its register of members closed for updating prior
to payment of dividends or issue of new shares or debentures.
Brokerage: Brokerage is the commission charged by the broker. The maximum brokerage chargeable is
determined by SEBI.
Bull: A bull is one who expects a rise in price so that he can later sell at a higher price.
Business Risk: The riskiness inherent in the firm’s operations if it uses no debt.

Buyer: The trading member who has placed the order for the purchase of the securities
Call Option: An option that is given to investor the right but not obligation to buy a particular stock at a
specified price within a specified time period.
Capital Budgeting: The process of planning expenditure on assets whose cash flows are expected to
extend beyond one year.
Capital Gains Yield: The capital gain during a given year divided by the beginning price.
Capital Markets: The financial markets for stocks and for intermediate or long-term debt.
Cash Budget: A table showing cash flows (receipts, disbursements, and cash balances) for a firm over a
specified period.
Credit Period: The length of time for which credit is granted.
Closing Price: The trade price of a security at the end of a trading day. Based on the closing price of the
security, the base price at the beginning of the next trading day is calculated.
Commercial Paper: Unsecured, short-term promissory notes of large firms, usually issued in
denominations of `100,000 or more and having an interest rate somewhat below the prime of lending
rate of commercial bank.
Commodities: Product used for commerce that are traded on a separate, authorized commodities
platform. Commodities include agricultural products and natural resources.
Convertible Securities: A security (bonds, debentures, preferred stocks) by an issuer that can be
converted into other securities of that issuer are known as convertible securities. The conversion usually
occurs at the option of the holder, but it may occur at the option of the issuer.
Consolidation: Business combination of two or more entities that occurs when the entities transfer all
of their net assets to a new entity created for that purpose.
Creditors: These are people/organisations you owe money to at any particular time – the value of the
creditors is included in the published accounts.
Debentures: A type of debt instrument that is not secured by physical assets or collateral. Debentures
are backed only by the general creditworthiness and reputation of the issuer. A debenture is an unsecured
form of investment.
Debtors: Although debtors are considered an asset, if you are owed a vast amount, this might indicate
problems collecting monies owed and possible cash flow difficulties. A debtor is a company or individual
who owes money.

Defensive Stock: A stock that provides a constant dividends and stable earnings even in the periods of
economic downturn i.e. even in the extreme critical situations of the stock market these companies
continue to pay the dividends at a constant rate.
Depreciation: Depreciation is a way of spreading the cost of an asset over its expected useful economic
life. It is an expense allowance made for wear and tear on an asset over its estimated useful life. It is an
expense that is supposed to reflect the loss in value of a fixed asset. For example: If a machine will
completely wear out after ten year’s use, the cost of the machine is charged as an expense over the
ten‐year life rather than all at once, when the machine is purchased. Straight line depreciation charges the
same amount to expense each year. Accelerated depreciation charges more to expense in early years, less
in later years. Depreciation is an accounting expense.
Derivatives: A security whose price is derived from one or more underlying assets. The most common
underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes.
Diversification: Reducing the investment risk by purchasing shares of different companies operating in
different sectors.
Dividend: A portion of the company’s earnings decided to pay to its shareholders in return to their
investments. It is usually declared as a percentage of current share price or some specified rupee value,
usually decided by the board of directors of the company.
Equity (Net Worth): The capital supplied by common stock holders common stock, paid-in capital,
retained earnings, and, occasionally, certain reserves. Total equity is common equity plus preferred stock.
Exchange Rate: The number of units of given currency that can be purchased for one unit of another
currency.
Face Value: It is the cash denomination or the amount of money the holder of the individual security
going to earn from the issuer of the security at the time of maturity. It is also known as par value.
Financial Instrument: A financial instrument is anything that ranges from cash, deed, negotiable
instrument, or for that matter any written and authenticated evidence that shows the existence of a
transaction or agreement.
Financial Intermediary: A financial intermediary is basically a party or person who acts as a link
between a provider who provides securities and the user, who purchases the securities. Share brokers, and
almost all the banks, are the best examples of financial intermediaries.
Government Bonds: A government bond, which is also known as a government security, is basically
any security that is held with the government and has the highest possible rate of interest.
Hedge: Hedge is a strategy that is used to minimize the risk of a particular investment and maximize the
returns of an investment. A ‘hedge’ strategy is, most of the times, implemented with the help of a hedge
fund. This term has been written from the banker’s point of view and may be interpreted differently in the
field of financial and commodity market.
Holding Period: The holding period is the time duration during which a capital asset is held/owned by
an individual or corporation. The holding period is taken into consideration, while pledging the asset as
collateral.
Income Stock: A security which has a solid record of dividend payments and offers the dividend higher
than the common stocks.
Index: A statistical measurement of change in the economy or security market. Such indices have their
own calculation methodology and are usually measured as a percentage change in the base value over the
time.
Initial Public Offering (IPO): A company’s first issue of shares to general public. IPOs are issued by
smaller, younger companies seeking funds for expansion and growth, but large companies also practice
this to become publicly traded companies.
Internet Trading: Internet Trading is a platform with Internet as a medium. Internet trading execution
takes place through order routing system, which will rout traders order to exchange trading system. Thus,
traders sitting in any part of the world can be able to trade using their brokers Internet Trading System.
The Securities and Exchange Board of India (SEBI) approved Internet Trading in January 2000.
Limit Order: An order to buy or sell a share at a specified price. The order will be executed only at the
specified limit price or even better. A limit order sets a minimum price the seller is willing to accept and
maximum price the buyer is willing to pay for it.
Liquidation: A liquidation occurs when the assets of a division are sold off piecemeal, rather than as an
operating entity.
Listed Stocks: The shares of a company that are traded on the stock exchange. The company has to pay
fees to be listed in the stock exchange and abide by the regulations of the stock exchange to maintain
listing privilege.
Market Capitalization: The total value in rupee of all of a company’s outstanding shares. It is
calculated by multiplying all the outstanding shares with the current market price of one share. It
determines the company’s size in terms of its wealth.
Money Market: Money market is component of financial market for asset involved in short term
borrowing, lending, buying and selling with original maturities of one year or less.
Mutual Fund: A pool of money managed by experts by investing in stocks, bonds and other securities
with the objective of improving their savings. These experts will create a diversified portfolio from these
funds.
One-sided Market: A market that has only potential sellers or only potential buyers but not both.
Out-of-The-Money (OTM): For call options, this means the stock price is below the strike price. For
put options, this means the stock price is above the strike price. The price of out-of-the-money options
consists entirely of “time value.”
Portfolio: Holding of any individual or institution. A portfolio may include various type of securities of
different companies operating in different sectors.
Pre-opening Session: The pre-open session is for duration of 15 minutes i.e. from 9:00 AM to 9:15 AM.
In pre- open session order entry, modification and cancellation takes place.
Price Earnings (P/E) Ratio: The market price of a share of stock divided by the earnings (profit) per
share. P/E ratios can vary from sky high to dismally low, but may not reflect the true value of a company.
Put Option: An option that gives an investor the right to sell a particular stock at a stated price within a
specified time period. Put option is purchased by those who believe that particular stock price is going to
fall down than the stated price.
Return On Investment (ROI): ROI is a measure of the effectiveness and efficiency with which
managers use the resources available to them, expressed as a percentage. Return on equity is usually net
profit after taxes divided by the shareholders’ equity. Return on invested capital is usually net profit after
taxes plus interest paid on long‐term debt divided by the equity plus the long‐term debt. Return on assets
used is usually the operating profit divided by the assets used to produce the profit. Typically used to
evaluate divisions or subsidiaries.
Different companies and different industries have different ROIs.
Risk: A probable chances of investments actual returns will be reduced then as calculated. Risk is usually
measured by calculating the standard deviation of the historical price returns. Standard deviation is
directly proportional to the degree of risk associated.
Securities: A transferable certificate of ownership of investment in products such as stocks, bonds,

