Java Unit1

Download as docx, pdf, or txt
Download as docx, pdf, or txt
You are on page 1of 17

UNIT-1

Introduction to Business & Economics


Structure of Business firm:
A business entity is an entity that is formed and administered as per corporate law in order to engage in
business activities, charitable work or activities allowable

Types of Business Entities:

1. Sole Trader:
It is the simplest, oldest and natural form of business organization. Sole means ‘one’. It is a one man
form of organization where in the trader assumes all the risk of ownership carrying out the business
with his own capital, skill, intelligence. He is the owner, manager and controller. He has total freedom
and flexibity. He is responsible for himself.

Features:

 It is easy to start a business under this form and easy to close


 He introduces his own capital
 He enjoys all the profits and in case of loss, he alone suffers
 He has high degree of flexibity to shift from one business to the other

Merits Demerits
Easy to start and easy to close Unlimited liability
Personal contact with customers Limited amount of capital
Prompt decision making No division of labor
High degree of flexibility Uncertainty
Secrecy Inadequate for growth and expansion
Low rate of taxation Lack of specialization
Total control More competition
Minimum interference from government Low bargaining power
transferability

2. Partnership:
Partnership is an improved form of sole trader in certain respects. Persons who entered into
such an agreement are individually called partners and collectively called firm
According to Indian Partnership Act 1932 “Partnership” as the relationship between two or
more persons who agree to share the profits of the business carried on by all or any one of them
for all.

Merits Demerits
Easy to form Formation of partnership is difficult
Availability of large amount of capital Liability
Division of labor Limited growth
Flexibility Instability
Personal contact with customers Lack of public confidence
Quick decisions High tax rate
Tax rate Lack of harmony

Partnership deed:
It is a written agreement among the partners is “partnership deed”. It contains the terms and
conditions governing the working of partnership. It contains
 Name and address of the firm
 Nature of the business proposed
 Duration
 Amount of capital of the partnership and ratio of contribution
 Profit sharing
 Rate of interest charged on capital contribution
 Amount of salary payable to any partner
 Allocation of responsibilities of partners in the firm
 Procedure for dissolution of the firm
 Special rights and obligations, liabilities of partners

Kinds of Partners:
 Active partner
 Sleeping partner
 Nominal partner
 Partner by Estoppe
 Partner by holding out
 Minor partner

3. Joint Stock Company:


Documents required for formation of company:
The word company has a Latin Origin “com “ means together “pany “ means bread
Section 3(1) of the Companies Act 1956 defines “ a company as a company formed and
registered under the Act or an existing company
 MOA- Memorandum of Association
 AOA – Articles of Association
 Prospectus

MOA:
It is called charter or constitution for the company for the company. It lays down the objectives of
the company. it has to conduct its operations within the limits set by MOA

There are six clauses (1) Name clause (2) Situation clause (3)Object clause (4) Liability clause (5)Capital
clause (6) Subscription clause

Name clause: It is necessary that the name of a private company should end with words “private limited
“and that of public company should end with “public limited”

Situation clause: Particulars of state in which registered office is proposed to be situated

Object clause: Objects of the company in the short run and long run are furnished here. The object
should be drafted in such a way that they provide high degree of operational freedom

Liability clause: The liability in respect of the shares issued by the company is limited by the face value of
shares

Capital clause: It specifies the details of authorized capital with which it plans to get registered

Subscription clause: The persons signing this clause have interest to form this company and they have
taken the number of shares as indicated against their names

AOA:
It contains rules of procedures for the internal management and control of the affairs of the company. It
is concerned with the procedural matters in conducting the routine matters of the company

The main contents of AOA are as follows

 Amount of share capital and different types of capital


 Methods to increase, reduce the capital
 Different types of shares , their respective rights
 Procedure in respect of transfer and transmission of shares
 Powers, rights and duties of directors in the board
 Procedure in appointment and removal of a director
 Remuneration of directors
 Matters relating to accounts and audits
 Procedure for amending the contents of memorandum of association
 Procedure for distribution of dividends
 Procedure for winding up
 Rules regarding common seal of the company

Prospectus:
It is defined as a circular, notice, advertisement or any other document inviting offers from the
public for the subscription or purchase of any shares or debentures of the body corporate
It is a basic document that supports the structure of the company

Contents of Prospectus:
 The name of the company and address of its registered office
 Nature and business of the company
 The main objectives of the company
 The number and types of shares and debentures
 List of promoters with their names, addresses etc
 List of directors
 Property purchase or proposed to be purchased
 Amount of reserve fund
 Name of auditors, bankers and solicitors

