UNIT I

 Microeconomics and Macroeconomics

 Basic understanding of economic concepts such as Demand,
supply
 Ownership
 Control and objectives of the firm
 Need, importance and role of industries in economic growth
and development
 Industry and agriculture sector Linkages

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 Micro-economics

 Microeconomics is a branch of economics that studies the

behavior of individuals and firms in making decisions regarding the
allocation of resources.

 It is concerned with the interaction between individual buyers

and sellers and the factors that influence the choices made by
buyers and sellers.

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 Usefulness of Micro-economics

1. Determination of demand pattern: micro-economics determines

the demand pattern in the country as a whole.
2. Determination of the pattern of supply: micro-economics
determines the supply pattern in the country as a whole.
3. Pricing: By determining demand and supply, microeconomics
helps us in understanding the process of price determination.
4. Policies for improvement of resource allocation: the pattern of
resource allocation helps us to formulate appropriate
development policies. (i.e. Tax or subsidy)
Eg: Free homes, subsidy for LED lamps in villages

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 Macro-economics

Macroeconomics is a branch of economics dealing with the

performance, structure, behavior, and decision-making of
an economy as a whole rather than individual markets.

Studies how the aggregate(total) economy behaves.

Deals with national income, price level, national output.

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 Importance of Macroeconomics

1. Income and employment determination: Employment expands

when income rises and shrink during depressions.
2. Price level: Upward movement of the general price level is known
as inflation. Downward movement of the general price level is known
as deflation.
3. Balance of payments: The difference between the total inflow and
the total outflow of foreign exchange is known as the balance of
payments of a country. When this balance is negative (i.e., outflow
exceeds inflow), the country faces a lot of economic hardships.
4. Interrelations between markets: Any disturbance in one of these
markets affects all the others 5
 Microeconomics
1. Deals with the economic decision
making of individual economic agents.
2. It takes into account small components
of the whole economy.
3. It deals with the process of price
determination in case of individual
products and factors of production.
4. It is concerned with the optimisation
goals(best use of resource) of individual
consumers and producers
5. It studies the flow of economic
resources or factors of production from
any individual owner to any individual
user
6. Microeconomic theories help us in
formulating appropriate policies for
resource allocation at the firm level.
Macroeconomics
1. Deals with aggregates and averages of
the entire economy, e.g., national income.
2. It takes into consideration the
economy of any country as a whole.
3. It deals with general price-level in any
economy.
4. It is concerned with the optimisation of
the growth process of the entire economy.
5. It studies the circular flow of income
and expenditure between different sectors
of the economy
6. Macroeconomic theories help us in
formulating appropriate policies for
controlling inflation, unemployment,
etc.
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 Industrial Economics

Industrial economics is a distinctive branch of economics which

deals with the economic problems(How to make use the best use of
limited or scarce resources) of firms and industries, and their
relationship with society.

Industrial Economics is the study of firms, industries and markets.

It considers a whole range of industries, such as electricity

generation, car production and restaurants.

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 Firm vs Industry

Industry refers to a kind of business inside an economy.

Industry is a group of firms that produce similar products for the
same market.
Eg: All restaurants and their suppliers make up fast food industry.
Banking industry.

Firm is a business establishment inside an industry.

Eg: KFC, Mcdonalds ,SBI

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Demand and Supply concept

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 Demand

Demand refers to how much (quantity) of a good or service is desired by

buyers.

Demand is a buyers willingness and ability to pay a price for a specific

quantity of a good or service.

The quantity demanded is the amount of a product people are willing to

buy at a certain price.

The relationship between price and quantity demanded is known as the

demand.

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 Factors affecting demand

1. Good's own price:

Increase in price will induce a decrease in the quantity demanded.

Eg: If the price of a new novel is high, a person might decide to borrow
the book from the public library rather than buying it.

2. Price of related goods:

Changes in the prices of other goods can increase or decrease demand.
A good that causes an increase in the demand for another good when
its price increases is called a “substitute good.”

Eg: Coffee & Tea, Pen & pencil, Rice & wheat.