future contracts and options which an individual holds.
Strike Price: The price at which the holder of an option can buy (in case of call option) or sell (in case of
put option) the securities they hold when the option is executed.
Stock: A certificate (or electronic or other record) that indicates ownership of a portion of a corporation;
a share of stock. Preferred stock promises its owner a dividend that is usually fixed in amount or percent.
Preferred shareholders get paid first out of any profits. They have preference. Common stock has no
preference and no fixed rate of return.
Stock also means the stock of goods, the stock on hand, the inventory of a company.

Stock Split: An attempt to increase the number of outstanding shares of a company by splitting the
existing shares. It is usually done to increase the availability of shares in the market. The usual split ratio
is 2:1 or 3:1, i.e. one share is split into two or three.
Thin Market: A market in which there are comparatively low number of bids to buy and offers to sell.
Since the number of transactions is low, the prices are very volatile.
Trading Session: The period of time stock market is open for trading for both sellers and buyers, within
this time frame all the orders of the day must be placed. [9:15 AM to 3:30 PM] Here all the orders placed
in pre- opening sessions are matched and executed.
Venture Capital: Venture Capital is a form of private equity and a type of financing that investors
provide to startup companies and small business that are believed to have long term growth potential.
Yield: It is the measure of return on investments in terms of percentage. Stock yield is calculated by
dividing the current price of the share by the annual dividend paid by the company for that share. For
example, if the current price of the share is ` 100 and the dividend paid is INR 5 per share annually, then
the stock yield is 5%.
Yield to Call (YTC): The rate of return earned on a bond if it is called before its maturity date.
Zero Coupon Bond: A bond that pays no annual interest but is sold at a discount below par, thus
providing compensation to investors in the form of capital appreciation.
Marketing Terminology
Advertising Campaign: An organization’s programme of advertising activities over a particular period
with specific aims, for example an increase in sales or awareness of a product.
Advertising: Advertising is any paid form of non-personal presentation and promotion of ideas, goods
and services through mass media such as newspapers, magazines, television or radio by an identified
sponsor.
After-Sales Service: The services received after the original goods or services have been paid for. Often
this service is provided as part of a warranty or guarantee scheme associated with the product/service
purchased.
Agent: Agent is a part of the distribution channel. An agent is effectively a wholesaler who represents
buyers and sellers on a relatively permanent basis, performs only a few functions and does not take title to
goods.

Barrier to Trade: Something that makes trade between two countries more difficult or expensive. For
example: A tax on imports.
Barriers to Entry/Exit: Economic or other characteristics of a marketplace that make it difficult for
new firms to enter or exit. Examples include: economies of scale; product differentiation; capital
requirements; cost disadvantages other than size; access to distribution channels; government policy; etc.
Benchmarking: Benchmarking is the process of comparing the products and services of a business
against those of competitors in a market, or leading businesses in other markets, in order to find ways of
improving quality and performance. An analysis of competitor strengths and weaknesses; used to evaluate
a firm’s relative competitive position, opportunities or improving, and success/failure in achieving such
improvement.
Brand: A brand is the specific type of the product form. A brand – represented by a brand name, symbol,
design, logo, packaging – is the identity of a particular product form that customers recognise as being
different from others.
Brand Equity: Brand equity refers to the value of a brand. Brand equity is based on the extent to which
the brand has high brand loyalty, name awareness, perceived quality and strong product associations.
Brand equity also includes other “intangible” assets such as patents, trademarks and channel
relationships.
Brand Loyalty: It is a strongly motivated and long standing decision of the customer to purchase a
particular product or service.
Brand Recognition: It is a customer’s awareness that a brand exists and is an alternative to purchase.
Business Model: A company’s business model is management’s storyline for how the strategy will be a
money maker.
Business Portfolio: The business portfolio is the collection of businesses and products that make up
the business.
Business to Business: Marketing activity directed from one business to another. This term is often
shortened to “B2B”.
Buying Behaviour: Buying behaviour concerns the process that buyers go through when deciding
whether or not to purchase goods or services. Buying behaviour can be influenced by a variety of external
factors and motivations, including marketing activity.
Cash Discount: A reduction in the price of goods given to encourage sale on case basis.
Competitive Advantage: Advantages that a firm has over its competitors.

