UNIT – III

INTRODUCTION TO MARKETS
Market is a place where buyer and seller meet, goods and services are offered for the sale and
transfer of ownership occurs. A market may be also defined as the demand made by a certain group
of potential buyers for a good or service. The former one is a narrow concept and later one, a
broader concept. Economists describe a market as a collection of buyers and sellers who transact
over a particular product or product class (the housing market, the clothing market, the grain
market etc.). For business purpose, we define a market as people or organizations with wants
(needs) to satisfy, money to spend, and the willingness to spend it. Broadly, market represents the
structure and nature of buyers and sellers for a commodity/service and the process by which the
price of the commodity or service is established. In this sense, we are referring to the structure of
competition and the process of price determination for a commodity or service. The determination
of price for a commodity or service depends upon the structure of the market for that commodity
or service (i.e., competitive structure of the market). Hence the understanding on the market
structure and the nature of competition are a pre-requisite in price determination.
MARKET STRUCTURES:
Market structure describes the competitive environment in the market for any good or service. A
market consists of all firms and individuals who are willing and able to buy or sell a particular
product. This includes firms and individuals currently engaged in buying and selling a particular
product, as well as potential entrants.
The determination of price is affected by the competitive structure of the market. This is because
the firm operates in a market and not in isolation. In marking decisions concerning economic
variables it is affected, as are all institutions in society by its environment.

PERFECT COMPETITION
Perfect competition refers to a market structure where competition among the sellers and buyers
prevails in its most perfect form. In a perfectly competitive market, a single market price prevails

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for the commodity, which is determined by the forces of total demand and total supply in the
market.
A market structure in which all firms in an industry are price takers and in which there is freedom
of entry into and exit from the industry is called perfect competition. The market with perfect
competition conditions is known as perfect market. Features of perfectly competition
1. A large number of buyers and sellers: The number of buyers and sellers is large and the
share of each one of them in the market is so small that none has any influence on the
market price. there should be significantly large number of buyers and sellers in the market.
The number should be so large that it should not make any difference in terms of price of
quantity supplied even if one enters the market or one leaves the market.
2. Homogenous products or services: the products and services of each seller should be
homogeneous. They cannot be differentiated from that of one another. It makes no
difference to the buyer whether he buys from firm X or firm Z. in other words, the buyer
does not have any particular preference to buy the goods from a particular trader or
supplier. The price is one and the same in every firm. There are no concessions or discounts.
3. Freedom to enter or exit the market: there should not be restrictions on the part of the
buyers and sellers to enter the market or leave the market. There should not be any barriers.
The buyers can enter the market or leave the market whenever they want.
4. Prefect information available to the buyers and sellers: each buyer and seller has total
knowledge of the prices prevailing in the market at every given point of time, quantity
supplied, costs, demand, nature of product, and other relevant information. There is no need
for any advertisement expenditure as the buyers and sellers are fully informed.
5. Perfect mobility of factors of production: there should not be any restrictions on the
utilization of factors of production such as land, labour, capital and so on. In words, the
firm or buyer should have free access to the factors of production. Whenever capital or
labor is required, it should instantly be made available.
6. Each firm is a price taker: an individual firm can alter its rate of production or sales
without significantly affecting the market price of the product, a firm in a perfect market
cannot influence the market through its own individual actions. It has no alternative other
than selling its products at the price prevailing in the market. It cannot sell as much as it
wants at its own set price.
Monopoly
The word monopoly is made up of two syllables, Mono and poly. Mono means single while poly
implies selling. Thus, monopoly is a form of market organization in which there is only one seller
of the commodity. There are no close substitutes for the commodity sold by the seller. Pure
monopoly is a market situation in which a single firm sells a product for which there is no good
substitute.