Advantages Disadvantages
Mobilization of larger resources Formation of company is long process
Separate legal entity High degree of government interference
Limited liability Inordinate delays in decision making
Transferability of shares Oligarchy in management
Liquidity of investments Lack of initiative
Democracy in management Lack of responsibility and commitment
Economics in large scale production Conflicting interests
Continued existence Promotes speculation
Institutional confidence Lobbying with govt departments
Professional management Tends to monopoly
Growth and expansion Higher taxes

4. Cooperative Societies:
It is an association of persons usually of limited means who have voluntarily joined together to
achieve a common economic end, through the formation of a democratically controlled business
organization making equitable contribution to be capital required and accepting a fair share of
the risks and benefits of the undertaking.
Features:

 It is a voluntary association
 Separate legal entity
 Compulsory registration
 Membership
 Finances
 Set up is democratic
 One member one vote
 Service objective
 Restricted reward to capital
 Non transferability of shares
 Equitable distribution of surplus

A cooperative society is suitable where

 Members come together spontaneously with a common interest


 Members are loyal, committed, united and have government support
 Members have proven skills in management

Advantages Disadvantages
Voluntary organization Shortage of funds
Limited liability Inefficient management
Continuous existence Many legal formation
Government support Shifting loyalties among members
Exploitation eliminated Misuse of funds
taxation Recurring losses

Theory of firm:
Theory of firm is the microeconomic concept founded on neoclassical economics the states that firms
exist and make decisions to maximize profits

Firm interacts with the market to determine pricing and demand and then allocate resources according
to models that look to maximize net profits

The theory governs decision making in a variety of areas including resource allocation, production
techniques, pricing determinants and quantity produced
Theory of firm goes along with theory of the consumers which states that consumers seek to maximize
overall utility. Utility refers to the perceived value a consumer places on a goods or service

Sources of Finance:
The following are the common methods of finance

Long term finance

Medium term finance

Short term finance

I. Long term finance:


It refers to the finance available for a long period says 3 years and above. They are used to purchase
fixed assets like land etc

Own capital:

Irrespective of the form of organization, the owners of the firm have to invest their finances to start
with.

Share capital:

If the capital is raised by shares, it is called share capital . the share capital can be of two types:
Preference share capital and Equity share capital.

Preference share capital: The investor has the following rights a) right to receive fixed rate
of dividend b) right to return of capital

Types of preference shares:

Cumulative preference shares: The holder enjoy the right to receive when profits permit, the
dividend missed in the years when the profits were nil.

Non cumulative preference share: They do not enjoy right over the arrears of dividend. They
cannot be claimed

Participating preference shares: They get their normal fixed dividend as per entitlement

Redeemable preference shares: The shares are paid at the end of a given period.
Non-redeemable preference shares: These shares continue as long as the company
continues .They are repaid at the end of lifetime of company

Equity Share capital:


Those are capital raised through equity share (ordinary share) .they does not enjoy the priorities as such
as preference share holder. They are entitled to voting rights as the number of shares

Debentures:
These are loans taken by company. It is the certificate issued by the company under its common seal
acknowledging the receipt of loan. A debenture holder is the creditors of the company. They are
entitled to fixed rate of interest against profits.

The following are the common types of debentures

Convertible debentures:

These are converted into equity shares after some terms and conditions. The shareholders will be
entitled to get dividend higher than the rate of interest of debenture

Partly convertible debenture: These are partly converted into shares

Non-convertible debenture: Not converted into shares

Secured debentures: Assets of the company are offered as security towards payment

Partly secured debentures: partly secured

Unsecured debentures: totally unsecured

II Medium Term Finance:


These refer to such sources of finance where the repayment is normally over one year and less than
three years

Bank loans: They are extended at a fixed rate of interest. Repayment scheduled at the beginning and
is usually directly debited to the current account at borrower.

Hire- purchase: The possession of the asset can be taken by down payment and balance is repaid
with a fixed rate of interest. The buyer becomes owner after completion of last investment.

Leasing or Renting: The Company who owns the asset is called lessor and the company which
takes the asset on lease is called lessee. The agreement between them is called lease agreement. On the
expiry of the agreement, the owner takes the asset back into custody.
Venture Capital: This is available only for limited companies where there is higher degree of risk.
They offer finance through merchant banking. They give advices related to finance. In return, they
expect one or two director positions on the board to control the board matters.