Competitive Position: The position that a firm has or wishes to achieve within its industry as measured
against its competition.
Conglomerate Diversification: A strategy of growing a firm by acquiring other firms for investment
purposes; usually little or no anticipated synergy with the acquired firm.
Consortium: Consortium is a combination of several companies working together for a particular

purpose, for example in order to buy something or build something.
Consumer Markets: Consumer markets are the markets for products and services bought by
individuals for their own or family use.
Corporate Culture: Corporate Culture refers to a company's values, beliefs, business principles,
traditions, ways of operating, and internal work environment.
Cross-Selling: Using a customer’s buying history to select them for related offers. For example: Selling a
car alarm and music systems to new car buyers.
Customer Demand: Consumer demand is a want for a specific product supported by an ability and
willingness to pay for it.
Customer Loyalty: Feeling or attitude that inclined a customer either to return to a company, shop or
outlet to purchase there again, or else to re-purchase a particular product, service or brand.
Customer Need: A need is a basic requirement that an individual wishes to satisfy.
Customer Satisfaction: The provision of goods or services which fulfil the customer’s expectations in
terms of quality and service, in relation to price paid.
Customer Wants: A want is a desire for a specific product or service to satisfy the underlying need.
Differentiation: A marketing strategy aimed at ensuring that products and services have a unique
element to allow them to stand out from the rest.
Direct Marketing: When businesses and non-profit organizations market their products, services or
causes directly to consumers based on consumer interests. Examples include catalogues and other postal
mailings, telemarketing, text messages, emails, ads on a mobile device and internet advertising.

Distribution Channel: The network of organisations necessary to distribute goods or services from the
manufacturers to the consumers; the distribution channel therefore potentially consists of manufacturers,
distributors, wholesalers, retailers and E-tailers.
Diversify: A company, increases the range of goods or services it produces and sells.
E-Commerce: The use of technologies such as the Internet, electronic data exchange and industry
extranets to streamline business transactions.
Economy of Scale: A reduction in costs through larger operating units, spreading fixed costs over large
numbers of items/units.
External Environment: The conditions and forces that define a firm’s competitive position and
influences its strategic options. Also, called Competitive Environment.
Fast-Moving Consumer Goods (FMCG): Fast-moving consumer goods are those that sell in high
volumes, with low unit value, and have fast consumer repurchase. Examples include, soaps, toothpastes,
hair oils, jams, ketchups, packed juices, ready meals, baked beans, etc.
Forecasting: The process of estimating future demands by anticipating what buyers are likely to do
under a given set of marketing conditions. For example: Economic confidence, disposal income, pricing
levels, etc.
Innovators: Innovators are those who adopt new products first. They are usually relatively young, lively,
intelligent, socially and geographically mobile. They are often of a high socioeconomic group.
Internal Marketing: The process of eliciting support for a company and its activities among its own
employees, in order to encourage them to promote its goals. This process can happen at a number of
levels, from increasing awareness of individual products or marketing campaigns, to explaining overall
business strategy.
Joint Venture: A third party commercial operation established by two or more firms to pursue a
particular market, resource supply, or other business opportunity. It is created and operated for the
benefit of the co- owners.
Long-Term Objectives: A firm’s intended performance over a multi-year period of time; usually
includes measures such as competitive position profitability, return on investment, technology leadership,
productivity, employee relations and development, public responsibility.

Market Development: The process of growing sales by offering existing products (or new versions of
them) to new customer groups.
Market Entry: The launch of a new product into a new or existing market. A different strategy is
required depending on whether the product is an early or late entrant to the market; the first entrant
usually has an automatic advantage, while later entrants need to demonstrate that their products are
better, cheaper and so on.
Market Leader: The company that has control over a certain market.
Market Positioning: A marketing strategy that will position a business’ products and services against
those of its competitors in the minds of consumers.
Market Research: The systematic gathering, recording and analysing of data about problems relating to
the marketing of goods and services.
Market Segmentation: Dividing consumers into groups based on different consumer characteristics, to
deliver specially designed advertisements that meet these characteristics as closely as possible.
Market Share: Market share can be defined as the percentage of all sales within a market that is held by
one brand / product or company.
Market Targeting: Market targeting is the process of evaluating each market segment and selecting the
most attractive segments to enter with a particular product or product line.
Marketing: Marketing is the science and art of exploring, creating and delivering value to satisfy the
needs of a target market at a profit. Marketing identifies unfulfilled needs and desires. It defines,
measures and quantifies the size of the identified market and the profit potential. It pinpoints which
segments the company is capable of serving best and it designs and promotes the appropriate products
and services.
Marketing Mix: It refers to the firm’s marketing elements. It is common to describe these elements in
terms of 4Ps of marketing, viz., Product, Price, Place and Promotion. For services marketing usually three
additional Ps are referred to, viz, People, Processes and Physical Evidence.
Marketing Plan: A detailed statement (usually prepared annually) of how a company’s marketing mix
will be used to achieve its market objectives. A plan is usually prepared following a marketing audit.

Mass Marketing: When many consumers receive the same message from businesses and non-profit
organizations through mass media, such as broadcast television, radio and newspapers, regardless of
consumer interests.
Merger: Merger is considered to be a process when two or more companies come together to expand
their business operations.
Mission: The unique purpose of a firm that sets it apart from firms of its type; identifies scope of
operations including markets, customers, products, distribution, technology, etc. in manner that reflects
values and priorities of the firm’s strategies.
Niche Marketing: Niche marketing refers to the exploitation of comparatively small market segments
by businesses that decide to concentrate their efforts. Niche segments exist in nearly all markets. For
example: atta noodles for health conscious.
Opportunities: Opportunities are any feature of the external environment which creates conditions that
a business can exploit to its advantage. If the business is successful in exploiting opportunities, then it will
be better placed to achieve its objectives.
Personal Selling: Oral communication with potential buyers of a product with the intention of making
a sale. The personal selling may focus initially on developing a relationship with the potential buyer, but
will always ultimately end with an attempt to “close the sale”.
Pre-Emptive Pricing: Pre-emptive pricing is a strategy involves setting low prices in order to
discourage or deter potential new entrants to the suppliers market.
Price: The price of a product may be seen as a financial expression of the value of that product.
Price Discrimination: Price discrimination occurs when a firm charges a different price to different
groups of consumers for an identical good or service, for reasons not associated with costs. For example,
bottled water is priced differently in shopping malls and cinema halls.
Price Elasticity of Demand: Price elasticity of demand measures the responsiveness of a change in
demand for a product following a change in its own price.
Price Sensitivity: Price sensitivity is the effect a change in price will have on customers.
Price Skimming: Price skimming involves charging a relatively high price for a short time where a new,
innovative, or much-improved product is launched onto a market.