A good that causes a decrease in the demand for another good when its
price increases is called a “complementary good.”Eg: Tea & sugar, Car
& petrol, Brick & Cement

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 Factors affecting demand

3. Personal Income:
Changes in income can increase or decrease demand.
A good whose demand decreases with an increase in income is called
an “inferior good.” Eg: Cycle
A good whose demand increases with an increase in income is called a
“normal good.” Eg: Cars, air travel, jewelers etc

4. Tastes or preferences:   
The greater the desire to own a good the more likely one is to buy the
good. Eg: Changes in fashion, habits.

5. Consumer expectations about future prices, income and availability:

If a consumer believes that the price of the good will be higher in the
future, he/she is more likely to purchase the good now. Eg: Petrol

6. Population:  
If the population grows this means that demand will also increase.
Eg: land prices
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 The Law of Demand

The law of demand states that

The quantity demanded of a good falls when the price of the good
rises, and vice versa, provided all other factors that affect buyers decisions
are unchanged.

All other factor are unchanged: Price of related goods or services, income,
taste or preferences

The higher the price, the lower the quantity demanded.

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 Demand Schedule

Demand schedule describes the relationship between price and

quantity demanded.

Scenario Price ($) Quantity demanded

A 2 60,000
B 4 40,000
C 6 30,000
D 8 25,000
E 10 23,000

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 Demand Curve

Price ($)
The demand curve is
the graph depicting the
relationship between A
the price of a certain P1
commodity and the B
amount of it that P2
consumers are willing
and able to purchase at C
that given price. P3

Q1 Q2 Q3 Quantity
The demand relationship the negative
curve illustrates
relationship between price and quantity demanded.
The higher the price of a good the lower the quantity demanded (A), and
the lower the price, the more the good will be in demand (C).
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  The movement along a fixed demand curve is referred to as a
change in quantity demanded.

A shift in demand curve is referred to as a change in demand.

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  An “increase in demand” means that consumers buy more at
every price level, (or consumers are willing to pay more for each
quantity.)
On the graph: the demand curve shifts outwards, up, and to the
right.

A “decrease in demand” means that consumers buy less at

every price level, (or they reduce the price they’re willing to pay
for a given quantity.)

On the graph: the demand curve shifts inwards, down, and to

the left.

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 Supply

Supply is the producers willing and ability to supply a given good to the
market at a given price and at a particular time.

Supply is the amount of something that firms, providers of financial

assets, or other economic agents are willing to provide to the
marketplace.

Quantity supplied is the amount of a good that sellers are willing and
able to sell.

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 Factors affecting Supply

1. Price of inputs: Inputs include land, labor, energy and raw materials. If

the price of inputs increases the supply will reduce as sellers are less
willing or able to sell goods at a given price.
Eg: if the price of electricity increased a seller may reduce his
supply of his product because of the increased costs of production

2. Number of suppliers: The market supply curve is the horizontal

summation of the individual supply curves. As more firms enter the
industry the market supply will increase.

3. Good's own price: The basic supply relationship is between the price of

a good and the quantity supplied. Increase in price will induce an
increase in the quantity supplied.

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 4. Conditions of production: The most significant factor here is the state
of technology. If there is a technological advancement in one good's
production, the supply increases. Other variables may also affect
production conditions.
Eg: Mobile phone.

5. Expectations: Sellers concern for future market conditions can directly

affect supply. If the seller believes that the demand for his product will
sharply increase in the foreseeable future the firm owner may
immediately increase production in anticipation of future price
increases.
6. Taxation: hotels
7. Price of related goods: close up and pepsodent
8. Goal of the market:

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 The Law of Supply

The law of supply states that

the quantity supplied of a good rises when the price of the
good rises, as long as all other factors that affect suppliers’
decisions are unchanged

positive relationship between

Law of Supply is a
quantity supplied and price and is the reason for
the upward slope of the supply curve.

A supply curve is simply a supply schedule presented in graphical

form. The standard presentation of a supply curve has price given
on the Y-axis and quantity supplied on the X-axis.

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 Supply Schedule

A supply schedule is a table which shows how much one or more

firms will be willing to supply at particular prices under the existing
circumstances

Scenario Price ($) Quantity supplied

A 15 5,000
B 12 4,000
C 9 3,000
D 6 2,000
E 3 1,000

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 Supply curve

C
P1
Price
($) P2 B

A
P3

Q1 Q2 Q3 Quantity

The supply relationship curve positive

illustrates the
relationship between price and quantity supply.
The lower the price of a good the lower the quantity supplied (A),
and the higher the price, the more the good will be supplied (C).
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 Equilibrium

When supply and demand are equal (i.e. when the

supply function and demand function intersect) the
economy is said to be at equilibrium. 