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Features of monopoly
1. Single person or a firm: A single person or a firm controls the total supply of the
commodity. There will be no competition for monopoly firm. The monopolist firm is the
only firm in the whole industry.
2. No close substitute: The goods sold by the monopolist shall not have closely competition
substitutes. Even if price of monopoly product increase people will not go in far substitute.
For example: If the price of electric bulb increase slightly, consumer will not go in for
kerosene lamp.
3. Large number of Buyers: Under monopoly, there may be a large number of buyers in the
market who compete among themselves.
4. Price Maker: Since the monopolist controls the whole supply of a commodity, he is a
price-maker, and then he can alter the price.
5. Supply and Price: The monopolist can fix either the supply or the price. He cannot fix
both. If he charges a very high price, he can sell a small amount. If he wants to sell more,
he has to charge a low price. He cannot sell as much as he wishes for any price he pleases.
6. Downward Sloping Demand Curve: The demand curve (average revenue curve) of
monopolist slopes downward from left to right. It means that he can sell more only by
lowering price.
Monopolistic competition
Monopolistic competition is said to exist when there are many firms and each one produces such
goods and services that are close substitutes to each other. They are similar but not identical.
Product differentiation is the essential feature of monopolistic. Products can be differentiated by
means of unique facilities, advertising, brand loyalty, packaging, pricing, terms of credit, superior
maintenance services, convenient location and so on.
Features of Monopolistic
1. Existence of Many firms: Industry consists of a large number of sellers, each one of whom
does not feel dependent upon others. Every firm acts independently without bothering
about the reactions of its rivals. The size is so large that an individual firm has only a
relatively small part in the total market, so that each firm has very limited control over the
price of the product. As the number is relatively large it is difficult for these firms to
determine its price- output policies without considering the possible reactions of the rival
forms. A monopolistically competitive firm follows an independent price policy.
2. Product Differentiation: Product differentiation means that products are different in some
ways, but not altogether so. The products are not identical but the same time they will not
be entirely different from each other. IT really means that there are various monopolist
firms competing with each other. An example of monopolistic competition and product
differentiation is the toothpaste produced by various firms. The product of each firm is
different from that of its rivals in one or more respects. Different toothpastes like Colgate,
Close-up, Forehans, Cibaca, etc., provide an example of monopolistic competition. These
products are relatively close substitute for each other but not perfect substitutes. Consumers
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 have definite preferences for the particular verities or brands of products offered for sale
by various sellers. Advertisement, packing, trademarks, brand names etc. help
differentiation of products even if they are physically identical.
3. Large Number of Buyers: There are large number buyers in the market. But the buyers
have their own brand preferences. So, the sellers are able to exercise a certain degree of
monopoly over them. Each seller has to plan various incentive schemes to retain the
customers who patronize his products.
4. Free Entry and Exist of Firms: As in the perfect competition, in the monopolistic
competition too, there is freedom of entry and exit. That is, there is no barrier as found
under monopoly.
5. Selling costs: Since the products are close substitute much effort is needed to retain the
existing consumers and to create new demand. So, each firm has to spend a lot on selling
cost, which includes cost on advertising and other sale promotion activities.
6. Imperfect Knowledge: Imperfect knowledge about the product leads to monopolistic
competition. If the buyers are fully aware of the quality of the product they cannot be
influenced much by advertisement or other sales promotion techniques. But in the business
world we can see that thought the quality of certain products is the same, effective
advertisement and sales promotion techniques make certain brands monopolistic. For
examples, effective dealer service backed by advertisement-helped popularization of some
brands through the quality of almost all the cement available in the market remains the
same.
7. The Group: Under perfect competition the term industry refers to all collection of firms
producing a homogenous product. But under monopolistic competition the products of
various firms are not identical through they are close substitutes. Prof. Chamberlin called
the collection of firms producing close subset

PRICING METHODS
COST – BASED PRICING METHODS
1. Cost plus pricing: This is also called full cost or markup pricing. Here the average cost
normal capacity of output is ascertained and then a conventional margin of profit is added to the
cost to arrive at the price. In other words, find out the product unit’s total cost and add percentage
of profit to arrive at the selling price.
This method is suitable where the cost keep fluctuating from time to time. It is commonly followed
in departmental stores and other retail shops. This method is simple to be administered but it does
not consider the competition factor. The competitor may produce the same product at lower cost
and thus offer it at a lower price.
2. Marginal cost pricing: in marginal cost pricing, selling price is fixed in such a way that it
covers fully the variable or marginal cost and contributes towards recovery of fixed costs fully or

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partly, depending upon the market situations. In times of stiff competition, marginal cost offers a
guideline as to how far the selling price can be lowered. This is also called break – even pricing or
target profit pricing. How break – even analysis helps in taking pricing decisions.
COMPETITION – ORIENTED PRICING:
Some commodities are priced according to the competition in their markets. Thus, we have the
going rate method of price and the sealed bid pricing technique. Under the former a firm prices its
new product according to the prevailing prices of comparable products in the market.
 Sealed bid pricing: this method is more popular in tenders and contracts. Each contracting
firm quotes its price in a sealed cover called tender. All the tenders are opened on a
scheduled date and the person who quotes the lowest prices, other things remaining the
same, is awarded the contract.
 Going rate pricing: here the price charged by the firm is in tune with the price charged in
the industry as a whole. In other words, the prevailing market price at a given point of time
is the guiding factor. When one wants to buy, or sell gold, the prevailing market rate at a
given point of time is taken as the basis to determine the price, normally the market leaders
keep announcing the prevailing prices at a given point of time based on demand and supply
positions.
DEMAND – ORIENTED PRICING
The higher the demand, the higher can be the price. Cost is not the consideration here. The key to
pricing here is the value as perceived by the consumer. This is a relatively modern marketing
concept.
 Price discrimination: price discrimination refers to the practice of charging different
prices to customers for the same good. The firm uses its discretion to charge differently the
different customer. It is also called differential pricing. Customers of different profile can
be separated in various ways, such as by different consumer requirement by nature of
product itself, by geographical areas, by income group and so on.
 Perceived value pricing: perceived value pricing refers to where the price is fixed on the
basis of the perception of the buyer of the value of the product.
STRATEGY – BASED PRICING:
1. Market skimming: when the product is introduced for the first time in the market, the
company follows this method. Under this method, the company fixes a very high price for
the product. The main idea is to charge the customer maximum possible. For example,
Sony introduces a particular TV model, it fixed a very high price and other company.
2. Market penetration: this is exactly opposite to the market skimming method. Here the
price of the product is fixed so low that the company can increase its market share. the
company attains profits with increasing volumes and increase in the market share. More
often, the companies believe that it is necessary to dominate the market in the long –run
making profit in the short-run.
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 3. Two – part pricing: the firms with market power can enhance profits by the strategy of
two – part pricing. Under this strategy, a firm charges a fixed fee for the right to purchase
its goods, plus a per unit charge for each unit purchased. Entertainment houses such as
country clubs, athletic clubs, golf courses, health clubs usually adopt this strategy. They
charge a fixed initiation fee plus a charge, per month or per visit, to use the facilities.
4. Block pricing: block pricing is another way a firm with market power can enhance its
profits. We see block pricing in out day – to – day life very frequently. Six lux soaps in a
single pack or five magi noodles in a single pack.
5. Commodity bundling: commodity bundling refers to the practice of bundling two or more
different products together and selling them at a single bundle price, the package deals
offered by the tourist companies, airlines hold testimony to this practice. The package
includes the airfare, hotel, meals, sightseeing and so on.
6. Peak load pricing: during seasonal period when demand is likely to be higher, a firm may
enhance profits by peak load pricing. The firm philosophy is to charge a higher price during
peak times than is charged during off – peak times. Apsrtc, air india, jet air etc,.
7. Cross subsidization: in case where demand for two products produced by a firm is
interrelated through demand or costs, the firm may enhance the profitability of its operation
through cross subsidization.
8. Transfer pricing: transfer pricing is an internal pricing technique. It refers to a price at
which inputs of one department are transferred to another, in order to maximize the overall
profits of the company. For example, kinetic Honda, hero Honda,
PRICING STRATEGIES IN TIMES OF STIFF PRICE COMPETITION
 Pricing matching: price matching is a strategy in which a firm promise to match a lower
price offered by any competitor, while announcing its own price. It is necessary that one
should be confident, before this strategy is adopted, that the price cannot be lower in the
market than one offered.
 Promoting brand loyalty: this is an advertising strategy where the customers are
frequently reminded by the brand value of given product or services. The conviction here
is that the customers, once they are loyal to the given branded product or services, will not
slip away when the competitors come out with products at lower prices.
 Time – to – time: this is also called randomized pricing strategy where the firm varies its
prices form time- to – time, say hour – to – time, say hour – to – hour or day – to – day.
This method offers two advantages, the rival firms can no more play with price cuts. Also,
customers cannot learn from experience which firm charges the lowers price in the market.
 Promotional pricing: to promote a particular product, at time, the firm may offer the
product at the most competitive price. Some time, the price of a particular product is kept
intentionally lower to attract the attention of the customer to other products of the firm.
 Target pricing: the company operates with a particular targeted profit in mind. Normally
the cost of capital will be one of the yardsticks to guide the targeted rate of return. How
much is the rate of return the other companies are achieving also could be another yardstick

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 to determine the price. The higher the risk and investment, the higher is the targeted profit
and so is the price.
PRICE OUTPUT DETERMINATION INCASE OF PERFECT COMPETITION SHORT
RUN:
The price and output of the firm are determined, under perfect competition, based on the industry
price and its own costs. The industry price has greater say in this process because the firm own
sales are very small and insignificant. The process of price output determination in case of perfect
competition.
The firm demand curve is horizontal at the price determined in the industry (MR = AR = price).
This demand curve is also known as average revenue curve. This is because if all the units are sold
at the same price, on an average, the revenue to the firm equal its price.

LONG RUN UNDER PERFECT COMPETITION

Having been attracted by supernormal profits, more and more firms enter the industry. With the
result, there will be a scramble for scarce inputs among the competing firms pushing the input
prices. Hence, the average cost increases. The entry of more and more firms will expand the supply
pulling down the market price. The entry of the firms into the industry continues till the
supernormal profit is completely eroded. In the long run, the firms will be in the position to enjoy
only normal profits but not supernormal profit. Normal profits are the profit that is just sufficient
for the firms to stay in the business.

PRICE OUT PUT DETERMINATION IN MONOPOLY

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Under monopoly the average revenue curve for a firm is a downward sloping one. It is because, of
the monopolist reduces the price of his product, the quantity demanded increase and vice versa. In
monopoly, marginal revenue is less than the average revenue.
The monopolist always wants to maximize his profits. To achieve maximum profits, it is necessary
that the marginal revenue should be more than the marginal cost.

BUSINESS AND NEW ECONOMIC ENVIRONMENT

CHARACTERISTIC FEATURES OF BUSINESS
1. Easy to start and easy to close: The form of business organization should be such that it
should be easy to close. There should not be hassles or long procedures in the process of setting
up business or closing the same.
2. Division of labour: There should be possibility to divide the work among the available owners.
3. Large amount of resources: Large volume of business requires large volume of resources.
Some forms of business organization do not permit to raise larger resources. Select the one
which permits to mobilize the large resources.
4. Liability: The liability of the owners should be limited to the extent of money invested in
business. It is better if their personal properties are not brought into business to make up the
losses of the business.
5. Secrecy: The form of business organization you select should be such that it should permit to
take care of the business secrets. We know that century old business units are still surviving
only because they could successfully guard their business secrets.
6. Transfer of ownership: There should be simple procedures to transfer the ownership to the
next legal heir.

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7. Ownership, Management and control: If ownership, management and control are in the
hands of one or a small group of persons, communication will be effective and coordination
will be easier. Where ownership, management and control are widely distributed, it calls for a
high degree of professional’s skills to monitor the performance of the business.
8. Continuity: The business should continue forever and ever irrespective of the uncertainties in
future.
9. Quick decision-making: Select such a form of business organization, which permits you to
take decisions quickly and promptly. Delay in decisions may invalidate the relevance of the
decisions.
10. Personal contact with customer: Most of the times, customers give us clues to improve
business. So, choose such a form, which keeps you close to the customers.
11. Flexibility: In times of rough weather, there should be enough flexibility to shift from one
business to the other. The lesser the funds committed in a particular business, the better it is.
12. Taxation: More profit means more tax. Choose such a form, which permits to pay low tax.
SOLE PROPRIETORSHIP:
The sole trader is the simplest, oldest and natural form of business organization. It is also called
sole proprietorship. ‘Sole’ means one. ‘Sole trader’ implies that there is only one trader who is the
owner of the business.
It is a one-man form of organization wherein the trader assumes all the risk of ownership carrying
out the business with his own capital, skill and intelligence. He is the boss for himself. He has total
operational freedom. He is the owner, Manager and controller. He has total freedom and flexibility.
Full control lies with him. He can take his own decisions. He can choose or drop a particular
product or business based on its merits. He need not discuss this with anybody. He is responsible
for himself. This form of organization is popular all over the world. Restaurants, Supermarkets,
pan shops, medical shops, hosiery shops etc.
Features of Sole Proprietorship
 It is easy to start a business under this form and also easy to close.  He introduces his own
capital. Sometimes, he may borrow, if necessary  He enjoys all the profits and in case of
loss, he lone suffers.
 He has unlimited liability which implies that his liability extends to his personal properties
in case of loss.
 He has a high degree of flexibility to shift from one business to the other.
 Business secretes can be guarded well
 There is no continuity. The business comes to a close with the death, illness or insanity of
the sole trader. Unless, the legal heirs show interest to continue the business, the business
cannot be restored.
 He has total operational freedom. He is the owner, manager and controller.

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  He can be directly in touch with the customers.
 He can take decisions very fast and implement them promptly.
 Rates of tax, for example, income tax and so on are comparatively very low
Advantages of Sole Proprietorship
1. Easy to start and easy to close: Formation of a sole trader from of organization is relatively
easy even closing the business is easy.
2. Personal contact with customers directly: Based on the tastes and preferences of the
customers the stocks can be maintained.
3. Prompt decision-making: To improve the quality of services to the customers, he can take
any decision and implement the same promptly. He is the boss and he is responsible for his
business Decisions relating to growth or expansion can be made promptly.
4. High degree of flexibility: Based on the profitability, the trader can decide to continue or
change the business, if need be.
5. Secrecy: Business secrets can well be maintained because there is only one trader.
6. Low rate of taxation: The rate of income tax for sole traders is relatively very low.
7. Direct motivation: If there are profits, all the profits belong to the trader himself. In other
words, if he works more hard, he will get more profits. This is the direct motivating factor. At
the same time, if he does not take active interest, he may stand to lose badly also.
8. Total Control: The ownership, management and control are in the hands of the sole trader and
hence it is easy to maintain the hold on business.
9. Minimum interference from government: Except in matters relating to public interest,
government does not interfere in the business matters of the sole trader. The sole trader is free
to fix price for his products/services if he enjoys monopoly market.
10. Transferability: The legal heirs of the sole trader may take the possession of the business.
Disadvantages of The Sole Proprietor
1. Unlimited liability: The liability of the sole trader is unlimited. It means that the sole trader
has to bring his personal property to clear off the loans of his business. From the legal point of
view, he is not different from his business.
2. Limited amounts of capital: The resources a sole trader can mobilize cannot be very large
and hence this naturally sets a limit for the scale of operations.
3. No division of labour: All the work related to different functions such as marketing,
production, finance, labour and so on has to be taken care of by the sole trader himself. There is
nobody else to take his burden. Family members and relatives cannot show as much interest as the
trader takes.

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4. Uncertainty: There is no continuity in the duration of the business. On the death, insanity
of insolvency the business may be come to an end.
5. Inadequate for growth and expansion: This from is suitable for only small size, one
manshow type of organizations. This may not really work out for growing and expanding
organizations.
6. Lack of specialization: The services of specialists such as accountants, market
researchers, consultants and so on, are not within the reach of most of the sole traders.
7. More competition: Because it is easy to set up a small business, there is a high degree of
competition among the small businessmen and a few who are good in taking care of customer
requirements along can service.
8. Low bargaining power: The sole trader is the in the receiving end in terms of loans or
supply of raw materials. He may have to compromise many times regarding the terms and
conditions of purchase of materials or borrowing loans from the finance houses or banks.
PARTNERSHIP
Partnership is an improved from of sole trader in certain respects. Where there are likeminded
persons with resources, they can come together to do the business and share the profits/losses of
the business in an agreed ratio. Persons who have entered into such an agreement are individually
called ‘partners’ and collectively called ‘firm’. The relationship among partners is called a
partnership.
Indian Partnership Act, 1932 defines 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 acting for all.
FEATURES OF PARTNERSHIP
1. Relationship: Partnership is a relationship among persons. It is relationship resulting out of an
agreement.
2. Two or more persons: There should be two or more number of persons.
3. There should be a business: Business should be conducted.
4. Agreement: Persons should agree to share the profits/losses of the business
5. Carried on by all or any one of them acting for all: The business can be carried on by all or
any one of the persons acting for all. This means that the business can be carried on by one
person who is the agent for all other persons. Every partner is both an agent and a principal.
Agent for other partners and principal for himself. All the partners are agents and the
‘partnership’ is their principal.
6. Unlimited liability: The liability of the partners is unlimited. The partnership and partners, in
the eye of law, and not different but one and the same. Hence, the partners have to bring their
personal assets to clear the losses of the firm, if any.

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7. Number of partners: According to the Indian Partnership Act, the minimum number of
partners should be two and the maximum number if restricted, as given below: 10 partners is
case of banking business 20 in case of non-banking business
8. Division of labour: Because there are more than two persons, the work can be divided among
the partners based on their aptitude.
9. Personal contact with customers: The partners can continuously be in touch with the
customers to monitor their requirements.
10. Flexibility: All the partners are likeminded persons and hence they can take any decision
relating to business.
PARTNERSHIP DEED

The written agreement among the partners is called ‘the partnership deed’. It contains the terms
and conditions governing the working of partnership. The following are contents of the partnership
deed.
1. Names and addresses of the firm and partners
2. Nature of the business proposed
3. Duration
4. Amount of capital of the partnership and the ratio for contribution by each of the partners.
5. Their profit sharing ration (this is used for sharing losses also)
6. Rate of interest charged on capital contributed, loans taken from the partnership and the
amounts drawn, if any, by the partners from their respective capital balances.
7. The amount of salary or commission payable to any partner
8. Procedure to value good will of the firm at the time of admission of a new partner, retirement
of death of a partner
9. Allocation of responsibilities of the partners in the firm
10. Procedure for dissolution of the firm
11. Name of the arbitrator to whom the disputes, if any, can be referred to for settlement.
12. Special rights, obligations and liabilities of partners(s), if any.
KIND OF PARTNERS
1. Active Partner: Active partner takes active part in the affairs of the partnership. He is also
called working partner.
2. Sleeping Partner: Sleeping partner contributes to capital but does not take part in the
affairs of the partnership.
3. Nominal Partner: Nominal partner is partner just for namesake. He neither contributes to
capital nor takes part in the affairs of business. Normally, the nominal partners are those who have
good business connections, and are well places in the society.

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4. Partner by Estoppels: Estoppels means behavior or conduct. Partner by estoppels gives
an impression to outsiders that he is the partner in the firm. In fact, be neither contributes to capital,
nor takes any role in the affairs of the partnership.
5. Partner by holding out: If partners declare a particular person (having social status) as
partner and this person does not contradict even after he comes to know such declaration, he is
called a partner by holding out and he is liable for the claims of third parties. However, the third
parties should prove they entered into contract with the firm in the belief that he is the partner of
the firm. Such a person is called partner by holding out.
6. Minor Partner: Minor has a special status in the partnership. A minor can be admitted for
the benefits of the firm. A minor is entitled to his share of profits of the firm. The liability of a
minor partner is limited to the extent of his contribution of the capital of the firm.
ADVANTAGES OF PARTNERSHIP
1. Easy to form: Once there is a group of like-minded persons and good business proposal,
it is easy to start and register a partnership.
2. Availability of larger amount of capital: More amount of capital can be raised from more
number of partners.
3. Division of labour: The different partners come with varied backgrounds and skills. This
facilities division of labour.
4. Flexibility: The partners are free to change their decisions, add or drop a particular product
or start a new business or close the present one and so on.
5. Personal contact with customers: There is scope to keep close monitoring with
customers’ requirements by keeping one of the partners in charge of sales and marketing.
Necessary changes can be initiated based on the merits of the proposals from the customers.
6. Quick decisions and prompt action: If there is consensus among partners, it is enough to
implement any decision and initiate prompt action. Sometimes, it may more time for the partners
on strategic issues to reach consensus.
7. The positive impact of unlimited liability: Every partner is always alert about his
impending danger of unlimited liability. Hence, he tries to do his best to bring profits for the
partnership firm by making good use of all his contacts.
DISADVANTAGES OF PARTNERSHIP:
1. Formation of partnership is difficult: Only like-minded persons can start a partnership.
It is sarcastically said,’ it is easy to find a life partner, but not a business partner’.
2. Liability: The partners have joint and several liabilities beside unlimited liability. Joint and
several liabilities puts additional burden on the partners, which means that even the personal
properties of the partner or partners can be attached. Even when all but one partner become
insolvent, the solvent partner has to bear the entire burden of business loss.
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3. Lack of harmony or cohesiveness: It is likely that partners may not, most often work as
a group with cohesiveness. This result in mutual conflicts, an attitude of suspicion and crisis of
confidence. Lack of harmony results in delay in decisions and paralyses the entire operations.
4. Limited growth: The resources when compared to sole trader, a partnership may raise
little more. But when compare to the other forms such as a company, resources raised in this form
of organization are limited. Added to this, there is a restriction on the maximum number of
partners.
5. Instability: The partnership form is known for its instability. The firm may be dissolved
on death, insolvency or insanity of any of the partners.
6. Lack of Public confidence: Public and even the financial institutions look at the
unregistered firm with a suspicious eye. Though registration of the firm under the Indian
Partnership Act is a solution of such problem, this cannot revive public confidence into this form
of organization overnight. The partnership can create confidence in other only with their
performance.
JOINT STOCK COMPANY
The joint stock company emerges from the limitations of partnership such as joint and several
liability, unlimited liability, limited resources and uncertain duration and so on. Normally, to take
part in a business, it may need large money and we cannot foretell the fate of business. It is not
literally possible to get into business with little money. Against this background, it is interesting to
study the functioning of a joint stock company. The main principle of the joint stock company
from is to provide opportunity to take part in business with a low investment as possible say
Rs.1000. Joint Stock Company has been a boon for investors with moderate funds to invest.
FEATURES OF JOINT STOCK COMPANY
1. Artificial person: The Company has no form or shape. It is an artificial person created by
law. It is intangible, invisible and existing only, in the eyes of law.
2. Separate legal existence: it has an independence existence, it separates from its members.
It can acquire the assets. It can borrow for the company. It can sue other if they are in default in
payment of dues, breach of contract with it, if any. Similarly, outsiders for any claim can sue it. A
shareholder is not liable for the acts of the company. Similarly, the shareholders cannot bind the
company by their acts.
3. Voluntary association of persons: The Company is an association of voluntary
association of persons who want to carry on business for profit. To carry on business, they need
capital. So they invest in the share capital of the company.
4. Limited Liability: The shareholders have limited liability i.e., liability limited to the face
value of the shares held by him. In other words, the liability of a shareholder is restricted to the
extent of his contribution to the share capital of the company. The shareholder need not pay
anything, even in times of loss for the company, other than his contribution to the share capital.

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5. Capital is divided into shares: The total capital is divided into a certain number of units.
Each unit is called a share. The price of each share is priced so low that every investor would like
to invest in the company. The companies promoted by promoters of good standing (i.e., known for
their reputation in terms of reliability character and dynamism) are likely to attract huge resources.
6. Transferability of shares: In the company form of organization, the shares can be
transferred from one person to the other. A shareholder of a public company can cell sell his
holding of shares at his will. However, the shares of a private company cannot be transferred. A
private company restricts the transferability of the shares.
7. Common Seal: As the company is an artificial person created by law has no physical form,
it cannot sign its name on a paper; so, it has a common seal on which its name is engraved. The
common seal should affix every document or contract; otherwise the company is not bound by
such a document or contract.
8. Perpetual succession: ‘Members may come and members may go, but the company
continues for ever and ever’ A. company has uninterrupted existence because of the right given to
the shareholders to transfer the shares.
9. Ownership and Management separated: The shareholders are spread over the length and
breadth of the country, and sometimes, they are from different parts of the world. To facilitate
administration, the shareholders elect some among themselves or the promoters of the company
as directors to a Board, which looks after the management of the business. The Board recruits the
managers and employees at different levels in the management. Thus, the management is separated
from the owners.
10. Winding up: Winding up refers to the putting an end to the company. Because law creates
it, only law can put an end to it in special circumstances such as representation from creditors of
financial institutions, or shareholders against the company that their interests are not safeguarded.
The company is not affected by the death or insolvency of any of its members.

11. The name of the company ends with ‘limited’: it is necessary that the name of the
company ends with limited (Ltd.) to give an indication to the outsiders that they are dealing with
the company with limited liability and they should be careful about the liability aspect of their
transactions with the company.
ADVANTAGES OF JOINT STOCK COMPANY
1. Mobilization of larger resources: A joint stock company provides opportunity for the investors
to invest, even small sums, in the capital of large companies. The facilities rising of larger
resources.
2. Separate legal entity: The Company has separate legal entity. It is registered under Indian
Companies Act, 1956.
3. Limited liability: The shareholder has limited liability in respect of the shares held by him. In
no case, does his liability exceed more than the face value of the shares allotted to him.

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4. Transferability of shares: The shares can be transferred to others. However, the private
company shares cannot be transferred.
5. Liquidity of investments: By providing the transferability of shares, shares can be converted
into cash.
6. Inculcates the habit of savings and investments: Because the share face value is very low,
this promotes the habit of saving among the common man and mobilizes the same towards
investments in the company.
7. Democracy in management: the shareholders elect the directors in a democratic way in the
general body meetings. The shareholders are free to make any proposals, question the practice
of the management, suggest the possible remedial measures, as they perceive, the directors
respond to the issue raised by the shareholders and have to justify their actions.
8. Economics of large scale production: Since the production is in the scale with large funds at
9. Continued existence: The Company has perpetual succession. It has no natural end. It continues
forever and ever unless law put an end to it.
10. Institutional confidence: Financial Institutions prefer to deal with companies in view of
their professionalism and financial strengths.
11. Professional management: With the larger funds at its disposal, the Board of Directors
recruits competent and professional managers to handle the affairs of the company in a
professional manner.
12. Growth and Expansion: With large resources and professional management, the company
can earn good returns on its operations, build good amount of reserves and further consider the
proposals for growth and expansion.
DISADVANTAGES OF JOINT STOCK COMPANY
1. Formation of company is a long-drawn procedure: Promoting a joint stock company
involves a long-drawn procedure. It is expensive and involves large number of legal formalities.
2. High degree of government interference: The government brings out a number of rules
and regulations governing the internal conduct of the operations of a company such as meetings,
voting, audit and so on, and any violation of these rules results into statutory lapses, punishable
under the companies act.
3. Inordinate delays in decision-making: As the size of the organization grows, the number
of levels in organization also increases in the name of specialization. The more the number of
levels, the more is the delay in decision-making. Sometimes, so-called professionals do not
respond to the urgencies as required. It promotes delay in administration, which is referred to ‘red
tape and bureaucracy’.

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4. Lack or initiative: In most of the cases, the employees of the company at different levels
show slack in their personal initiative with the result, the opportunities once missed do not recur
and the company loses the revenue.
5. Lack of responsibility and commitment: In some cases, the managers at different levels
are afraid to take risk and more worried about their jobs rather than the huge funds invested in the
capital of the company lose the revenue.
6. Lack of responsibility and commitment: In some cases, the managers at different levels
are afraid to take risk and more worried about their jobs rather than the huge funds invested in the
capital of the company. Where managers do not show up willingness to take responsibility, they
cannot be considered as committed. They will not be able to handle the business risks.
PUBLIC ENTERPRISES
Public enterprises occupy an important position in the Indian economy. Today, public enterprises
provide the substance and heart of the economy. Its investment of over Rs. 10,000 crore is in heavy
and basic industry, and infrastructure like power, transport and communications. The concept of
public enterprise in Indian dates back to the era of pre-independence.
Genesis of Public Enterprises
In consequence to declaration of its goal as socialistic pattern of society in 1954, the Government
of India realized that it is through progressive extension of public enterprises only, the following
aims of our five years plans can be fulfilled.
 Higher production
 Greater employment
 Economic equality, and
 Dispersal of economic power
The government found it necessary to revise its industrial policy in 1956 to give it a socialistic
bent.
NEED FOR PUBLIC ENTERPRISES
The Industrial Policy Resolution 1956 states the need for promoting public enterprises as follows:
 To accelerate the rate of economic growth by planned development
 To speed up industrialization, particularly development of heavy industries and to expand
public sector and to build up a large and growing cooperative sector.
 To increase infrastructure facilities
 To disperse the industries over different geographical areas for balanced regional
development
 To increase the opportunities of gainful employment
 To help in raising the standards of living

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  To reducing disparities in income and wealth (By preventing private monopolies and
curbing concentration of economic power and vast industries in the hands of a small
number of individuals)
Features of Public Enterprises
1. Under the control of a government department: The departmental undertaking is not an
independent organization. It has no separate existence. It is designed to work under close control
of a government department. It is subject to direct ministerial control.
2. More financial freedom: The departmental undertaking can draw funds from government
account as per the needs and deposit back when convenient.
3. Like any other government department: The departmental undertaking is almost similar
to any other government department
4. Budget, accounting and audit controls: The departmental undertaking has to follow
guidelines (as applicable to the other government departments) underlying the budget preparation,
maintenance of accounts, and getting the accounts audited internally and by external auditors.
5. More a government organization, less a business organization. The set-up of a
departmental undertaking is more rigid, less flexible, slow in responding to market needs.
ADVANTAGES OF PUBLIC ENTERPRISES
1. Effective control: Control is likely to be effective because it is directly under the Ministry.
2. Responsible Executives: Normally the administration is entrusted to a senior civil servant. The
administration will be organized and effective.
3. Less scope for mystification of funds: Departmental undertaking does not draw any money
more than is needed, that too subject to ministerial sanction and other controls. So, chances for
mis-utilisation are low.
4. Adds to Government revenue: The revenue of the government is on the rise when the revenue
of the departmental undertaking is deposited in the government account.
DISADVANTAGES OF PUBLIC ENTERPRISES
1. Decisions delayed: Control is centralized. This results in lower degree of flexibility.
Officials in the lower levels cannot take initiative. Decisions cannot be fast and actions cannot be
prompt.
2. No incentive to maximize earnings: The departmental undertaking does not retain any
surplus with it. So, there is no inventive for maximizing the efficiency or earnings.
3. Slow response to market conditions: Since there is no competition, there is no profit
motive; there is no incentive to move swiftly to market needs.

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4. Redtapism and bureaucracy: The departmental undertakings are in the control of a civil
servant and under the immediate supervision of a government department. Administration gets
delayed substantially.
5. Incidence of more taxes: At times, in case of losses, these are made up by the government
funds only. To make up these, there may be a need for fresh taxes, which is undesirable.
PUBLIC CORPORATION
Having released that the routing government administration would not be able to cope up with the
demand of its business enterprises, the Government of India, in 1948, decided to organize some of
its enterprises as statutory corporations. In pursuance of this, Industrial Finance Corporation,
Employees’ State Insurance Corporation was set up in 1948.

Public corporation is a ‘right mix of public ownership, public accountability and business
management for public ends’. The public corporation provides machinery, which is flexible, while
at the same time retaining public control.
DEFINITION
A public corporation is defined as a ‘body corporate creates by an Act of Parliament or Legislature
and notified by the name in the official gazette of the central or state government. It is a corporate
entity having perpetual succession, and common seal with power to acquire, hold, dispose of
property, sue and be sued by its name”.
Examples of a public corporation are Life Insurance Corporation of India, Unit Trust of India,
Industrial Finance Corporation of India, Damodar Valley Corporation and others.
FEATURES OF PUBLIC CORPORATION
1. A body corporate: It has a separate legal existence. It is a separate company by itself. If
can raise resources, buy and sell properties, by name sue and be sued.
2. More freedom and day-to-day affairs: It is relatively free from any type of political
interference. It enjoys administrative autonomy.
3. Freedom regarding personnel: The employees of public corporation are not government
civil servants. The corporation has absolute freedom to formulate its own personnel policies and
procedures, and these are applicable to all the employees including directors.
4. Perpetual succession: A statute in parliament or state legislature creates it. It continues
forever and till a statue is passed to wind it up.
5. Financial autonomy: Through the public corporation is fully owned government
organization, and the initial finance are provided by the Government, it enjoys total financial
autonomy, Its income and expenditure are not shown in the annual budget of the government, it
enjoys total financial autonomy. Its income and expenditure are not shown in the annual budget of

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the government. However, for its freedom it is restricted regarding capital expenditure beyond the
laid down limits, and raising the capital through capital market.
6. Commercial audit: Except in the case of banks and other financial institutions where
chartered accountants are auditors, in all corporations, the audit is entrusted to the comptroller and
auditor general of India.
7. Run on commercial principles: As far as the discharge of functions, the corporation shall
act as far as possible on sound business principles.
ADVANTAGES OF PUBLIC CORPORATION
1. Independence, initiative and flexibility: The corporation has an autonomous set up. So,
it is independent, take necessary initiative to realize its goals, and it can be flexible in its decisions
as required.
2. Scope for Redtapism and bureaucracy minimized: The Corporation has its own policies
and procedures. If necessary they can be simplified to eliminate redtapism and bureaucracy, if any.
3. Public interest protected: The corporation can protect the public interest by making its
policies more public friendly, Public interests are protected because every policy of the corporation
is subject to ministerial directives and board parliamentary control.
4. Employee friendly work environment: Corporation can design its own work culture and
train its employees accordingly. It can provide better amenities and better terms of service to the
employees and thereby secure greater productivity.
5. Competitive prices: the corporation is a government organization and hence can afford
with minimum margins of profit, it can offer its products and services at competitive prices.
6. Economics of scale: By increasing the size of its operations, it can achieve economics of
largescale production.
7. Public accountability: It is accountable to the Parliament or legislature; it has to submit
its annual report on its working results.
Disadvantages of Public Corporation
1. Continued political interference: the autonomy is on paper only and in reality, the continued.
2. Misuse of Power: In some cases, the greater autonomy leads to misuse of power. It takes time
to unearth the impact of such misuse on the resources of the corporation. Cases of misuse of power
defeat the very purpose of the public corporation.
3. Burden for the government: Where the public corporation ignores the commercial principles,
and suffers losses, it is burdensome for the government to provide subsidies to make up the losses.
GOVERNMENT COMPANY

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Section 617 of the Indian Companies Act defines a government company as “any company in
which not less than 51 percent of the paid-up share capital” is held by the Central Government or
by any State Government or Governments or partly by Central Government and partly by one or
more of the state Governments and includes and company which is subsidiary of government
company as thus defined”.
A government company is the right combination of operating flexibility of privately organized
companies with the advantages of state regulation and control in public interest.
Government companies differ in the degree of control and their motive also. Some
government companies are promoted as
 industrial undertakings (such as Hindustan Machine Tools, Indian Telephone Industries,
and so on)
 Promotional agencies (such as National Industrial Development Corporation, National
Small Industries Corporation, and so on) to prepare feasibility reports for promoters who
want to set up public or private companies.
 Agency to promote trade or commerce. For example, state trading corporation, Export
Credit Guarantee Corporation and so such like.
 A company to take over the existing sick companies under private management (E.g.
Hindustan Shipyard)
 A company established as a totally state enterprise to safeguard national interests such as
Hindustan Aeronautics Ltd. And so on.
 Mixed ownership company in collaboration with a private consult to obtain technical
know-how and guidance for the management of its enterprises, e.g. Hindustan Cables)

FEATURES OF GOVERNMENT COMPANY

1. Like any other registered company: It is incorporated as a registered company under the
Indian companies Act. 1956. Like any other company, the government company has separate
legal existence. Common seal, perpetual succession, limited liability, and so on. The provisions
of the Indian Companies Act apply for all matters relating to formation, administration and
winding up. However, the government has a right to exempt the application of any provisions
of the government companies.
2. Shareholding: The majority of the share are held by the Government, Central or State, partly
by the Central and State Government(s), in the name of the President of India, It is also common
that the collaborators and allotted some shares for providing the transfer of technology.
3. Directors are nominated: As the government is the owner of the entire or majority of the share
capital of the company, it has freedom to nominate the directors to the Board. Government may
consider the requirements of the company in terms of necessary specialization and appoints the
directors accordingly.

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4. Administrative autonomy and financial freedom: A government company functions
independently with full discretion and in the normal administration of affairs of the undertaking.
5. Subject to ministerial control: Concerned minister may act as the immediate boss. It is
because it is the government that nominates the directors, the minister issue directions for a
company and he can call for information related to the progress and affairs of the company any
time.
ADVANTAGES OF GOVERNMENT COMPANY
1. Formation is easy: There is no need for an Act in legislature or parliament to promote a
government company. A Government company can be promoted as per the provisions of the
companies Act. Which is relatively easier?
2. Separate legal entity: It retains the advantages of public corporation such as autonomy,
legal entity.
3. Ability to compete: It is free from the rigid rules and regulations. It can smoothly function
with all the necessary initiative and drive necessary to complete with any other private
organization. It retains its independence in respect of large financial resources, recruitment of
personnel, management of its affairs, and so on.
4. Flexibility: A Government company is more flexible than a departmental undertaking or
public corporation. Necessary changes can be initiated, which the framework of the company law.
Government can, if necessary, change the provisions of the Companies Act. If found restricting
the freedom of the government company. The form of Government Company is so flexible that it
can be used for taking over sick units promoting strategic industries in the context of national
security and interest.
5. Quick decision and prompt actions: In view of the autonomy, the government company
take decision quickly and ensure that the actions and initiated promptly. 6. Private participation
facilitated: Government company is the only from providing scope for private participation in the
ownership. The facilities to take the best, necessary to conduct the affairs of business, from the
private sector and also from the public sector.
DISADVANTAGES OF GOVERNMENT COMPANY
1. Continued political and government interference: Government seldom leaves the
government company to function on its own. Government is the major shareholder and it dictates
its decisions to the Board. The Board of Directors gets these approved in the general body. There
were a number of cases where the operational polices were influenced by the whims and fancies
of the civil servants and the ministers.
2. Higher degree of government control: The degree of government control is so high that
the government company is reduced to mere adjuncts to the ministry and is, in majority of the
cases, not treated better than the subordinate organization or offices of the government.

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3. Evades constitutional responsibility: A government company is creating by executive
action of the government without the specific approval of the parliament or Legislature.
4. Poor sense of attachment or commitment: The members of the Board of Management
of government companies and from the ministerial departments in their ex-officio capacity. The
lack the sense of attachment and do not reflect any degree of commitment to lead the company in
a competitive environment.
5. Divided loyalties: The employees are mostly drawn from the regular government
departments for a defined period. After this period, they go back to their government departments
and hence their divided loyalty dilutes their interest towards their job in the government company.
6. Flexibility on paper: The powers of the directors are to be approved by the concerned
Ministry, particularly the power relating to borrowing, increase in the capital, appointment of top
officials, entering into contracts for large orders and restrictions on capital expenditure. The
government companies are rarely allowed to exercise their flexibility and independence.

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