Publicity: Promotional activities designed to promote a business and its products by obtaining media
coverage not paid for by the business.
Sales Promotion: Sales promotion refers to any activity designed to boost the sales of a product or
service. It may include an advertising campaign, increased PR activity, a free-sample campaign, arranging
demonstrations or exhibitions, setting up competitions with attractive prizes, temporary price reductions,
door- to-door calling, telephone-selling, personal letters on other methods.
Short-Term Objectives: Usually one year objectives sometimes known as Annual Objectives. They
often coincide with Long-Term Objectives; they usually indicate the speed at which management wants
the organization to progress.
Stakeholder: A person, group, or business that has an interest in the outcomes of a firm’s operations.
Strength: A skill, resource, or other advantage that a firm has relative to its competitors that is
important to serving the needs of customers in its marketplace.
Target Marketing: Reaching out to a group of consumers sharing common consumer characteristics
with the most appropriate advertisements.
Telemarketing: Using the telephone to contact individuals about an advertiser’s products or services, or
to get support for a cause.
Test Marketing: Test marketing occurs when a new product is tested with a sample of customers, or
launched in a restricted geographical area, to judge customers’ reactions.
Threats: Threats are any aspect of the external environment which cause problems and which may
prevent achievement of objectives. Almost by definition, what presents a threat to one business offers an
opportunity to other businesses.
Unique Selling Proposition (USP): A unique selling proposition is a customer benefit that no other
product can claim.
Weakness: A limitation or lack of skills, resources, or capabilities that impedes a firm’s effective
performance.
Banking Terminology
Acceptance: Acceptance which is also known as the banker’s acceptance is a signed instrument of
acknowledgment that indicates the approval and acceptance of all terms and conditions of any agreement
on behalf of the banker. It is a very wide term that is used in context with financial agreements and
contracts.
Accepting House: An accepting house is a banking or finance organization that specializes in the
service of acceptance and guarantee of bills of exchange. This organization specializes in two prominent
functions, that is facilitating the different negotiable instruments and merchant banking.

Account Balance: The total amount of money in a particular bank account, along with the debit and
credit amounts, the net amount is also termed as the account balance.
Accrued Interest: Accrued Interest is the interest, accumulated on an investment but is not yet paid.
Often, accrued interest is also termed as interest receivable. Some banking books prefer to call it as the
interest that is earned, but not yet paid.
Administered Rates: Administered rates are the rates of interest which can be changed contractually
by lender. In some cases, these rates can also be changed by the depositor and also the payee. The laws
and provisions that monitor the concept of administered rates differ in each jurisdiction.
American Depository Receipt (ADR): American depository receipts, also known as ADRs, are
depository receipts which are equal to a specific number of shares of company that have been issued in a
foreign country. American depository receipts are traded only in the United States of America. Similar
mechanism exists for other countries also.
Annuities: Annuities are contracts that guarantee income or return, in exchange of a huge sum of money
that is deposited, either at the same time or is paid with the help of periodic payments. Some of the
common types of annuities include the deferred, fixed, immediate or variable variants.
Automated Clearing House: An automated clearing house is nation-wide electronic clearing houses
that monitors and administers the process of check and fund clearance between banks. It is an electronic
system and thus minimizes the human work in the process of clearance. It distributes credit and debit
balances automatically.
Automated Teller Machines: Automated teller machines are basically used to conduct transactions
with the bank, electronically. The automated teller machine is an excellent example of integration of
computers and electronics into the field of banking.
Balance Transfer: A balance transfer is the repayment of a credit debt with the help of another source
of credit. In some cases, balance transfer also refers to transfer of funds from one account to another.
Bank Account: A bank account is an account held by a person with a bank, with the help of which the
account holder can deposit, safeguard his money, earn interest and also make cheque payments.
Bank Rate: It is the interest rate at which the Central Bank in the discharge of its function as Banker’s
Bank lends to the commercial banks. Since this lending may be in the form of discounting of the securities
pledged, it is also called the discount rate.

Basis Point: It is a measure of change in financial parameters such as interest, stock indices and market
rates. It is 1/100 of one percent.
Bounced Cheque: A bounced cheque is nothing but an ordinary bank cheque that any bank can refuse
to encash or pay because of the fact that there are no sufficient finances in the bank account of the
originator or drawer of the cheque or same other valid reason.
Bridge Financing: Also, known as gap financing, bridge financing is a loan where the time and cash
flow between a short term loan and a long term loan is filled up. Bridge financing begins at the end of the
time period of the first loan and ends with the start of the time period of the second loan, thereby bridging
the gap between two loans. It is also known as gap financing.
Cap: A cap is a limit that regulates the increase or decrease in the rate of interest and installments of an
adjustable rate mortgage.
Cashier’s Cheque: The cashier’s cheque is drawn by a bank on it’s own name to may payments other
organizations, banks, corporations or even individuals.
Cash Reserve: The cash reserve is the total amount of cash that is present in the bank account and can
also be withdrawn immediately.
Certificate of Deposit: The certificate of deposit is a certificate of savings deposit that promises the
depositor the sum back along with appropriate interest.
Cheque: A cheque is a negotiable instrument that instructs the bank to pay a particular amount of money
from the writer’s bank, to the receiver of the cheque.
Clearing: Clearing of a cheque is basically a function that is executed at the clearing house, when all
amount of the cheque is subtracted from the payer’s account and then added to the payee’s account.
Clearing House: The clearing house is a place where the representatives of the different banks meet for
confirming and clearing all the checks and balances with each other. The clearing house, in most countries
across the world, is managed by the central bank.
Compound Interest: Compound interest is the interest that is ‘compounded’ on a sum of money that is
deposited. The compound interest, unlike simple interest, is calculated by taking into consideration, the
principal amount and the accumulated interest.