III Short Term Finance:


Short term finance is that finance which is available for a short period of less than one year. There are
different types

Commercial paper (CP): it is a new money market instrument introduced in India. CPs are issued
usually in large finance companies in public and private sector. Ex .. Reliance Industries

Bank overdraft: This is a special arrangement with the bank where the customer can draw more
than what he has in his savings/ current account subject to a maximum limit. Interest is charged day to
day

Trade credit: It is common for the trader to buy the materials and other supplies from the suppliers
on credit basis. After selling the stock, the trader pays the cash.

Debt Factoring(DF) or Credit Factoring (CF): Debt factoring is the arrangement with factor
where the trader agrees to sell its accounts receivable or debtors at discount to the specialized dealers
called factors .In case of credit factoring , the trader agrees to sell his accounts payable.

Institutions providing Finance in India:

 Insurance Companies: (LIC)


 National Small industries Corporation (NSIC): Established in 1955 helping for growth of small
scale industries.
 Industrial finance Corporation of India(IFCI): Established in 1948 by government to help medium
and large scale industries.
 State financial Corporation(SFC): 1951, small and medium scale
 Industrial Development bank of India(IDBI) 1964
 State Industrial Infrastructure Corporation(SIIC)
 Small industries Development Bank of India (SIDBI)1990 for industrial development.

Limited Liability Company:


LLC is the America’s newest form of business organization. They are creative’s of state legislatives

It originated in 19th century. The bulk of laws authorizing LLCs in the United States were passed in
1980 and 1990s. it is a hybrid form of business. It offers liability protection to its owners for
company debts and liabilities.
Advantages Disadvantages
 LLC do not require annual meetings  LLC do not have reliable body of legal
 Owners are protected from personal precedent to guide owners and mangers
liability for company debts  LLC are more expensive to set up than
 LLC enjoy partnership style partnership
 It is authorized  LLC usually requires annual fees and
periodic filings with the state
 LLC is not appropriate to raise money in
the capital market

ECONOMICS:
Economics governs the life of the individual society and modern state. The knowledge of economics
helps in solving many problems Adam Smith is called as Father of Economics.

 Study of economics helps to eradicate poverty


 It teaches the knowledge of economic system
 It teaches the modern methods of production
 It helps in proper budgeting
 It helps to formulate budget
 It helps to frame law
 It helps to increase national wealth

Micro and Macro Economic Concepts:

Micro Economics: The study of an individual consumer or a firm is called micro economics (Theory of
firm). Micro means “one millionth “. It deals with the behavior and problems of a single individual and of
micro organizations. It deals with the applications of the concepts such as “Price theory “, Law of
demand.

Macro economics: The study of aggregate or total level of economic activity in a country is called macro
economics. It deals with the flow of economic resources or factors of production. It studies the inter
relations among various aggregates and examines their nature and behavior. It deals with price level in
general. It is concerned with the level of employment in the economy. The important tools of macro
economics include national income analysis, theories of employment

Concepts and Importance of National Income:

National Income is the flow of goods and services produced in an economy over a period of one
year.

Definition: Marshall has defined national income as the labor and capital of country acting upon its
natural resources, produce annually a certain net aggregate of commodity i.e material
Gross Domestic Product: A country's Gross Domestic Product, or GDP, is the total
monetary or market value of all the goods and services produced within that
country's borders during a specified period of time.
Gross domestic product is a monetary measure of the market value of all the final goods and services
produced and sold in a specific time period by a country or countries. GDP is most often used by the
government

Gross National Product: Gross national product (GNP) is an estimate of the total value of all the
final products and services turned out in a given period by the means of production owned by a
country's residents.

It is defined as the total value of final goods and services produced by the residents of the country
during or given period of time

GNP = Domestic products – Imports + Exports

Net National Product: The total output of find goods consists of both consumption goods and
capital goods. Every year a portion of the produce is kept aside for replacing. This share of GNP which is
kept aside worn out capital equipment is called capital consumption allowance

NNP = GNP- Depreciation

Personal Income: It may be defined as the current incomes of the persons and households from all
the services. It includes all receipts from productive services and receipts for which there is not
productive service rendered. It is not a measure of production

Disposable personal outlay: The income which individuals have at their disposal after the
payment of personal taxes is called disposal income. It is that point of income spent on consumption

Real income: The real income of the economy is found by taking base year and price level of that
year

Real income = money (income)/price index X 100

Importance of National Income:


 It shows the performances and functioning of the economy. It indicates the growth of economy
 National income statistics help the policy makers to frame policies to achieve full employment
and rapid economic growth
 The trend in National Income helps in economic planning. Sector wise distribution of outlay and
determination of targets
Inflation:
Inflation occurs when prices of goods and services are rising while the purchasing power of the country
is decreasing. There are generally three types of Inflation: demand-pull Inflation, cost-push Inflation, and
built-in Inflation.
Demand-Pull Inflation

Demand-pull inflation describes how demand for goods and services can drive up their prices. If
something is in short supply, you can generally get people to pay more for it.