At this point, the amount of goods being supplied is

exactly the same as the amount of goods being
demanded.

At the given price, suppliers are selling all the goods

that they have produced and consumers are getting
all the goods that they are demanding.

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 Supply

Price ($)

P* B

Demand

Q* Quantity

Disequilibrium occurs whenever the price or quantity is not equal

to P* or Q*.
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 Excess Supply

If the price is set too high, excess supply will be created within the
economy and there will be allocative inefficiency.

Because Q2 is greater than Q1,

Supply
too much is being produced and
too little is being consumed. P1

Price ($)
The suppliers are trying to
produce more goods, which
they hope to sell to increase
profits, but those consuming Demand
the goods will find the product
less attractive and purchase Q1 Q2 Quantity
less because the price is too
high.

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 Excess Demand

Excess demand is created when price is set below the equilibrium price.
Because the price is so low, too many consumers want the good while
producers are not making enough of it.

Supply

P1
Because Q1 is greater than Q2,

Price ($)
very little is being produced and
too much is being consumed.

Demand

Q2 Q1 Quantity

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 Shifts vs. Movement

Movement: A movement refers to a change along a curve. On the

demand curve, a movement denotes a change in both price and
quantity demanded from one point to another on the curve. The
movement implies that the demand relationship remains
consistent.

Shift: A shift in a demand or supply curve occurs when a good's

quantity demanded or supplied changes even though price
remains the same. Shifts in the demand curve imply that the
original demand relationship has changed, meaning that quantity
demand is affected by a factor other than price.

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Elasticity

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 Elasticity

Elasticity is the measurement of how responsive an economic variable is

to a change in another. It gives answers to questions such as:

"If I lower the price of a product, how much more will sell?"

"If I raise the price of one good, how will that affect sales of this other
good?"

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 Elasticity of demand

Elasticity of demand is defined as the percentage change in quantity

demanded to a percentage change in an independent variable

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Different elasticity of demand measures the responsiveness of quantity
demanded to changes in variables which affect demand

1. Price elasticity of demand- measures the responsiveness of quantity

demanded by changes in the price of the goods.

2. Income elasticity of demand – measures the responsiveness of

quantity demanded by changes in consumer incomes.

3. Cross elasticity of demand – measures the responsiveness of

quantity demanded by changes in price of another good

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 1. Price elasticity of demand

Price elasticity of demand which is the degree of responsiveness in

changes in quantity demanded to changes in price.

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Examples of Price Elasticity of Demand

If the quantity purchased changes more than price change

(say, 10%/5%), the product is termed elastic.

If the change in quantity purchased is the same as the price

change (say, 10%/10% = 1), the product is said to have unit
unitary elasticity.

If the quantity purchased changes less than the price (say,

5%/10%), then the product is termed inelastic.

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 DETERMINANTS OF PRICE ELASTICITY OF DEMAND

1) Necessity/ luxury (ex: medicine, alcohol, cigaratee)

2) Few substitutes/ many substitutes

3) Little time to purchase/ lot of time to purchase

4) Large % budget/ small % of budget

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 2. Income elasticity of demand

Income elasticity of demand is a measure of how much the quantity

demanded of a good responds to a change in consumers income.

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 Normal goods: elasticity is +ve

Inferior good: elasticity is –ve

Positive Income Elasticity can be divided into 3 categories:

1. Income inelastic EY < 1 (Dd rises by a smaller proportion as Y)

2. Unit income elasticity EY = 1 (Dd rises by exactly the same proportion as Y)

3. Income elastic EY > 1 (Dd rises by a greater proportion than Y)

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 3. Cross elasticity of demand

Cross elasticity of demand is a measure of how much the quantity

demanded of one good responds to a change in the price of another
good.

The formula for calculating the cross elasticity of demand for good is
X:

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Two goods, which are substitutes, will have a positive cross elasticity.

Two goods, which are complements, will have a negative cross

elasticity.

Greater the elasticity: stronger the relationship

Lesser the elasticity: weaker the relationship

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 Price elasticity of supply

Price elasticity of supply measures the responsiveness of quantity

supplied to changes in price

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41
 Ownership

Determining ownership in law involves determining who has

certain rights and duties over the property.

These rights and duties, sometimes called a "bundle of rights", can

be separated and held by different parties.

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 Types of Ownership

1) Sole proprietorship

2) Partnership

3) Corporation

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 Sole proprietorship

A sole proprietorship is a legally defined type of business

ownership in which a single individual owns the business, collects
all profit from it, and has unlimited liability for its debt.

A business that is owned and operated by one person.

The owner is responsible for all operations of the business and

assumes all the risk.

Approximately 76 percent of all businesses in the U.S. are sole

proprietorships.

Eg: photographers, plumbers, consultants, local restaurants and

shops, and home-based businesses.
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 Advantages of Sole proprietorship

1) Easy and inexpensive to create or register.

Unless you need certification or local permits, government

intervention is minimal

2) Owner makes all business decisions & has direct control over all
aspects of the business(sole management)

3) Least costly to begin

4) No special legal restrictions

5) Flexibility in scheduling to meet owner’s needs

6) Owner receives all profits.

7) Free to select the business

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 Advantages of Sole proprietorship

8) Privacy – owner is the only one who knows details of the business
Secret ideas, formulas, or recipes.

9) Ability to act quickly in making decisions – no checking with others

10) Tax advantages

• Business itself pays no taxes
• Taxes are paid as personal income of owner which is usually lower
than corporate taxes
• Many business expenses are deductible
11) Easy to close/dissolve
• Pay employees and creditors
• Sell your equipment
• Notify customers if possible
12) Suitable for special form of business like tailoring, Parlour etc
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 Disadvantages of Sole proprietorship

1) Owner has unlimited liability for all debts and actions of the business.

Unlimited liability: The debts of the business may be paid from the
personal assets of the owner.
If you cannot pay business debt with business income, bill
collectors can take your personal assets (home, car etc).

2) Difficult to raise capital.

Banks/lenders consider sole proprietorships to be a high-risk

investment
Needs include paying employees, purchasing equipment &
inventory, & running the business.

Expansions can be delayed or halted causing you to lose business

to your competition
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 Disadvantages of Sole proprietorship

3) Sole proprietorship is limited by his/her skills and abilities.

4) Uncertain life
 illness or injury that prevents you from working may cause you to
close
 Bankruptcy or incarceration will dissolve your business
 The death of the owner automatically dissolves the business.

5) Responsibility

6) Long hours

7) Lack of continuity for your business if you are unavailable

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 Partnership

A form of business ownership in which two or more people share

the assets, liabilities, and profits.

In a partnership, your financial resources are combined with those

of your business partner(s), and put into the business.

You and your partner(s) would then share in the profits of the
business according to any legal agreement you have drawn up.

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 Types of Partnership

•General partnership: A partnership in which all

partners have
unlimited personal liability and take

full responsibility for the

management of the

business.

•Limited partnership: A partnership in which the

partners’ liability is
limited to their investment.

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•Joint venture: A partnership in which two
 Advantages of Partnership

•Fairly easy & inexpensive to start

• May pay attorney if you develop a partnership agreement

•Combined resources
• Team with partners with different skills, experience, contacts, &
capital
• Sharing responsibilities makes business run more efficiently &
smoothly
• Increase the amount of capital to run the business. Lenders may
be more willing to lend or extend credit

•Decreased Competition
• Combining businesses will decrease or eliminate competition

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 Advantages of Partnership

•More financial resources

•Business losses are shared by all partners.
•The partnership does not pay income tax on profits.
• Each partner pays income tax on her/his individual share of the
profit
•Easy Formation
•Simple dissolution
•Personal contacts
•Flexible organisation

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 Disadvantages of Partnership

•Unlimited liability
• Each owner in a general partnership has unlimited liability.
• Each partner can lose personal assets to pay business debt
• In a limited partnership, the liability is limited to the amount
invested in the business

•Limited Capital
• Although partners may bring more capital to the business than
sole proprietors, it is still limited to what each can contribute.

•Difficulty in ending
• Withdrawing can be complicated if there is no written
partnership agreement.

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 Disadvantages of Partnership

•Partnerships may lead to disagreements.

• May disagree on business goals, finances, responsibilities, &
division of profits
• Can affect the efficiency of the business, morale of employees,
& success or failure of the venture

•Developing a detailed partnership agreement often helps resolve

the conflict because it addresses many issues that cause potential
disagreements

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 Disadvantages of Partnership

•Uncertain life/Transferability
• Unless specified in a detailed partnership agreement,
bankruptcy, death & the withdrawal or admittance of a new
partner dissolves the partnership.

• Remaining partners may start a new partnership if they have the

money to buy the former partner’s share

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 Corporation

A corporation is a legally defined type of business ownership in

which the business is considered a type of “person” (or “entity”)
under the law, and limited liability is granted to the business
owner(s).

The owners of a corporation are called its shareholders or

stockholders

A share of stock is a unit of ownership in a corporation.

Shareholders have a limited liability. They risk only the money they
invested in the corporation
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The board of directors of a corporation generally governs a
corporation for the benefit of shareholders.

Rights of shareholders:

The right to sell their shares.

The right to vote on the directors nominated by the board of

directors

The right to dividends if they are declared.(Profit of a company that

is paid to the people who owns shares in that company)

The right to purchase new shares issued by the company.

The right to what assets remain after a liquidation.(liquidation is

the process of selling off assets to repay creditors and giving the
investors whatever is left over.)

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 Advantages of Corporations

• No limit of investment
•Unlimited profit and investment
•Very easy to sell and purchase by click on phone or computers
•Companies provide the dividend.
•Easy to open.
•It is a type of sole proprietorship

•Financial Power
• Can raise money quickly by issuing shares of stock.
• Because it is closely regulated by the government, financial
institutions are more willing to lend larger amounts of capital.

•Limited Liability
• Owners are liable only up to the amount of their investments.
Personal assets cannot be used to pay business debt. 58
 Advantages of Corporations

•Easy-to-transfer ownership
• Ownership simply transferred by selling stock to someone else.
• New stock certificate is issued in the name of new stockholder.
No permission is required by others

•Unlimited life
• May exist indefinitely.
• The death or withdrawal of an owner/stockholder does not affect
the life span of the corporation.

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 Disadvantages of Corporations

•All money can lose if company will become bankruptcy.

•Need time to research.
•High volatility.
Legal assistance is needed to start a corporation.

•Corporations are subject to more government regulations than

partnerships or sole proprietorships.

•Required to keep detailed reports for stockholders & to keep them

informed of certain corporate transactions, meetings, & voting rights.

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 Disadvantages of Corporations

•Dual taxation
• Corporation is taxed on profits from the company
• Shareholders are taxed on the dividends (a part of profit of a
company that is paid to the people who own shares in it) they
earn on their investments

•Separate owners & managers

• Stockholders are not generally involved in the day-to-day
operation of the corporation

• Stockholders form a board of directors to make decisions about

the business & managers carry out these decisions.

• Separation of ownership & management provides more

opportunity for irregularities or misunderstandings.
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 Hybrid forms of Business Ownership

•Limited Liability Company (LLC) is a hybrid business entity having

certain characteristics of both a corporation and a partnership or sole
proprietorship (depending on how many owners there are)
• Small businesses of all kinds use the LLC format.

•Limited Liability Partnership (LLP) is a partnership in which some or

all partners (depending on the jurisdiction) have limited liabilities.

•Both combine various elements of sole proprietorships, partnerships,

& corporations into one package

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Advantages of Hybrid Businesses Ownership

•Cost to start & operate

• Generally less expensive than corporations.
• No dual taxation - requires less paperwork & regulation.
• LLPs are designed for business professionals such as lawyers &
doctors.

•Limited Liability

• Personal assets cannot be used to pay business debt.

• Owners (members) lose only what they have invested in the
business if it fails.

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Advantages of Hybrid Businesses Ownership

•Taxation
• LLCs & LLPs pay taxes on personal income-tax returns
• Since they are not considered separate entities (like
corporations) they are not subject to dual taxation.

•Combined resources
• Often have more owners & tend to have a wider pool of financial
resources, skills, talents, & contacts(min=2 and max. =50)

•Life span
• Hybrids are required to dissolve after a specific time period.
• Depending on the state registered in, usually between 30 & 40
years.
• Owners can decide if they want to reorganize or let it dissolve

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Advantages of Hybrid Businesses Ownership

•Flexibility

• Members are permitted to run the company or to allow others to

manage it.
• Membership changes do not automatically dissolve the company.