Debit Card: A debit card is an instrument that was developed with digital cash technology, and is used
when a consumer makes that payment first to the credit card company and then swipes the card. The
debit card operates in the exact opposite manner of the credit card.
Deposit Slip: A deposit slip is a bill of itemized nature and depicts the amount of paper money, coins
and the check numbers that are being deposited into a bank account.
Depositor: The person who deposits money into a bank account is called a depositor.
Debt Settlement: Debt settlement is a procedure wherein a person in debt negotiates the price with the
lender of a loan, in order to reduce the installments and the rate of repayment, and ensure a fast and
guaranteed repayment.
Debt Repayment: Debt repayment is the total process repayment of a debt along with the interest.
Sometimes, the consolidation that is provided is also included in debt repayment.
Debt Recovery: Debt recovery is the process that is initiated by the banks and lending institutions, by
various procedures like debt settlement or selling of collaterals.
E-Cash: Also known as electronic cash and digital cash, e-cash is a technology where the banking
organizations resort to the use of electronic, computer, internet and other networks to execute
transactions and transfer funds.
Early Withdrawal Penalty: An early withdrawal penalty is basically a penalty that is levied by a bank
because of an early withdrawal of a fixed investment by any investor. There can be several types of early
withdrawal penalties, like forfeiting the promised interest.
Earnest Money Deposit: An earnest money deposit is made by the buyer to the potential seller of a real
estate, in the initial stages of negotiation of purchase.
Expiration Date: This term indicates the invalidity of a financial document or instrument, after a
specified period of time.
Education Loan: An education loan, also known as student’s loan, is specifically meant to provide forth
borrower’s expenditure towards education. In the majority of countries, educational loans tend to have a
low rate of interest. The period of repayment also starts after the completion period of the loan.

Guarantor: A guarantor is a creator of trust who takes the responsibility of the repayment of a loan, and
is also, in some cases, liable and equally responsible for the repayment of the loan.
Installment Contract: An installment contract is a contract where the borrower, who is also the
purchaser, pays a series of installments that includes the interest of the principal amount.
Interest / Interest Rate: Interest is a charge that is paid by any borrower or debtor for the use of
money, which is calculated on the basis of the rate of interest, time period of the debt and the principal
amount that was borrowed. Interest is, sometimes, also titled as the ‘cost of credit’. Interest rate is the
percentage of principal amount that is paid as an interest for the use of money.
Internet Banking: Internet banking is a system wherein customers can conduct their transactions
through the
Internet. This kind of banking is also known as e-banking or online banking.
Letter of Credit: A document issued by a bank (on behalf of the buyer or the importer), stating its
commitment to pay a third party (seller or the exporter), a specific amount, for the purchase of goods by
its customer, who is the buyer. The seller has to meet the conditions given in the document and submit
the relevant documents, in order to receive the payment. Letters of credit are mainly used in international
trade transactions of huge amounts, wherein the customer and the supplier live in different countries.
Lock-in Period: A guarantee given by the lender that there will be no change in the quoted mortgage
rates for a specified period of time, which is called the lock-in period.
Mortgage: A mortgage is a legal agreement between the lender and the borrower where real estate
property is used as collateral for the loan, in order to secure the payment of the debt. According to the
mortgage agreement, the lender of the loan is authorized to confiscate the property, the moment the
borrower stops paying the installments.
Maturity: The term maturity is used to indicate the end of investment period of any fixed investment or
security. After maturity, the investor is repaid the invested amount along with the interest that has been
accumulated. For example, on the maturity of a one year fixed deposit, the invested sum along with the
accumulated interest, is transferred by the bank to the account of the investor.

Market Value: Market value is the value at which the demand of consumers and the supply of the
manufacturers decide the price of a commodity or service. The market value is the equilibrium point on
the supply and demand graph, where the demand and supply curves meet. Thus, market value is decided
on the basis of the number people who demand a commodity and the number of commodities that the
sellers are capable of selling.
Online Banking: The accessing of bank information, accounts and transactions with the help of a
computer through the financial institution’s website on the Internet is called online banking. It is also
called Internet banking or e-banking.
Overdraft: It is a check or rather an amount of check, which is above the balance available in the account
of the payer.
Payee: Payee is the person to whom the money is to be paid by the payer.
Payer: Payer is the person who pays the money to the payee.
Personal Identification Number (PIN): Personal identification number or PIN is a secret code of
numbers and alphabets given to customers to perform transactions through an automatic teller machine
or an ATM.
Repo Rate. The rate at which banks borrow money from the RBI against pledging or sale of government
securities to RBI is known as “Repo Rate.” Repo rate is short form of Repurchase Rate. Generally, these
loans are for short durations up to 2 weeks. Repo Rate differs from Bank Rate with respect to the time
horizon. Repo Rate is a short-term measure and it refers to short-term loans. On the other hand, Bank
Rate is a long term measure and is governed by the long-term monetary policies of the RBI.
Reverse Repo Rate. It is the rate of interest offered by RBI, when banks deposit their surplus funds with
the RBI for short periods.
Smart Cards: Unlike debit and credit cards (with magnetic stripes), smart cards possess a computer
chip, which is used for data storage, processing and identification.
Syndicated Loan: A very large loan extended by a group of small banks to a single borrower, especially
corporate borrowers. In most cases of syndicated loans, there will be a lead bank, which provides a part of
the loan and syndicates the balance amount to other banks.
Time Deposit: A kind of bank deposit which the investor is not able to withdraw, before a time fixed
when making the deposit.
Value At Risk (VAR): The sum or portion of the value that is at stake of subject to loss from a variation
in prevalent interest rates.

Wholesale Banking: Wholesale banking is a term used for banks which offer services to other
corporate entities, large institutions and other financial institutions.
Zero Balance Account: A bank account which does not require any minimum balance is termed as a
zero balance account.
Zero-Down-Payment Mortgage: Zero-down-payment mortgage is a type of mortgage given to a buyer

who does not make any down payments while borrowing. The mortgage buyer borrows the amount at the
entire purchase price. For example, Jaan Dhan Account.
Other Business Terminology
Acquisition: When one organization takes over the other organization and controls all its business
operations, it is known as acquisitions. In this process of acquisition, one financially strong organization
overpowers the weaker one.
Bankruptcy: A bankruptcy refers to economic insolvency, wherein the person’s assets are liquidated, to
pay off all liabilities with the help of a bankruptcy trustee or a court of law.
Bottom-Line: In plain english bottom line means the most important fact or aspect of anything. In BCK,
it may be defined as the firm’s income after all expenses have been deducted from revenues. These
expenses include interest charges paid on loans, general and administrative costs and income taxes. In
simpler words, it is the same thing as Net Profits for these mattered the most for the owners of the firm.
In today’s context, a firm’s performance is evaluated not on the basis of such an economic performance as
net profits alone but also on the basis of contribution to the communities and the conservation of the
environment. See, Triple Bottom Line.
Business Environment: It is a set of all the variables external to the firm but influence its decision-
making and in turn are also influenced by it.
Business Facilitators: These are individuals, organisations/ institutions and all other arrangements
that ease the setting up of, operating and exiting from business.
Corporate Forms of Business Organisation: These are the forms of business organisation where in
the eyes of law the business entity is distinct from its owners. It can own the assets and owe to others as
an artificial legal person. Thus, the liability of business owners can be limited to a predetermined amount.
Company is the ideal representation of the corporate forms of business organisation.
Corporate Governance: It is a system of overseeing the affairs of a corporation to ensure that they are
conducted in an ethical manner and as per provisions of law. The mechanism of corporate governance
includes (a) the board of directors who appoint, oversee and reward the management team; (b)
independent audit of the accounts of the company; (c) reporting of the performance to the markets (stock
exchanges) and business media. All these are examples of the system of corporate governance.
Electronic Commerce: It broadly refers to the Internet and mobile telephony based applications for
conducting business and commerce. The latter more precisely is known as mobile commerce. It includes
not only such pure e-commerce businesses as Amazon but also includes such business functions as E-
marketing, Internet Marketing, etc. Usually a typical e-commerce retailing will have an order placement,
tracking and delivery end as well as on-line payment end.
Electronic Filing: Electronic filing is system of filing information required by regulators, government
and others electronically. In taxation, it is a method of filing of tax returns and tax forms on the Internet.
Globalisation: It is a systematic process of removing the barriers to international trade in goods and
services and the international flows of capital. Some people argue that it should include barrier free
movement of labour as well. Collectively all this results in the greater integration of a country’s economy
with the economy of the Rest of the World.
Goodwill: Goodwill in accounting is the difference between what a company pays when it buys the assets
of another company and the book value of those assets. Sometimes, real goodwill is a company’s good
reputation, the loyalty of its customers, and so on.
Infrastructure: It means the basic facilities e.g. buildings, roads, power supplies needed for the
operation of a society or enterprise. For example, the firm infrastructure would comprise its factories,
offices, warehouses etc.
Joint Products and By-Products: Joint products represent “two or more products separated in the
course of the same processing operation, usually requiring further processing each product being in such
proportion that no single product can be designed as a major product”. For example: In the oil industry,
gasoline, fuel oil lubricants, paraffin, coal tar, asphalt and kerosene are all produced from crude
petroleum. By-products are defined as “products recovered from material discarded in a main process, or
from the production of some major products, where the material value is to be considered at the time of
severance from the main product”. Thus, by-products emerge as a result of processing operation of
another product or they are produced from the scrap or waste of materials of a process. For example,
molasses in sugar industry.
Liberalisation: It refers to a systematic process of easing of government’s control over the private
business activity. It is often contrasted with the license and permit era where the businesses had to obtain
government licences and permissions (permits) to start or grow a business. Liberalisation is one of three
pillars of the New Economic Policy (NEP) of the Government of India since 1990s. The other two pillars
are privatisation and globalisation. That is why the NEP is also known as LPG or GPL where G, L, and P
respectively imply globalisation, liberalisation and privatisation.
Logistics: It is a commercial activity implying moving of supplies to the production facilities and goods
and services to their respective markets. Inbound logistics imply the movement of inputs and the
outbound logistics means the movement of outputs.
Merger: When two or more companies come together to increase their strength and financial gains along
with breaking the trade barriers in a newly created entity.
Mission: A company’s Mission statement is typically focused on its present business scope – “who we are
and what we do”; mission statements broadly describe an organizations present capabilities, customer
focus, activities, and business makeup.
PESTLE: It is a mnemonic i.e. a pattern of letters that helps in remembering the various elements of the
macro environment of business. In its expanded form, it denotes P for Political, E for Economic, S for
Social, T for Technological, L for Legal and E for Environment (natural environment).
Privatisation: It is a systematic process of dispensing with the state ownership of business enterprises.
One way of doing this could be by way of listing the shares of public corporations on the stock exchanges.
Proprietary Forms of Business Organisations: These are the forms of business organisation where
the law does not distinguish between the business as a separate entity distinct from its owners.
Consequently, the liabilities of the business are considered as the personal liabilities of the owners. Sole-
proprietorship and partnership may be cited as the best representative examples of the proprietary form
of business organisation.
Returns and Risks: These are the two sides of the business’s outcomes particularly for its owners and
generally for all investments. Individuals and businesses invest their resources in expectation of the
returns or rewards, that may be simply called profits. However, these expectations may not always realise
at all or fully. The non/ partial realisation of expectations is called risk. In certain investments, such risks
are non-existent or so low as to label these as risk free investments. For example, if a person deposits her
/his savings in a savings banks account of recurring deposit account or a fixed deposit account of a bank,
the returns are almost assured. But most other investments, more so investment in business entail risks.
Thus, those who undertake the risks expect commensurate returns as well. Thus, the cliché higher the
risk-higher the returns.
Sustainable Development: Sustainable development (SD) is a broader measure of the development of

a country that includes economic parameters such as income and non-economic parameters such as social
equity and ecological balance. It emphasises simultaneous attention to economic growth, social equity and
environmental conservation. It is the macro context of business’s Triple Bottom Line. In another sense, it
also used at individual business organisations.
Term Insurance: It is the insurance for a certain time period which provides for no defrayal to the
insured individual, excluding losses during the period, and that becomes null upon its expiration.
Triple Bottom Line (TBL): It is the BCK philosophy that promotes the belief and evaluates the
business’s performance on the basis that attainment of profit, care for people and care for the planet are
equally important. The equal emphasis on these triple Ps, viz., Profits, People and Planet is known as the