Are you still paying for plane tickets for a vacation despite prices being considerably higher than normal?
That’s a good example of demand-pull inflation.

The U.S. is experiencing demand-pull inflation due to wages rising and Americans having a decent
amount of money in their savings accounts, Blake explains, although some consumers are starting to
empty those accounts.
“Consumer spending has remained high, despite the rising prices we currently see,” Blake says. “This is
commonly referred to as demand-pull inflation, as consumer demand pulls prices higher because firms
cannot keep up.”

Cost-Push Inflation

Cost-push inflation often kicks in when demand-pull inflation is going strong. When raw materials costs
increase for businesses, the businesses in turn must raise their prices, regardless of demand.

“Increases to the prices that producers face put businesses in a tough spot,” Blake says. “They can either
accept higher costs or keep their prices the same, or they can respond by trying to keep their profit
margins the same.”

When the price of chicken keeps going up, for example, eventually your favorite restaurant will need to
charge more for a chicken sandwich.

Built-in Inflation

As demand-pull inflation and cost-push inflation occur, employees may start asking employers for a
raise. If employers don’t keep their wages competitive, they could end up with a labor shortage.
If a business raises workers’ wages or salaries and tries to maintain profit margins by raising prices,
that’s built-in inflation.

Now, if you learn about your favorite coffeehouse raising prices due to the climbing cost of coffee beans,
you’re a victim of cost-push inflation.

And if you’re going to buy that coffee even though the price is uncomfortably high, you’re engaging in
demand-pull inflation.

Coulborn say inflation as too much money chasing to few goods. Inflation is irreversible upward moving
of prices, caused by excess of demand over capacity to supply.

Types of inflation:

Creeping inflation

Walking inflation

Running inflation

Galloping inflation

Creeping inflation: There is a slow moving and a very mild inflation when prices rise approximately by
2 % annually which do not disrupt the economic balance.

Walking inflation: When the rise in price is pronounced (noticed) there exist walking inflation. Here
the inflation rises approximately by 5% annually

Running inflation: The rate of increase of price level gets accelerated under running inflation. The
price rise is more than 10% a year

Galloping inflation: In this case the price rises every minute and there is no upward limit to which the
price level may rise in course of time

Causes of Inflation:
 Demand-pull. The most common cause for a rise in prices is when more buyers want a product or
service than the seller has available. ...
 Cost-push. Sometimes prices rise because costs go up on the supply side of the equation. ...
 Increased money supply. ...
 Devaluation. ...
 Rising wages. ...
 Monetary and fiscal policies.

Business Cycle:
Samuelson defines business cycle as a swing in total national output, income and employment, usually
lasting for a period of two to 10 years, marked by widespread expansion or contraction in most sectors
of economy

Characteristics of business cycle:

Cyclical movement: When excess movement in one direction, depression tends to bring into operation
not only in its remedy but also a stimulus to an excess movement in the other direction. It is said to be
cyclical

International in nature: Different countries are linked together through international trade and foreign
exchange. This implies that prosperity in one country contributes to prosperity in other countries

Varying degree of Impact: Business cycles may affect different industries in an economy in varying
degrees Ex. During boom conditions, people tend to spend more on construction of houses. This leads to
demand increase for cement, sand, bricks and other material.

Irregular pattern: No two business cycles are similar in rhythm which is rough and imperfect. We cannot
predict the duration or timing of business cycle. Wages and prices are likely to decline.

Wave like movement: It reflect wave like movement that implies a composite photogragh of all recorded
cycles. It can be noticed that the cyclical movement take the shape of a wave

Fluctuation in productive capacities: These are measured in towns of unemployment.

Fluctuations in price levels: The upward phases of cycle is identified with expansion in productive
capacities, diminishing unemployment and rise in prices. Downward phase is characterized by
curtailment in productive capacities.