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 Disadvantages of Hybrid Ownership

•Requirements & laws to establish & operate hybrids vary from state
to state

• Problematic for businesses that operate in more than one state

• No universal guidelines from state to state.

•Verification of each state’s statutes can be costly.

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Factors Affecting the Choice of ownership
• Tax considerations
• Liability exposure
• Start-up and future capital requirements
• Control
• Managerial ability
• Business goals
• Management succession plans
• Cost of formation

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 Firm

A firm is a business organization that buys or hires factors of production in

order to produce goods and services that can be sold at a profit.

The terms business, firm, and enterprise are usually used interchangeably.

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 Firm

It may be engaged with:

1. Production

2. Manufacturing

3. Trading

4. Provision of services

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 Production

Vegetables and fruit farming

Poultry farming

Fishpond business

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 Provision of services

Beauty parlors

Saloons

Dental clinics

Hotels

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 Manufacturing

Cars

Sugar

Computers

Radios

Televisions

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 Trading

Are those that are not engaged in production or manufacturing but

with buying and selling of goods that are produced or
manufactured by other firms.

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 Objectives of Firm

1) Economic objectives:

a. Profit
• Profit is the financial gain or excess of return over investment.
• Survival, growth and expansion of the business.

b. Creating and retaining customers

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• Consumer is a king of the market
• New concepts and products for attracting the new customers and
retaining the old one.

74
 Objectives of Firm

1) Economic objectives:

c. Innovation
• New ideas, new concepts and new process changes, will bring
improvement in products, process of production and distribution of
goods.
• Innovation helps in reducing the cost by adopting better methods of
production.

d. Optimum utilization of the scarce resources

• Physical, human and capital resources have to optimally utilised for

making profit.
• wastage of the limited resource should be avoided.

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 Objectives of Firm

2)  Organic objectives

a. Survival
• highly competitive markets
• Live long

b. Growth
•  increase in the number of activities of an organisation
• Business takes place through expansion and diversification

c. Prestige/Recognition
• Prestige means goodwill or reputation arising from success or
achievement.

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 Objectives of Firm

 3) Social Objectives:

• This objective helps to shape the character of the company in the
minds of the society.  
• Provide housing, transport, education and health care to their
employees and their families.

a. Towards the Employees

• The authorities should not
exploit the employees.

b. Towards the Consumers

• Should not supply inferior
and harmful products.
• Providing quality products
the competitive price.

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 Objectives of Firm

c. Towards Shareholders
• responsibility of the business to safeguard the capital of the
shareholders and provide a reasonable dividend

d. Towards the Suppliers

• responsibility of the business to give regular orders for the
purchase of goods, avail reasonable credit period and pay dues in time.

e. Towards the government

i. Paying taxes regularly
ii. Conducting business in a lawful manner
iii. Setting up business enterprise as per the government guidelines
iv. Avoiding indulgence into monopolistic and restrictive trade
practices,
v. Avoiding indulgence into corruption and unlawful practices.

f. Towards the environment

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 Objectives of Firm

4) Human Objectives

a. Economic well-being of the employees

• benefits of provident fund, pension and other amenities like
medical facilities, housing facilities etc

b. Human Resource development

• proper training and development programmes to improve their
skills and competencies.

c. Motivating employees
•  incentives like bonus, increments, promotions, job-enrichment,
proper working conditions, appreciations etc.

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 Objectives of Firm

5) National Objectives

a. Employment opportunities

b. Developing backward areas

like transportation, banking, communication etc

c. Promoting social justice

Provide equal opportunities to all the employees to work and
progress.

d. Raising standard of living

Consuming quality products enhances the standard of living of the
people.

e. Contributes revenue to the government

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 Objectives of Firm

6) Profit Satisfying
•   It means a business is making enough profit to keep
shareholders happy or it's sufficient for investors to maintain
confidence in the management they appoint. 

7) Sales maximization
• increase their market share
• make more profit in the long run

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 Objectives of APPLE LTD.

To expand their sales to customers who have not yet own any
apples products

To produce hassle free products that provide services and

enjoyment for customers

Become the leading business in the mobile market

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 Objectives of Indian Oil co. ltd.

To serve the national interests in oil and related sectors in

accordance and consistent with government policies

To maximize utilization of the existing facilities for improving

efficiency and increasing productivity

To earn a reasonable rate of return on investment

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