TBL. This idea at the macro level corresponds to the more evolved notion of the development of a
country’s economy, society and ecology. See sustainable development.
Turnaround: A turnaround is the financial recovery of a company that has been performing poorly for
an extended time. To effect a turnaround, a company must acknowledge and identify its problems,
consider changes in management, and develop and implement a problem-solving strategy.
Vision: A Strategic vision is a road map of a company’s future – providing specifics about technology and
customer focus, the geographic and product markets to be pursued, the capabilities it plans to develop,
and the kind of company that management is trying to create.
Whole Life Insurance: A whole life insurance is a contract between the insurer and the policy owner,
that the insurer will pay the sum of money on the occurrence of the event mentioned in the policy to the
insured. It’s a concept wherein the insurer mitigates the loss caused to the insured on the basis of certain
principles.

TEST YOUR KNOWLEDGE

Multiple Choice Questions (MCQS)
1. What is consolidation?
a) It is an expense that is supposed to reflect the loss in value of a fixed asset.
b) Combination of two or more entities that occurs when the entities transfer all their net assets to a
new entity created for that purpose.
c) Potential liability arising from a past transaction or a subsequent event.
d) Costs that can be attributed clearly to the activity you are considering.
2. A portion of the after‐tax profits paid out to the owners of a business as a return on their investment
is:
a) Dividend c) Expenditure
b) Expense d) Deferred income
3. Which of the following statements are true?
a) Brand equity refers to the value of a brand.
b) Brand equity is based on the extent to which the brand has high brand loyalty, name awareness,
perceived quality and strong product associations.
c) Brand equity includes other “intangible” assets such as patents, trademarks and channel
relationships.
d) All of the above
4. What is meant by B2B?
a) Buying behaviour that concerns the process that buyers go through when deciding whether or not
to purchase goods or services.
b) A company’s business model is management’s storyline for how the strategy will be a money
maker.
c) Marketing activity directed from one business to another.
d) None of the above
5. ____________ is the process of estimating future demand by anticipating what buyers are likely to
do under a given set of marketing conditions:
a) Cross marketing c) Market development
b) Forecasting d) Internal marketing
6. The exploitation of comparatively small market segments by businesses that decide to concentrate
their efforts is called:
a) Niche marketing c) Market segmentation
b) Mass marketing d) Market positioning
7. ‘Personal selling’ is done through:
a) Written communication c) TV and media
b) Oral communication d) Sign language

8. What is price sensitivity?

a) The effect a change in price will have on customers.
b) Charging a relatively high price for a short time where a new, innovative, or much-improved
product is launched onto a market.
c) A strategy involves setting low prices in order to discourage or deter potential new entrants to the
suppliers market.
d) It measures the responsiveness of a change in demand for a product following a change in its own
price.
9. What is a bull market?
a) A market in which the stock price are increasing consistently.
b) A market in which the stock price are decreasing consistently.
c) A market in which the stock price are stable over a long time.
10. Carrying forward of transaction form one settlement period to the next without effecting delivery or
payment is called ____________.
a) Badla b) Beta c) Blue chips d) Basket trading
11. Bid is the opposite of
a) Ask/offer b) Call c) Equity d) None of the above
12. A stock that provides a constant dividends and stable earnings even in the periods of economic
downturn is ____________.
a) Defensive Stock b) Cash budget c) Income stock d) Listed stock
13. What are mutual funds?
a) A pool of money managed by experts by investing in stocks, bonds and other securities with the
objective of improving their savings.
b) A number of shares which are less than or greater than but not equal to the board lot size.
c) A company’s first issue of shares to general public.
14. ____________ is the measure of return on investments in terms of percentage
a) Yield b) Index c) Equity d) Bonus
15. The number of units of given currency that can be purchased for one unit of another currency is called
____________.
a) Current ratio b) Exchange rate c) Equity d) dividend
16. Risk is a probable chance that investments’ actual returns will be ____________ than as calculated.
a) Increased b) Reduced c) Equal d) None of the above
17. ____________ is a very wide term that is used in context with financial agreements and contracts.
a) Account balance b) Acceptance c) Annuity d) Arbitrage

18. What is a cap?

a) A cap is a limit that regulates the increase or decrease in the rate of interest and instalments of an
adjustable rate mortgage.
b) A cap is the total amount of cash that is present in the bank account and can also be withdrawn
immediately.
c) A cap is the certificate of savings deposit that promises the depositor the sum back along with
appropriate interest.
d) A cap is a loan where the time and cash flow between a short term loan and a long term loan is
filled up.
19. A negotiable instrument that instructs the bank to pay a particular amount of money from the writer’s
bank, to the receiver is called
a) A cheque b) A draft c) An overdraft d) RTGS
20. What is a financial instrument?
a) anything that ranges from cash, deed, negotiable instrument, or for that matter any written and
authenticated evidence that shows the existence of a transaction or agreement.
b) is basically any security that is held with the government and has the highest possible rate of
interest.
c) is a contract where the borrower, who is also the purchaser, pays a series of instalments that
includes the interest of the principal amount
d) none of the above
21. ____________ is a strategy that is used to minimize the risk of a particular investment and
maximize the returns of an investment.
a) Cap b) Encryption c) Hedge d) Term insurance
22. ____________ is a technology where the banking organizations resort to the use of electronics,
computers and other networks to execute transactions and transfer funds.
a) E-cash b) Digi-cash c) Hedge d) Cap
23. ____________ is the simultaneous purchase and sale of two identical commodities or instruments.
This simultaneous sale and purchase is done in order to take advantage of the price variations in two
different markets.
a) Cap b) Term insurance c) Arbitrage d) Hedge
24. A guarantee given by the lender that there will be no change in the quoted mortgage rates for a
specified period of time, which is called the ____________.
a) Lock-in period b) Maturity c) Holding Period d) Due date
25. ____________ is a road map of company’s future.
a) Objective b) Goal c) Vision d) Aim

26. When two or more companies come together to expand their business operations in a newly created
entity.
a) Joint venture b) Acquisition c) Consolidation d) Merger
27. Four P’s of marketing are:
a) Product, Price, Purchase, Place
b) Product, Price, Place, Promotion
c) Place, Procurement, Price, Promotion
d) Promotion, Product, Procurement, Presence
28. Which of the following statement is incorrect?
a) Arbitrage is simultaneous purchase and sale of a commodity.
b) Current assets are those which can be turned into cash within a year.
c) Intangible assets are those which do not have physical form. They are in the form of rights.
d) Break-even point is also called an optimum point of a firm.
29. Which of the following is incorrect?
a) Market is a bullish, when stock-market players are optimist and bearish when they are pessimist.
b) Blue chips are shares of well-established sound finance companies having impressive record.
c) Bonus is one month extra salary which is paid to employee irrespective of profit or loss.
d) Debentures is a debt instrument that carries assured return called interest.
30. Marketing mix includes 4 Ps and 4Cs. Match the following and prepare the proper combinations:
4 P’s 4 C’s
Product Convenience
Price Communication
Promotion Cost
Place Customers’ satisfaction
a) Product-Communication, Price-Cost, Promotion- Customers’ satisfaction, Place-Convenience

b) Product-Customer’s satisfaction, Price-Cost, Promotion- Convenience, Place- Communication
c) Product- Convenience, Price-Cost, Promotion-Communication, Place- Customer’s satisfaction
d) Product-Customer’s satisfaction, Price-Cost, Promotion-Communication, Place-Convenience
31. A loan where the time and cash flow between a short-term loan and a long-term loan is filled up is
called as which of the following?
a) Basis point b) Cap c) Annuities d) Bridge financing
32. A very large loan extended by a group of small banks to a single corporate borrower is called as which
of the following?
a) Time Deposit b) Long term loan c) Annuities d) Syndicated loan
33. Which one of the following is not related to funds transfer in banks?
a) RTGS b) NEFT c) IFSC d) CRR and SLR
34. ADR stands for:

a) American Deficit Record c) Asset Depreciation Record

b) American Depository Receipt d) Asset Depository Receipt
35. Which of the following are the additional Ps of Marketing?
a) People, Product, Place c) Promotion, Product, Purpose
b) Product, Price, Place d) People, Physical Evidence, Processes
Answer Keys
1 (b) 2 (a) 3 (d) 4 (c) 5 (b)
6 (a) 7 (b) 8 (a) 9 (a) 10 (a)
11 (a) 12 (a) 13 (a) 14 (a) 15 (b)
16 (b) 17 (b) 18 (a) 19 (a) 20 (a)
21 (c) 22 (a) 23 (c) 24 (a) 25 (c)
26 (c) 27 (b) 28 (d) 29 (c) 30 (d)
31 (d) 32 (d) 33 (d) 34 (b) 35 (d)

CAF-Business Economics and Business and Commercial Knowledge

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

CAF-Business Economics and Business and Commercial Knowledge

Uploaded by

Copyright:

Available Formats

CA Foundation

Business Economics and

Prof. Sandip Sengupta

Prof. Krishna Thakkar

1. Nature & Scope of Business Economics 01 – 15

2. Theory of Consumer Behavior 16 – 26

9. Theory of Cost 96 – 108

10. Price Determination in Different Market 109 – 114

11. Behavioral Principles 115 – 121

12. Monopoly 122 – 128

13. Monopolistically Competitive Market 129 – 130

14. Oligopoly 131 – 133

15. Business Cycle 134 – 140

Business and Commercial Knowledge

16. Formation of Contract of Sale 143 – 160

17. Business Environment 161 – 181

18. Business Organizations 182 – 250

19. Government Policies for Business Growth 251 – 259

20. Organizations Facilitating Business 260 – 276

21. Common Business Terminologies 277 – 307

Chapter – 01 – Nature and Scope of Business Economics

Consider the following situation.

Bhagwati Education Institute Page 1

The two fundamental facts of economics are that:

Science of material well-being

Bhagwati Education Institute Page 2

Science of choice making

His definition is as follows:

Science of dynamic growth and development.

Bhagwati Education Institute Page 3

Samuelson’s definition is known as a modern definition of economics. It is a combination of wealth,

Bhagwati Education Institute Page 4

Nature of Business Economics

Bhagwati Education Institute Page 5

The following points will describe the nature of Business Economics:

Bhagwati Education Institute Page 6

Business Economics is generally normative or prescriptive in nature. It suggests the application of

Scope of Business Economics

Bhagwati Education Institute Page 7

2. Macroeconomics applied to environmental or external issues

Bhagwati Education Institute Page 8

Central Economic Problems

Bhagwati Education Institute Page 9

For whom to produce?

Market provision are to be made for economic growth.

The salient features of market economy are as follows:

Bhagwati Education Institute Page 10

A capitalist economy’s solutions:

Advantages of a capitalist economy:

Bhagwati Education Institute Page 11

Disadvantages of a capitalist economy:

Bhagwati Education Institute Page 12

Features of a socialist economy:

Advantages of a socialist economy:

Bhagwati Education Institute Page 13

Disadvantages of a socialist economy:

Features of a mixed economy:

Merits of Mixed Economy

Demerits of Mixed Economy

Bhagwati Education Institute Page 15

Chapter – 02 – Theory of Demand

Two things are to be noted about quantity demanded of a commodity.

Demand for a good is determined by the following

Bhagwati Education Institute Page 16