Phases of Business Cycles:


An economy is expected to have constant growth, represented by the growth trend line. In reality,
though, the economy is unstable. National output goes up and down periodically. It expands to touch
the peak and contracts down to the trough.

Thus, a trade cycle consists of the following four phases:  


1. Expansion: When a nation’s GDP shows an upward move or recovers with time, this period of growth is
remarked as economic expansion. During this phase, the various economic indicators like consumer
spending, income, demand, supply, employment, output, and business returns shoot up.
2. Peak: During the expansion phase, the GDP spikes to its highest level; this is considered the economy’s
peak. At this point, economic factors like income, consumer spending, and employment level remain
constant.
3. Contraction: Next comes the phase of economic slowdown; it occurs when the stagnant peak GDP starts
tumbling down towards the trough. With this, the nation’s production, employment level, demand,
supply, income level, and other economic parameters plummet.
4. Trough: This is the stage at which the GDP and other economic indicators are at their lowest. During this
phase, the economy gets stuck at a negative growth rate. Additionally, the demand for goods and
services reduces.

A business cycle is a macroeconomic oscillation that affects the nation’s growth and productivity. They
are also called trade cycles or economic cycles. NBER is a US-based non-profit organization. It is a private
non-partisan research organization. The National Bureau of Economic Research (NBER) identifies and
gauges the economic cycle. It has a Business Cycle Dating Committee responsible for keeping the
chronological record of the economic stages. To determine economic conditions NBER uses the
following parameters; GDP, production, employment, aggregate demand, real income, and consumer
spending.
Nature and Scope of Business Economics:
Business economics is the youngest of all social sciences. It originates from economics. It assumes that
firm/buyer act in a rational manner. The buyer is carried away by the advertisings, brand loyalties etc.

Features:

Close to Micro economics: It is concerned with finding solutions for different managerial problems of a
particular firm

Operates against the backdrop of Macroeconomics: Business economics has to be aware of the limits set
by the macro economic conditions such as government industrial policy, inflation.

Normative statement: Normative statement includes the word “ought “or “should”. They reflect
people’s attitudes and expressions of what a team “ought “to do. It deals with statements such as
“Government of India should open up economy.

Prescriptive actions: It is goal oriented. It explains whether the concept can be applied in a given
context or not.

Applied in nature: Models are built to reflect the real life complex business situations and these models
are of immense help to mangers for inventory control, optimization, project management etc.

Offers scope to evaluate each alternative: Managerial economics provides opportunity to evaluate each
alternative in terms of its cost and revenue. It decides which is best alternative to maximize the profits
for the firm.

Scope:
The main focus in Business economics is to find an optimal solution to a given problem. Problem may
relate to production, reduction or control of costs, planning and investment decisions, determination of
price of a given product or service, HRM and profit planning decisions.

 Production
 Control of costs
 Make or buy decisions
 Inventory decisions
Concepts and techniques→ ⇨ of  Capital management
Business Economics  Profit planning and For Optimum solution
management
 Investment decisions
 Determination of price
of a given
product/service
Multidisciplinary nature of Business Economics:
Business economics is clearly linked with many disciplines such as

Economics: Economics and Business Economics both are concerned with the problems of scarcity and
allocation. If economics is concerned with the study of markets, business economics is interested in
studying the impact of such markets on the performance of a given firm

Operations Research: Decision making is the main focus in operations research of Business Economics. If
Business Economics is focused on “Problems of decision making, Operation Research focus on solving
business economics problems. Model building is one area of common exercise, Optimization is a
interesting word

Mathematics: Business economist is concerned with estimating and predicting the relevant economic
factors for decision making and forward planning. Tools such as algebra, calculus, vectors, input output
tables are used

Statistics: Deals with different techniques useful to analyze the cause and affect relationships in a given
variable. Techniques such as averages, correlation, regression, time series, interpolation, probability,
dispersion are used to analyze risk and uncertainty

Accountancy: The accountant provides accounting information relating to costs, revenue, payables,
profit/losses etc forms the basis for business economist to act upon. The main objective of accounting
function is to record, classify and interpret the given accounting data

Psychology: Consumer psychology is the basis on which business economist acts upon. It is the main
focus of study in business economics. It contributes towards understanding the behavioral implications,
attitudes and motivations of each of the micro economic variables such as consumers, workers,
investors

Organizational behavior: It enables the business economist to study and develop behavioral models of
the firm integrating the manager’s behavior with that of the owner.

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy