B.tech IT-II-II EEA (18MB2202) AY-2020-21

B.Tech.
IT AR20 Regulation
Geethanjali College of Engineering and Technology

(Autonomous)
Cheeryal (V), Keesara (M), Medchal District – 501 301 (T.S)
ENGINEERING ECONOMICS AND ACCOUNTING (18MB2202)
Course File
DEPARTMENT OF
INFORMATION AND TECHNOLOGY
Faculty HOD IT
SHAINAZ BEGUM Dr. K.Srinivas
Department of Information Technology 1

B.Tech. IT AR20 Regulation
Contents
S.No Topic Page. No.

1 Cover Page 1
2 Syllabus copy 4-5
3 Vision of the Department 6
4 Mission of the Department 6
5 PEOs and Pos 6-7
6 Course objectives and outcomes 8
7 Course mapping with POs 8-9
8 Brief notes on the importance of the course and how it fits into the 10-11
curriculum
9 Prerequisites if any 12
10 Instructional Learning Outcomes 12-14
11 Class Time Table 15
12 Individual time Table 16
13 Lecture schedule with methodology being used/adopted 17-18
14 Detailed notes 19-132
15 Additional topics 132
16 University Question papers of previous years 132-133
17 Question Bank 134-137
18 Assignment Questions 137-138
19 Unit wise Quiz Questions and long answer questions 138-141
20 Tutorial problems 142
21 Known gaps ,if any and inclusion of the same in lecture schedule 142
22 Discussion topics , if any 142
23 References, Journals, websites and E-links if any 143
24 Quality Measurement Sheets 144
A Course End Survey 144
B Teaching Evaluation 144
25 Student List 144-148
26 Group wise students list for discussion topic 148

1. Cover Page
GEETHANJALI COLLEGE OF ENGINEERING AND TECHNOLOGY
DEPARTMENT OF INFORMATION TECHNOLOGY
(Name of the Subject) 18MB2202- ENGINEERING ECONOMICS AND ACCOUNTING

Programme : UG
Branch: IT Version No: 2

Year: II Created on: 1/03/2021
Semester: II No. of pages : 148
Prepared by:
1) Name: Shainaz begum
2) Sign :
3) Design: Asst. Prof
4) Date :
Modified by :
1) Name: 2) Sign :
3) Design : 4) Date :
Verified by : * For Q.C Only.

1) Name: Dr. J.Pardhasaradhi 1) Name:
2) Sign: 2) Sign:
3) Design: Group head 3) Design:
4) Date : 4) Date :
Approved by: (HOD ) 1) Name : Dr.K.Srinivas

2) Sign:
3) Date:

2. Syllabus
GEETHANJALICOLLE
GE OF ENGINEERING AND TECHNOLOGY
ENGINEERING ECONOMICS AND ACCOUNTING (18MB2202)
II Yr B.Tech IT II SEM L T P/D C

3 - -/- 3
Course Objective:
Develop the ability to:
1. Learn the basic Business types
2. Understand the impact of the Economy on Business and Firms specifically.
3. Analyze the Business from the Financial Perspective.
4. Understand the importance of handling Capital.
5. Learn fundamental concepts of accounting.
Course Outcome:
The students will able to:
CO1. Understand Business and the impact of economic variables on them.
CO2. Understand the Demand, Supply concepts.
CO3. Analyze the Production, Cost, Market Structure, Pricing aspects.
CO4. Understand capital structure.
CO5. Study the Financial Statements of a Company.
UNIT – I
Introduction to Business and Economics: Business: Structure of Business Firm, Theory of
Firm, Types of Business Entities, Limited Liability Companies, Sources of Capital for a
Company, Non-Conventional Sources of Finance. Economics: Significance of Economics,
Micro and Macro Economic Concepts, Concepts and Importance of National Income, Inflation,
Money Supply in Inflation, Business Cycle, Features and Phases of Business Cycle. Nature and
Scope of Business Economics, Role of Business Economist, Multidisciplinary nature of
Business Economics.
UNIT – II

Demand and Supply Analysis: Elasticity of Demand: Elasticity, Types of Elasticity, Law of
Demand, Measurement and Significance of Elasticity of Demand, Factors affecting Elasticity of
Demand, Elasticity of Demand in decision making, Demand Forecasting: Characteristics of
Good Demand Forecasting, Steps in Demand Forecasting, Methods of Demand Forecasting.
Supply Analysis: Determinants of Supply, Supply Function & Law of Supply.
UNIT- III
Production, Cost, Market Structures & Pricing: Production Analysis: Factors of
Production, Production Function, Production Function with one variable input, two variable
inputs, Returns to Scale, Different Types of Production Functions. Cost analysis: Types of
Costs, Short run and Long run Cost Functions.
Market Structures: Nature of Competition, Features of Perfect competition, Monopoly,
Oligopoly, and Monopolistic Competition.
Pricing: Types of Pricing, Product Life Cycle based Pricing, Break Even Analysis, and Cost
Volume Profit Analysis.
UNIT - IV
Capital Budgeting: Capital and its significance, Types of Capital, Estimation of Fixed and
Working capital requirements, Methods and sources of raising capital – Trading Forecast,
Capital Budget, Cash Budget. Capital Budgeting: features of capital budgeting proposals,
Methods of Capital Budgeting: Payback Method, Accounting Rate of Return (AR A) and Net
Present Value Method (simple problems).
UNIT - V
Financial Accounting: Accounting concepts and Conventions, Accounting Equation, Double-
Entry system of Accounting, Rules for maintaining Books of Accounts, Journal, Posting to
Ledger, Preparation of Trial Balance, Elements of Financial Statements, and Preparation of
Final Accounts.
TEXT BOOKS:
1. Geethika Ghosh, Piyali Gosh, Purba Roy Choudhury, Managerial Economics, 2e, Tata
McGraw Hill Education Pvt. Ltd. 2012.
2. S.N.Maheswari & S.K. Maheswari, Financial Management, Vikas, 2012.
REFERENCES:
1. Paresh Shah, Financial Accounting for Management 2e, Oxford Press, 2015.
2. S. N. Maheshwari, Sunil K Maheshwari, Sharad K Maheshwari, Financial Accounting, 5e,
Vikas Publications, 2013.

GEETHANJALI COLLEGE OF ENGINEERING AND TECHNOLOGY

(Autonomous)
Cheeryal (V), Keesara (M), Medchal Dist., - 501 301
Department of Information Technology
VISION OF THE INSTITUTE

Geethanjali visualizes dissemination of knowledge and skills to students, who would eventually
contribute to well-being of the people of the nation and global community.
MISSION OF THE INSTITUTE

1. To impart adequate fundamental knowledge in all basic sciences and engineering, technical
and Inter-personal skills to students.
2. To bring out creativity in students that would promote innovation, research and
entrepreneurship.
3. To Preserve and promote cultural heritage, humanistic and spiritual values promoting peace
and harmony in society.
VISION OF THE DEPARTMENT
The department of Information Technology endeavors to bring out technically competent,

socially responsible technocrats through continuous improvement in teaching learning processes
and innovative research practices.
MISSION OF THE DEPARTMENT

1. Inculcate into the students, the technical and problem solving skills to ensure their
success in their chosen profession.
2. Impart the essential skills like teamwork, lifelong learning etc. to the students which
make them globally acceptable technocrats.
3. Facilitate the students with strong fundamentals in basic sciences, mathematics and
Information Technology areas to keep pace with the growing challenges in field.
4. Enrich the faculty with knowledge in the frontiers of the Information Technology area.


PROGRAM EDUCATIONAL OBJECTIVES (PEOs) OF B.Tech.(IT) PROGRAM:
Program Educational Objectives (PEOs) are broad statements that describe what graduates
are expected to attain within a few years of graduation. The PEOs for
Information Technology graduates are:
PEO-I: Exhibit sound knowledge in the fundamentals of Information Technology and apply
practical experience with programming techniques to solve real world problems.
PEO-II: To inculcate professional behavior with strong ethical values, leadership qualities,
innovative thinking and analytical abilities into the student.
PEO-III: To empower the student with the qualities of effective communication, team work,
continuous learning attitude, leadership and proficiency in cutting edge technologies needed
for a successful Information Technology professional.
PEO-IV: Imbibe sound knowledge in mathematics, basic sciences, first principles to form a
strong base for the student to keep up with the growing challenges in the field of Information
Technology.
PROGRAM OUTCOMES (POs) OF B.Tech.(IT) PROGRAM:

Program Outcomes (POs) describe what students are expected to know and be able to do by
the time of graduation to accomplish Program Educational Objectives (PEOs). The Program
Outcomes for Information Technology graduates are:
Engineering Graduates would be able to:
1. Engineering knowledge: Apply the knowledge of mathematics, science,

engineering fundamentals, and an engineering specialization to the solution of
complex engineering problems.

2. Problem analysis: Identify, formulate, review research literature, and analyze

complex engineering problems reaching substantiated conclusions using first
principles of mathematics, natural sciences, and engineering sciences.
3. Design/development of solutions: Design solutions for complex engineering

problems and design system components or processes that meet the specified
needs with appropriate consideration for the public health and safety, and the
cultural, societal, and environmental considerations.
4. Conduct investigations of complex problems: Use research-based

knowledge and research methods including design of experiments, analysis
and interpretation of data, and synthesis of the information to provide valid
conclusions.
5. Modern tool usage: Create, select, and apply appropriate techniques,

resources, and modern engineering and IT tools including prediction and
modeling to complex engineering activities with an understanding of the
limitations.

6. The engineer and society: Apply reasoning informed by the contextual

knowledge to assess societal, health, safety, legal and cultural issues and the
consequent responsibilities relevant to the professional engineering practice.
7. Environment and sustainability: Understand the impact of the professional

engineering solutions in societal and environmental contexts, and demonstrate
the knowledge of, and need for sustainable development.
8. Ethics: Apply ethical principles and commit to professional ethics and

responsibilities and norms of the engineering practice.
9. Individual and team work: Function effectively as an individual, and as a

member or leader in diverse teams, and in multidisciplinary settings.
10. Communication: Communicate effectively on complex engineering activities

with the engineering community and with society at large, such as, being able
to comprehend and write effective reports and design documentation, make
effective presentations, and give and receive clear instructions.
11. Project management and finance: Demonstrate knowledge and

understanding of the engineering and management principles and apply these
to one’s own work, as a member and leader in a team, to manage projects and
in multidisciplinary environments.
12. Life-long learning: Recognize the need for, and have the preparation and
ability to engage in independent and life-long learning in the broadest context
of technological change.
PROGRAM SPECIFIC OUTCOMES (PSOs):
1. To inculcate algorithmic thinking and problem solving skills, applying

different programming paradigms.
10
2. Develop an ability to design and implement various

processes/methodologies/practices employed in design, validation, testing and
maintenance of software products.
1. Course Objectives and outcomes
Course Objective: Develop the ability to:

1. Learn the basic Business types
2. Understand the impact of the Economy on Business and Firms specifically.
3. Analyze the Business from the Financial Perspective.
4. Understand the importance of handling Capital.
5. Learn fundamental concepts of accounting.
Course Outcome:
At the end of the course, student would be able to:
CO18MB2202.1:Understand Business and the impact of economic variables on them.
CO18MB2202.2:Understand the Demand, Supply concepts.
CO18MB2202.3:Analyze the Production, Cost, Market Structure, Pricing aspects.
CO18MB2202.4:Understand capital structure.
CO18MB2202.5:Study the Financial Statements of a Company.
2. Course mapping with PEOs and POs
Course PEOs Pos

ENGINEERING PEO2,PEO3 PO2,PO3,PO4,PO5,PO6,PO7,PO8,PO
9, PO10,PO11,PO12
ECONOMICS
AND
ACCOUNTING
(18MB2202)
11
Mapping of Course Outcomes with POs & PSOs
S.No. Course Outcome POs

CO18MB2202.1:Understand Business and the impact of economic PO2,PO3,PO4,PO5,P
1 O6,PO7, PO8,PO9,
variables on them.
PO10,PO11,PO12
CO18MB2202.2:Understand the Demand, Supply concepts. PO2,PO3,PO4,PO5,P
2 O6,PO7, PO8,PO9,
PO10,PO11,PO12
CO18MB2202.3:Analyze the Production, Cost, Market Structure, PO2,PO3,PO4,PO5,P
3 O6,PO7, PO8,PO9,
Pricing aspects.
PO10,PO11,PO12
CO18MB2202.4:Understand capital structure. PO2,PO3,PO4,PO5,P
4 O6,PO7, PO8,PO9,
PO10,PO11,PO12
CO18MB2202.5:Study the Financial Statements of a Company. PO2,PO3,PO4,PO5,P
5 O6,PO7, PO8,PO9,
PO10,PO11,PO12
Mapping of Course outcomes to Program Outcomes
Course Name Program Outcomes

Engineering Economics and PSO1 PSO2
1 2 3 4 5 6 7 8 9 10 11 12
Accounting
CO16MB2202.1:Understand
Business and the impact of - 2 2 2 3 3 3 2 2 3 3 2 2 -
economic variables on them.
- 2 2 2 3 3 2 2 2 3 3 2 2 -
the Demand, Supply concepts.
CO16MB2202.3:Analyze the
Production, Cost, Market - 3 3 2 3 3 3 2 3 3 3 3 2 -
Structure, Pricing aspects.
- 2 2 2 3 3 3 2 2 3 2 3 2 -
capital structure.
CO16MB2202.5:Study the
Financial Statements of a - 3 2 2 3 3 3 2 2 3 2 2 2 -
Company.
3-Substantial(High) 2-Moderate(Medium) 1-Slight(Low) -:Not Related
12
3.
8. Brief Importance of the Course and how it fits into the
Curriculum
a. What role does this course play within the Program?

This course helps the student to understand various Economics and accounting aspects to
deal with different decision making aspects and money in their life.
This course is useful to understand and correlate engineering with economics and
accounting.
b. How is the course unique or different from other courses of the Program?
This is the course wherein Engineers have an added responsibility and that is to include
economics in their calculation & decisions.
c. What essential knowledge or skills should they gain from this experience?
Students acquire analyzing skills about how to deal with decision making related to money
d. What knowledge or skills from this course will students need to have mastered to
perform well in future classes or later (Higher Education / Jobs)?
Learning aspects of economics and accounting helps making decisions in the following. What
should be the product mix? Which is the production technique? What is the i/p mix at least cost?
What should be the level of output and price? How to take investment decisions? How much
should the firm advertise? And for accounting and finance how to select a project based on
the profitability and what exactly is effecting the profit position of then
e. Why is this course important for students to take?
Engineering Economics is a subject of vital importance to Engineers. This subject helps one
understand the need for the knowledge of Economics for being an effective manager and decision
maker. The Economics theories and accounting used to take decisions related to uncertain and
changing business environment.
f. What is/are the prerequisite(s) for this course?
None
g. When students complete this course, what do they need know or be able to do?
Able to deal with Learning the basic Business types, Understand the impact of the Econ-
omy on Business and Firms specifically, Analyze the Business from the Financial Per-
spective, Understand the importance of handling Capital, Learn fundamental concepts of
accounting.
h. Is there specific knowledge that the students will need to know in the future?
In future, students have to apply these concepts in designing, validating and analyzing the
computer applications and business.
13
i. Are there certain practical or professional skills that students will need to apply in
the future?
Many factors have contributed to an expansion of engineering responsibilities and
concerns. Apart from the conventional work, now engineers are expected not only to
create novel technological solutions but also to make skilful financial analysis of the
effects of implementation.
j. Five years from now, what do you hope students will remember from this course?
The main applications the computer science students will wind up working on - for almost
all programmers - will involve accounting economics helps in better decisions of business
in their future.
k. What is it about this course that makes it unique or special?
It is the only course that facilitates students to have Economics and Accounting
knowledge.
l. Why does the program offer this course?
Students in their career they have to know how to read a bank statement, an investment
prospectus, an income statement and balance sheet. When they wind up working in appli-
cations - at all - they will need to know the language of accounting, accountants and eco-
nomics.
m. Why can’t this course be “covered” as a sub-section of another course?
It cannot be part of any prerequisite courses as this course is to give basic knowledge
about the Economics and accounting.
n. What unique contributions to students’ learning experience does this course make?
It helps in knowing and understanding the business, accounting and related decisions.
o. What is the value of taking this course? How exactly does it enrich the program?
As a practicing professional Computer Scientist in industry topics studied under business

faculty are critical to the success. Most of the computer science graduates or Engineering
background learns these skills on their own over time. In retrospect, studying them during
a degree program from the Business and accounting would have been very valuable. It can
be a huge head start to being a working professional.
p. What are the major career options that require this course
For all the career options of CSE, EEA knowledge gives better platforms of work or
business.
9. Prerequisites
(None)
14
10. Instructional learning outcomes

S.No Unit Contents Outcomes(Ability to)
 Business, Structure of Business
Firm
 Theory of Firm
 Types of Business Entities
 Limited Liability Companies
 Sources of Capital for a
Company
 Non-Conventional Sources of
Finance
 Economics, Significance of
Economics,
 Micro and Macro Economic
1 I Business and it’s types and economics Concepts
 Concepts and Importance of
National Income
 Inflation, Money Supply in
Inflation
 Business Cycle, Features and
Phases of Business Cycle
 Nature and Scope of Business
Economics
 Role of Business Economist
 Multidisciplinary nature of
Business Economics
2 II Impact of economy on business firms  Demand, determinants of

demand
 Law of Demand, Exceptions
 Elasticity of Demand: Elasticity,
Types of Elasticity
 Measurement and Significance
of Elasticity of Demand
15
 Factors affecting Elasticity of
Demand, Elasticity of Demand
in decision making
 Demand Forecasting:
Characteristics of Good Demand
Forecasting, Steps in Demand
Forecasting,
 Methods of Demand Forecasting
 Supply Analysis: Determinants
of Supply, Supply Function &
Law of Supply.
 Production, Factors of Production,

Production Function,
 Production Function with one
variable input, two variable inputs,
Returns to Scale,
 Different Types of Production
Functions.
 Cost analysis: Types of Costs,
 Short run and Long run Cost
Functions.
3 III Financial perspective of Business
 Market Structures, Nature of
Competition
 Features of Perfect competition
 Monopoly, Oligopoly, and
Monopolistic Competition.
 Pricing, Types of Pricing,
 Product Life Cycle based Pricing
 Break Even Analysis, and Cost
Volume Profit Analysis.
4 IV Capital budgeting  Capital and its significance

 Types of Capital
 Estimation of Fixed and Working
16
capital requirements
 Methods and sources of raising
capital
 Trading Forecast
 Capital Budget,
 Cash Budget
 Capital Budgeting: features of
capital budgeting proposals
 Methods of Capital Budgeting
 Financial Accounting,
Accounting concepts and
Conventions
 Accounting Equation, Double-
Entry system of Accounting
 Rules for maintaining Books of
5 V Accounting concepts and Final accounts Accounts, Journal, Posting to
Ledger, Preparation of Trial
Balance
 Elements of Financial
Statements
 Preparation of Final Accounts.
17
11. Class Time Table
Offline:
Geethanjali College of Engineering & Technology
Department of Information & Technology
Even Semester Room No 324
Year/Sem/Sec: II-B.Tech II-Semester Batch - 1
Class Teacher : Mrs Y Swathi Tejah A.Y. : 2020-21 Version : 01 W.E.F. 22-03-2021
Time 09.00-09.55 09.55-10.50 10.50-11.45 11.45-12.40 12.40-01.10 01.10-02.05 02.05-03.00 03.00-03.55
Period 1 2 3 4 5 6 7
LUNCH
Monday OS DBMS DAA LAB DAA EEA CAALP
Wednesday DBMS LAB DAA DAA OS DBMS OS
Friday EEA EEA OSALP LAB DBMS CAALP CAALP
Year/Sem/Sec: II-B.Tech II-Semester Batch - 2

Time 09.00-09.55 09.55-10.50 10.50-11.45 11.45-12.40 12.40-01.10 01.10-02.05 02.05-03.00 03.00-03.55
Period 1 2 3 4 5 6 7
LUNCH
Tuesday OS DBMS DAA LAB DAA EEA CAALP
Thursday DBMS LAB DAA DAA OS DBMS OS
Saturday EEA EEA OSALP LAB DBMS CAALP CAALP
S.No Subject(T/P) Course Code Faculty Name

1 Design and Analysis of Algorithms 18CS2201 Dr Ramakanth Mohanty
2 Computer Architecture and Assembly Language Programming 18IT2201 N Radhika Amareshwari
3 Database Management Systems 18CS2203 Mr K Naresh Babu
4 Operating Systems 18CS2205 Y Swathi Tejah
5 Engineering Economics and Accounting 18MB2202 Mrs Shainaz Begum
6 Design and Analysis of Algorithms Lab 18CS22L1 Dr Ramakanth Mohanty, Dr Rajesh Srivatsava
7 Operating Systems and Assembly Language Programming 18IT22L1 N Radhika Amareshwari , Y Swathi Tejah
8 Lab
Database Management Systems Lab 18CS22L3 Mr K Naresh Babu
9 Environmental Science 18CH2201 Mrs Bhargavi Lakshmi
TT. Coord:__________ HOD:__________________ Dean Academics:-_______________ Principal:___________________
Online:
Geethanjali College of Engineering & Technology
Department of Information Technology
EVEN Semester
Year/Sem/Sec: II-B.Tech II-Semester A-Section A.Y : 2020 -21 W.E.F 25-03-2021
Class Teacher:
Time 09.00-10.30 11.00-12.30 12.30-1.30 1.30-3.00
Period 1 2 3
Monday DBMS EEA DAA Lab
Tuesday OS DBMS DAA
LUNCH
Wednesday CAALP EEA DBMS Lab

Thursday DAA CAALP OS
Friday OS DBMS OSALP Lab
Saturday CAALP DAA ES
S.No Subject(T/P) Course Code Faculty Name

1 Design and Analysis of Algorithms 18CS2201 Dr Ramakanth Mohanty
2 Computer Architecture and Assembly Language Programming 18IT2201 N Radhika Amareshwari
3 Database Management Systems 18CS2203 Mr K Naresh Babu
4 Operating Systems 18CS2205 Y Swathi Tejah
5 Engineering Economics and Accounting 18MB2202 Mrs Shainaz Begum
6 Design and Analysis of Algorithms Lab 18CS22L1 Dr Ramakanth Mohanty, Dr Rajesh Srivatsava
7 Operating Systems and Assembly Language Programming Lab 18IT22L1 N Radhika Amareshwari , Y Swathi Tejah
8 Database Management Systems Lab 18CS22L3 Mr K Naresh Babu, Mr Aadi Reddy
9 Environmental Science 18CH2201 Mrs Bhargavi Lakshmi
TT. Coord:__________ HOD:__________________ Dean Academics:-_______________ Principal:___________________
18
12. INDIVIDUAL TimeTable
OFFLINE TIME TABLE
Ms.Shainaz Begum Work Load: 29

09:00- 10:00- 11:00- 12:00- 1:00- 2:30-
Time 10:00 11:00 12:00 01:00 1:30
01:30:2-30
3:30
3:30-4:30
Period 1 2 3 4 5 6 7
EEA-
Monday MF-EEE A&B EEA-CSE-D ME EEA CSE-E
IT
EEA-
Tuesday MF-EEE A&B EEA-CSE-D ME EEA CSE-E
IT
LUNCH
Wednesday EEA- IT ME EEA CSE-D EEA CSE-E

Thursday EEA-IT ME EEA CSE-D EEA CSE-E

Friday EEA-IT EEA CSE-E ME/MF- EEE
Saturday EEA-IT ME
EEA CSE-E MF-EEE A&B
ONLINE TIME TABLE
SHAINAZ BEGUM
Time 09.00-10.30 11.00-12.30 12.30-1.30 1.30-3.00
Period 1& 2 3&4 5&6
Monday IT-EEA MBA-M.E
Tuesday CSE-D EEA CSE-E EEA
Wednesday MBA-M.E IT- EEA
NH
C
Thursday
U
L
Friday CSE-D EEA CSE-E EEA

Saturday
19
. Lecture Schedule with Methodology being used/adopted
Lesson Plan
Academic Year: 2020-21 Course-Year-Sem-Branch-Sec: B.Tech-II-II-
CSE
Subject: ENGINEERING ECONOMICS AND ACCOUNTING (18MB2202) No.of Periods/Week:3
Faculty Name: Mrs SHAINAZ BEGUM Designation: Asst. Prof.

S.No No. of Regular/ Teaching Aids Used
Topics to be covered
. Periods Additional LCD/OHP/BB/LCD
1 1 Introduction to EEA Regular BB
UNIT-I
2 1 Business: structure of business firm, theory of firm Regular BB
3 1 Types of business entities, limited liability companies, Regular BB
4 1 Source of capital, non-conventional source of finance Regular BB
Economics: significance of economics, micro and BB
5 1 Regular
macro economics concepts
concepts and importance of national income, BB
6 1 Regular
inflation, money supply in inflation
7 1 Business cycle, features and phases of business cycle, Regular BB
8 1 nature and scope of business economics
Role of business economist, multidisciplinary nature BB
9 1 Regular
of business economics
UNIT-II
Demand Definition, types and Determinants of BB
10 1 Regular
demand
Law of demand, Elasticity of demand, types of BB
11 1 elasticity, measurements and significance of elasticity Regular
of demand
Factors effecting elasticity of demand, elasticity of BB
12 1 Regular
demand in decision making,
Demand forecasting, Characteristics of god demand BB
13 1 Regular
forecasting, Steps in demand forecasting
14 1 Methods of demand forecasting Regular PPT
15 Methods of demand forecasting PPT
Supply analysis: determinates of supply, supply BB
16 1 Regular
function and law of supply
UNIT-III
Production analysis: factors of production, BB
17 1 Regular
production function,
18 1 production function with one variable input Regular BB
19 1 Two variable inputs , returns to scale, Regular BB
20 1 different types of production function Regular BB
21 1 Cost analysis: types of costs, Regular PPT
22 1 short run and long run cost function Regular BB
23 1 Market structures: nature of competition, features of Regular BB
20
perfect competition
24 1 Monopoly, Oligopoly and Monopolistic Competition Regular BB
Pricing: types of pricing, product life cycle based BB
25 1 Regular
pricing, analysis
26 1 break even analysis and cost volume profit Regular BB
27 1 Simple problems on CVP Regular BB
UNIT-IV
28 1 Capital and its significance, Types of Capital Regular BB
Estimation of Fixed and Working capital BB
29 1 Regular
requirements, Methods and sources of raising capital
30 1 Trading Forecast, Capital Budget, Cash Budge Regular BB

features of capital budgeting proposals, Methods of BB
31 1 Regular
Capital Budgeting
32 1 PBP,ARR Regular BB
33 1 Practice problems on PBP,ARR Regular BB
34 1 NPV Regular BB
35 1 Practice problems on NPV Regular BB
36 1 Practice problems on NPV
UNIT-V
Financial accounting: accounting concepts and BB
37 1 Regular
conventions, accounting equation
38 1 Double entry system of accounting, Regular BB
39 1 rules for maintaining books of accounts Regular BB
40 1 Journal Regular BB
41 1 posting to ledger Regular BB
42 1 Preparation of trial balance Regular BB
43 1 elements of financial statements Regular BB
44 1 Performa of Preparation for final accounts Regular BB
45 1 Adjustments Regular BB
46 1 Simple problems on final accounts Regular BB
47 1 Simple problems on final accounts Regular BB
48 1 Practice problems Regular BB
21
8. Detailed Notes
UNIT -1
INTRODUCTION TO BUSINESS ECONOMICS
BUSINESS
Imagine you want to do business. Which are you interested in? For example, you want to get
into InfoTech industry. What can you do in this industry? Which one do you choose? The
following are the alternatives you have on hand:
You can buy and sell
You can set up a small/medium/large industry to manufacture
You can set up a workshop to repair
You can develop software
You can design hardware
You can be a consultant/trouble-shooter
If you choose any one or more of the above, you have chosen the line of activity. The next
step for you is to decide whether.
You want to be only owner (It means you what to be sole trader) or
You want to take some more professionals as co-owners along with you (If means you what
to from partnership with others as partners) or
You want to be a global player by mobilizing large resources across the country/world
You want to bring all like-minded people to share the benefits of the common enterprise (You
want to promote a joint stock company) or
You want to involve government in the IT business (here you want to suggest government to
promote a public enterprise!)
1.1 STRUCTURE OF BUSINESS FIRM
To decide this, it is necessary to know how to evaluate each of these alternatives.
Factors affecting the choice of form of business organization
Before we choose a particular form of business organization, let us study what factors affect
such a choice? The following are the factors affecting the choice of a business organization:
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.
Division of labour: There should be possibility to divide the work among the available
owners.
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.
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.
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.
Transfer of ownership: There should be simple procedures to transfer the ownership to the
next legal heir.
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
22
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.
Continuity: The business should continue forever and ever irrespective of the uncertainties
in future.
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.
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.
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.
Taxation: More profit means more tax. Choose such a form, which permits to pay low tax.
These are the parameters against which we can evaluate each of the available forms of
business organizations.
THEORY OF FIRM:
1.2 Types Of Business Entities

Sole Trader
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. Example: Restaurants, Supermarkets, pan shops, medical shops, hosiery shops etc.
Features
23
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.
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
The following are the advantages of the sole trader from of business organization:
Easy to start and easy to close: Formation of a sole trader form of organization is relatively
easy even closing the business is easy.
Personal contact with customers directly: Based on the tastes and preferences of the
customers the stocks can be maintained.
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.
High degree of flexibility: Based on the profitability, the trader can decide to continue or
change the business, if need be.
Secrecy: Business secrets can well be maintained because there is only one trader.
Low rate of taxation: The rate of income tax for sole traders is relatively very low.
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.
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.
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.
Transferability: The legal heirs of the sole trader may take the possession of the business.
Disadvantages
The following are the disadvantages of sole trader form:
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.
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.
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.
24
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.
Inadequate for growth and expansion: This from is suitable for only small size, one-man-
show type of organizations. This may not really work out for growing and expanding
organizations.
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.
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.
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.
2) Partnership
Partnership is an improved from of sole trader in certain respects. Where there are like-
minded 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
Relationship: Partnership is a relationship among persons. It is relationship resulting out of an
agreement.
Two or more persons: There should be two or more number of persons.
There should be a business: Business should be conducted.
Agreement: Persons should agree to share the profits/losses of the business
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.
The following are the other features:
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.
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
Division of labour: Because there are more than two persons, the work can be divided among
the partners based on their aptitude.
Personal contact with customers: The partners can continuously be in touch with the
customers to monitor their requirements.
Flexibility: All the partners are likeminded persons and hence they can take any decision
relating to business.
25
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.
Names and addresses of the firm and partners
Nature of the business proposed
Duration
Amount of capital of the partnership and the ratio for contribution by each of the partners.
Their profit sharing ration (this is used for sharing losses also)
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.
The amount of salary or commission payable to any partner
Procedure to value good will of the firm at the time of admission of a new partner, retirement
of death of a partner
Allocation of responsibilities of the partners in the firm
Procedure for dissolution of the firm
Name of the arbitrator to whom the disputes, if any, can be referred to for settlement.
Special rights, obligations and liabilities of partners(s), if any.
Kind of partners
The following are the different kinds of partners:
Active Partner: Active partner takes active part in the affairs of the partnership. He is also
called working partner.
Sleeping Partner: Sleeping partner contributes to capital but does not take part in the affairs
of the partnership.
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.
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.
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.
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.
Right of partners
Every partner has right
To take part in the management of business
To express his opinion
Of access to and inspect and copy and book of accounts of the firm
To share equally the profits of the firm in the absence of any specific agreement to the
contrary
To receive interest on capital at an agreed rate of interest from the profits of the firm
To receive interest on loans, if any, extended to the firm.
To be indemnified for any loss incurred by him in the conduct of the business
To receive any money spent by him in the ordinary and proper conduct of the business of the
firm.
26
Advantages
The following are the advantages of the partnership from:
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.
Availability of larger amount of capital: More amount of capital can be raised from more
number of partners.
Division of labour: The different partners come with varied backgrounds and skills. This
facilities division of labour.
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.
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.
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.
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:
The following are the disadvantages of partnership:
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’.
Liability: The partners have joint and several liabilities beside unlimited liability. Joint and
several liability 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.
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.
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.
Instability: The partnership form is known for its instability. The firm may be dissolved on
death, insolvency or insanity of any of the partners.
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.
27
The word ‘ company’ has a Latin origin, com means ‘ come together’, pany means ‘ bread’,
joint stock company means, people come together to earn their livelihood by investing in the
stock of company jointly.
Company Defined
Lord justice Lindley explained the concept of the joint stock company from of organization
as ‘an association of many persons who contribute money or money’s worth to a common
stock and employ it for a common purpose.
Features
This definition brings out the following features of the company:
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.
Separate legal existence: it has an independence existence, it separate 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.
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.
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.
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.
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.
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.
Perpetual succession: ‘Members may comes 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.
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.
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.
28
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.
Formation of Joint Stock Company
There are two stages in the formation of a joint stock company. They are:
To obtain Certificates of Incorporation
To obtain certificate of commencement of Business
Certificate of Incorporation: The certificate of Incorporation is just like a ‘date of birth’
certificate. It certifies that a company with such and such a name is born on a particular day.
Certificate of commencement of Business: A private company need not obtain the certificate
of commencement of business. It can start its commercial operations immediately after
obtaining the certificate of Incorporation.
The persons who conceive the idea of starting a company and who organize the necessary
initial resources are called promoters. The vision of the promoters forms the backbone for the
company in the future to reckon with.
The promoters have to file the following documents, along with necessary fee, with a
registrar of joint stock companies to obtain certificate of incorporation:
Memorandum of Association: The Memorandum of Association is also called the charter of
the company. It outlines the relations of the company with the outsiders. If furnishes all its
details in six clause such as (ii) Name clause (II) situation clause (iii) objects clause (iv)
Capital clause and (vi) subscription clause duly executed by its subscribers.
Articles of association: Articles of Association furnishes the byelaws or internal rules
government the internal conduct of the company.
The list of names and address of the proposed directors and their willingness, in writing to act
as such, in case of registration of a public company.
A statutory declaration that all the legal requirements have been fulfilled. The declaration has
to be duly signed by any one of the following: Company secretary in whole practice, the
proposed director, legal solicitor, chartered accountant in whole time practice or advocate of
High court.
The registrar of joint stock companies peruses and verifies whether all these documents are in
order or not. If he is satisfied with the information furnished, he will register the documents
and then issue a certificate of incorporation, if it is private company, it can start its business
operation immediately after obtaining certificate of incorporation.
Advantages
The following are the advantages of a joint Stock Company
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.
Separate legal entity: The Company has separate legal entity. It is registered under Indian
Companies Act, 1956.
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.
Transferability of shares: The shares can be transferred to others. However, the private
company shares cannot be transferred.
Liquidity of investments: By providing the transferability of shares, shares can be converted
into cash.
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.
29
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.
Economics of large scale production: Since the production is in the scale with large funds at
Continued existence: The Company has perpetual succession. It has no natural end. It
continues forever and ever unless law put an end to it.
Institutional confidence: Financial Institutions prefer to deal with companies in view of their
professionalism and financial strengths.
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.
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.
All that shines is not gold. The company from of organization is not without any
disadvantages. The following are the disadvantages of joint stock companies.
Disadvantages
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.
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.
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’.
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.
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.
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.
4) 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.
30
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
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)
Achievements of public Enterprises
The achievements of public enterprise are vast and varied. They are:
Setting up a number of public enterprises in basic and key industries
Generating considerably large employment opportunities in skilled, unskilled, supervisory
and managerial cadres.
Creating internal resources and contributing towards national exchequer for funds for
development and welfare.
Bringing about development activities in backward regions, through locations in different
areas of the country.
Assisting in the field of export promotion and conservation of foreign exchange.
Creating viable infrastructure and bringing about rapid industrialization (ancillary industries
developed around the public sector as its nucleus).
Restricting the growth of private monopolies
Stimulating diversified growth in private sector
Taking over sick industrial units and putting them, in most of the vases, in order,
Creating financial systems, through a powerful networking of financial institutions,
development and promotional institutions, which has resulted in social control and social
orientation of investment, credit and capital management systems.
Benefiting the rural areas, priority sectors, small business in the fields of industry, finance,
credit, services, trade, transport, consultancy and so on.
Let us see the different forms of public enterprise and their features now.
Forms of public enterprises

Public enterprises can be classified into three forms:
Departmental undertaking
Public corporation
Government company
These are explained below
Departmental Undertaking
31
This is the earliest from of public enterprise. Under this form, the affairs of the public
enterprise are carried out under the overall control of one of the departments of the
government. The government department appoints a managing director (normally a civil
servant) for the departmental undertaking. He will be given the executive authority to take
necessary decisions. The departmental undertaking does not have a budget of its own. As and
when it wants, it draws money from the government exchequer and when it has surplus
money, it deposits it in the government exchequer. However, it is subject to budget,
accounting and audit controls.
Examples for departmental undertakings are Railways, Department of Posts, All India Radio,
Doordarshan, Defence undertakings like DRDL, DLRL, ordinance factories, and such.
Features
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.
More financial freedom: The departmental undertaking can draw funds from government
account as per the needs and deposit back when convenient.
Like any other government department: The departmental undertaking is almost similar to
any other government department
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.
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
Effective control: Control is likely to be effective because it is directly under the Ministry.
Responsible Executives: Normally the administration is entrusted to a senior civil servant.
The administration will be organized and effective.
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.
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
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.
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.
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.
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.
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.
Any business organization to be more successful needs to be more dynamic, flexible,
responsive to market conditions, fast in decision making and prompt in actions. None of these
qualities figure in the features of a departmental undertaking. It is true that departmental
undertaking operates as a extension to the government. With the result, the government may
32
miss certain business opportunities. So as not to miss business opportunities, the government
has thought of another form of public enterprise, that is, Public corporation.
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 – 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 create 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
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.
More freedom and day-to-day affairs: It is relatively free from any type of political
interference. It enjoys administrative autonomy.
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.
Perpetual succession: A statute in parliament or state legislature creates it. It continues forever
and till a statue is passed to wind it up.
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 the
government. However, for its freedom it is restricted regarding capital expenditure beyond
the laid down limits, and raising the capital through capital market.
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.
Run on commercial principles: As far as the discharge of functions, the corporation shall act
as far as possible on sound business principles.
Advantages
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.
Scope for Redtapism and bureaucracy minimized: The Corporation has its own policies and
procedures. If necessary they can be simplified to eliminate redtops and bureaucracy, if any.
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.
33
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.
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.
Economics of scale: By increasing the size of its operations, it can achieve economics of
large-scale production.
Public accountability: It is accountable to the Parliament or legislature; it has to submit its
annual report on its working results.
Disadvantages
Continued political interference: the autonomy is on paper only and in reality, the continued.
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.
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
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
knowhow and guidance for the management of its enterprises, e.g. Hindustan Cables)
Features
The following are the features of a government company:
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.
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
34
common that the collaborators and allotted some shares for providing the transfer of
technology.
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.
Administrative autonomy and financial freedom: A government company functions
independently with full discretion and in the normal administration of affairs of the
undertaking.
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
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?
Separate legal entity: It retains the advantages of public corporation such as autonomy, legal
entity.
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.
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.
Quick decision and prompt actions: In view of the autonomy, the government company take
decision quickly and ensure that the actions and initiated promptly.
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
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.
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.
Evades constitutional responsibility: A government company is creating by executive action
of the government without the specific approval of the parliament or Legislature.
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.
35
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.
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.
1.3 Source of capital
In case of proprietorship business, the individual proprietor generally invests his own savings
to start with, and may borrow money on his personal security or the security of his assets
from others. Similarly, the capital of a partnership from consists partly of funds contributed
by the partners and partly of borrowed funds. But the company from of organization enables
the promoters to raise necessary funds from the public who may contribute capital and
become members (share holders) of the company. In course of its business, the company can
raise loans directly from banks and financial institutions or by issue of securities (debentures)
to the public. Besides, profits earned may also be reinvested instead of being distributed as
dividend to the shareholders.Thus for any business enterprise, there are two sources of
finance, viz, funds contributed by owners and funds available from loans and credits. In other
words the financial resources of a business may be own funds and borrowed funds.
Owner funds or ownership capital:
The ownership capital is also known as ‘risk capital’ because every business runs the risk of
loss or low profits, and it is the owner who bears this risk. In the event of low profits they do
not have adequate return on their investment. If losses continue the owners may be unable to
recover even their original investment. However, in times of prosperity and in the case of a
flourishing business the high level of profits earned accrues entirely to the owners of the
business. Thus, after paying interest on loans at a fixed rate, the owners may enjoy a much
higher rate of return on their investment. Owners contribute risk capital also in the hope that
the value of the firm will appreciate as a result of higher earnings and growth in the size of
the firm.
The second characteristic of this source of finance is that ownership capital remains
permanently invested in the business. It is not refundable like loans or borrowed capital.
Hence a large part of it is generally used for a acquiring long – lived fixed assets and to
finance a part of the working capital which is permanently required to hold a minimum level
of stock of raw materials, a minimum amount of cash, etc.
Another characteristic of ownership capital related to the management of business. It is on the
basis of their contribution to equity capital that owners can exercise their right of control over
the management of the firm. Managers cannot ignore the owners in the conduct of business
affairs. The sole proprietor directly controls his own business. In a partnership firm, the active
partner will take part in the management of business. A company is managed by directors
who are elected by the members (shareholders).
Merits:
Arising out of its characteristics, the advantages of ownership capital may be briefly stated as
follows:
It provides risk capital
It is a source of permanent capital
It is the basis on which owners ‘acquire their right of control over management
It does not require security of assets to be offered to raise ownership capital
Limitations:
There are also certain limitations of ownership capital as a source of finance. These are:
36
The amount of capital, which may be raised as owners fund depends on the number of
persons, prepared to take the risks involved. In a partnership confer, a few persons cannot
provide ownership capital beyond a certain limit and this limitation is more so in case of
proprietary form of organization.
A joint stock company can raise large amount by issuing shares to the public. Bus it leads to
an increased number of people having ownership interest and right of control over
management. This may reduce the original investors’ power of control over management.
Being a permanent source of capital, ownership funds are not refundable as long as the
company is in existence, even when the funds remain idle.
A company may find it difficult to raise additional ownership capital unless it has high profit-
earning capacity or growth prospects. Issue of additional shares is also subject to so many
legal and procedural restrictions.
Borrowed funds and borrowed capital: It includes all funds available by way of loans or
credit. Business firms raise loans for specified periods at fixed rates of interest. Thus
borrowed funds may serve the purpose of long-term, medium-term or short-term finance. The
borrowing is generally at against the security of assets from banks and financial institutions.
A company to borrow the funds can also issue various types of debentures.
Interest on such borrowed funds is payable at half yearly or yearly but the principal amount is
being repaid only at the end of the period of loan. These interest and principal payments have
to be met even if the earnings are low or there is loss. Lenders and creditors do not have any
right of control over the management of the borrowing firm. But they can sue the firm in a
law court if there is default in payment, interest or principal back.
Merits:From the business point of view, borrowed capital has several merits.
It does not affect the owner’s control over management.
Interest is treated as an expense, so it can be charged against income and amount of tax
payable thereby reduced.
The amount of borrowing and its timing can be adjusted according to convenience and needs,
and
It involves a fixed rate of interest to be paid even when profits are very high, thus owners
may enjoy a much higher rate of return on investment then the lenders.
Limitations:
There are certain limitations, too in case of borrowed capacity. Payment of interest and
repayment of loans cannot be avoided even if there is a loss. Default in meeting these
obligations may create problems for the business and result in decline of its credit worthiness.
Continuing default may even lead to insolvency of firm.
Secondly, it requires adequate security to be offered against loans. Moreover, high rates of
interest may be charged if the firm’s ability to repay the loan in uncertain.
Source of Company Finance
Based upon the time, the financial resources may be classified into (1) sources of long term
(2) sources of short – term finance. Some of these sources also serve the purpose of medium
– term finance.
I. The source of long – term finance is:
 Own capital
 shares
1) preference share capital …
a) Cumulative preference share
b) Non-Cumulative preference share
37
c) participative preference share
d) Redeemable preference share
e) Non-Redeemable preference share
2) Equity share capital
 debentures
a) Convertible debentures
b) Non Convertible debentures
c) Partly Convertible debentures
d) Secured debentures
e) Partly secured debentures
f) Un secured debentures
 Loan from financial institutions
 Retained profits and
 Government grants and loans
III. Sources of Meduim -term Finance are
 Bank loan
 Hire purchase
 Leasing or renting
 Venture capital
III. Sources of Short-term Finance are:

 Trade credit
 Bank loans and advances and
 Short-term loans from finance companies.
 Lease finance
 Hire purchase
 Factoring services
I.Sources of Long Term Finance

Issue of Shares: The amount of capital decided to be raised from members of the public is
divided into units of equal value. These units are known as share and the aggregate values of
shares are known as share capital of the company. Those who subscribe to the share capital
become members of the company and are called shareholders. They are the owners of the
company. Hence shares are also described as ownership securities.
Issue of Preference Shares: Preference share have three distinct characteristics. Preference
shareholders have the right to claim dividend at a fixed rate, which is decided according to
the terms of issue of shares. Moreover, the preference dividend is to be paid first out of the
38
net profit. The balance, it any, can be distributed among other shareholders that is, equity
shareholders. However, payment of dividend is not legally compulsory. Only when dividend
is declared, preference shareholders have a prior claim over equity shareholders.
Preference shareholders also have the preferential right of claiming repayment of capital in
the event of winding up of the company. Preference capital has to be repaid out of assets after
meeting the loan obligations and claims of creditors but before any amount is repaid to equity
shareholders.
Holders of preference shares enjoy certain privileges, which cannot be claimed by the equity
shareholders. That is why; they cannot directly take part in matters, which may be discussed
at the general meeting of shareholders, or in the election of directors.
Depending upon the terms of conditions of issue, different types of preference shares may be
issued by a company to raises funds. Preference shares may be issued as:
Cumulative or Non-cumulative
Participating or Non-participating
Redeemable or Non-redeemable, or as
Convertible or non-convertible preference shares.
In the case of cumulative preference shares, the dividend unpaid if any in previous years gets
accumulated until that is paid. No cumulative preference shares have any such provision.
Participatory shareholders are entitled to a further share in the surplus profits after a
reasonable divided has been paid to equity shareholders. Non-participating preference shares
do not enjoy such right. Redeemable preference shares are those, which are repaid after a
specified period, where as the irredeemable preference shares are not repaid. However, the
company can also redeem these shares after a specified period by giving notice as per the
terms of issue. Convertible preference shows are those, which are entitled to be converted
into equity shares after a specified period.
Merits:
Many companies due to the following reasons prefer issue of preference shares as a source of
finance.
It helps to enlarge the sources of funds.
Some financial institutions and individuals prefer to invest in preference shares due to the
assurance of a fixed return.
Dividend is payable only when there are profits.
If does not affect the equity shareholders’ control over management
Limitations:
The limitations of preference shares relates to some of its main features:
Dividend paid cannot be charged to the company’s income as an expense; hence there is no
tax saving as in the case of interest on loans.
Even through payment of dividend is not legally compulsory, if it is not paid or arrears
accumulate there is an adverse effect on the company’s credit.
Issue of preference share does not attract many investors, as the return is generally limited
and not exceed the rates of interest on loan. On the other than, there is a risk of no dividend
being paid in the event of falling income.
1. Issue of Equity Shares: The most important source of raising long-term capital for a
company is the issue of equity shares. In the case of equity shares there is no promise to
shareholders a fixed dividend. But if the company is successful and the level profits are high,
equity shareholders enjoy very high returns on their investment. This feature is very attractive
to many investors even though they run the risk of having no return if the profits are
inadequate or there is loss. They have the right of control over the management of the
company and their liability is limited to the value of shares held by them.
39
From the above it can be said that equity shares have three distinct characteristics:
The holders of equity shares are the primary risk bearers. It is the issue of equity shares that
mainly provides ‘risk capital’, unlike borrowed capital. Even compared with preference
capital, equity shareholders are to bear ultimate risk.
Equity shares enable much higher return sot be earned by shareholders during prosperity
because after meeting the preference dividend and interest on borrowed capital at a fixed rate,
the entire surplus of profit goes to equity shareholders only.
Holders of equity shares have the right of control over the company. Directors are elected on
the vote of equity shareholders.
Merits:
From the company’ point of view; there are several merits of issuing equity shares to raise
long-term finance.
It is a source of permanent capital without any commitment of a fixed return to the
shareholders. The return on capital depends ultimately on the profitability of business.
It facilities a higher rate of return to be earned with the help borrowed funds. This is possible
due to two reasons. Loans carry a relatively lower rate of interest than the average rate of
return on total capital. Secondly, there is tax saving as interest paid can be charged to income
as a expense before tax calculation.
Assets are not required to give as security for raising equity capital. Thus additional funds can
be raised as loan against the security of assets.
Limitations:
Although there are several advantages of issuing equity shares to raise long-term capital there
are few limitations.
The risks of fluctuating returns due to changes in the level of earnings of the company do not
attract many people to subscribe to equity capital.
The value of shares in the market also fluctuate with changes in business conditions, this is
another risk, which many investors want to avoid.
2. Issue of Debentures:
When a company decides to raise loans from the public, the amount of loan is divided into
units of equal. These units are known as debentures. A debenture is the instrument or
certificate issued by a company to acknowledge its debt. Those who invest money in
debentures are known as ‘debenture holders’. They are creditors of the company. Debentures
are therefore called ‘creditor ship’ securities. The value of each debentures is generally fixed
in multiplies of 10 like Rs. 100 or Rs. 500, or Rs. 1000.
Debentures carry a fixed rate of interest, and generally are repayable after a certain period,
which is specified at the time of issue. Depending upon the terms and conditions of issue
there are different types of debentures. There are:
Secured or unsecured Debentures and
Convertible of Non convertible Debentures.
It debentures are issued on the security of all or some specific assets of the company, they are
known as secured debentures. The assets are mortgaged in favor of the debenture holders.
Debentures, which are not secured by a charge or mortgage of any assets, are called
unsecured debentures. The holders of these debentures are treated as ordinary creditors.
Sometimes under the terms of issue debenture holders are given an option to convert their
debentures into equity shares after a specified period. Or the terms of issue may lay down that
the whole or part of the debentures will be automatically converted into equity shares of a
specified price after a certain period. Such debentures are known as convertible debentures. If
40
there is no mention of conversion at the time of issue, the debentures are regarded as non-
convertible debentures.
Merits:
Debentures issue is a widely used method of raising long-term finance by companies, due to
the following reasons.
Interest payable on Debentures can be fixed at low rates than rate of return on equity shares.
Thus Debentures issue is a cheaper source of finance.
Interest paid can be deducted from income tax purpose; there by the amount of tax payable is
reduced.
Funds raised for the issue of debentures may be used in business to earn a much higher rate of
return then the rate of interest. As a result the equity shareholders earn more.
Another advantage of debenture issue is that funds are available from investors who are not
entitled to have any control over the management of the company.
Companies often find it convenient to raise debenture capital from financial institutions,
which prefer to invest in debentures rather than in shares. This is due to the assurance of a
fixed return and repayment after a specified period.
Limitations:
Debenture issue as a source of finance has certain limitations too.
It involves a fixed commitment to pay interest regularly even when the company has low
earnings or incurring losses.
Debentures issue may not be possible beyond a certain limit due to the inadequacy of assets
to be offered as security.
Methods of Issuing Securities: The firm after deciding the amount to be raised and the type of
securities to be issued, must adopt suitable methods to offer the securities to potential
investors. There are for common methods followed by companies for the purpose.
When securities are offered to the general public a document known as Prospectus, or a
notice, circular or advertisement is issued inviting the public to subscribe to the securities
offered thereby all particulars about the company and the securities offered are made to the
public. Brokers are appointed and one or more banks are authorized to collect subscription.
Sometimes the entire issue is subscribed by an organization known as Issue House, which in
turn sells the securities to the public at a suitable time.
The company may negotiate with large investors of financial institutions who agree to take
over the securities. This is known as ‘Private Placement’ of securities.
When an existing company decides to raise funds by issue of equity shares, it is required
under law to offer the new shares to the existing shareholders. This is described as right issue
of equity shares. But if the existing shareholders decline, the new shares can be offered to the
public.
3. Loans from financial Institutions:
Government with the main object of promoting industrial development has set up a number
of financial institutions. These institutions play an important role as sources of company
finance. Besides they also assist companies to raise funds from other sources.
These institutions provide medium and long-term finance to industrial enterprises at a reason
able rate of interest. Thus companies may obtain direct loan from the financial institutions for
expansion or modernization of existing manufacturing units or for starting a new unit.
Often, the financial institutions subscribe to the industrial debenture issue of companies some
of the institutions (ICICI) and (IDBI) also subscribe to the share issued by companies.
All such institutions also underwrite the public issue of shares and debentures by companies.
Underwriting is an agreement to take over the securities to the extent there is no public
response to the issue. They may guarantee loans, which may be raised by companies from
other sources.
41
Loans in foreign currency may also be granted for the import of machinery and equipment
wherever necessary from these institutions, which stand guarantee for re-payments. Apart
from the national level institutions mentioned above, there are a number of similar
institutions set up in different states of India. The state-level financial institutions are known
as State Financial Corporation, State Industrial Development Corporations, State Industrial
Investment Corporation and the like. The objectives of these institutions are similar to those
of the national-level institutions. But they are mainly concerned with the development of
medium and small-scale industrial units. Thus, smaller companies depend on state level
institutions as a source of medium and long-term finance for the expansion and
modernization of their enterprise.
4. Retained Profits:
Successful companies do not distribute the whole of their profits as dividend to shareholders
but reinvest a part of the profits. The amount of profit reinvested in the business of a
company is known as retained profit. It is shown as reserve in the accounts. The surplus
profits retained and reinvested may be regarded as an internal source of finance. Hence, this
method of financing is known as self-financing. It is also called sloughing back of profits.
Since profits belong to the shareholders, the amount of retained profit is treated as ownership
fund. It serves the purpose of medium and long-term finance. The total amount of ownership
capital of a company can be determined by adding the share capital and accumulated
reserves.
Merits:
This source of finance is considered to be better than other sources for the following reasons.
As an internal source, it is more dependable than external sources. It is not necessary to
consider investor’s preference.
Use of retained profit does not involve any cost to be incurred for raising the funds. Expenses
on prospectus, advertising, etc, can be avoided.
There is no fixed commitment to pay dividend on the profits reinvested. It is a part of risk
capital like equity share capital.
Control over the management of the company remains unaffected, as there is no addition to
the number of shareholder.
It does not require the security of assets, which can be used for raising additional funds in the
form of loan.
Limitations:
However, there are certain limitations on the part of retained profit.
Only well established companies can be avail of this sources of finance. Even for such
companies retained profits cannot be used to an unlimited extent.
Accumulation of reserves often attract competition in the market,
With the increased earnings, shareholders expect a high rate of dividend to be paid.
Growth of companies through internal financing may attract government restrictions as it
leads to concentration of economic power.
5. Public Deposits:
An important source of medium – term finance which companies make use of is public
deposits. This requires advertisement to be issued inviting the general public of deposits. This
requires advertisement to be issued inviting the general public to deposit their savings with
the company. The period of deposit may extend up to three years. The rate of interest offered
is generally higher than the interest on bank deposits. Against the deposit, the company
mentioning the amount, rate of interest, time of repayment and such other information issues
a receipt.
42
Since the public deposits are unsecured loans, profitable companies enjoying public
confidence only can be able to attract public deposits. Even for such companies there are
rules prescribed by government limited its use.
II.Sources of Short Term Finance
The major sources of short-term finance are discussed below:
Trade credit: Trade credit is a common source of short-term finance available to all
companies. It refers to the amount payable to the suppliers of raw materials, goods etc. after
an agreed period, which is generally less than a year. It is customary for all business firms to
allow credit facility to their customers in trade business. Thus, it is an automatic source of
finance. With the increase in production and corresponding purchases, the amount due to the
creditors also increases. Thereby part of the funds required for increased production is
financed by the creditors. The more important advantages of trade credit as a source of short-
term finance are the following:
It is readily available according to the prevailing customs. There are no special efforts to be
made to avail of it. Trade credit is a flexible source of finance. It can be easily adjusted to the
changing needs for purchases.
Where there is an open account for any creditor failure to pay the amounts on time due to
temporary difficulties does not involve any serious consequence Creditors often adjust the
time of payment in view of continued dealings. It is an economical source of finance.
However, the liability on account of trade credit cannot be neglected. Payment has to be made
regularly. If the company is required to accept a bill of exchange or to issue a promissory note
against the credit, payment must be made on the maturity of the bill or note. It is a legal
commitment and must be honored; otherwise legal action will follow to recover the dues.
Bank loans and advances: Money advanced or granted as loan by commercial banks is known
as bank credit. Companies generally secure bank credit to meet their current operating
expenses. The most common forms are cash credit and overdraft facilities. Under the cash
credit arrangement the maximum limit of credit is fixed in advance on the security of goods
and materials in stock or against the personal security of directors. The total amount drawn is
not to exceed the limit fixed. Interest is charged on the amount actually drawn and
outstanding. During the period of credit, the company can draw, repay and again draw
amounts within the maximum limit. In the case of overdraft, the company is allowed to
overdraw its current account up to the sanctioned limit. This facility is also allowed either
against personal security or the security of assets. Interest is charged on the amount actually
overdrawn, not on the sanctioned limit.
The advantage of bank credit as a source of short-term finance is that the amount can be
adjusted according to the changing needs of finance. The rate of interest on bank credit is
fairly high. But the burden is no excessive because it is used for short periods and is
compensated by profitable use of the funds.
Commercial banks also advance money by discounting bills of exchange. A company having
sold goods on credit may draw bills of exchange on the customers for their acceptance. A bill
is an order in writing requiring the customer to pay the specified amount after a certain period
(say 60 days or 90 days). After acceptance of the bill, the company can drawn the amount as
an advance from many commercial banks on payment of a discount. The amount of discount,
which is equal to the interest for the period of the bill, and the balance, is available to the
company. Bill discounting is thus another source of short-term finance available from the
commercial banks.Short term loans from finance companies: Short-term funds may be
available from finance companies on the security of assets. Some finance companies also
provide funds according to the value of bills receivable or amount due from the customers of
the borrowing company, which they take over.
NON-CONVENTIONAL SOURCE OF FINANCE
43
Non Conventional sources of finance
Entrepreneurs can turn to a variety of sources to finance the establishment or expansion of
their businesses. Common sources of business capital include personal savings, loans from
friends and relatives, loans from financial institutions such as banks or credit unions, loans
from commercial finance companies, assistance from venture capital firms or investment
clubs, loans from the Small Business Administration and other government agencies, and
personal or corporate credit cards. But for some businesspeople, these sources of financing
are either unavailable, or available with restrictions or provisions that are either impossible
for the company to meet or deemed excessive by the business owner. In such instances, the
capital-hungry entrepreneur has the option of pursuing a number of nontraditional financing
sources to secure the money that his or her company needs. Some of the more common
nontraditional financing sources include selling assets, borrowing against the cash value of a
life insurance policy, and taking out a second mortgage on a home or other property.
Selling Assets
Some entrepreneurs choose to sell some of their personal or business assets in order to
finance the opening or continued existence of their enterprises. Generally, business owners
who have already established the viability of their firms and are looking to expand their
operations do not have to take this sometimes dramatic course of action, since their records
will often allow them to secure capital from other sources, either private or public. Whether
selling personal or business assets, the small business owner should take a rational approach.
Some entrepreneurs, desperate to secure money, end up selling business assets that are
important to basic business operations. In such instances, the entrepreneur may end up
accelerating rather than halting the demise of his or her business. Only nonessential
equipment and inventory should be sold. Similarly, care should be taken in the selling of
personal assets. Items like boats, antiques, etc. can fetch a decent price. But before embarking
on this course of action, the entrepreneur should objectively study whether the resulting
income will be sufficient, or whether the enterprise's financial straits are an indication of
fundamental flaws.
Borrowing Against the Cash Value of Your Life Insurance
Entrepreneurs who have a whole life policy have the option of borrowing against the policy
(this is not an option for holders of term insurance). This can be an effective means of
securing capital provided that the owner has held the policy for several years, thus giving it
some cash value. Insurers may let policyholders borrow as much as 90 percent of the value of
the policy. As long as the policyholder continues to meet his or her premium payment
obligations, the policy will remain intact. Interest rates on such loans are generally not
outrageous, but if the policyholder dies during the period in which he or she has a loan on the
policy, benefits are usually dramatically reduced.
Second Mortgage
Some entrepreneurs secure financing by taking out a second mortgage on their home. This
risky alternative does provide the homeowner with a couple of advantages: interest on the
mortgage is tax deductible and is usually lower than what he or she would pay with a credit
card or an unsecured loan. But if the business ultimately fails, this method of financing could
result in the loss of your home. Using a second mortgage as a vehicle for financing a
company is very risky and is best for people who want to borrow all the money they need at
one time and secure fixed, equal payments.
Other Possible Sources of Financing
Some entrepreneurs obtain financing for growth and expansion through franchising or
licensing. Basically, they get money by selling the rights to a unique business or product to
other companies. Other small business owners are able to form alliances or partnerships with
other firms that have a vested interest in their success, such as customers, suppliers, or
44
distributors. These business owners may obtain funds from their partners through cooperative
work agreements, barter arrangements, or trade credit. The Internet provides another potential
source of leads for loans from nontraditional sources. For example, America's Business
Funding Directory, at http://www.businessfinance.com, includes a searchable database of
nontraditional funding sources.
Experts recommend using nontraditional financing to start a business or provide funds during
periods of rapid growth, but emphasize that small business owners should consider it a
temporary arrangement. The use of nontraditional financing is a last resort move and a
business owner should make every effort possible to limit the time frame during which such
financing is used.
Lease finance: A finance lease is a way of providing finance – effectively a leasing company
(the lessor or owner) buys the asset for the user (usually called the hirer or lessee) and rents it
to them for an agreed period.
Hire purchase: A hire purchase known as installment plan in North America, is an
arrangement whereby a customer agrees to a contract to acquire an asset by paying an initial
installment (e.g. 40% of the total) and repays the balance of the price of the asset plus interest
over a period of time.
Factoring services: Factoring is a financial transaction and a type of debtor finance in which a
business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a
discount. A business will sometimes factor its receivable assets to meet its present and
immediate cash needs.
1.4 ECONOMICS:
1. Study of Economics helps to conquer poverty
Economics studies the, vital question of satisfying human wants with scarce resources. The
present day poverty and the poor standard of living of the people of many backward countries
are due to poor resources, little production and lack of technology. The knowledge of
economics is essential to eradicate poverty of a nation and to raise their living standards.
2. Economics teaches the knowledge of economic systems
The knowledge of the subject tells how the complex forces work in the economic systems. It
explains the relationship between the producer and consumer, the labor and the management
etc. It explains how the action in one sector affects the other sector. Without the knowledge of
the working of the economic systems, administration will not be effective and it may even be
impossible.
3. Economics teaches modern methods of production
In practical life, the subject helps the businessmen, the industrialist and the banker as well as
the labor leader. It gives the businessmen and industrialists the knowledge of modern
methods of production and production at low cost.
4. Study of Economics helps in proper budgeting
Economics is useful to the householder. With the knowledge of economics, the householder is
able to utilize his little income to get the maximum satisfaction for his family by proper
budgeting and careful spending. This increases the happiness of the family.
5. Study of Economics helps to increase national wealth
By studying economics, we can discover new factors that may lead to increase the national
wealth. Modern governments are actively engaged in economic Planning. The purpose of
planning is to remove poverty by increasing the national income and wealth and also by
effectively distributing the wealth. Without the knowledge of economics, this is absolutely
impossible.
6. Study of Economics helps to formulate budget
45
The knowledge of economics is very essential for the Finance Minister; It helps in framing
the just system of taxation. It helps in formulating the budget for development and for
removing unemployment. Supply of money, effective credit system, efficient working of the
banking system can be had in the country only by having a thorough knowledge of
economics by the people who administer these sectors.
7. Study of Economics helps to frame law
The knowledge of economics is very essential for the legislators and parliamentarians. They
will be able to frame laws effectively only by having knowledge of the subject. As citizens
and voters and people, electing the representatives, the knowledge of economics will be much
helpful. It will help the people to understand many economic programmers presented by the
political parties in their ‘Election Manifesto’. The people can wisely judge the truth of the
statements in the Manifesto.
Economics is not a bundle of theories and principles. It is a practical social science. The study
of the subject is not undertaken merely for the sake of knowledge. It is done to lay down
principles and policies for removing poverty and increasing human welfare.
MICRO AND MACRO ECONOMICS CONCEPTS:
Micro economics is the study of an economic behavior of a particular individual, firm, or
household, i.e. it studies a particular unit. On the other hand, macro economics is the study of
the economy as a whole i.e., not a single unit but the combination of all, firms, households,
nation, etc.
BASIS FOR
MICROECONOMICS MACROECONOMICS
COMPARISON
Meaning The branch of economics that The branch of economics that

studies the behavior of an studies the behavior of the whole
individual consumer, firm, economy, (both national and
family is known as international) is known as
Microeconomics. Macroeconomics.
Deals with Individual economic variables Aggregate economic variables
Business Applied to operational or Environment and external issues

Application internal issues
Scope Covers various issues like Covers various issues like,

demand, supply, product national income, general price
pricing, factor pricing, level, distribution, employment,
production, consumption, money etc.
economic welfare, etc.
Importance Helpful in determining the Maintains stability in the general

prices of a product along with price level and resolves the
the prices of factors of major problems of the economy
production (land, labor, like inflation, deflation, reflation,
capital, entrepreneur etc.) unemployment and poverty as a
within the economy. whole.
Limitations It is based on unrealistic It has been analyzed that 'Fallacy

assumptions, i.e. In of Composition' involves, which
microeconomics it is assumed sometimes doesn't proves true
46
BASIS FOR
MICROECONOMICS MACROECONOMICS
COMPARISON
that there is a full because it is possible that what is

employment in the society true for aggregate may not be
which is not at all possible. true for individuals too.
SIGNIFICANCE OF ECONOMICS
National Income
National Income is the total value of all final goods and services produced by the country in
certain year. The growth of National Income helps to know the progress of the country.
• In other words, the total amount of income accruing to a country from economic activities
in a year’s time is known as national income. It includes payments made to all resources in
the form of wages, interest, rent and profits.
• From the modern point of view, national income is defined as “the net output of
commodities and services flowing during the year from the country’s productive system in
the hands of the ultimate consumers.”
47
National Income Accounting (NIA)

National Income Accounting is a method or technique used to measure the economic activity
in the national economy as a whole.
NIA is mainly done for:
• Policy Formulation: It helps in comparing the estimates of the past from the future and also
forecast the growth rates in future. For example, if a country has a GDP of Rs. 103 Lakh
which is 3 Lakh rupees higher than the last year, it has a growth rate of 3 per cent.
• Effective Decision Making: To estimate the contribution of each of the sectors of the
economy. It helps the business to plan for production.
• International Economic Comparison: It helps in comparing the level of development of
countries and provides useful insight into how well an economy is functioning, and where
money is being generated and spent. One can compare the standard of living of different
nations and its growth rate.
There are various terms associated with measuring of National Income.
A. GDP (GROSS DOMESTIC PRODUCT)

• Here the catch word is ‘Domestic’ which refers to ‘Geographical Area’
• The total value of all final goods and services produced within the boundary of the country
during a given period of time (generally one year) is called as GDP.
• In this case, the final produce of resident citizens as well as foreign nationals who reside
within that geographical boundary is considered.
48
Types of GDP: Real GDP and Nominal GDP
• Real GDP: Refers to the current year production of goods and services valued at base year
prices. Such base year prices are Constant Prices.
• Nominal GDP: Refers to current year production of final goods and services valued at
current year prices.
Which one is a better measure?
• Real GDP is a better measure to calculate the GDP because in a particular year GDP may be
inflated because of high rate of inflation in the economy.
• Real GDP therefore allows us to determine if production increased or decreased, regardless
of changes in the inflation and purchasing power of the currency.
B. GROSS NATIONAL PRODUCT (GNP)

• Here the catch word is ‘National’ which refers to all the citizens of a country.
• GNP is the total value of the total production or final goods and services produced by the
nationals of a country during a given period of time (generally one year).
• In this case, the income of all the resident and non-resident citizens (who resides in abroad)
of a country in included whereas, the income of foreigners who reside within India is
excluded.
• The GNP contains the income earned by Indian Nationals (both in Indian Territory and
Abroad) only.
GDP and GNP are measured on the basis of Market Price and Factor Cost.
a) Market Price
it refers to the actual transacted price which includes indirect taxes such as custom duty,
excise duty, sales tax, service tax etc. (impending Goods and Services Tax). These taxes tend
to raise the prices of the goods in an economy.
b) Factor Cost
it is the cost of factors of production i.e. rent for land interest for capital, wages for labour
and profit for entrepreneurship. This is equal to revenue price of the final goods and services
sold by the producers.
Revenue Price (or Factor Cost) = Market Price – Net Indirect Taxes
49
Net Indirect Taxes = Indirect Taxes – Subsidies
Hence, Factor Cost = Market Price – Indirect Taxes + Subsidies
C. Net National Product (NNP): NNP = GNP – Depreciation
• It is calculated by subtracting Depreciation from Gross National Product.
• Depreciation – Wear and Tear of goods produced.
• This deduction is done because a part of current produce goes to replace the depreciated
parts of the products already produced. This part does not add value to current year’s total
produce. It is used to keep the products already produced intact and hence it is deducted.
D. Net Domestic Product (NDP): NDP = GDP – Depreciation
• It is the calculated GDP after adjusting the value of depreciation. This is basically, Net form
of GDP, i.e. GDP – total value of wear and tear.
• NDP of an economy is always lower than its GDP, since their depreciation can never be
reduced to zero. The concept of NDP and NNP are not used to compare different economies
because the method of calculating depreciation varies from country to country.
INFLATION:
In economics, inflation is a sustained increase in the general price level of goods and services
in an economy over a period of time. When the general price level rises, each unit of currency
buys fewer goods and services; consequently, inflation reflects a reduction in the purchasing
power per unit of money – a loss of real value in the medium of exchange and unit of account
within the economy A chief measure of price inflation is the inflation rate, the annualized
percentage change in a general price index, usually the consumer price index, over time. The
opposite of inflation is deflation (negative inflation rate).
MONEY SUPPLY IN INFLATION:
Supplying the money in the market is the sole responsibility of the central bank of the country
(Reserve Bank of India in case of India). RBI prints the currency and supplies money in the
economy. Coins are minted by the Ministry of Finance but circulated by the RBI in the whole
country. Supply of money decides the rate of inflation in the economy. If supply of money
increases in the economy then inflation starts rising and vice versa.
How Does Money Supply Affect Inflation?
Inflation can happen if the money supply grows faster than the economic output under
otherwise normal economic circumstances. Inflation, or the rate at which the average price of
goods or serves increases over time, can also be affected by factors beyond money supply.
The theory most discussed when looking at the link between inflation and money supply is
the quantity theory of money (QTM), but there are other theories that challenge it.
Quantity Theory
The quantity theory of money proposes that the exchange value of money is determined like
any other good, with supply and demand. The basic equation for the quantity theory is
called The Fisher Equation because it was developed by American economist Irving Fisher.
In it's simplest form, it looks like this:
(M)(V)=(P)(T)
Where: M=Money Supply
V=Velocity of circulation (the number of times money changes hands)
P=Average Price Level
T=Volume of transactions of goods and services
Some variants of the quantity theory propose that inflation and deflation occur
proportionately to increases or decreases in the supply of money. Empirical evidence has not
demonstrated this, and most economists do not hold this view.
A more nuanced version of the quantity theory adds two caveats:
1. New money has to actually circulate in the economy to cause inflation.
50
2. Inflation is relative—not absolute.
In other words, prices tend to be higher than they otherwise would have been if more dollar
bills are involved in economic transactions.
The link between Money Supply and Inflation is Increasing the money supply faster than the
growth in real output will cause inflation. The reason is that there is more money chasing the
same number of goods. Therefore, the increase in monetary demand causes firms to put up
prices.
1.5 BUSINESS CYCLE
Business cycles are characterized by boom in one period and collapse in the subsequent
period in the economic activities of a country.
These fluctuations in the economic activities are termed as phases of business cycles.
The fluctuations are compared with ebb and flow. The upward and downward fluctuations in
the cumulative economic magnitudes of a country show variations in different economic
activities in terms of production, investment, employment, credits, prices, and wages. Such
changes represent different phases of business cycles.
ADVERTISEMENTS:
The different phases of business cycles are shown in Figure-1:
There are basically two important phases in a business cycle that are prosperity and
depression. The other phases that are expansion, peak, trough and recovery are intermediary
phases.
Figure-2 shows the graphical representation of different phases of a business cycle:
As shown in Figure-2, the steady growth line represents the growth of economy when there
are no business cycles. On the other hand, the line of cycle shows the business cycles that
move up and down the steady growth line. The different phases of a business cycle (as shown
in Figure-2) are explained below.
51
1. Expansion:
The line of cycle that moves above the steady growth line represents the expansion phase of a
business cycle. In the expansion phase, there is an increase in various economic factors, such
as production, employment, output, wages, profits, demand and supply of products, and sales.
In addition to this in the expansion phase, the prices of factor of production and output
increases simultaneously. In this phase, debtors are generally in good financial condition to
repay their debts; therefore, creditors lend money at higher interest rates. This leads to an
increase in the flow of money.
In expansion phase, due to increase in investment opportunities, idle funds of organizations
or individuals are utilized for various investment purposes. Therefore, in such a case, the cash
inflow and outflow of businesses are equal. This expansion continues till the economic
conditions are favorable.
2. Peak:
The growth in the expansion phase eventually slows down and reaches to its peak. This phase
is known as peak phase. In other words, peak phase refers to the phase in which the increase
in growth rate of business cycle achieves its maximum limit. In peak phase, the economic
factors, such as production, profit, sales, and employment, are higher, but do not increase
further. In peak phase, there is a gradual decrease in the demand of various products due to
increase in the prices of input.
The increase in the prices of input leads to an increase in the prices of final products, while
the income of individuals remains constant. This also leads consumers to restructure their
monthly budget. As a result, the demand for products, such as jewellery, homes, automobiles,
refrigerators and other durables, starts falling.
3. Recession:
As discussed earlier, in peak phase, there is a gradual decrease in the demand of various
products due to increase in the prices of input. When the decline in the demand of products
becomes rapid and steady, the recession phase takes place.
In recession phase, all the economic factors, such as production, prices, saving and
investment, starts decreasing. Generally, producers are unaware of decrease in the demand of
products and they continue to produce goods and services. In such a case, the supply of
products exceeds the demand.
Over the time, producers realize the surplus of supply when the cost of manufacturing of a
product is more than profit generated. This condition firstly experienced by few industries
and slowly spread to all industries.
This situation is firstly considered as a small fluctuation in the market, but as the problem
exists for a longer duration, producers start noticing it. Consequently, producers avoid any
type of further investment in factor of production, such as labor, machinery, and furniture.
This leads to the reduction in the prices of factor, which results in the decline of demand of
inputs as well as output.
4. Trough:
During the trough phase, the economic activities of a country decline below the normal level.
In this phase, the growth rate of an economy becomes negative. In addition, in trough phase,
there is a rapid decline in national income and expenditure.
In this phase, it becomes difficult for debtors to pay off their debts. As a result, the rate of
interest decreases; therefore, banks do not prefer to lend money. Consequently, banks face the
situation of increase in their cash balances.
Apart from this, the level of economic output of a country becomes low and unemployment
becomes high. In addition, in trough phase, investors do not invest in stock markets. In trough
phase, many weak organizations leave industries or rather dissolve. At this point, an economy
reaches to the lowest level of shrinking.
52
5. Recovery:
As discussed above, in trough phase, an economy reaches to the lowest level of shrinking.
This lowest level is the limit to which an economy shrinks. Once the economy touches the
lowest level, it happens to be the end of negativism and beginning of positivism.
This leads to reversal of the process of business cycle. As a result, individuals and
organizations start developing a positive attitude toward the various economic factors, such as
investment, employment, and production. This process of reversal starts from the labor
market.
Consequently, organizations discontinue laying off individuals and start hiring but in limited
number. At this stage, wages provided by organizations to individuals is less as compared to
their skills and abilities. This marks the beginning of the recovery phase.
In recovery phase, consumers increase their rate of consumption, as they assume that there
would be no further reduction in the prices of products. As a result, the demand for consumer
products increases.
In addition in recovery phase, bankers start utilizing their accumulated cash balances by
declining the lending rate and increasing investment in various securities and bonds.
Similarly, adopting a positive approach other private investors also start investing in the stock
market As a result, security prices increase and rate of interest decreases.
Price mechanism plays a very important role in the recovery phase of economy. As discussed
earlier, during recession the rate at which the price of factor of production falls is greater than
the rate of reduction in the prices of final products.
Therefore producers are always able to earn a certain amount of profit, which increases at
trough stage. The increase in profit also continues in the recovery phase. Apart from this, in
recovery phase, some of the depreciated capital goods are replaced by producers and some
are maintained by them. As a result, investment and employment by organizations increases.
As this process gains momentum an economy again enters into the phase of expansion. Thus,
a business cycle gets completed.
Introduction to Economics
Economics is a study of human activity both at individual and national level. The economists
of early age treated economics merely as the science of wealth. The reason for this is clear.
Every one of us in involved in efforts aimed at earning money and spending this money to
satisfy our wants such as food, Clothing, shelter, and others. Such activities of earning and
spending money are called “Economic activities”. It was only during the eighteenth century
that Adam Smith, the Father of Economics, defined economics as the study of nature and uses
of national wealth’.
Dr. Alfred Marshall, one of the greatest economists of the nineteenth century, writes
“Economics is a study of man’s actions in the ordinary business of life: it enquires how he
gets his income and how he uses it”. Thus, it is one side, a study of wealth; and on the other,
and more important side; it is the study of man. As Marshall observed, the chief aim of
economics is to promote ‘human welfare’, but not wealth. The definition given by AC Pigou
endorses the opinion of Marshall. Pigou defines Economics as “the study of economic
welfare that can be brought directly and indirectly, into relationship with the measuring rod of
money”.
Prof. Lionel Robbins defined Economics as “the science, which studies human behavior as a
relationship between ends and scarce means which have alternative uses”. With this, the
focus of economics shifted from ‘wealth’ to human behavior’.
Lord Keynes defined economics as ‘the study of the administration of scarce means and the
determinants of employments and income”.
Microeconomics
53
The study of an individual consumer or a firm is called microeconomics (also called the
Theory of Firm). Micro means ‘one millionth’. Microeconomics deals with behavior and
problems of single individual and of micro organization. Managerial economics has its roots
in microeconomics and it deals with the micro or individual enterprises. It is concerned with
the application of the concepts such as price theory, Law of Demand and theories of market
structure and so on.
Macroeconomics
The study of ‘aggregate’ or total level of economic activity in a country is called
macroeconomics. It studies the flow of economics resources or factors of production (such as
land, labour, capital, organization and technology) from the resource owner to the business
firms and then from the business firms to the households. It deals with total aggregates, for
instance, total national income total employment, output and total investment. It studies the
interrelations among various aggregates and examines their nature and behavior, their
determination and causes of fluctuations in the. It deals with the price level in general, instead
of studying the prices of individual commodities. It is concerned with the level of
employment in the economy. It discusses aggregate consumption, aggregate investment, price
level, and payment, theories of employment, and so on.
Though macroeconomics provides the necessary framework in term of government policies
etc., for the firm to act upon dealing with analysis of business conditions, it has less direct
relevance in the study of theory of firm.
Management
Management is the science and art of getting things done through people in formally
organized groups. It is necessary that every organization be well managed to enable it to
achieve its desired goals. Management includes a number of functions: Planning, organizing,
staffing, directing, and controlling. The manager while directing the efforts of his staff
communicates to them the goals, objectives, policies, and procedures; coordinates their
efforts; motivates them to sustain their enthusiasm; and leads them to achieve the corporate
goals.
Welfare Economics
Welfare economics is that branch of economics, which primarily deals with taking of poverty,
famine and distribution of wealth in an economy. This is also called Development
Economics. The central focus of welfare economics is to assess how well things are going for
the members of the society. If certain things have gone terribly bad in some situation, it is
necessary to explain why things have gone wrong. Prof. Amartya Sen was awarded the Nobel
Prize in Economics in 1998 in recognition of his contributions to welfare economics. Prof.
Sen gained recognition for his studies of the 1974 famine in Bangladesh. His work has
challenged the common view that food shortage is the major cause of famine.
In the words of Prof. Sen, famines can occur even when the food supply is high but people
cannot buy the food because they don’t have money. There has never been a famine in a
democratic country because leaders of those nations are spurred into action by politics and
free media. In undemocratic countries, the rulers are unaffected by famine and there is no one
to hold them accountable, even when millions die.
Welfare economics takes care of what managerial economics tends to ignore. In other words,
the growth for an economic growth with societal up liftmen is countered productive. In times
of crisis, what comes to the rescue of people is their won literacy, public health facilities, a
system of food distribution, stable democracy, social safety, (that is, systems or policies that
take care of people when things go wrong for one reason or other).
Business Economics
Introduction
54
Managerial Economics as a subject gained popularity in USA after the publication of the
book “Managerial Economics” by Joel Dean in 1951.
Managerial Economics refers to the firm’s decision making process. It could be also
interpreted as “Economics of Management” or “Economics of Management”. Managerial
Economics is also called as “Industrial Economics” or “Business Economics”.
As Joel Dean observes managerial economics shows how economic analysis can be used in
formulating polices.
Meaning & Definition:
In the words of E. F. Brigham and J. L. Pappas Managerial Economics is “the applications of
economics theory and methodology to business administration practice”.
Managerial Economics bridges the gap between traditional economics theory and real
business practices in two days. First it provides a number of tools and techniques to enable
the manager to become more competent to take decisions in real and practical situations.
Secondly it serves as an integrating course to show the interaction between various areas in
which the firm operates.
C. I. Savage & T. R. Small therefore believes that managerial economics “is concerned with
business efficiency”.
M. H. Spencer and Louis Siegelman explain the “Managerial Economics is the integration of
economic theory with business practice for the purpose of facilitating decision making and
forward planning by management”.
It is clear, therefore, that managerial economics deals with economic aspects of managerial
decisions of with those managerial decisions, which have an economics contest. Managerial
economics may therefore, be defined as a body of knowledge, techniques and practices which
give substance to those economic concepts which are useful in deciding the business strategy
of a unit of management.
Managerial economics is designed to provide a rigorous treatment of those aspects of
economic theory and analysis that are most use for managerial decision analysis says J. L.
Pappas and E. F. Brigham.
Managerial Economics, therefore, focuses on those tools and techniques, which are useful in
decision-making.
Nature of Business Economics
Managerial economics is, perhaps, the youngest of all the social sciences. Since it originates
from Economics, it has the basis features of economics, such as assuming that other things
remaining the same (or the Latin equivalent ceteris paribus). This assumption is made to
simplify the complexity of the managerial phenomenon under study in a dynamic business
environment so many things are changing simultaneously. This set a limitation that we cannot
really hold other things remaining the same. In such a case, the observations made out of such
a study will have a limited purpose or value. Managerial economics also has inherited this
problem from economics.
Further, it is assumed that the firm or the buyer acts in a rational manner (which normally
does not happen). The buyer is carried away by the advertisements, brand loyalties,
incentives and so on, and, therefore, the innate behaviour of the consumer will be rational is
not a realistic assumption. Unfortunately, there are no other alternatives to understand the
subject other than by making such assumptions. This is because the behaviour of a firm or a
consumer is a complex phenomenon.
The other features of managerial economics are explained as below:
Close to microeconomics: Managerial economics is concerned with finding the solutions for
different managerial problems of a particular firm. Thus, it is more close to microeconomics.
Operates against the backdrop of macroeconomics: The macroeconomics conditions of the
economy are also seen as limiting factors for the firm to operate. In other words, the
55
managerial economist has to be aware of the limits set by the macroeconomics conditions
such as government industrial policy, inflation and so on.
Normative statements: A normative statement usually includes or implies the words ‘ought’
or ‘should’. They reflect people’s moral attitudes and are expressions of what a team of
people ought to do. For instance, it deals with statements such as ‘Government of India
should open up the economy. Such statement are based on value judgments and express
views of what is ‘good’ or ‘bad’, ‘right’ or ‘ wrong’. One problem with normative statements
is that they cannot to verify by looking at the facts, because they mostly deal with the future.
Disagreements about such statements are usually settled by voting on them.
Prescriptive actions: Prescriptive action is goal oriented. Given a problem and the objectives
of the firm, it suggests the course of action from the available alternatives for optimal
solution. If does not merely mention the concept, it also explains whether the concept can be
applied in a given context on not. For instance, the fact that variable costs are marginal costs
can be used to judge the feasibility of an export order.
Applied in nature: ‘Models’ are built to reflect the real life complex business situations and
these models are of immense help to managers for decision-making. The different areas
where models are extensively used include inventory control, optimization, project
management etc. In managerial economics, we also employ case study methods to
conceptualize the problem, identify that alternative and determine the best course of action.
Offers scope to evaluate each alternative: Managerial economics provides an opportunity to
evaluate each alternative in terms of its costs and revenue. The managerial economist can
decide the better alternative to maximize the profits for the firm.
Interdisciplinary: The contents, tools and techniques of managerial economics are drawn
from different subjects such as economics, management, mathematics, statistics, accountancy,
psychology, organizational behavior, sociology and etc.
Assumptions and limitations: Every concept and theory of managerial economics is based on
certain assumption and as such their validity is not universal. Where there is change in
assumptions, the theory may not hold good at all.
Scope of business Economics:
The scope of managerial economics refers to its area of study. Managerial economics refers
to its area of study. Managerial economics, Provides management with a strategic planning
tool that can be used to get a clear perspective of the way the business world works and what
can be done to maintain profitability in an ever-changing environment. Managerial
economics is primarily concerned with the application of economic principles and theories to
five types of resource decisions made by all types of business organizations.
The selection of product or service to be produced.
The choice of production methods and resource combinations.
The determination of the best price and quantity combination
Promotional strategy and activities.
The selection of the location from which to produce and sell goods or service to consumer.
The production department, marketing and sales department and the finance department
usually handle these five types of decisions.
The scope of managerial economics covers two areas of decision making
Operational or Internal issues
Environmental or External issues
a. Operational issues:
Operational issues refer to those, which wise within the business organization and they are
under the control of the management. Those are:
Theory of demand and Demand Forecasting
Pricing and Competitive strategy
56
Production cost analysis
Resource allocation
Profit analysis
Capital or Investment analysis
Strategic planning
1. Demand Analyses and Forecasting:
A firm can survive only if it is able to the demand for its product at the right time, within the
right quantity. Understanding the basic concepts of demand is essential for demand
forecasting. Demand analysis should be a basic activity of the firm because many of the other
activities of the firms depend upon the outcome of the demand fore cost. Demand analysis
provides:
The basis for analyzing market influences on the firms; products and thus helps in the
adaptation to those influences.
Demand analysis also highlights for factors, which influence the demand for a product. This
helps to manipulate demand. Thus demand analysis studies not only the price elasticity but
also income elasticity, cross elasticity as well as the influence of advertising expenditure with
the advent of computers, demand forecasting has become an increasingly important function
of managerial economics.
2. Pricing and competitive strategy: Pricing decisions have been always within the preview of
managerial economics. Pricing policies are merely a subset of broader class of managerial
economic problems. Price theory helps to explain how prices are determined under different
types of market conditions. Competitions analysis includes the anticipation of the response of
competitions the firm’s pricing, advertising and marketing strategies. Product line pricing and
price forecasting occupy an important place here.
3. Production and cost analysis: Production analysis is in physical terms. While the cost
analysis is in monetary terms cost concepts and classifications, cost-out-put relationships,
economies and diseconomies of scale and production functions are some of the points
constituting cost and production analysis.
4. Resource Allocation: Managerial Economics is the traditional economic theory that is
concerned with the problem of optimum allocation of scarce resources. Marginal analysis is
applied to the problem of determining the level of output, which maximizes profit. In this
respect linear programming techniques has been used to solve optimization problems. In fact
lines programming is one of the most practical and powerful managerial decision making
tools currently available.
5. Profit analysis: Profit making is the major goal of firms. There are several constraints here
an account of competition from other products, changing input prices and changing business
environment hence in spite of careful planning, there is always certain risk involved.
Managerial economics deals with techniques of averting of minimizing risks. Profit theory
guides in the measurement and management of profit, in calculating the pure return on
capital, besides future profit planning.
6. Capital or investment analyses: Capital is the foundation of business. Lack of capital may
result in small size of operations. Availability of capital from various sources like equity
capital, institutional finance etc. may help to undertake large-scale operations. Hence efficient
allocation and management of capital is one of the most important tasks of the managers. The
major issues related to capital analysis are:
The choice of investment project
Evaluation of the efficiency of capital
Most efficient allocation of capital
Knowledge of capital theory can help very much in taking investment decisions. This
involves, capital budgeting, feasibility studies, analysis of cost of capital etc.
57
7. Strategic planning:
Strategic planning provides management with a framework on which long-term decisions can
be made which has an impact on the behavior of the firm. The firm sets certain long-term
goals and objectives and selects the strategies to achieve the same. Strategic planning is now
a new addition to the scope of managerial economics with the emergence of multinational
corporations. The perspective of strategic planning is global.
It is in contrast to project planning which focuses on a specific project or activity. In fact the
integration of managerial economics and strategic planning has given rise to be new area of
study called corporate economics.
B. Environmental or External Issues:
An environmental issue in managerial economics refers to the general business environment
in which the firm operates. They refer to general economic, social and political atmosphere
within which the firm operates. A study of economic environment should include:
The type of economic system in the country.
The general trends in production, employment, income, prices, saving and investment.
Trends in the working of financial institutions like banks, financial corporations, insurance
companies
Magnitude and trends in foreign trade;
Trends in labour and capital markets;
Government’s economic policies viz. industrial policy monetary policy, fiscal policy, price
policy etc.
The social environment refers to social structure as well as social organization like trade
unions, consumer’s co-operative etc. The Political environment refers to the nature of state
activity, chiefly states’ attitude towards private business, political stability etc.
The environmental issues highlight the social objective of a firm i.e.; the firm owes a
responsibility to the society. Private gains of the firm alone cannot be the goal.
The environmental or external issues relate managerial economics to macro economic theory
while operational issues relate the scope to micro economic theory. The scope of managerial
economics is ever widening with the dynamic role of big firms in a society.
1.6 The role of managerial economist

Making decisions and processing information are the two primary tasks of the managers.
Managerial economists have gained importance in recent years with the emergence of an
organizational culture in production and sales activities.
A management economist with sound knowledge of theory and analytical tools for
information system occupies a prestigious place among the personnel. A managerial
economist is nearer to the policy-making. Equipped with specialized skills and modern
techniques he analyses the internal and external operations of the firm. He evaluates and
helps in decision making regarding sales, Pricing financial issues, labour relations and
profitability. He helps in decision-making keeping in view the different goals of the firm.
His role in decision-making applies to routine affairs such as price fixation, improvement in
quality, Location of plant, expansion or contraction of output etc. The role of managerial
economist in internal management covers wide areas of production, sales and inventory
schedules of the firm.
The most important role of the managerial economist relates to demand forecasting because
an analysis of general business conditions is most vital for the success of the firm. He
prepares a short-term forecast of general business activity and relates general economic
forecasts to specific market trends. Most firms require two forecasts one covering the short
term (for nest three months to one year) and the other covering the long term, which
58
represents any period exceeding one-year. He has to be ever alert to gauge the changes in
tastes and preferences of the consumers. He should evaluate the market potential. The need to
know forecasting techniques on the part of the managerial economics means, he should be
adept at market research. The purpose of market research is to provide a firm with
information about current market position as well as present and possible future trends in the
industry. A managerial economist who is well equipped with this knowledge can help the firm
to plan product improvement, new product policy, pricing, and sales promotion strategy.
The fourth function of the managerial economist is to undertake an economic analysis of the
industry. This is concerned with project evaluation and feasibility study at the firm level i.e.,
he should be able to judge on the basis of cost benefit analysis, whether it is advisable and
profitable to go ahead with the project. The managerial economist should be adept at
investment appraisal methods. At the external level, economic analysis involves the
knowledge of competition involved, possibility of internal and foreign sales, the general
business climate etc.
Another function is security management analysis. This is very important in the case of
defense-oriented industries, power projects, and nuclear plants where security is very
essential. Security management means, also that the production and trade secrets concerning
technology, quality and other such related facts should not be leaked out to others. This
security is more necessary in strategic and defense-oriented projects of national importance; a
managerial economist should be able to manage these issues of security management
analysis.
The sixth function is an advisory function. Here his advice is required on all matters of
production and trade. In the hierarchy of management, a managerial economist ranks next to
the top executives or the policy maker who may be doyens of several projects. It is the
managerial economist of each firm who has to advise them on all matters of trade since they
are in the know of actual functioning of the unit in all aspects, both technical and financial.
Another function of importance for the managerial economist is a concerned with pricing and
related problems. The success of the firm depends upon a proper pricing strategy. The pricing
decision is one of the most difficult decisions to be made in business because the information
required is never fully available. Pricing of established products is different from new
products. He may have to operate in an atmosphere constrained by government regulation.
He may have to anticipate the reactions of competitors in pricing. The managerial economist
has to be very alert and dynamic to take correct pricing decision in changing environment.
Finally the specific function of a managerial economist includes an analysis of environment
issues. Modern theory of managerial economics recognizes the social responsibility of the
firm. It refers to the impact of a firm on environmental factors. It should not have adverse
impact on pollution and if possible try to contribute to environmental preservation and
protection in a positive way.
The role of management economist lies not in taking decision but in analyzing, concluding
and recommending to the policy maker. He should have the freedom to operate and analyze
and must possess full knowledge of facts. He has to collect and provide the quantitative data
from within the firm. He has to get information on external business environment such as
general market conditions, trade cycles, and behavior pattern of the consumers. The
managerial economist helps to co-ordinate policies relating to production, investment,
inventories and price.
Managerial economics relationship with other disciplines/ Linkages with other
disciplines
Many new subjects have evolved in recent years due to the interaction among basic
disciplines. While there are many such new subjects in natural and social sciences,
59
managerial economics can be taken as the best example of such a phenomenon among social
sciences. Hence it is necessary to trace its roots and relationship with other disciplines.
1. Relationship with economics:
The relationship between managerial economics and economics theory may be viewed from
the point of view of the two approaches to the subject Viz. Micro Economics and Marco
Economics. Microeconomics is the study of the economic behavior of individuals, firms and
other such micro organizations. Managerial economics is rooted in Micro Economic theory.
Managerial Economics makes use to several Micro Economic concepts such as marginal cost,
marginal revenue, elasticity of demand as well as price theory and theories of market
structure to name only a few. Macro theory on the other hand is the study of the economy as a
whole. It deals with the analysis of national income, the level of employment, general price
level, consumption and investment in the economy and even matters related to international
trade, Money, public finance, etc.
The relationship between managerial economics and economics theory is like that of
engineering science to physics or of medicine to biology. Managerial economics has an
applied bias and its wider scope lies in applying economic theory to solve real life problems
of enterprises. Both managerial economics and economics deal with problems of scarcity and
resource allocation.
2. Management theory and accounting:
Managerial economics has been influenced by the developments in management theory and
accounting techniques. Accounting refers to the recording of pecuniary transactions of the
firm in certain books. A proper knowledge of accounting techniques is very essential for the
success of the firm because profit maximization is the major objective of the firm.
Managerial Economics requires a proper knowledge of cost and revenue information and
their classification. A student of managerial economics should be familiar with the
generation, interpretation and use of accounting data. The focus of accounting within the firm
is fast changing from the concepts of store keeping to that if managerial decision making, this
has resulted in a new specialized area of study called “Managerial Accounting”.
3. Managerial Economics and mathematics:
The use of mathematics is significant for managerial economics in view of its profit
maximization goal long with optional use of resources. The major problem of the firm is how
to minimize cost, hoe to maximize profit or how to optimize sales. Mathematical concepts
and techniques are widely used in economic logic to solve these problems. Also mathematical
methods help to estimate and predict the economic factors for decision making and forward
planning.
Mathematical symbols are more convenient to handle and understand various concepts like
incremental cost, elasticity of demand etc., Geometry, Algebra and calculus are the major
branches of mathematics which are of use in managerial economics. The main concepts of
mathematics like logarithms, and exponentials, vectors and determinants, input-output
models etc., are widely used. Besides these usual tools, more advanced techniques designed
in the recent years viz. linear programming, inventory models and game theory fine wide
application in managerial economics.
4. Managerial Economics and Statistics:
Managerial Economics needs the tools of statistics in more than one way. A successful
businessman must correctly estimate the demand for his product. He should be able to
analyses the impact of variations in tastes. Fashion and changes in income on demand only
then he can adjust his output. Statistical methods provide and sure base for decision-making.
Thus statistical tools are used in collecting data and analyzing them to help in the decision
making process.
60
Statistical tools like the theory of probability and forecasting techniques help the firm to
predict the future course of events. Managerial Economics also make use of correlation and
multiple regressions in related variables like price and demand to estimate the extent of
dependence of one variable on the other. The theory of probability is very useful in problems
involving uncertainty.
5. Managerial Economics and Operations Research:
Taking effectives decisions is the major concern of both managerial economics and
operations research. The development of techniques and concepts such as linear
programming, inventory models and game theory is due to the development of this new
subject of operations research in the postwar years. Operations research is concerned with the
complex problems arising out of the management of men, machines, materials and money.
Operation research provides a scientific model of the system and it helps managerial
economists in the field of product development, material management, and inventory control,
quality control, marketing and demand analysis. The varied tools of operations Research are
helpful to managerial economists in decision-making.
6. Managerial Economics and the theory of Decision- making:
The Theory of decision-making is a new field of knowledge grown in the second half of this
century. Most of the economic theories explain a single goal for the consumer i.e., Profit
maximization for the firm. But the theory of decision-making is developed to explain
multiplicity of goals and lot of uncertainty.
As such this new branch of knowledge is useful to business firms, which have to take quick
decision in the case of multiple goals. Viewed this way the theory of decision making is more
practical and application oriented than the economic theories.
7. Managerial Economics and Computer Science:
Computers have changes the way of the world functions and economic or business activity is
no exception. Computers are used in data and accounts maintenance, inventory and stock
controls and supply and demand predictions. What used to take days and months is done in a
few minutes or hours by the computers. In fact computerization of business activities on a
large scale has reduced the workload of managerial personnel. In most countries a basic
knowledge of computer science, is a compulsory programme for managerial trainees.
To conclude, managerial economics, which is an offshoot traditional economics, has gained
strength to be a separate branch of knowledge. It strength lies in its ability to integrate ideas
from various specialized subjects to gain a proper perspective for decision-making.
A successful managerial economist must be a mathematician, a statistician and an economist.
He must be also able to combine philosophic methods with historical methods to get the right
perspective only then; he will be good at predictions. In short managerial practices with the
help of other allied sciences.
UNIT-2
DEMAND AND SUPPLY ANALYSIS:
Introduction & Meaning:
Demand in common parlance means the desire for an object. But in economics demand is
something more than this. According to Stonier and Hague, “Demand in economics means
demand backed up by enough money to pay for the goods demanded”. This means that the
demand becomes effective only it if is backed by the purchasing power in addition to this
there must be willingness to buy a commodity.
61
Thus demand in economics means the desire backed by the willingness to buy a commodity
and the purchasing power to pay. In the words of “Benham” “The demand for anything at a
given price is the amount of it which will be bought per unit of time at that Price”. (Thus
demand is always at a price for a definite quantity at a specified time.) Thus demand has three
essentials – price, quantity demanded and time. Without these, demand has to significance in
economics.
2.1 ELASTICITY:
Elasticity can be quantified as the ratio of the percentage change in one variable to the
percentage change in another variable, when the latter variable has a causal influence on the
former. A more precise definition is given in terms of differential calculus.
TYPES OF ELASTICITY:
Perfectly Elastic Demand:
Perfectly Inelastic Demand:
Relatively Elastic Demand:
Relatively Inelastic Demand:
Unitary Elastic Demand
LAW of Demand:
Law of demand shows the relation between price and quantity demanded of a commodity in
the market. In the words of Marshall, “the amount demand increases with a fall in price and
diminishes with a rise in price”.
A rise in the price of a commodity is followed by a reduction in demand and a fall in price is
followed by an increase in demand, if a condition of demand remains constant.
The law of demand may be explained with the help of the following demand schedule.
Demand Schedule.
Price of Appel (In. Rs.) Quantity Demanded

10 1
8 2
6 3
4 4
2 5
When the price falls from Rs. 10 to 8 quantity demand increases from 1 to 2. In the same way
as price falls, quantity demand increases on the basis of the demand schedule we can draw
the demand curve.
62
Price
The demand curve DD shows the

inverse relation between price
and quantity demand of apple. It is
downward sloping.
Assumptions:
Law is demand is based on certain assumptions:
1. This is no change in consumers taste and preferences.
2. Income should remain constant.
3. Prices of other goods should not change.
4. There should be no substitute for the commodity
5. The commodity should not confer at any distinction
6. The demand for the commodity should be continuous
7. People should not expect any change in the price of the commodity
Exceptional demand curve:
Sometimes the demand curve slopes upwards from left to right. In this case the demand curve
has a positive slope.
Price
When price increases from OP to Op1 quantity demanded also increases from to OQ1 and
vice versa. The reasons for exceptional demand curve are as follows.
1. Giffen paradox:
The Giffen good or inferior good is an exception to the law of demand. When the price of an
inferior good falls, the poor will buy less and vice versa. For example, when the price of
maize falls, the poor are willing to spend more on superior goods than on maize if the price of
maize increases, he has to increase the quantity of money spent on it. Otherwise he will have
63
to face starvation. Thus a fall in price is followed by reduction in quantity demanded and vice
versa. “Giffen” first explained this and therefore it is called as Giffen’s paradox.
2. Veblen or Demonstration effect:
‘Veblen’ has explained the exceptional demand curve through his doctrine of conspicuous
consumption. Rich people buy certain good because it gives social distinction or prestige for
example diamonds are bought by the richer class for the prestige it possess. It the price of
diamonds falls poor also will buy is hence they will not give prestige. Therefore, rich people
may stop buying this commodity.
3. Ignorance:
Sometimes, the quality of the commodity is Judge by its price. Consumers think that the
product is superior if the price is high. As such they buy more at a higher price.
1. Speculative effect:
If the price of the commodity is increasing the consumers will buy more of it because of the
fear that it increase still further, Thus, an increase in price may not be accomplished by a
decrease in demand.
5. Fear of shortage:
During the times of emergency of war People may expect shortage of a commodity. At that
time, they may buy more at a higher price to keep stocks for the future.
2. Necessaries:
In the case of necessaries like rice, vegetables etc. people buy more even at a higher price.
2.2 Factors Affecting Demand:

There are factors on which the demand for a commodity depends. These factors are
economic, social as well as political factors. The effect of all the factors on the amount
demanded for the commodity is called Demand Function.
These factors are as follows:
1. Price of the Commodity:
The most important factor-affecting amount demanded is the price of the commodity. The
amount of a commodity demanded at a particular price is more properly called price demand.
The relation between price and demand is called the Law of Demand. It is not only the
existing price but also the expected changes in price, which affect demand.
2. Income of the Consumer:
The second most important factor influencing demand is consumer income. In fact, we can
establish a relation between the consumer income and the demand at different levels of
income, price and other things remaining the same. The demand for a normal commodity
goes up when income rises and falls down when income falls. But in case of Giffen goods the
relationship is the opposite.
64
3. Prices of related goods:
The demand for a commodity is also affected by the changes in prices of the related goods
also. Related goods can be of two types:
(i). Substitutes which can replace each other in use; for example, tea and coffee are
substitutes. The change in price of a substitute has effect on a commodity’s demand
in the same direction in which price changes. The rise in price of coffee shall raise
the demand for tea;
(ii). Complementary foods are those which are jointly demanded, such as pen and ink. In
such cases complementary goods have opposite relationship between price of one
commodity and the amount demanded for the other. If the price of pens goes up,
their demand is less as a result of which the demand for ink is also less. The price
and demand go in opposite direction. The effect of changes in price of a commodity on
amounts demanded of related commodities is called Cross Demand.
4. Tastes of the Consumers:
The amount demanded also depends on consumer’s taste. Tastes include fashion, habit,
customs, etc. A consumer’s taste is also affected by advertisement. If the taste for a
commodity goes up, its amount demanded is more even at the same price. This is called
increase in demand. The opposite is called decrease in demand.
5. Wealth:
The amount demanded of commodity is also affected by the amount of wealth as well as its
distribution. The wealthier are the people; higher is the demand for normal commodities. If
wealth is more equally distributed, the demand for necessaries and comforts is more. On the
other hand, if some people are rich, while the majorities are poor, the demand for luxuries is
generally higher.
6. Population:
Increase in population increases demand for necessaries of life. The composition of

population also affects demand. Composition of population means the proportion of young
and old and children as well as the ratio of men to women. A change in composition of
population has an effect on the nature of demand for different commodities.
7. Government Policy:
65
Government policy affects the demands for commodities through taxation. Taxing a
commodity increases its price and the demand goes down. Similarly, financial help from the
government increases the demand for a commodity while lowering its price.
8. Expectations regarding the future:
If consumers expect changes in price of commodity in future, they will change the demand at
present even when the present price remains the same. Similarly, if consumers expect their
incomes to rise in the near future they may increase the demand for a commodity just now.
9. Climate and weather:
The climate of an area and the weather prevailing there has a decisive effect on consumer’s
demand. In cold areas woolen cloth is demanded. During hot summer days, ice is very much
in demand. On a rainy day, ice cream is not so much demanded.
10. State of business:
The level of demand for different commodities also depends upon the business conditions in
the country. If the country is passing through boom conditions, there will be a marked
increase in demand. On the other hand, the level of demand goes down during depression.
ELASTICITY OF DEMAND
Elasticity of demand explains the relationship between a change in price and consequent
change in amount demanded. “Marshall” introduced the concept of elasticity of demand.
Elasticity of demand shows the extent of change in quantity demanded to a change in price.
In the words of “Marshall”, “The elasticity of demand in a market is great or small according
as the amount demanded increases much or little for a given fall in the price and diminishes
much or little for a given rise in Price”
Elastic demand: A small change in price may lead to a great change in quantity demanded.
In this case, demand is elastic.
In-elastic demand: If a big change in price is followed by a small change in demanded then
the demand in “inelastic”.
Types of Elasticity of Demand:
There are three types of elasticity of demand:
1. Price elasticity of demand
66
2. Income elasticity of demand
3. Cross elasticity of demand
1. Price elasticity of demand:
Marshall was the first economist to define price elasticity of demand. Price elasticity of
demand measures changes in quantity demand to a change in Price. It is the ratio of
percentage change in quantity demanded to a percentage change in price.
Proportionate change in the quantity demand of commodity

Price elasticity = ------------------------------------------------------------------
Proportionate change in the price of commodity
There are five cases of price elasticity of demand
A. Perfectly elastic demand:
When small change in price leads to an infinitely large change is quantity demand, it is called
perfectly or infinitely elastic demand. In this case E=∞
The demand curve DD1 is horizontal straight line.

It shows the at “OP” price any amount is demand and if
price increases, the consumer will not purchase the
commodity.
B. Perfectly Inelastic Demand
In this case, even a large change in price fails to bring about a change in quantity demanded.
When price increases from ‘OP’ to ‘OP’, the quantity demanded remains the same. In other
words the response of demand to a change in Price is nil. In this case ‘E’=0.
67
C. Relatively elastic demand:
Demand changes more than proportionately to a change in price. i.e. a small change in price
loads to a very big change in the quantity demanded. In this case
E > 1. This demand curve will be flatter.
When price falls from ‘OP’ to ‘OP’, amount demanded in crease from “OQ’ to “OQ1’ which
is larger than the change in price.
D. Relatively in-elastic demand.
Quantity demanded changes less than proportional to a change in price. A large change in
price leads to small change in amount demanded. Here E < 1. Demanded carve will be
steeper.
When price falls from “OP’ to ‘OP1 amount demanded increases from OQ to OQ1, which is
smaller than the change in price.
E. Unit elasticity of demand:
68
The change in demand is exactly equal to the change in price. When both are equal E=1 and
elasticity if said to be unitary.
When price falls from ‘OP’ to ‘OP1’ quantity demanded increases from ‘OP’ to ‘OP1’,
quantity demanded increases from ‘OQ’ to ‘OQ1’. Thus a change in price has resulted in an
equal change in quantity demanded so price elasticity of demand is equal to unity.
2. Income elasticity of demand:
Income elasticity of demand shows the change in quantity demanded as a result of a change
in income. Income elasticity of demand may be slated in the form of a formula.
Proportionate change in the quantity demand of commodity

Income Elasticity = ------------------------------------------------------------------
Proportionate change in the income of the people
Income elasticity of demand can be classified in to five types.
A. Zero income elasticity:
Quantity demanded remains the same, even though money income increases. Symbolically, it
can be expressed as Ey=0. It can be depicted in the following way:
69
As income increases from OY to OY1, quantity demanded never changes.
B. Negative Income elasticity:
When income increases, quantity demanded falls. In this case, income elasticity of demand is
negative. i.e., Ey < 0.
When income increases from OY to OY1, demand falls from OQ to OQ1.
c. Unit income elasticity:
When an increase in income brings about a proportionate increase in quantity demanded, and
then income elasticity of demand is equal to one. Ey = 1
70
When income increases from OY to OY1, Quantity demanded also increases from OQ to
OQ1.
d. Income elasticity greater than unity:
In this case, an increase in come brings about a more than proportionate increase in quantity
demanded. Symbolically it can be written as Ey > 1.
It shows high-income elasticity of

demand. When income increases from
OY
to OY1, Quantity demanded increases from
OQ to OQ1.
E. Income elasticity leas than unity:
When income increases quantity demanded also increases but less than proportionately. In
this case E < 1.
An increase in income from OY to OY, brings what an increase in quantity demanded from
OQ to OQ1, But the increase in quantity demanded is smaller than the increase in income.
Hence, income elasticity of demand is less than one.
3. Cross elasticity of Demand:
A change in the price of one commodity leads to a change in the quantity demanded of
another commodity. This is called a cross elasticity of demand. The formula for cross
elasticity of demand is:
Proportionate change in the quantity demand of commodity “X”

Cross elasticity = -----------------------------------------------------------------------
Proportionate change in the price of commodity “Y”
71
a. In case of substitutes, cross elasticity of demand is positive. Eg: Coffee and Tea
When the price of coffee increases, Quantity demanded of tea increases. Both are substitutes.
Price of Coffee
b. Incase of compliments, cross elasticity is negative. If increase in the price of one

commodity leads to a decrease in the quantity demanded of another and vice versa.
W
hen price of car goes up from OP to OP!, the quantity demanded of petrol decreases from OQ
to OQ!. The cross-demanded curve has negative slope.
c. In case of unrelated
commodities, cross elasticity
of demanded is zero. A change
in the price of one commodity
will not affect the quantity
demanded of another.
72
Quantity demanded of commodity “b” remains unchanged due to a change in the price of ‘A’,
as both are unrelated goods.
Factors influencing the elasticity of demand
Elasticity of demand depends on many factors.
1. Nature of commodity:
Elasticity or in-elasticity of demand depends on the nature of the commodity i.e. whether a
commodity is a necessity, comfort or luxury, normally; the demand for Necessaries like salt,
rice etc is inelastic. On the other band, the demand for comforts and luxuries is elastic.
2. Availability of substitutes:
Elasticity of demand depends on availability or non-availability of substitutes. In case of
commodities, which have substitutes, demand is elastic, but in case of commodities, which
have no substitutes, demand is in elastic.
3. Variety of uses:
If a commodity can be used for several purposes, than it will have elastic demand. i.e.
electricity. On the other hand, demanded is inelastic for commodities, which can be put to
only one use.
4. Postponement of demand:
If the consumption of a commodity can be postponed, than it will have elastic demand. On
the contrary, if the demand for a commodity cannot be postpones, than demand is in elastic.
The demand for rice or medicine cannot be postponed, while the demand for Cycle or
umbrella can be postponed.
5. Amount of money spent:
Elasticity of demand depends on the amount of money spent on the commodity. If the
consumer spends a smaller for example a consumer spends a little amount on salt and
matchboxes. Even when price of salt or matchbox goes up, demanded will not fall. Therefore,
73
demand is in case of clothing a consumer spends a large proportion of his income and an
increase in price will reduce his demand for clothing. So the demand is elastic.
6. Time:
Elasticity of demand varies with time. Generally, demand is inelastic during short period and
elastic during the long period. Demand is inelastic during short period because the consumers
do not have enough time to know about the change is price. Even if they are aware of the
price change, they may not immediately switch over to a new commodity, as they are
accustomed to the old commodity.
7. Range of Prices:
Range of prices exerts an important influence on elasticity of demand. At a very high price,
demand is inelastic because a slight fall in price will not induce the people buy more.
Similarly at a low price also demand is inelastic. This is because at a low price all those who
want to buy the commodity would have bought it and a further fall in price will not increase
the demand. Therefore, elasticity is low at very him and very low prices.
Importance of Elasticity of Demand:

The concept of elasticity of demand is of much practical importance.
1. Price fixation:
Each seller under monopoly and imperfect competition has to take into account elasticity of
demand while fixing the price for his product. If the demand for the product is inelastic, he
can fix a higher price.
2. Production:
Producers generally decide their production level on the basis of demand for the product.
Hence elasticity of demand helps the producers to take correct decision regarding the level of
cut put to be produced.
3. Distribution:
Elasticity of demand also helps in the determination of rewards for factors of production. For
example, if the demand for labour is inelastic, trade unions will be successful in raising
wages. It is applicable to other factors of production.
4. International Trade:
Elasticity of demand helps in finding out the terms of trade between two countries. Terms of
trade refers to the rate at which domestic commodity is exchanged for foreign commodities.
Terms of trade depends upon the elasticity of demand of the two countries for each other
goods.
5. Public Finance:
Elasticity of demand helps the government in formulating tax policies. For example, for
imposing tax on a commodity, the Finance Minister has to take into account the elasticity of
demand.
6. Nationalization:
74
The concept of elasticity of demand enables the government to decide about nationalization
of industries.
Demand Forecasting
Introduction:
The information about the future is essential for both new firms and those planning to expand
the scale of their production. Demand forecasting refers to an estimate of future demand for
the product.
It is an ‘objective assessment of the future course of demand”. In recent times, forecasting
plays an important role in business decision-making. Demand forecasting has an important
influence on production planning. It is essential for a firm to produce the required quantities
at the right time.
It is essential to distinguish between forecasts of demand and forecasts of sales. Sales forecast
is important for estimating revenue cash requirements and expenses. Demand forecasts relate
to production, inventory control, timing, reliability of forecast etc. However, there is not
much difference between these two terms.
Types of demand Forecasting:

Based on the time span and planning requirements of business firms, demand forecasting can
be classified in to 1. Short-term demand forecasting and
2. Long – term demand forecasting.
1. Short-term demand forecasting:

Short-term demand forecasting is limited to short periods, usually for one year. It relates to
policies regarding sales, purchase, price and finances. It refers to existing production capacity
of the firm. Short-term forecasting is essential for formulating is essential for formulating a
suitable price policy. If the business people expect of rise in the prices of raw materials of
shortages, they may buy early. This price forecasting helps in sale policy formulation.
Production may be undertaken based on expected sales and not on actual sales. Further,
demand forecasting assists in financial forecasting also. Prior information about production
and sales is essential to provide additional funds on reasonable terms.
2. Long – term forecasting:

In long-term forecasting, the businessmen should now about the long-term demand for the
product. Planning of a new plant or expansion of an existing unit depends on long-term
demand. Similarly a multi product firm must take into account the demand for different
items. When forecast are mode covering long periods, the probability of error is high. It is
very difficult to forecast the production, the trend of prices and the nature of competition.
Hence quality and competent forecasts are essential.
Prof. C. I. Savage and T.R. Small classify demand forecasting into time types.
75
They are
1. Economic forecasting
2. Industry forecasting
3. Firm level forecasting.
Economic forecasting is concerned with the economics, while industrial level forecasting is
used for inter-industry comparisons and is being supplied by trade association or chamber of
commerce. Firm level forecasting relates to individual firm.
2.3 Characteristics of good demand forecasting:
1. It is in terms of specific quantities
2. It is undertaken in an uncertain atmosphere
3. A forecast is made for a specific period of time which would be sufficient

to take a decision and put it into action.
4. It is based on historical information and the past data.
5. It tells us only the approximate demand for a product in the future.
6. It is based on certain assumptions.
7. It cannot be 100% precise as it deals with future expected demand
Demand Forecasting is a systematic process of predicting the future demand

for a firm’s product. Simply, estimating the potential demand for a product
in the future is called as demand forecasting.
2.4 Steps in Demand Forecasting
Specifying the Objective: The objective for which the demand forecasting is to be
done must be clearly specified. The objective may be defined in terms of; long-term
or short-term demand, the whole or only the segment of a market for a firm’s prod-
uct, overall demand for a product or only for a firm’s own product, firm’s overall
market share in the industry, etc. The objective of the demand must be determined
before the process of demand forecasting begins as it will give direction to the whole
research.
Determining the Time Perspective:
On the basis of the objectives set, the demand forecast can either be for a short-pe-
riod say for the next 2-3 year or long period. While forecasting demand for a short
period (2-3 years), many determinants of demand can be assumed to remain constant
or do not change significantly. While in the long run, the determinants of demand
76
may change significantly. Thus, it is essential to define the time perspective, i.e., the
time duration for which the demand is to be forecasted.
Making a Choice of Method for Demand Forecasting:
Once the objective is set and the time perspective has been specified the method for
performing the forecast is selected. There are several methods of demand forecasting
falling under two categories; survey methods and statistical methods.
The Survey method includes consumer survey and opinion poll methods, and the sta-
tistical methods include trend projection, barometric and econometric methods. Each
method varies from one another in terms of the purpose of forecasting, type of data
required, availability of data and time frame within which the demand is to be fore-
casted. Thus, the forecaster must select the method that best suits his requirement.
Collection of Data and Data Adjustment: Once the method is decided upon, the next
step is to collect the required data either primary or secondary or both. The primary
data are the first-hand data which has never been collected before. While the sec-
ondary data is the data already available. Often, data required is not available and
hence the data are to be adjusted, even manipulated, if necessary with a purpose to
build a data consistent with the data required.
Estimation and Interpretation of Results: Once the required data are collected and the
demand forecasting method is finalized, the final step is to estimate the demand for
the predefined years of the period. Usually, the estimates appear in the form of equa-
tions, and the result is interpreted and presented in the easy and usable form.
Thus, the objective of demand forecasting can only be achieved only if these steps
are followed systematically.
2.5 Methods of demand forecasting:

Several methods are employed for forecasting demand. All these methods can be grouped
under survey method and statistical method. Survey methods and statistical methods are
further subdivided in to different categories.
1. Survey Method:
Under this method, information about the desires of the consumer and opinion of exports are
collected by interviewing them. Survey method can be divided into four type’s viz., Option
survey method; expert opinion; Delphi method and consumers interview methods.
a. Opinion survey method:
77
This method is also known as sales-force composite method (or) collective opinion method.
Under this method, the company asks its salesman to submit estimate of future sales in their
respective territories. Since the forecasts of the salesmen are biased due to their optimistic or
pessimistic attitude ignorance about economic developments etc. these estimates are
consolidated, reviewed and adjusted by the top executives. In case of wide differences, an
average is struck to make the forecasts realistic.
This method is more useful and appropriate because the salesmen are more knowledge. They
can be important source of information. They are cooperative. The implementation within
unbiased or their basic can be corrected.
B. Expert opinion method:

Apart from salesmen and consumers, distributors or outside experts may also e used for
forecasting. In the United States of America, the automobile companies get sales estimates
directly from their dealers. Firms in advanced countries make use of outside experts for
estimating future demand. Various public and private agencies all periodic forecasts of short
or long term business conditions.
C. Delphi Method:
A variant of the survey method is Delphi method. It is a sophisticated method to arrive at a

consensus. Under this method, a panel is selected to give suggestions to solve the problems in
hand. Both internal and external experts can be the members of the panel. Panel members one
kept apart from each other and express their views in an anonymous manner. There is also a
coordinator who acts as an intermediary among the panelists. He prepares the questionnaire
and sends it to the panelist. At the end of each round, he prepares a summary report. On the
basis of the summary report the panel members have to give suggestions. This method has
been used in the area of technological forecasting. It has proved more popular in forecasting.
It has provided more popular in forecasting non-economic rather than economic variables.
D. Consumers interview method:

In this method the consumers are contacted personally to know about their plans and
preference regarding the consumption of the product. A list of all potential buyers would be
drawn and each buyer will be approached and asked how much he plans to buy the listed
product in future. He would be asked the proportion in which he intends to buy. This method
seems to be the most ideal method for forecasting demand.
2. Statistical Methods:
Statistical method is used for long run forecasting. In this method, statistical and
mathematical techniques are used to forecast demand. This method relies on post data.
a. Time series analysis or trend projection methods:
78
A well-established firm would have accumulated data. These data are analyzed to determine
the nature of existing trend. Then, this trend is projected in to the future and the results are
used as the basis for forecast. This is called as time series analysis. This data can be presented
either in a tabular form or a graph. In the time series post data of sales are used to forecast
future.
b. Barometric Technique:
Simple trend projections are not capable of forecasting turning paints. Under Barometric
method, present events are used to predict the directions of change in future. This is done
with the help of economics and statistical indicators. Those are (1) Construction Contracts
awarded for building materials (2) Personal income (3) Agricultural Income. (4) Employment
(5) Gross national income (6) Industrial Production (7) Bank Deposits etc.
c. Regression and correlation method:
Regression and correlation are used for forecasting demand. Based on post data the future
data trend is forecasted. If the functional relationship is analyzed with the independent
variable it is simple correction. When there are several independent variables it is multiple
correlation. In correlation we analyze the nature of relation between the variables while in
regression; the extent of relation between the variables is analyzed. The results are expressed
in mathematical form. Therefore, it is called as econometric model building. The main
advantage of this method is that it provides the values of the independent variables from
within the model itself.
2.6 SUPPLY
Supply refers to the amount of a good or service that the producers/providers are willing and
able to offer to the market at various prices during a period of time. There are two important
aspects of supply:
 Supply refers to what is offered for sale and not what is finally sold.
 Supply is a flow. Hence, it is a certain quantity per day or week or month, etc.
Determinants of Supply
While price is an important aspect for determining the willingness and desire to part with
goods/services, many other factors determine the supply of a product or service as discussed
below:
Price of the Good/ Service
The most obvious one of the determinants of supply is the price of the product/service. With all
other parameters being equal, the supply of a product increases if its relative price is higher. The
reason is simple. A firm provides goods or services to earn profits and if the prices rise, the profit
rises too.
79
Price of Related Goods
Let’s say that the price of wheat rises. Hence, it becomes more profitable for firms to supply
wheat as compared to corn or soya bean. Hence, the supply of wheat will rise, whereas the
supply of corn and soya bean will experience a fall.
Hence, we can say that if the price of related goods rises, then the firm increases the supply of
the goods having a higher price. This leads to a drop in supply of the goods having a lower price.
Price of the Factors of Production
Production of a good involves many costs. If there is a rise in the price of a particular factor of
production, then the cost of making goods that use a great deal of that factors experiences a huge
increase. The cost of production of goods that use relatively smaller amounts of the said factor
increases marginally.
For example, a rise in the cost of land will have a large effect on the cost of producing wheat and
a small effect on the cost of producing automobiles.
Therefore, the change in the price of one factor of production causes changes in the relative
profitability of different lines of production. This causes producers to shift from one line to
another, leading to a change in the supply of goods.
State of Technology
Technological innovations and inventions tend to make it possible to produce better quality
and/or quantity of goods using the same resources. Therefore, the state of technology can
increase or decrease the supply of certain goods.
Government Policy
Commodity taxes like excise duty, import duties, GST, etc. have a huge impact on the cost of
production. These taxes can raise the overall costs. Hence, the supply of goods that are impacted
by these taxes increases only when the price increases. On the other hand, subsidies reduce the
cost of production and usually lead to an increase in supply.
Other Factors
There are many other factors affecting the supply of goods or services like the government’s
industrial and foreign policies, the goals of the firm, infrastructural facilities, market structure,
natural factors etc.
80
Supply Function
pply function is the mathematical expression of the relationship between supply and those factors that affect the
ess and ability of a supplier to offer goods for sale
SX = Supply of goods

PX = Price
PF = Factor input employed (used) for production.
 Raw material
 Human resources
 Machinery
O = Factors outside economic sphere.
T = Technology.
t = Taxes.
S = Subsidies
Law of supply :
Definition: Law of supply states that other factors remaining constant, price and quantity
supplied of a good are directly related to each other. In other words, when the price paid by
buyers for a good rises, then suppliers increase the supply of that good in the
markeDescription: Law of supply depicts the producer behavior at the time of changes in the
prices of goods and services. When the price of a good rises, the supplier increases the supply
in order to earn a profit because of higher prices.
The above diagram shows the supply curve that is upward sloping (positive relation between
the price and the quantity supplied). When the price of the good was at P3, suppliers were
supplying Q3 quantity. As the price starts rising, the quantity supplied also starts rising.
SUPPLY ANALYSIS:
Determinants of supply
When there is change in price, quantity supplied also change. That is a movement along the
same supply curve. When factors other than price changes, supply curve will shift. Here are
some determinants of the supply curve.

1. Production cost:
81
Since most private companies’ goal is profit maximization. Higher production cost will lower
profit, thus hinder supply. Factors affecting production cost are: input prices, wage rate,
government regulation and taxes, etc.

2. Technology:
Technological improvements help reduce production cost and increase profit, thus stimulate
higher supply.

3. Number of sellers:
More sellers in the market increase the market supply.

4. Expectation for future prices:
If producers expect future price to be higher, they will try to hold on to their inventories and
offer the products to the buyers in the future, thus they can capture the higher price.
Supply function
In economics, supply is the amount of something that firms, producers, labourers, providers
of financial assets, or other economic agents are willing to provide to the marketplace. Supply
is often plotted graphically with the quantity provided (the independent variable) plotted
horizontally and the price (the dependent variable) plotted vertically.
In the goods market, supply is the amount of a product per unit of time that producers are
willing to sell at various given prices when all other factors are held constant. In the labor
market, the supply of labor is the amount of time per week, month, or year that individuals
are willing to spend working, as a function of the wage rate. In the financial markets,
the money supply is the amount of highly liquid assets available in the money market, which
is either determined or influenced by a country's monetary authority.
The remainder of this article focuses on the supply of goods. Difference between stock and
supply:
 Stock is the total amount of the commodity available with the producer.
 Supply is the only part of total stock which producers are willing to bring into the
market and offer sale at particular price.
Law of supply
The law of supply is a fundamental principle of economic theory which states that, keeping
other factors constant, an increase in price results in an increase in quantity supplied.[1] In
other words, there is a direct relationship between price and quantity: quantities respond in
the same direction as price changes. This means that producers are willing to offer more
products for sale on the market at higher prices by increasing production as a way of
increasing profits.[2]
In short, the law of supply is a positive relationship between quantity supplied and price and
is the reason for the upward slope of the supply curve
82
UNIT - III
PRODUCTION ANALYSIS
3.1 Factors of Production:
The factors of production are the building blocks of any economy. In other words, they are
the inputs that we use to produce goods and services so that we can make an economic profit.
We divide the factors of production into the following four

categories: Land, Labor, Capital, and Enterprise.
Land
This factor includes land plus anything that comes from the land. This also includes any
natural resource we to produce goods and services. Forests, coal, natural gas, copper, oil, and
water, for example, belong to the category common land or natural resources.
Forests are among the renewable resources. Oil or natural gas, on the other hand, are non-
renewable resources. Resource owners earn rent in return for land.
Labor
Labor refers to the effort that humans contribute to the production of goods and services. In
other word.‘workers.’
Resources include, for example, the work that the engineer who designed a bridge did. It also
includes everything the waiter in your local restaurant does when you want to order a meal.
Any person who has received money for work has contributed labor resources to the
production of goods or services. We refer to labor resource income as wages. Wages, for
most people, are their largest source of income.
Capital
Capital includes machinery, tools, and buildings. Specifically, it includes those elements that
we use to produce goods and services. Examples include computers, delivery vehicles,
conveyor belts, forklift trucks, hammers, etc.
The type of capital we utilize depends on the work we are doing.
For example, a teacher uses desks, a whiteboard, and textbooks to deliver education services.
A doctor, on the other hand, uses an examination room, a stethoscope, and other medical
devices.
We refer to the income of capital resource owners as interest
83
Production function:
a production function gives the technological relation between quantities of physical inputs

and quantities of output of goods. The production function is one of the key concepts of main
stream neoclassical theories, used to define marginal product and to distinguish allocative
efficiency, a key focus of economics.
Entrepreneurship
Entrepreneurship or enterprise is what we need to combine the other factors of production

– capital, labor, and land. Specifically, we combine them with the aim of earning a profit.
The most successful entrepreneurs are people who find new ways to produce goods or deliver
services, i.e., Innovators. Innovators also create new goods and services and bring them to the
market.
Many of the innovations we see around are exist thanks to entrepreneurs. Bill Gates and
Henry Ford, for example, combined capital, labor, and land in new ways.
Entrepreneurs have helped build some of the world’s largest corporations. They have also
created many small businesses in your neighborhood. They thrive in economies where they
have the freedom to set up businesses and purchase resources freely. The entrepreneur
earns profit.
Importance:
1. When inputs are specified in physical units, production function helps to estimate the
level of production.
2. It becomes is equates when different combinations of inputs yield the same level of
output.
3. It indicates the manner in which the firm can substitute on input for another without
altering the total output.
4. When price is taken into consideration, the production function helps to select the
least combination of inputs for the desired output.
5. It considers two types’ input-output relationships namely ‘law of variable proportions’
and ‘law of returns to scale’. Law of variable propositions explains the pattern of out-
put in the short-run as the units of variable inputs are increased to increase the output.
On the other hand law of returns to scale explains the pattern of output in the long run
as all the units of inputs are increased.
6. The production function explains the maximum quantity of output, which can be pro-
duced, from any chosen quantities of various inputs or the minimum quantities of var-
ious inputs that are required to produce a given quantity of output.
84
Production function can be fitted the particular firm or industry or for the economy as whole.
Production function will change with an improvement in technology.
Assumptions:
Production function has the following assumptions.
1. The production function is related to a particular period of time.

2. There is no change in technology.
3. The producer is using the best techniques available.
4. The factors of production are divisible.
5. Production function can be fitted to a short run or to long run.
Cobb-Douglas production function:
Production function of the linear homogenous type is invested by Junt wicksell and first
tested by C. W. Cobb and P. H. Douglas in 1928. This famous statistical production function
is known as Cobb-Douglas production function. Originally the function is applied on the
empirical study of the American manufacturing industry. Cobb – Douglas production function
takes the following mathematical form.
Y= (AKX L1-x)
Where Y=output
K=Capital
L=Labour
A, ∞=positive constant
Assumptions:
It has the following assumptions
1. The function assumes that output is the function of two factors viz. capital and labour.
2. It is a linear homogenous production function of the first degree
3. The function assumes that the logarithm of the total output of the economy is a linear
function of the logarithms of the labour force and capital stock.
4. There are constant returns to scale
5. All inputs are homogenous
6. There is perfect competition
7. There is no change in technology
ISOQUANTS:
The term Isoquants is derived from the words ‘iso’ and ‘quant’ – ‘Iso’ means equal and
‘quant’ implies quantity. Isoquant therefore, means equal quantity. A family of iso-product
85
curves or Isoquants or production difference curves can represent a production function with
two variable inputs, which are substitutable for one another within limits.
Isoquants are the curves, which represent the different combinations of inputs producing a
particular quantity of output. Any combination on the Isoquant represents the some level of
output.
For a given output level firm’s production become,
Q= f (L, K)
Where ‘Q’ is the units of output is a function of the quantity of two inputs ‘L’ and ‘K’.
Thus an Isoquant shows all possible combinations of two inputs, which are capable of
producing equal or a given level of output. Since each combination yields same output, the
producer becomes indifferent towards these combinations.
Assumptions:
1. There are only two factors of production, viz. labour and capital.
2. The two factors can substitute each other up to certain limit
3. The shape of the Isoquant depends upon the extent of substitutability of the two in-
puts.
4. The technology is given over a period.
An Isoquant may be explained with the help of an arithmetical example.
Combinations Labour (units) Capital (Units) Output (quintals)

A 1 10 50
B 2 7 50
C 3 4 50
D 4 4 50
E 5 1 50
Combination ‘A’ represent 1 unit of labour and 10 units of capital and produces ‘50’ quintals
of a product all other combinations in the table are assumed to yield the same given output of
a product say ‘50’ quintals by employing any one of the alternative combinations of the two
factors labour and capital. If we plot all these combinations on a paper and join them, we will
get continues and smooth curve called Iso-product curve as shown below.
86
Labour is on the X-axis and capital is on the Y-axis. IQ is the ISO-Product curve which
shows all the alternative combinations A, B, C, D, E which can produce 50 quintals of a
product.
Producer’s Equilibrium:
The tem producer’s equilibrium is the counter part of consumer’s equilibrium. Just as the
consumer is in equilibrium when be secures maximum satisfaction, in the same manner, the
producer is in equilibrium when he secures maximum output, with the least cost combination
of factors of production.
The optimum position of the producer can be found with the help of iso-product curve. The
Iso-product curve or equal product curve or production indifference curve shows different
combinations of two factors of production, which yield the same output. This is illustrated as
follows.
Let us suppose. The producer can produces the given output of paddy say 100 quintals by
employing any one of the following alternative combinations of the two factors labour and
capital computation of least cost combination of two inputs.
L K Q L&LP (3Rs.) KXKP(4Rs.) Total cost

Units Units Output Cost of cost of
labour capital
10 45 100 30 180 210
20 28 100 60 112 172
30 16 100 90 64 154
40 12 100 120 48 168
50 8 100 150 32 182
It is clear from the above that 10 units of ‘L’ combined with 45 units of ‘K’ would cost the
producer Rs. 20/-. But if 17 units reduce ‘K’ and 10 units increase ‘L’, the resulting cost
87
would be Rs. 172/-. Substituting 10 more units of ‘L’ for 12 units of ‘K’ further reduces cost
pf Rs. 154/-/ However, it will not be profitable to continue this substitution process further at
the existing prices since the rate of substitution is diminishing rapidly. In the above table the
least cost combination is 30 units of ‘L’ used with 16 units of ‘K’ when the cost would be
minimum at Rs. 154/-. So this is the stage “the producer is in equilibrium”.
.
3.2 LAW OF PRODUCTION:
Production analysis in economics theory considers two types of input-output relationships.
1. When quantities of certain inputs, are fixed and others are variable and
2. When all inputs are variable.
These two types of relationships have been explained in the form of laws.
i) Law of variable proportions

ii) Law of returns to scale
I. Law of variable proportions:
The law of variable proportions which is a new name given to old classical concept of “Law
of diminishing returns has played a vital role in the modern economics theory. Assume that a
firms production function consists of fixed quantities of all inputs (land, equipment, etc.)
except labour which is a variable input when the firm expands output by employing more and
more labour it alters the proportion between fixed and the variable inputs. The law can be
stated as follows:
“When total output or production of a commodity is increased by adding units of a variable

input while the quantities of other inputs are held constant, the increase in total production
becomes after some point, smaller and smaller”.
“If equal increments of one input are added, the inputs of other production services being
held constant, beyond a certain point the resulting increments of product will decrease i.e. the
marginal product will diminish”. (G. Stigler)
“As the proportion of one factor in a combination of factors is increased, after a point, first
the marginal and then the average product of that factor will diminish”. (F. Benham)
The law of variable proportions refers to the behavior of output as the quantity of one Factor
is increased Keeping the quantity of other factors fixed and further it states that the marginal
product and average product will eventually do cline. This law states three types of
productivity an input factor – Total, average and marginal physical productivity.
88
Assumptions of the Law: The law is based upon the following assumptions:
i) The state of technology remains constant. If there is any improvement in technol-

ogy, the average and marginal output will not decrease but increase.
ii) Only one factor of input is made variable and other factors are kept constant. This
law does not apply to those cases where the factors must be used in rigidly fixed
proportions.
iii) All units of the variable factors are homogenous.
Three stages of law:
The behaviors of the Output when the varying quantity of one factor is combines with a fixed
quantity of the other can be divided in to three district stages. The three stages can be better
understood by following the table.
Fixed factor Variable factor Total product Average Product Marginal

(Labour) Product
1 1 100 100 - Stage I
1 2 220 120 120
1 3 270 90 50
1 4 300 75 30 Stage
1 5 320 64 20 II
1 6 330 55 10
1 7 330 47 0 Stage
1 8 320 40 -10 III
Above table reveals that both average product and marginal product increase in the beginning
and then decline of the two marginal products drops of faster than average product. Total
product is maximum when the farmer employs 6th worker, nothing is produced by the 7th
worker and its marginal productivity is zero, whereas marginal product of 8th worker is ‘-10’,
by just creating credits 8th worker not only fails to make a positive contribution but leads to a
fall in the total output.
Production function with one variable input and the remaining fixed inputs is illustrated as
below
89
From the above graph the law of variable proportions operates in three stages. In the first
stage, total product increases at an increasing rate. The marginal product in this stage
increases at an increasing rate resulting in a greater increase in total product. The average
product also increases. This stage continues up to the point where average product is equal to
marginal product. The law of increasing returns is in operation at this stage. The law of
diminishing returns starts operating from the second stage awards. At the second stage total
product increases only at a diminishing rate. The average product also declines. The second
stage comes to an end where total product becomes maximum and marginal product becomes
zero. The marginal product becomes negative in the third stage. So the total product also
declines. The average product continues to decline.
We can sum up the above relationship thus when ‘A.P.’ is rising, “M. P.’ rises more than “ A.
P; When ‘A. P.” is maximum and constant, ‘M. P.’ becomes equal to ‘A. P.’ when ‘A. P.’ starts
falling, ‘M. P.’ falls faster than ‘ A. P.’.
Thus, the total product, marginal product and average product pass through three phases, viz.,
increasing diminishing and negative returns stage. The law of variable proportion is nothing
but the combination of the law of increasing and demising returns.
II. Law of Returns of Scale:
The law of returns to scale explains the behavior of the total output in response to change in
the scale of the firm, i.e., in response to a simultaneous to changes in the scale of the firm,
i.e., in response to a simultaneous and proportional increase in all the inputs. More precisely,
the Law of returns to scale explains how a simultaneous and proportionate increase in all the
inputs affects the total output at its various levels.
The concept of variable proportions is a short-run phenomenon as in these period fixed

factors cannot be changed and all factors cannot be changed. On the other hand in the long-
term all factors can be changed as made variable. When we study the changes in output when
all factors or inputs are changed, we study returns to scale. An increase in the scale means
that all inputs or factors are increased in the same proportion. In variable proportions, the
cooperating factors may be increased or decreased and one faster (Ex. Land in agriculture
(or) machinery in industry) remains constant so that the changes in proportion among the
factors result in certain changes in output. In returns to scale all the necessary factors or
production are increased or decreased to the same extent so that whatever the scale of
production, the proportion among the factors remains the same.
When a firm expands, its scale increases all its inputs proportionally, then technically there
are three possibilities. (i) The total output may increase proportionately (ii) The total output
may increase more than proportionately and (iii) The total output may increase less than
proportionately. If increase in the total output is proportional to the increase in input, it means
constant returns to scale. If increase in the output is greater than the proportional increase in
the inputs, it means increasing return to scale. If increase in the output is less than
proportional increase in the inputs, it means diminishing returns to scale.
Let us now explain the laws of returns to scale with the help of Isoquants for a two-input and
single output production system.
90
ECONOMIES OF SCALE
Production may be carried on a small scale or o a large scale by a firm. When a firm expands
its size of production by increasing all the factors, it secures certain advantages known as
economies of production. Marshall has classified these economies of large-scale production
into internal economies and external economies.
Internal economies are those, which are opened to a single factory or a single firm
independently of the action of other firms. They result from an increase in the scale of output
of a firm and cannot be achieved unless output increases. Hence internal economies depend
solely upon the size of the firm and are different for different firms.
External economies are those benefits, which are shared in by a number of firms or industries
when the scale of production in an industry or groups of industries increases. Hence external
economies benefit all firms within the industry as the size of the industry expands.
Causes of internal economies:

Internal economies are generally caused by two factors
1. Indivisibilities 2. Specialization.
1. Indivisibilities
Many fixed factors of production are indivisible in the sense that they must be used in a fixed
minimum size. For instance, if a worker works half the time, he may be paid half the salary.
But he cannot be chopped into half and asked to produce half the current output. Thus as
output increases the indivisible factors which were being used below capacity can be utilized
to their full capacity thereby reducing costs. Such indivisibilities arise in the case of labour,
machines, marketing, finance and research.
2. Specialization.
Division of labour, which leads to specialization, is another cause of internal economies.

Specialization refers to the limitation of activities within a particular field of production.
Specialization may be in labour, capital, machinery and place. For example, the production
process may be split into four departments relation to manufacturing, assembling, packing
and marketing under the charge of separate managers who may work under the overall charge
of the general manger and coordinate the activities of the for departments. Thus specialization
will lead to greater productive efficiency and to reduction in costs.
Internal Economies:
Internal economies may be of the following types.
A). Technical Economies.

Technical economies arise to a firm from the use of better machines and superior techniques
of production. As a result, production increases and per unit cost of production falls. A large
firm, which employs costly and superior plant and equipment, enjoys a technical superiority
over a small firm. Another technical economy lies in the mechanical advantage of using large
machines. The cost of operating large machines is less than that of operating mall machine.
More over a larger firm is able to reduce its per unit cost of production by linking the various
processes of production. Technical economies may also be associated when the large firm is
91
able to utilize all its waste materials for the development of by-products industry. Scope for
specialization is also available in a large firm. This increases the productive capacity of the
firm and reduces the unit cost of production.
B). Managerial Economies:
These economies arise due to better and more elaborate management, which only the large
size firms can afford. There may be a separate head for manufacturing, assembling, packing,
marketing, general administration etc. Each department is under the charge of an expert.
Hence the appointment of experts, division of administration into several departments,
functional specialization and scientific co-ordination of various works make the management
of the firm most efficient.
C). Marketing Economies:
The large firm reaps marketing or commercial economies in buying its requirements and in
selling its final products. The large firm generally has a separate marketing department. It can
buy and sell on behalf of the firm, when the market trends are more favorable. In the matter
of buying they could enjoy advantages like preferential treatment, transport concessions,
cheap credit, prompt delivery and fine relation with dealers. Similarly it sells its products
more effectively for a higher margin of profit.
D). Financial Economies:
The large firm is able to secure the necessary finances either for block capital purposes or for
working capital needs more easily and cheaply. It can barrow from the public, banks and
other financial institutions at relatively cheaper rates. It is in this way that a large firm reaps
financial economies.
E). Risk bearing Economies:
The large firm produces many commodities and serves wider areas. It is, therefore, able to
absorb any shock for its existence. For example, during business depression, the prices fall
for every firm. There is also a possibility for market fluctuations in a particular product of the
firm. Under such circumstances the risk-bearing economies or survival economies help the
bigger firm to survive business crisis.
F). Economies of Research:
A large firm possesses larger resources and can establish it’s own research laboratory and
employ trained research workers. The firm may even invent new production techniques for
increasing its output and reducing cost.
G). Economies of welfare:
A large firm can provide better working conditions in-and out-side the factory. Facilities like
subsidized canteens, crèches for the infants, recreation room, cheap houses, educational and
medical facilities tend to increase the productive efficiency of the workers, which helps in
raising production and reducing costs.
92
External Economies.
Business firm enjoys a number of external economies, which are discussed below:
A). Economies of Concentration:
When an industry is concentrated in a particular area, all the member firms reap some
common economies like skilled labour, improved means of transport and communications,
banking and financial services, supply of power and benefits from subsidiaries. All these
facilities tend to lower the unit cost of production of all the firms in the industry.
B). Economies of Information
The industry can set up an information centre which may publish a journal and pass on
information regarding the availability of raw materials, modern machines, export
potentialities and provide other information needed by the firms. It will benefit all firms and
reduction in their costs.
C). Economies of Welfare:
An industry is in a better position to provide welfare facilities to the workers. It may get land
at concessional rates and procure special facilities from the local bodies for setting up
housing colonies for the workers. It may also establish public health care units, educational
institutions both general and technical so that a continuous supply of skilled labour is
available to the industry. This will help the efficiency of the workers.
D). Economies of Disintegration:
The firms in an industry may also reap the economies of specialization. When an industry
expands, it becomes possible to split some of the processes which are taken over by specialist
firms. For example, in the cotton textile industry, some firms may specialize in manufacturing
thread, others in printing, still others in dyeing, some in long cloth, some in dhotis, some in
shirting etc. As a result the efficiency of the firms specializing in different fields increases
and the unit cost of production falls.
Thus internal economies depend upon the size of the firm and external economies depend
upon the size of the industry.
DISECONOMIES OF LARGE SCALE PRODUCTION
Internal and external diseconomies are the limits to large-scale production. It is possible that
expansion of a firm’s output may lead to rise in costs and thus result diseconomies instead of
economies. When a firm expands beyond proper limits, it is beyond the capacity of the
manager to manage it efficiently. This is an example of an internal diseconomy. In the same
manner, the expansion of an industry may result in diseconomies, which may be called
external diseconomies. Employment of additional factors of production becomes less efficient
93
and they are obtained at a higher cost. It is in this way that external diseconomies result as an
industry expands.
The major diseconomies of large-scale production are discussed below:
Internal Diseconomies:
A). Financial Diseconomies:
For expanding business, the entrepreneur needs finance. But finance may not be easily
available in the required amount at the appropriate time. Lack of finance retards the
production plans thereby increasing costs of the firm.
B). Managerial diseconomies:
There are difficulties of large-scale management. Supervision becomes a difficult job.

Workers do not work efficiently, wastages arise, decision-making becomes difficult,
coordination between workers and management disappears and production costs increase.
C). Marketing Diseconomies:
As business is expanded, prices of the factors of production will rise. The cost will therefore
rise. Raw materials may not be available in sufficient quantities due to their scarcities.
Additional output may depress the price in the market. The demand for the products may fall
as a result of changes in tastes and preferences of the people. Hence cost will exceed the
revenue.
D). Technical Diseconomies:
There is a limit to the division of labour and splitting down of production p0rocesses. The
firm may fail to operate its plant to its maximum capacity. As a result cost per unit increases.
Internal diseconomies follow.
E). Diseconomies of Risk-taking:
As the scale of production of a firm expands risks also increase with it. Wrong decision by
the management may adversely affect production. In large firms are affected by any disaster,
natural or human, the economy will be put to strains.
External Diseconomies:
When many firms get located at a particular place, the costs of transportation increases due to
congestion. The firms have to face considerable delays in getting raw materials and sending
finished products to the marketing centers. The localization of industries may lead to scarcity
of raw material, shortage of various factors of production like labour and capital, shortage of
power, finance and equipments. All such external diseconomies tend to raise cost per unit.
94
3.3 COST ANALYSIS
Profit is the ultimate aim of any business and the long-run prosperity of a firm depends upon
its ability to earn sustained profits. Profits are the difference between selling price and cost of
production. In general the selling price is not within the control of a firm but many costs are
under its control. The firm should therefore aim at controlling and minimizing cost. Since
every business decision involves cost consideration, it is necessary to understand the meaning
of various concepts for clear business thinking and application of right kind of costs.
COST CONCEPTS:
A managerial economist must have a clear understanding of the different cost concepts for
clear business thinking and proper application. The several alternative bases of classifying
cost and the relevance of each for different kinds of problems are to be studied. The various
relevant concepts of cost are:
1. Opportunity costs and outlay costs:
Out lay cost also known as actual costs obsolete costs are those expends which are actually
incurred by the firm these are the payments made for labour, material, plant, building,
machinery traveling, transporting etc., These are all those expense item appearing in the
books of account, hence based on accounting cost concept.
On the other hand opportunity cost implies the earnings foregone on the next best alternative,
has the present option is undertaken. This cost is often measured by assessing the alternative,
which has to be scarified if the particular line is followed.
The opportunity cost concept is made use for long-run decisions. This concept is very
important in capital expenditure budgeting. This concept is very important in capital
expenditure budgeting. The concept is also useful for taking short-run decisions opportunity
cost is the cost concept to use when the supply of inputs is strictly limited and when there is
an alternative. If there is no alternative, Opportunity cost is zero. The opportunity cost of any
action is therefore measured by the value of the most favorable alternative course, which had
to be foregoing if that action is taken.
2. Explicit and implicit costs:
Explicit costs are those expenses that involve cash payments. These are the actual or business
costs that appear in the books of accounts. These costs include payment of wages and
salaries, payment for raw-materials, interest on borrowed capital funds, rent on hired land,
Taxes paid etc.
Implicit costs are the costs of the factor units that are owned by the employer himself. These
costs are not actually incurred but would have been incurred in the absence of employment of
self – owned factors. The two normal implicit costs are depreciation, interest on capital etc. A
decision maker must consider implicit costs too to find out appropriate profitability of
alternatives.
95
3. Historical and Replacement costs:
Historical cost is the original cost of an asset. Historical cost valuation shows the cost of an
asset as the original price paid for the asset acquired in the past. Historical valuation is the
basis for financial accounts.
A replacement cost is the price that would have to be paid currently to replace the same asset.
During periods of substantial change in the price level, historical valuation gives a poor
projection of the future cost intended for managerial decision. A replacement cost is a
relevant cost concept when financial statements have to be adjusted for inflation.
4. Short – run and long – run costs:
Short-run is a period during which the physical capacity of the firm remains fixed. Any
increase in output during this period is possible only by using the existing physical capacity
more extensively. So short run cost is that which varies with output when the plant and
capital equipment in constant.
Long run costs are those, which vary with output when all inputs are variable including plant
and capital equipment. Long-run cost analysis helps to take investment decisions.
5. Out-of pocket and books costs:
Out-of pocket costs also known as explicit costs are those costs that involve current cash
payment. Book costs also called implicit costs do not require current cash payments.
Depreciation, unpaid interest, salary of the owner is examples of back costs.
But the book costs are taken into account in determining the level dividend payable during a
period. Both book costs and out-of-pocket costs are considered for all decisions. Book cost is
the cost of self-owned factors of production.
6. Fixed and variable costs:
Fixed cost is that cost which remains constant for a certain level to output. It is not affected
by the changes in the volume of production. But fixed cost per unit decreases, when the
production is increased. Fixed cost includes salaries, Rent, Administrative expenses
depreciations etc.
Variable is that which varies directly with the variation is output. An increase in total output
results in an increase in total variable costs and decrease in total output results in a
proportionate decline in the total variables costs. The variable cost per unit will be constant.
Ex: Raw materials, labour, direct expenses, etc.
7. Post and Future costs:
Post costs also called historical costs are the actual cost incurred and recorded in the book of
account these costs are useful only for valuation and not for decision making.
96
Future costs are costs that are expected to be incurred in the futures. They are not actual costs.
They are the costs forecasted or estimated with rational methods. Future cost estimate is
useful for decision making because decision are meant for future.
8. Traceable and common costs:
Traceable costs otherwise called direct cost, is one, which can be identified with a products
process or product. Raw material, labour involved in production is examples of traceable
cost.
Common costs are the ones that common are attributed to a particular process or product.
They are incurred collectively for different processes or different types of products. It cannot
be directly identified with any particular process or type of product.
9. Avoidable and unavoidable costs:
Avoidable costs are the costs, which can be reduced if the business activities of a concern are
curtailed. For example, if some workers can be retrenched with a drop in a product – line, or
volume or production the wages of the retrenched workers are escapable costs.
The unavoidable costs are otherwise called sunk costs. There will not be any reduction in this
cost even if reduction in business activity is made. For example cost of the ideal machine
capacity is unavoidable cost.
10. Controllable and uncontrollable costs:
Controllable costs are ones, which can be regulated by the executive who is in charge of it.
The concept of controllability of cost varies with levels of management. Direct expenses like
material, labour etc. are controllable costs.
Some costs are not directly identifiable with a process of product. They are appointed to
various processes or products in some proportion. This cost varies with the variation in the
basis of allocation and is independent of the actions of the executive of that department.
These apportioned costs are called uncontrollable costs.
11. Incremental and sunk costs:
Incremental cost also known as different cost is the additional cost due to a change in the
level or nature of business activity. The change may be caused by adding a new product,
adding new machinery, replacing a machine by a better one etc.
Sunk costs are those which are not altered by any change – They are the costs incurred in the
past. This cost is the result of past decision, and cannot be changed by future decisions.
Investments in fixed assets are examples of sunk costs.
12. Total, average and marginal costs:
Total cost is the total cash payment made for the input needed for production. It may be
explicit or implicit. It is the sum total of the fixed and variable costs. Average cost is the cost
97
per unit of output. If is obtained by dividing the total cost (TC) by the total quantity produced
(Q)
TC
Average cost = ------
Q
Marginal cost is the additional cost incurred to produce and additional unit of output or it is
the cost of the marginal unit produced.
13. Accounting and Economics costs:
Accounting costs are the costs recorded for the purpose of preparing the balance sheet and
profit and ton statements to meet the legal, financial and tax purpose of the company. The
accounting concept is a historical concept and records what has happened in the post.
Economics concept considers future costs and future revenues, which help future planning,
and choice, while the accountant describes what has happened, the economics aims at
projecting what will happen.
COST-OUTPUT RELATIONSHIP
A proper understanding of the nature and behavior of costs is a must for regulation and
control of cost of production. The cost of production depends on money forces and an
understanding of the functional relationship of cost to various forces will help us to take
various decisions. Output is an important factor, which influences the cost.
The cost-output relationship plays an important role in determining the optimum level of
production. Knowledge of the cost-output relation helps the manager in cost control, profit
prediction, pricing, promotion etc. The relation between cost and its determinants is
technically described as the cost function.
C= f (S, O, P, T ….)
Where;
C= Cost (Unit or total cost)
S= Size of plant/scale of production
O= Output level
P= Prices of inputs
T= Technology
Considering the period the cost function can be classified as (a) short-run cost function and
(b) long-run cost function. In economics theory, the short-run is defined as that period during
which the physical capacity of the firm is fixed and the output can be increased only by using
the existing capacity allows to bring changes in output by physical capacity of the firm.
(a) Cost-Output Relation in the short-run:
The cost concepts made use of in the cost behavior are total cost, Average cost, and marginal
cost.
98
Total cost is the actual money spent to produce a particular quantity of output. Total cost is
the summation of fixed and variable costs.
TC=TFC+TVC
Up to a certain level of production total fixed cost i.e., the cost of plant, building, equipment
etc, remains fixed. But the total variable cost i.e., the cost of labour, raw materials etc., Vary
with the variation in output. Average cost is the total cost per unit. It can be found out as
follows.
TC
AC=
Q
Q
The total of average fixed cost (TFC/Q) keep coming down as the production is increased and
average variable cost (TVC/Q) will remain constant at any level of output.
Marginal cost is the addition to the total cost due to the production of an additional unit of
product. It can be arrived at by dividing the change in total cost by the change in total output.
In the short-run there will not be any change in total fixed cost. Hence change in total cost
implies change in total variable cost only.
Cost – output relations
Units of Total Total Total Average Average Average Marginal

Output Q fixed variable cost variable fixed cost cost
cost TFC cost (TFC + cost cost (TC/Q) MC
TVC TVC) (TVC / (TFC / AC
TC Q) AVC Q) AFC
0 - - 60 - - - -
1 60 20 80 20 60 80 20
2 60 36 96 18 30 48 16
3 60 48 108 16 20 36 12
4 60 64 124 16 15 31 16
5 60 90 150 18 12 30 26
6 60 132 192 22 10 32 42
The above table represents the cost-output relation. The table is prepared on the basis of the
law of diminishing marginal returns. The fixed cost Rs. 60 May include rent of factory
building, interest on capital, salaries of permanently employed staff, insurance etc. The table
shows that fixed cost is same at all levels of output but the average fixed cost, i.e., the fixed
cost per unit, falls continuously as the output increases. The expenditure on the variable
factors (TVC) is at different rate. If more and more units are produced with a given physical
capacity the AVC will fall initially, as per the table declining up to 3 rd unit, and being constant
up to 4th unit and then rising. It implies that variable factors produce more efficiently near a
firm’s optimum capacity than at any other levels of output.
99
And later rises. But the rise in AC is felt only after the start rising. In the table ‘AVC’ starts
rising from the 5th unit onwards whereas the ‘AC’ starts rising from the 6 th unit only so long
as ‘AVC’ declines ‘AC’ also will decline. ‘AFC’ continues to fall with an increase in Output.
When the rise in ‘AVC’ is more than the decline in ‘AFC’, the total cost again begin to rise.
Thus there will be a stage where the ‘AVC’, the total cost again begin to rise thus there will
be a stage where the ‘AVC’ may have started rising, yet the ‘AC’ is still declining because the
rise in ‘AVC’ is less than the droop in ‘AFC’.
Thus the table shows an increasing returns or diminishing cost in the first stage and
diminishing returns or diminishing cost in the second stage and followed by diminishing
returns or increasing cost in the third stage.
The short-run cost-output relationship can be shown graphically as follows.
In the above graph the “AFC’

curve continues to fall as output
rises an account of its
spread over more and more
units Output. But AVC curve
(i.e. variable cost per unit) first
falls and than rises due to the
operation of the law of variable
proportions. The behavior of
“ATC’ curve depends upon the
behavior of ‘AVC’ curve and
‘AFC’ curve. In the initial stage
of production both ‘AVC’ and
‘AFC’ decline and hence ‘ATC’ also decline. But after a certain point ‘AVC’ starts rising. If
the rise in variable cost is less than the decline in fixed cost, ATC will still continue to decline
otherwise AC begins to rise. Thus the lower end of ‘ATC’ curve thus turns up and gives it a
U-shape. That is why ‘ATC’ curve are U-shaped. The lowest point in ‘ATC’ curve indicates
the least-cost combination of inputs. Where the total average cost is the minimum and where
the “MC’ curve intersects ‘AC’ curve, It is not be the maximum output level rather it is the
point where per unit cost of production will be at its lowest.
The relationship between ‘AVC’, ‘AFC’ and ‘ATC’ can be summarized up as follows:
1. If both AFC and ‘AVC’ fall, ‘ATC’ will also fall.

2. When ‘AFC’ falls and ‘AVC’ rises
a. ‘ATC’ will fall where the drop in ‘AFC’ is more than the raise in ‘AVC’.
b. ‘ATC’ remains constant is the drop in ‘AFC’ = rise in ‘AVC’
c. ‘ATC’ will rise where the drop in ‘AFC’ is less than the rise in ‘AVC’
b. Cost-output Relationship in the long-run:
Long run is a period, during which all inputs are variable including the one, which are fixes
in the short-run. In the long run a firm can change its output according to its demand. Over a
100
long period, the size of the plant can be changed, unwanted buildings can be sold staff can be
increased or reduced. The long run enables the firms to expand and scale of their operation by
bringing or purchasing larger quantities of all the inputs. Thus in the long run all factors
become variable.
The long-run cost-output relations therefore imply the relationship between the total cost and
the total output. In the long-run cost-output relationship is influenced by the law of returns to
scale.
In the long run a firm has a number of alternatives in regards to the scale of operations. For
each scale of production or plant size, the firm has an appropriate short-run average cost
curves. The short-run average cost (SAC) curve applies to only one plant whereas the long-
run average cost (LAC) curve takes in to consideration many plants.
The long-run cost-output relationship is shown graphically with the help of “LCA’ curve.
To draw on ‘LAC’ curve we have

to start with a number of ‘SAC’
curves. In the above figure it is
assumed that technologically there
are only three sizes of plants – small,
medium and large, ‘SAC’, for the
small size, ‘SAC2’ for the medium size plant and ‘SAC3’ for the large size plant. If the firm
wants to produce ‘OP’ units of output, it will choose the smallest plant. For an output beyond
‘OQ’ the firm wills optimum for medium size plant. It does not mean that the OQ production
is not possible with small plant. Rather it implies that cost of production will be more with
small plant compared to the medium plant.
For an output ‘OR’ the firm will choose the largest plant as the cost of production will be
more with medium plant. Thus the firm has a series of ‘SAC’ curves. The ‘LCA’ curve drawn
will be tangential to the entire family of ‘SAC’ curves i.e. the ‘LAC’ curve touches each
‘SAC’ curve at one point, and thus it is known as envelope curve. It is also known as
planning curve as it serves as guide to the entrepreneur in his planning to expand the
production in future. With the help of ‘LAC’ the firm determines the size of plant which
yields the lowest average cost of producing a given volume of output it anticipates.
3.4 MARKET STRUCTURES:

MONOPOLY
Monopoly is derived from The Landlord's Game created by Elizabeth Magie in the United
States in 1903 as a way to demonstrate that an economy which rewards wealth creation is
better than one where monopolists work under few constraints, and to promote the economic
theories of Henry George—in particular his ideas about taxation. It was first published
101
by Parker Brothers in 1935. The game is named after the economic concept of monopoly—
the domination of a market by a single entity.
OLIGOPOLY:
Oligopoly is a market structure with a small number of firms, none of which can keep the
others from having significant influence. The concentration ratio measures the market share
of the largest firms. A monopoly is one firm, duopoly is two firms and oligopoly is two or
more firms. There is no precise upper limit to the number of firms in an oligopoly, but the
number must be low enough that the actions of one firm significantly influence the others.
3.5 PRICING:
TYPES OF PRICING:
 Pricing at a Premium. With premium pricing, businesses set costs higher than their
competitors. ...
 Pricing for Market Penetration. ...
 Economy Pricing. ...
 Price Skimming. ...
 Psychology Pricing. ...
 Bundle Pricing.
PRODUCT LIFE CYCLE BASED PRICING:

The initial stage of a product's life cycle, development, is when the product is first introduced
to the market. Typically, sales are slow during this stage because consumers are unfamiliar
with the new product. ... Pricing products low (market penetration) helps a business penetrate
the market and gain consumer attention.
BREAKEVEN ANALYSIS
The study of cost-volume-profit relationship is often referred as BEA. The term BEA is
interpreted in two senses. In its narrow sense, it is concerned with finding out BEP; BEP is
the point at which total revenue is equal to total cost. It is the point of no profit, no loss. In its
broad determine the probable profit at any level of production.
Assumptions:
1. All costs are classified into two – fixed and variable.

2. Fixed costs remain constant at all levels of output.
3. Variable costs vary proportionally with the volume of output.
4. Selling price per unit remains constant in spite of competition or change in the volume
of production.
5. There will be no change in operating efficiency.
6. There will be no change in the general price level.
7. Volume of production is the only factor affecting the cost.
8. Volume of sales and volume of production are equal. Hence there is no unsold stock.
9. There is only one product or in the case of multiple products. Sales mix remains con-
stant.
Merits:
102
1. Information provided by the Break Even Chart can be understood more easily then
those contained in the profit and Loss Account and the cost statement.
2. Break Even Chart discloses the relationship between cost, volume and profit. It re-
veals how changes in profit. So, it helps management in decision-making.
3. It is very useful for forecasting costs and profits long term planning and growth
4. The chart discloses profits at various levels of production.
5. It serves as a useful tool for cost control.
6. It can also be used to study the comparative plant efficiencies of the industry.
7. Analytical Break-even chart present the different elements, in the costs – direct mate-
rial, direct labour, fixed and variable overheads.
Demerits:
1. Break-even chart presents only cost volume profits. It ignores other considerations
such as capital amount, marketing aspects and effect of government policy etc., which
are necessary in decision making.
2. It is assumed that sales, total cost and fixed cost can be represented as straight lines.
In actual practice, this may not be so.
3. It assumes that profit is a function of output. This is not always true. The firm may in-
crease the profit without increasing its output.
4. A major drawback of BEC is its inability to handle production and sale of multiple
products.
5. It is difficult to handle selling costs such as advertisement and sale promotion in BEC.
6. It ignores economics of scale in production.
7. Fixed costs do not remain constant in the long run.
8. Semi-variable costs are completely ignored.
9. It assumes production is equal to sale. It is not always true because generally there
may be opening stock.
10. When production increases variable cost per unit may not remain constant but may re-
duce on account of bulk buying etc.
11. The assumption of static nature of business and economic activities is a well-known
defect of BEC.
1. Fixed cost
2. Variable cost
3. Contribution
4. Margin of safety
5. Angle of incidence
6. Profit volume ratio
7. Break-Even-Point
1. Fixed cost: Expenses that do not vary with the volume of production are known as fixed
expenses. Egg. Manager’s salary, rent and taxes, insurance etc. It should be noted that
fixed changes are fixed only within a certain range of plant capacity. The concept of fixed
overhead is most useful in formulating a price fixing policy. Fixed cost per unit is not
fixed.
2. Variable Cost: Expenses that vary almost in direct proportion to the volume of production
of sales are called variable expenses. Egg. Electric power and fuel, packing materials con-
sumable stores. It should be noted that variable cost per unit is fixed.
103
3. Contribution: Contribution is the difference between sales and variable costs and it con-
tributed towards fixed costs and profit. It helps in sales and pricing policies and measur-
ing the profitability of different proposals. Contribution is a sure test to decide whether a
product is worthwhile to be continued among different products.
Contribution = Sales – Variable cost

Contribution = Fixed Cost + Profit.
4. Margin of safety: Margin of safety is the excess of sales over the break even sales. It can
be expressed in absolute sales amount or in percentage. It indicates the extent to which
the sales can be reduced without resulting in loss. A large margin of safety indicates the
soundness of the business. The formula for the margin of safety is:
Present sales – Break even sales or
Margin of safety can be improved by taking the following steps.
1. Increasing production
2. Increasing selling price
3. Reducing the fixed or the variable costs or both
4. Substituting unprofitable product with profitable one.
5. Angle of incidence: This is the angle between sales line and total cost line at the Break-
even point. It indicates the profit earning capacity of the concern. Large angle of inci-
dence indicates a high rate of profit; a small angle indicates a low rate of earnings. To im-
prove this angle, contribution should be increased either by raising the selling price and/or
by reducing variable cost. It also indicates as to what extent the output and sales price can
be changed to attain a desired amount of profit.
6. Profit Volume Ratio is usually called P. V. ratio. It is one of the most useful ratios for
studying the profitability of business. The ratio of contribution to sales is the P/V ratio. It
may be expressed in percentage. Therefore, every organization tries to improve the P. V.
ratio of each product by reducing the variable cost per unit or by increasing the selling
price per unit. The concept of P. V. ratio helps in determining break even-point, a desired
amount of profit etc.
The formula is, X 100
7. Break – Even- Point: If we divide the term into three words, then it does not require fur-
ther explanation.
Break-divide
Even-equal
Point-place or position
Break Even Point refers to the point where total cost is equal to total revenue. It is a
point of no profit, no loss. This is also a minimum point of no profit, no loss. This is
also a minimum point of production where total costs are recovered. If sales go up
beyond the Break Even Point, organization makes a profit. If they come down, a loss
is incurred.
1. Break Even point (Units) =
104
2. Break Even point (In Rupees) = X sales
UNIT-4
Meaning of Capital:
Capital has been defined as that part of a person’s wealth, other than land, which yields an
income or which aids in the production of further wealth.
Obviously, if wealth is left unused or is hoarded, it cannot be considered capital.
Capital serves as an instrument of production. Anything which is used in production is

capital.
What Is Capital?
Capital is a term for financial assets, such as funds held in deposit accounts and/or funds
obtained from special financing sources. Capital can also be associated with capital assets of
a company that requires significant amounts of capital to finance or expand.
Capital can be held through financial assets or raised from debt or equity financing.
Businesses will typically focus on three types of business capital: working capital, equity
capital, and debt capital. In general, business capital is a core part of running a business and
financing capital intensive assets.
Capital assets are assets of a business found on either the current or long-term portion of the
balance sheet. Capital assets can include cash, cash equivalents, and marketable securities as
well as manufacturing equipment, production facilities, and storage facilities.
Types of Capital:
Fixed Capital and Working Capital:

Capital may be divided into fixed capital and working capital. Fixed capitals are the durable-
use producer goods which are used in production again and again till they wear out.
Machinery, tools, railways, tractors, factories, etc., are all fixed capital. Fixed capital does not
mean fixed in location.
Capital like plant, tractors and factories are called “fixed” because if money is spent upon
these durable-use goods it becomes “fixed” for a long period in contrast with the money spent
in purchasing raw materials which is released as soon as the goods made with them are sold
out.
Working capital, on the other hand, includes the single-use producer goods like raw
materials, goods in process, and fuel. They are used up in a single act of consumption.
Moreover, money spent on them is fully recovered when goods made with them are sold in
the market. Working capital includes a company’s most liquid capital assets available for
105
fulfilling daily obligations. It is calculated on a regular basis through the following two
assessments:
Current Assets – Current Liabilities
Accounts Receivable + Inventory – Accounts Payable
Working capital measures a company's short-term liquidity—more specifically, its ability to

cover its debts, accounts payable, and other obligations that are due within one year.
Importance of Capital:
Capital plays a vital role in the modern productive system:
(i) Essential for Production:

Production without capital is hard for us even to imagine. Nature cannot furnish goods and
materials to man unless he has the tools and machinery for mining, farming, foresting,
Ashing, etc. If man had to work with his bare hands on barren soil, productivity would be
very low indeed. Even in the primitive stage, man used some tools and implements to assist
him in the work of production. Primitive man made use of elementary tools like bow and
arrow for hunting and fishing-net for catching fish. But elaborate and sophisticated tools and
machines are required for modern production.
(ii) Increases Productivity:

With the growth of technology and specialization, capital has become still more important.
More goods can be produced with the aid of capital. In fact, greater productivity of the
modern economy likes that of the U.S.A. is mainly due to the extensive use of capital, i.e.,
machinery, tools or implements in the productive process. Capital adds greatly to the
productivity of worker and hence of the economy as a whole.
(iii) Importance in Economic Development:

Because of its strategic role in raising productivity, capital occupies a central position in the
process of economic development. In fact, capital accumulation is the very core of
economic development. It may be free enterprise economy like the American or a
socialist economy like that of Soviet Russia or a planned and mixed economy of
India, economic development cannot take place without capital formation.
Much economic development is not possible without the making and using of machinery,
construction of irrigation works, the production of agricultural tools and implements,
building of dams, bridges and factories, roads, railways, airports, ships and harbors
which are all capital. Broadening and deepening of capital are mainly responsible for
economic development.
(iv) Creating Employment Opportunities:
Another important economic role of capital is the creation of employment opportunities in the
country. Capital creates employment in two stages.
First, when the capital is produced. Some workers have to be employed to make capital goods
like machinery, factories, dams and irrigation works.
Secondly, more men have to be employed when capital has to be used for producing further
goods. In other words, many workers have to be engaged to produce goods with the
help of machines, factories, etc.
106
Thus, we see that employment will increase as capital formation is stepped up in the
economy. Now if the population grows faster than the increase in the stock of capital,
the entire addition to the labour force cannot be absorbed in productive employment,
because not enough instruments of production are there to employ them. This results
in unemployment.
The rate of capital formation must be kept sufficiently high so that employment opportunities
are enlarged to absorb the additions to working force of the country as a result of
population growth. In India, the stock of capital has not been growing at a fast enough
rates so as to keep pace with the growth of population.
That is why there is huge unemployment and under-employment in both urban and rural
areas. The fundamental solution to this problem of unemployment and under-
employment is to step up the rate of capital formation so as to enlarge employment
opportunities.
Introduction to Capital Budgeting:

The word Capital refers to be the total investment of a company of firm in money,
tangible and intangible assets.
Whereas budgeting defined by the “Rowland and William” it may be said to be the
art of building budgets. Budgets are a blue print of a plan and action expressed in
quantities and manners. Investment decision is the process of making investment
decisions in capital expenditure. A capital expenditure may be defined as an
expenditure the benefits of which are expected to be received over period of time
exceeding one year. The main characteristic of a capital expenditure is that the
expenditure is incurred at one point of time whereas benefits of the expenditure are
realized at different points of time in future. The examples of capital expenditure:
1. Purchase of fixed assets such as land and building, plant and machin-
ery, good will, etc.
2. The expenditure relating to addition, expansion, improvement and al-
teration to the fixed assets.
3. The replacement of fixed assets.
4. Research and development project.
MEANING
The process through which different projects are evaluated is known as capital
budgeting. Capital budgeting is defined “as the firm’s formal process for the
acquisition and investment of capital. It involves firm’s decisions to invest its
current funds for addition, disposition, modification and replacement of fixed
assets”.
DEFINITION
Capital budgeting (investment decision) as, “Capital budgeting is long term
planning for making and financing proposed capital outlays.”-----------------------------------Charles
T.Horngreen
107
“Capital budgeting consists in planning development of available capital for the
purpose of maximizing the long term profitability of the concern” –
Lynch
“Capital budgeting is concerned with the allocation of the firm source financial
resources among the available opportunities. The consideration of investment
opportunities involves the comparison of the expected future streams of earnings
from a project with the immediate and subsequent streams of earning from a project,
with the immediate and subsequent streams of expenditure”. G.C. Philippatos
NEED AND IMPORTANCE OF CAPITAL BUDGETING

1. Huge investments: Capital budgeting requires huge investments of funds,
but the available funds are limited, therefore the firm before investing projects, plan
are control its capital expenditure.
2. Long-term: Capital expenditure is long-term in nature or permanent
in nature. Therefore financial risks involved in the investment decision are more. If
higher risks are involved, it needs careful planning of capital budgeting.
3. Irreversible: The capital investment decisions are irreversible, are not
changed back. Once the decision is taken for purchasing a permanent asset, it is
very difficult to dispose of those assets without involving huge losses.
4. Long-term effect: Capital budgeting not only reduces the cost but
also increases the revenue in long-term and will bring significant changes in the
profit of the company by avoiding over or more investment or under investment.
Over investments leads to be unable to utilize assets or over utilization of fixed as-
sets. Therefore before making the investment, it is required carefully planning and
analysis of the project thoroughly.
Calculation of cash inflow
Sales xxxx
Less: Cash expenses xxxx
PBDT xxxx
Less: Depreciation xxxx
PBT xxxx
less: Tax xxxx
PAT xxxx
Add: Depreciation xxxx
Cash inflow p.a Calcula- xxxx
108
tion of cash outflow
xxxx
Cost of project/asset
Transportation/installation charges xxxx
Working capital xxxx
Cash outflow xxxx
Nature / Features of Capital budgeting decisions:

Following are the features of capital budgeting decisions;
1. Long term effect
Such decisions have long term effect on future profitability and influence pace of
firms growth. A good decision may bring amazing/good returns and wrong decision
may endanger very survival of firm. Hence capital budgeting decisions determine
future destiny of firm.
2. High degree of risk
Decision is based on estimated return. Changes in taste, fashion, research and
technological advancement leads to greater risk in such decisions.
3. Huge funds
Large amount/funds are required and sparing huge funds is problem and hence
decision to be taken after proper care/analysis
4. Irreversible decision
Reverting from a decision is very difficult as sale of high value asset would be a
problem.
5. Most difficult decision
Decision is based on future estimates/uncertainty. Future events are affected by
economic, political and technological changes taking place.
6. Impact on firm’s future competitive strengths
These decisions determine future profit/ cost and hence affect the competitive
strengths of firm.
7. Impact on cost structure
Due to this vital decision, firm commits itself to fixed costs such as supervision,
insurance, rent, interest etc. If investment does not generate anticipated profit, future
profitability would be affected.
PROJECT EVALUATION TECHNIQUES (OR) CAPITAL BUDGETING

TECHNIQUES
At each point of time a business firm has a number of proposals regarding
various projects in which it can invest funds. But the funds available with the firm
are always limited and it is not possible to invest funds in all the proposals at a time.
Hence, it is very essential to select from amongst the various competing proposals,
109
those which give the highest benefits. The crux of the capital budgeting is the
allocation of available resources to various proposals.
There are many methods of evaluating profitability of capital investment

proposals. The various commonly used methods are as follows:
(A) Traditional methods:
(1) Pay-back Period Method or Pay out or Pay off Method.
(2) Improvement of Traditional Approach to pay back Period
Method.(post payback method)
(3) Accounting or Average Rate of Return Method.
(B) Time-adjusted method or discounted methods:

(4) Net Present Value Method.
(5) Internal Rate of Return Method.
(6) Profitability Index Method.
(A) TRADITIONAL METHODS:

1. PAY-BACK PERIOD METHOD
The ‘pay back’ sometimes called as pay out or pay off period method represents the
period in which the total investment in permanent assets pays back itself. This
method is based on the principle that every capital expenditure pays itself back
within a certain period out of the additional earnings generated from the capital
assets.
Under this method, various investments are ranked according to the length of their
payback period in such a manner that the investment within a shorter payback
period is preferred to the one which has longer pay back period. (It is one of the
non- discounted cash flow methods of capital budgeting).
110
MERITS
The following are the important merits of the pay-back method:
1. It is easy to calculate and simple to understand.
2. Pay-back method provides further improvement over the accounting rate return.
3. Pay-back method reduces the possibility of loss on account of obsolescence.
DEMERITS
1. It ignores the time value of money.
2. It ignores all cash inflows after the pay-back period.
3. It is one of the misleading evaluations of capital budgeting.
ACCEPT /REJECT CRITERIA

If the actual pay-back period is less than the predetermined pay-back
period, the project would be accepted. If not, it would be rejected.
2. AVERAGE RATE OF RETURN:

This method takes into account the earnings expected from the investment over their
whole life. It is known as accounting rate of return method for the reason that under
this method, the Accounting concept of profit (net profit after tax and depreciation)
is used rather than cash inflows. According to this method, various projects are
ranked in order of the rate of earnings or rate of return. The project with the higher
rate of return is selected as compared to the one with lower rate of return. This
method can also be used
to make decision as to accepting or rejecting a proposal. Average rate of return
means the average rate of return or profit taken for considering
(a)Average Rate of Return Method (ARR):
Under this method average profit after tax and depreciation is calculated and then
it is divided by the total capital outlay or total investment in the project. The project
evaluation. This method is one of the traditional methods for evaluating
The project proposals
ARR = (Total profits (after dep & taxes))/ (Net Investment in the project X No. of
years of profits) x 100
OR
ARR = (Average Annual profits)/ (Net investment in the project) x 100

(b)Average Return on Average Investment Method:
This is the most appropriate method of rate of return on investment Under this
method, average profit after depreciation and taxes is divided by the average amount
of investment; thus:
111
Average Return on Average Investment = (Average Annual Profit after depreciation
and taxes)/ (Average Investment) x 100
Merits
1. It is easy to calculate and simple to understand.
2. It is based on the accounting information rather than cash inflow.
3. It is not based on the time value of money.
4. It considers the total benefits associated with the project.
Demerits
1. It ignores the time value of money.
2. It ignores the reinvestment potential of a project.
3. Different methods are used for accounting profit. So, it leads to some
difficulties in the calculation of the project.
Accept/Reject criteria
If the actual accounting rate of return is more than the predetermined required rate
of return, the project would be accepted. If not it would be rejected.
(B)TIME – ADJUSTED OR DISCOUNTED CASH FLOW METHODS: or
MODERN METHOD
The traditional methods of capital budgeting i.e. pay-back method as well as
accounting rate of return method, suffer from the serious limitations that give equal
weight to present and future flow of incomes. These methods do not take into
consideration the time value of money, the fact that a rupee earned today has more
value than a rupee earned after five years.
1. NET PRESENT VALUE

Net present value method is one of the modern methods for evaluating the project
proposals. In this method cash inflows are considered with the time value of the
money. Net present value describes as the summation of the present value of cash
inflow and present value of cash outflow. Net present value is the difference
between the total present values of future cash inflows and the total present value of
future cash outflows.
NPV = Total Present value of cash inflows – Net Investment

If offered an investment that costs $5,000 today and promises to pay you $7,000 two
years from today and if your opportunity cost for projects of similar risk is 10%,
would you make this investment? You
112
Need to compare your $5,000 investment with the $7,000 cash flow you expect in
two years. Because you feel that a discount rate of 10% reflects the degree of
uncertainty associated with the $7,000 expected in two years, today it is worth:
By investing $5,000 today, you are getting in return a promise of a cash flow in the
future that is worth $5,785.12 today. You increase your wealth by $785.12 when you
make this investment.
Merits
1. It recognizes the time value of money.
2. It considers the total benefits arising out of the proposal.
3. It is the best method for the selection of mutually exclusive projects.
4. It helps to achieve the maximization of shareholders’ wealth.
Demerits
1. It is difficult to understand and calculate.
2. It needs the discount factors for calculation of present values.
3. It is not suitable for the projects having different effective lives.
If the present value of cash inflows is more than the present value of cash outflows,
it would be accepted. If not, it would be rejected.
2. PROFITABILITY INDEX METHOD
The profitability index (PI) is the ratio of the present value of change in operating
cash inflows to the present value of investment cash outflows:
Instead of the difference between the two present values, as in equation PI is the
ratio of the two present values. Hence, PI is a variation of NPV. By construction, if
the NPV is zero, PI is one.
3. INTERNAL RATE OF RETURN METHOD

This method is popularly known as time adjusted rate of return method/discounted
rate of return method also. The internal rate of return is defined as the interest rate
that equates the present value of expected future receipts to the cost of the
investment outlay. This internal rate of return is found by trial and error. First we
113
compute the present value of the cash-flows from an investment, using an arbitrarily
elected interest rate. Then we compare the present value so obtained with the
investment cost. If the present value is higher than the cost figure, we try a higher
rate of interest and go through the procedure again. Conversely, if the present value
is lower than the cost, lower the interest rate and repeat the process. The interest rate
that brings about this equality is defined as the internal rate of return. This rate of
return is compared to the cost of capital and the project having higher difference, if
they are mutually exclusive, is adopted and other one is rejected. As the
determination of internal rate of return involves a number of attempts to make the
present value of earnings equal to the investment, this approach is also called the
Trial and Error Method. Internal rate of return is time adjusted technique and covers
the disadvantages of the Traditional techniques. In other words it is a rate at which
discount cash flows to zero. It is expected by the following ratio
Steps to be followed:
Step1. Find out factor Factor is calculated as follows:
Step 2. Find out positive net present
value
Base factor = Positive discount
rate
DP = Difference in percentage
Step 3. Find out negative net present
value
Step 4. Find out formula net present
value
Merits
114
1. It considers the time value
of money.
2. It takes into account the to-
tal cash inflow and outflow.
3. It does not use the concept
of the required rate of re-
turn.
4. It gives the approximate/nearest rate of return.
Demerits
1. It involves complicated computational method.
2. It produces multiple rates which may be confusing for taking decisions.
3. It is assume that all intermediate cash flows are reinvested at the internal rate of return.
If the present value of the sum total of the compounded reinvested cash flows is greater than the
present value of the outflows, the proposed project is accepted. If not it would be
UNIT-5
INTRODUCTION TO FINANCIAL ACCOUNTING
4.1 ACCOUNTING CONCEPTS AND CONVENTIONS:

Accounting concepts
Accounting has been evolved over a period of several centuries. During this period,
certain rules and conventions have been adopted. They serve as guidelines in identifying the
events and transactions to be accounted for measuring, recording, summarizing and reporting
them to the interested parties. These rules and conventions are termed as Generally Accepted
Accounting Principles. These principles are also referred as standards, assumptions, concepts,
conventions doctrines, etc. Thus, the accounting concepts are the fundamental ideas or basic
assumptions underlying the theory and practice of financial accounting. They are the broad
working rules for all accounting activities developed and accepted by the accounting profes-
sion.
Basic accounting concepts may be classified into two broad categories.
1. Concept to be observed at the time of recording transactions.(Recording Stage).
2. Concept to be observed at the time of preparing the financial accounts (Reporting
Stage)
FINAL ACCOUNTS
INTRODUCTION: The main object of any Business is to make profit. Every trader
generally starts business for the purpose of earning profit. While establishing Business, he
brings his own capital, borrows money from relatives, friends, outsiders or financial
115
institutions, then purchases machinery, plant, furniture, raw materials and other assets. He
starts buying and selling of goods, paying for salaries, rent and other expenses, depositing
and withdrawing cash from Bank. Like this he undertakes innumerable transactions in
Business.
The number of Business transactions in an organization depends up on
the size of the organization. In small organizations the transactions generally will be in
thousands and in big organizations they may be in lacks. As such it is humanly impossible to
remember all these transactions. Further it may not be possible to find out the final result of
the Business without recording and analyzing these transactions.
Accounting came in practice as an aid to human memory by maintaining a systematic record
of Business transactions.
BOOK KEEPING AND ACCOUNTING:

According to G.A.Lee the Accounting system has two stages. First
stage is Book keeping and the second stage is accounting.
[A]. BOOK KEEPING:

Book keeping involves the chronological recording of financial transactions in a set of books
in a systematic manner
“Book keeping is the system of recording Business transactions for the purpose of providing
reliable information to the owners and managers about the state and prospect of the Business
concepts”.
Thus Book keeping is an art of recording business transactions in the books of original entry
and the ledges.
[B]. ACCOUNTING: Accounting begins where the Bookkeeping ends
1. SMITH AND ASHBUNNE: Accounting means “measuring and reporting the results of
economic activities”.
2. R.N ANTHONY: Accounting is a system of “collecting, summarizing, Analyzing and
reporting in monster terms, the information about the Business”.
3. ICPA: Recording, classifying and summarizing is a significant manner and in terms of
money transactions and events, which are in part at least, of a financial character and
interpreting the results there.
Thus accounting is an art of recording, classifying, summarizing and interpreting business

transactions of financial nature. Hence accounting is the “Language of Business”.
ADVANTAGE OF ACCOUNTING
The following are the advantages of Accounting…………
1. PROVIDES FOR SYSTEMATIC RECORDS: Since all the financial transactions are
recorded in the books, one need not rely on memory. Any information required is
readily available from these records.
116
2. FACILITATES THE PRPARATION OF FINANCIAL STATEMENTS: Profit and
Loss account and balance sheet can be easily prepared with the help of the informa-
tion in the records. This enables the trader to know the net result of Business opera-
tions (i.e. profit/loss) during the accounting period and the financial position of the
business at the end of the accounting period.
3. PROVIDES CONTROL OVER ASSETS: Book keeping provides information regard-
ing cash in hand, cash at hand, stack of goods, accounts receivable from various par-
ties and the amounts invested in various other assets. As the trader knows the values
of the assets he will have control over them.
4. PROVIES THE REQUIRED INFORMATION: Interested parties such as owners,
lenders, creditors etc, get necessary information at frequent intervals.
5. COMPARITIVE STUDY: One can compare present performance of the organization
with that of its past. This enables the managers to draw useful conclusions and make
proper decisions.
6. LESS SCOPE FOR FRAUD OR THEFT: It is difficult to conceal fraud or theft etc.
because of the balancing of the books of accounts periodically. As the work is divided
among many persons, there will be check and counter check.
7. TAX MALTERS: Properly maintained Book keeping records will help in the settle-
ment of all tax matters with the tax authorities.
8. ASCERTAINING VALUE OF BUSINESS: The accounting records will help in ascer-
taining the correct value of the Business. This helps in the event of sale or purchase of
a business.
9. DOCUMENTARY EVIDENCE: Accounting records can also be used as evidence in
the court of substantial the claim of the Business. Thus records are based on docu-
mentary proof. Authentic vouchers support every entry. As such, courts accept these
records as evidence.
10. HELPFUL TO MANAGEMENT: Accounting is useful to the management in various
ways. It enables the management to assess the achievement of its performance. The
weaknesses of the business can be identified and corrective measures can be applied to
remove them with the help of accounting.
LIMITATIONS OF ACCOUNTING
The following are the limitations of accounting…………..

1. DOES NOT RECORD ALL EVENTS: Only the transactions of a financial character
will be recorded under book keeping. So it does not reveal a complete picture about the
quality of human resources, location advantages, business contacts etc.
2. DOES NOT REFLECT CURRENT VLAUES: The data available under book keeping
is historical in nature. So they do not reflect current values. For instance we record the
values of stock at cost price or market price, whichever is less. In case of building,
machinery etc., we adapt historical case as the basis. In fact, the current values of
117
Buildings, plant and machinery may be much more than what is recorded in the balance
sheet.
3. ESTIMATES BASED ON PERSONAL JUDGEMENT: The estimates used for
determining the values of various items may not be correct. For example, debtors are
estimated in terms of collectibles, inventories are based on marketability and fixed assets
are based on useful working life. These estimates are based on personal judgment and
hence sometimes may not be correct.
4. INADEQUATE INFORMATION ON COSTS AND PROFITS: Book keeping only
provides information about overall profitability of the business. No information is
given about the cost and profitability of different activities of products or divisions.
BASIC ACCOUNTING CONCEPTS

Accounting is a system evolved to achieve a set of objectives. In order to achieve the goals,
we need a set of rules or guidelines. These guidelines are termed here as “BASIC
ACCOUNTING ONCEPTS”. The term concept means an idea or thought. Basic accounting
concepts are the fundamental ideas or basic assumptions underlying the theory and profit of
FINANCIAL ACCOUNTING. These concepts help in bringing about uniformity in the
practice of accounting. In accountancy following concepts are quite popular.
1. BUSINESS ENTITY CONEPT: In this concept “Business is treated as separate from the
proprietor”. All the
Transactions recorded in the book of Business and not in the books of proprietor. The
proprietor is also treated as a creditor for the Business.
2. GOING CONCERN CONCEPT: This concept relates with the long life of Business. The
assumption is that business will continue to exist for unlimited period unless it is dissolved
due to some reasons or the other.
3. MONEY MEASUREMENT CONCEPT: In this concept “Only those transactions are

recorded in accounting which can be expressed in terms of money, those transactions which
cannot be expressed in terms of money are not recorded in the books of accounting”.
4. COST CONCEPT: Accounting to this concept, can asset is recorded at its cost in the books
of account. i.e. the price, which is paid at the time of acquiring it. In balance sheet, these
assets appear not at cost price every year, but depreciation is deducted and they appear at the
amount, which is cost, less classification.
5. ACCOUNTING PERIOD CONCEPT: every Businessman wants to know the result of his
investment and efforts after a certain period. Usually one-year period is regarded as an ideal
for this purpose. This period is called Accounting Period. It depends on the nature of the
business and object of the proprietor of business.
6. DUAL ASCEPT CONCEPT: According to this concept “Every business transactions has
two aspects”, one is the receiving benefit aspect another one is giving benefit aspect. The
118
receiving benefit aspect is termed as “DEBIT”, where as the giving benefit aspect is termed
as “CREDIT”. Therefore, for every debit, there will be corresponding credit.
7. MATCHING COST CONCEPT: According to this concept “The expenses incurred during
an accounting period, e.g., if revenue is recognized on all goods sold during a period, cost of
those good sole should also
Be charged to that period.
8. REALISATION CONCEPT: According to this concept revenue is recognized when a sale

is made. Sale is
Considered to be made at the point when the property in goods posses to the buyer and he
becomes legally liable to pay.
ACCOUNTING CONVENTIONS
Accounting is based on some customs or usages. Naturally accountants have to adopt that
usage or custom.
They are termed as convert conventions in accounting. The following are some of the
important accounting conventions.
1. FULL DISCLOSURE: According to this convention accounting reports should disclose

fully and fairly the information. They purport to represent. They should be prepared honestly
and sufficiently disclose information which is if material interest to proprietors, present and
potential creditors and investors. The companies ACT, 1956 makes it compulsory to provide
all the information in the prescribed form.
2. MATERIALITY: Under this convention the trader records important factor about the
commercial activities. In the form of financial statements if any unimportant information is to
be given for the sake of clarity it will be given as footnotes.
3. CONSISTENCY: It means that accounting method adopted should not be changed from
year to year. It means that there should be consistent in the methods or principles followed.
Or else the results of a year cannot be conveniently compared with that of another.
4. CONSERVATISM: This convention warns the trader not to take unrealized income in to account.
That is why the practice of valuing stock at cost or market price, whichever is lower is in vague. This
is the policy of “playing safe”; it takes in to consideration all prospective losses but leaves all
prospective profits.
ACCOUNTING EQUATION:
The accounting equation is used in double-entry accounting. It shows the relationship
between your business’s assets, liabilities, and equity. By using the accounting equation, you
119
can see if your assets are financed by debt or business funds. The accounting equation is also
called the balance sheet equation
4.2 DOUBLE ENTRY SYSTEM OF ACCOUNTING:

The double entry system of accounting or bookkeeping means that every business transaction
will involve two accounts (or more). For example, when a company borrows money from its
bank, the company's Cash account will increase and its liability account Loans Payable will
increase.
RULES FOR MAINTAINING BOOKS OF ACCOUNTS:
All business transactions are classified into three categories:

1. Those relating to persons
2. Those relating to property (Assets)
3. Those relating to income & expenses
Thus, three classes of accounts are maintained for recording all business transactions.
They are:
1. Personal accounts
2. Real accounts
3. Nominal accounts
Personal Accounts: Accounts which are transactions with persons are called “Personal
Accounts” .
A separate account is kept on the name of each person for recording the benefits received
from, or given to the person in the course of dealings with him.
E.g.: Krishna’s A/C, Gopal’s A/C, SBI A/C, Nagarjuna Finanace Ltd.A/C, ObulReddy &
Sons A/C, HMT Ltd. A/C, Capital A/C, Drawings A/C etc.
2. Real Accounts: The accounts relating to properties or assets are known as “Real
Accounts” .Every business needs assets such as machinery, furniture etc, for running its
activities .A separate account is maintained for each asset owned by the business.
E.g.: cash A/C, furniture A/C, building A/C, machinery A/C etc.
3. Nominal Accounts: Accounts relating to expenses, losses, incomes and gains are known as
“Nominal Accounts”. A separate account is maintained for each item of expenses, losses,
income or gain.
E.g.: Salaries A/C, stationery A/C, wages A/C, postage A/C, commission A/C, interest A/C,
purchases A/C, rent A/C, discount A/C, commission received A/C, interest received A/C, rent
received A/C, discount received A/C.
Before recording a transaction, it is necessary to find out which of the accounts is to be

debited and which is to be credited. The following three different rules have been laid down
for the three classes of accounts….
120
Personal Accounts: The account of the person receiving benefit (receiver) is to be debited and
the account of the person giving the benefit (given) is to be credited.
Rule: “Debit----The Receiver

Credit---The Giver”
Real Accounts: When an asset is coming into the business, account of that asset is to be
debited .When an asset is going out of the business; the account of that asset is to be credited.
Rule: “Debit----What comes in

Credit---What goes out”
3. Nominal Accounts: When an expense is incurred or loss encountered, the account

representing the expense or loss is to be debited. When any income is earned or gain made,
the account representing the income of gain is to be credited.
4.4 JOURNAL Rule: “Debit----All expenses and losses

The first step in accounting therefore isCredit---All
the record ofincomes and gains”in the books of
all the transactions
original entry viz., Journal and then posting into ledges.
JOURNAL: The word Journal is derived from the Latin word ‘journ’ which means a day.
Therefore, journal means a ‘day Book’ in day-to-day business transactions are recorded in
chronological order.
Journal is treated as the book of original entry or first entry or prime entry. All the business
transactions are recorded in this book before they are posted in the ledges. The journal is a
complete and chronological (in order of dates) record of business transactions. It is recorded
in a systematic manner. The process of recording a transaction in the journal is called
“JOURNALISING”. The entries made in the book are called “Journal Entries”.
The proforma of Journal is given below.
Date Particulars L.F. no Debit Credit

RS. RS.
1998 Jan 1 Purchases account to cash 10,000/- 10,000/-
account(being goods purchased
for cash)
121
LEDGER
All the transactions in a journal are recorded in a chronological order. After a certain period,
if we want to know whether a particular account is showing a debit or credit balance it
becomes very difficult. So, the ledger is designed to accommodate the various accounts
maintained the trader. It contains the final or permanent record of all the transactions in duly
classified form. “A ledger is a book which contains various accounts.” The process of
transferring entries from journal to ledger is called “POSTING”.
Posting is the process of entering in the ledger the entries given in the journal. Posting into
ledger is done periodically, may be weekly or fortnightly as per the convenience of the
business. The following are the guidelines for posting transactions in the ledger.
1. After the completion of Journal entries only posting is to be made in the ledger.
2. For each item in the Journal a separate account is to be opened. Further, for each
new item a new account is to be opened.
3. Depending upon the number of transactions space for each account is to be deter-
mined in the ledger.
4. For each account there must be a name. This should be written in the top of the ta-
ble. At the end of the name, the word “Account” is to be added.
5. The debit side of the Journal entry is to be posted on the debit side of the account, by
starting with “TO”.
6. The credit side of the Journal entry is to be posted on the debit side of the account,
by starting with “BY”.
Proforma for ledger: LEDGER BOOK
Particulars account
Date Particulars Lf Amount Date Particulars Lfno amount

no
sales account
Date Particulars Lfno Amount Date Particulars Lfno amount
122
cash account
Date Particulars Lfno Amount Date Particulars Lfno amount
TRAIL BALANCE
The first step in the preparation of final accounts is the preparation of trail balance. In the
double entry system of book keeping, there will be credit for every debit and there will not be
any debit without credit. When this principle is followed in writing journal entries, the total
amount of all debits is equal to the total amount all credits.
A trail balance is a statement of debit and credit balances. It is prepared on a particular date
with the object of checking the accuracy of the books of accounts. It indicates that all the
transactions for a particular period have been duly entered in the book, properly posted and
balanced. The trail balance doesn’t include stock in hand at the end of the period. All
adjustments required to be done at the end of the period including closing stock are generally
given under the trail balance.
DEFINITIONS:
SPICER AND POGLAR : A trail balance is a list of all the balances standing on the ledger
accounts and cash book of a concern at any given date.
J.R.BATLIBOI:
A trail balance is a statement of debit and credit balances extracted from the ledger with a
view to test the arithmetical accuracy of the books.
Thus a trail balance is a list of balances of the ledger accounts’ and cash book of a business
concern at any given date.
PROFORMA FOR TRAIL BALANCE:
Trail balance for MR…………………………………… as on …………
NO NAME OF ACCOUNT DEBIT CREDIT
(PARTICULARS) AMOUNT(RS.) AMOUNT(RS.)
123
Trail Balance
Specimen of trial balance
1 Capital Credit Loan

2 Opening stock Debit Asset
3 Purchases Debit Expense
4 Sales Credit Gain
5 Returns inwards Debit Loss
6 Returns outwards Debit Gain
7 Wages Debit Expense
8 Freight Debit Expense
9 Transport expenses Debit Expense
10 Royalties on production Debit Expense
11 Gas, fuel Debit Expense
12 Discount received Credit Revenue
13 Discount allowed Debit Loss
14 Bad debts Debit Loss
15 Dab debts reserve Credit Gain
16 Commission received Credit Revenue
17 Repairs Debit Expense
18 Rent Debit Expense
19 Salaries Debit Expense
20 Loan Taken Credit Loan
21 Interest received Credit Revenue
22 Interest paid Debit Expense
23 Insurance Debit Expense
24 Carriage outwards Debit Expense
25 Advertisements Debit Expense
26 Petty expenses Debit Expense
27 Trade expenses Debit Expense
28 Petty receipts Credit Revenue
29 Income tax Debit Drawings
30 Office expenses Debit Expense
31 Customs duty Debit Expense
32 Sales tax Debit Expense
33 Provision for discount on debtors Debit Liability
34 Provision for discount on creditors Debit Asset
35 Debtors Debit Asset
36 Creditors Credit Liability
37 Goodwill Debit Asset
38 Plant, machinery Debit Asset
39 Land, buildings Debit Asset
124
40 Furniture, fittings Debit Asset
41 Investments Debit Asset
42 Cash in hand Debit Asset
43 Cash at bank Debit Asset
44 Reserve fund Credit Liability
45 Loan advances Debit Asset
46 Horse, carts Debit Asset
47 Excise duty Debit Expense
48 General reserve Credit Liability
49 Provision for depreciation Credit Liability
50 Bills receivable Debit Asset
51 Bills payable Credit Liability
52 Depreciation Debit Loss
53 Bank overdraft Credit Liability
54 Outstanding salaries Credit Liability
55 Prepaid insurance Debit Asset
56 Bad debt reserve Credit Revenue
57 Patents & Trademarks Debit Asset
58 Motor vehicle Debit Asset
59 Outstanding rent Credit Revenue
ELEMENTS OF FINANCIAL STATEMENTS:
Financial statements build up by key five elements of Financial Statements. For example, in

Balance Sheet, there are three main element contain on it: Assets, Liabilities and Equity. In
Income Statement, there are two key element contain on it Revenues and Expenses
4.5FINAL ACCOUNTS
In every business, the business man is interested in knowing whether the business has
resulted in profit or loss and what the financial position of the business is at a given time. In
brief, he wants to know (i) The profitability of the business and (ii) The soundness of the
business.
The trader can ascertain this by preparing the final accounts. The final accounts are
prepared from the trial balance. Hence the trial balance is said to be the link between the
ledger accounts and the final accounts. The final accounts of a firm can be divided into two
stages. The first stage is preparing the trading and profit and loss account and the second
stage is preparing the balance sheet.
TRADING ACCOUNT
The first step in the preparation of final account is the preparation of trading account.
The main purpose of preparing the trading account is to ascertain gross profit or gross loss as
a result of buying and selling the goods.
Trading account of MR……………………. for the year ended ……………………
125
Particulars Amount Particulars Amount
To opening stock Xxxx By sales xxxx

To purchases xxxx Less: returns xxx Xxxx
Less: returns xx Xxxx By closing stock Xxxx
To carriage inwards Xxxx

To wages Xxxx
To freight Xxxx
To customs duty, octroi Xxxx
To gas, fuel, coal,

Water Xxxx
To factory expenses
To other man. Expenses Xxxx
To productive expenses Xxxx
To gross profit c/d
Xxxx Xxxx
Xxxx
Xxxx
Finally, a ledger may be defined as a summary statement of all the transactions relating to a
person , asset, expense or income which have taken place during a given period of time. The
up-to-date state of any account can be easily known by referring to the ledger.
PROFIT AND LOSS ACCOUNT

The business man is always interested in knowing his net income or net profit.Net profit
represents the excess of gross profit plus the other revenue incomes over administrative,
sales, Financial and other expenses. The debit side of profit and loss account shows the
expenses and the credit side the incomes. If the total of the credit side is more, it will be the
net profit. And if the debit side is more, it will be net loss.
PROFIT AND LOSS A/C OF MR…………………….FOR THE YEAR

ENDED…………
PARTICULARS AMOUNT PARTICULARS AMOUNT
126
TO office salaries Xxxxxx By gross profit b/d Xxxxx
TO rent,rates,taxes Xxxxx Interest received Xxxxx
TO Printing and stationery Xxxxx Discount received Xxxx
TO Legal charges Commission received Xxxxx
Audit fee Xxxx Income from
TO Insurance Xxxx investments
TO General expenses Xxxx Dividend on shares Xxxx
TO Advertisements Xxxxx Miscellaneous Xxxx
TO Bad debts Xxxx investments
TO Carriage outwards Xxxx Rent received xxxx
TO Repairs Xxxx
TO Depreciation Xxxxx
TO interest paid Xxxxx
TO Interest on capital Xxxxx
TO Interest on loans Xxxx
TO Discount allowed Xxxxx
TO Commission Xxxxx
TO Net profit------- Xxxxx
(transferred to capital a/c)
xxxxxx Xxxxxx
BALANCE SHEET
The second point of final accounts is the preparation of balance sheet. It is prepared often in
the trading and profit; loss accounts have been compiled and closed. A balance sheet may be
considered as a statement of the financial position of the concern at a given date.
DEFINITION: A balance sheet is an item wise list of assets, liabilities and proprietorship of
a business at a certain state.
J.R.botliboi: A balance sheet is a statement with a view to measure exact financial position of
a business at a particular date.
Thus, Balance sheet is defined as a statement which sets out the assets and liabilities of a
business firm and which serves to ascertain the financial position of the same on any
particular date. On the left-hand side of this statement, the liabilities and the capital are
shown. On the right-hand side all the assets are shown. Therefore, the two sides of the
balance sheet should be equal. Otherwise, there is an error somewhere.
BALANCE SHEET OF ………………………… AS ON

…………………………………….
Liabilities and capital Amount Assets Amount
127
Creditors Xxxx Cash in hand Xxxx
Bills payable Xxxx Cash at bank Xxxx
Bank overdraft Xxxx Bills receivable Xxxx
Loans Xxxx Debtors Xxxx
Mortgage Xxxx Closing stock Xxxx
Reserve fund Xxxx Investments Xxxx
Capital xxxxxx Furniture and fittings Xxxx
Add: Plats&machinery
Net Profit xxxx Land & buildings Xxxx
------- Patents, tm ,copyrights Xxxx
xxxxxxx Goodwill Xxxx
-------- Prepaid expenses
Outstanding incomes Xxxx
Less: Xxxx
Drawings xxxx Xxxx Xxxx
--------- XXXX XXXX
Advantages: The following are the advantages of final balance.

1. It helps in checking the arithmetical accuracy of books of accounts.
2. It helps in the preparation of financial statements.
3. It helps in detecting errors.
4. It serves as an instrument for carrying out the job of rectification of entries.
5. It is possible to find out the balances of various accounts at one place.
128
FINAL ACCOUNTS -- ADJUSTMENTS
We know that business is a going concern. It has to be carried on indefinitely at the end of
every accounting year. The trader prepares the trading and profit and loss account and balance
sheet. While preparing these financial statements, sometimes the trader may come across
certain problems .The expenses of the current year may be still payable or the expenses of the
next year have been prepaid during the current year. In the same way, the income of the
current year still receivable and the income of the next year have been received during the
current year. Without these adjustments, the profit figures arrived at or the financial position
of the concern may not be correct. As such these adjustments are to be made while preparing
the final accounts.
The adjustments to be made to final accounts will be given under the Trial Balance. While
making the adjustment in the final accounts, the student should remember that “every
adjustment is to be made in the final accounts twice i.e. once in trading, profit and loss
account and later in balance sheet generally”. The following are some of the important
adjustments to be made at the time of preparing of final accounts:-
1. CLOSING STOCK:-
(i)If closing stock is given in Trail Balance: It should be shown only in the balance sheet
“Assets Side”.
(ii)If closing stock is given as adjustment:
1. First, it should be posted at the credit side of “Trading Account”.

2. Next, shown at the asset side of the “Balance Sheet”.
2. OUTSTANDING EXPENSES:-
(i)If outstanding expenses given in Trail Balance: It should be only on the liability side of
Balance Sheet.
(ii)If outstanding expenses given as adjustment:
1. First, it should be added to the concerned expense at the
debit side of profit and loss account or Trading Account.
2. Next, it should be added at the liabilities side of the
Balance Sheet.
3. PREAPID EXPENSES:-
(i) If prepaid expenses given in Trial Balance: It should be shown only in assets side of the
Balance Sheet.
(ii)If prepaid expense given as adjustment :
1. First, it should be deducted from the concerned expenses at the debit side of profit and
loss account or Trading Account.
2. Next, it should be shown at the assets side of the Balance Sheet.
129
4. INCOME EARNED BUT NOT RECEIVED [OR] OUTSTANDING INCOME [OR]
ACCURED INCOME:-
(i)If incomes given in Trial Balance: It should be shown only on the assets side of the Balance
Sheet.
(ii)If incomes outstanding given as adjustment:
1. First, it should be added to the concerned income at the credit side of profit and loss
account.
2. Next, it should be shown at the assets side of the Balance sheet.
5. INCOME RECEIVED IN ADVANCE: UNEARNED INCOME:-

(i)If unearned incomes given in Trail Balance: It should be shown only on the liabilities side
of the Balance Sheet.
(ii)If unearned income given as adjustment :

1. First, it should be deducted from the concerned income in the credit side of the profit
and loss account.
2. Secondly, it should be shown in the liabilities side of the
Balance Sheet.
6. DEPRECIATION:-
(i)If Depreciation given in Trail Balance: It should be shown only on the debit side of the
profit and loss account.
(ii)If Depreciation given as adjustment

1. First, it should be shown on the debit side of the profit and loss account.
2. Secondly, it should be deduced from the concerned asset in the Balance sheet assets
side.
7. INTEREST ON LOAN [OR] CAPITAL:-

(i)If interest on loan (or) capital given in Trail balance : It should be shown only on debit
side of the profit and loss account.
(ii)If interest on loan (or) capital given as adjustment:
1. First, it should be shown on debit side of the profit and loss account.
2. Secondly, it should added to the loan or capital in
The liabilities side of the Balance Sheet.
8. BAD DEBTS:-
130
(i)If bad debts given in Trail balance: It should be shown on the debit side of the profit and
loss account.
(ii)If bad debts given as adjustment:

1. First, it should be shown on the debit side of the profit and loss account.
2. Secondly, it should be deducted from debtors in the assets side of the Balance Sheet.
9. INTEREST ON DRAWINGS:-
(i)If interest on drawings given in Trail balance: It should be shown on the credit side of the
profit and loss account.
(ii)If interest on drawings given as adjustments:

1. First, it should be shown on the credit side of the profit and loss account.
2. Secondly, it should be deducted from capital on liabilities
side of the Balance Sheet.
10. INTEREST ON INVESTMENTS:-
(i)If interest on the investments given in Trail balance: It should be shown on the credit side
of the profit and loss account.
(ii)If interest on investments given as adjustments :
1. First, it should be shown on the credit side of the profit and loss account.
2. Secondly, it should be added to the investments on assets side of the Balance Sheet.
Note: Problems to be solved on final accounts
9. Additional topics
--Nil—
10. University Question papers of previous years

(Model paper for the academic year 2018-19)
AR 18
Code No: 18MB2202
131
Geethanjali College of Engineering and Technology, Hyderabad (Autonomous)
III B.Tech(CSE) II Semester(Regular) End Examinations, April/May-2019
Engineering Economics and Accounting
Time: 3 Hours Max. Marks: 70
PART-A 10x 2M = 20M

1. Answer all questions.
a. Define business.
b. What is partnership deed?
c. Write about the supply function?
d. What is the Giffen paradox?
e. What is the opportunity cost?
f. Write about the Margin of Safety?
g. Define working capital.
h. What is NPV?
i. What is accounting?
j. What is the ledger?
PART-B 10x 5M = 50M

2.Explain different kinds of partners.
OR
3.Discuss various types of business entities.
4.Define Eelasticity of demand? Explain the types of elasticity of demand.
OR
5. Elaborate methods of demand forecasting?
6.Explain different types of costs.
OR
7. Explain Law of variable proportions.
8.The machine cost Rs. 1, 00,000 and has scrap value of Rs. 10,000 after 5 years. The net
profits before depreciation and taxes for the five years period are to be projected that Rs.
20,000, Rs. 24,000, Rs. 30,000, Rs. 26,000 and Rs. 22,000. Taxes are 50%. Calculate pay-
back period, accounting rate of return and NPV @12%.
OR
9. List and explain the techniques of Capital Budgeting
132
10. Explain the concepts and conventions of accounting?
OR
11. Write about the i) journal ii) trial balance iii) P&L Account
133
134
.
11. Question Bank

UNIT-I
1. Define business.
2. What is partnership deed?
3. What are features of sole trader?
4. Write about the national income.
5. Explain business cycle.
6. Explain the nature of business.
7. Write a short note on role of Business Economist.
8. Explain the different kinds of partner?
9. How Joint Stock Company formed?
10. Write about the micro and macro economics?
11. Explain the merits of sources of finance?
12. Explain the different types of business entities?
13. Explain the features and phases of business cycle.
14. Explain the nature and scope of business economics?
UNIT-II
135
1. What are the characteristics of good forecasting?
2. Write about the Delphi method?
3. Write about the supply function?
4. What is the giffen paradox?
5. Write about the cross elasticity of demand in case of substitutes?
6. Explain the factors affecting demand?
7. What are the types of demand forecasting?
8. What are the factors affecting in elasticity of demand?
9. Define the elasticity of demand? Explain the types of elasticity of demand?
10. Explain the methods of demand forecasting?
11. Explain the supply of law of demand?
UNIT-III
1. Explain the factors of production?
2. What is the opportunity cost?
3. Write about the Margin of Safety?
4. Describe about the contribution?
5. What is the ISOQUANT?
6. . Write about the cobb-douglas production function?
7. Explain the law of returns?
8. Explain about the Break even analysis?
9. . Explain the economies of scale?
10. Explain about the cost-output relationship?
11. Explain the different types of costs?
12. Explain the methods of demand forecasting?
UNIT-IV
1. Define capital
2. Define working capital.
3. Explain types of capital.
4. Features of capital budgeting proposals
5. What is NPV?
6. List out the techniques of Capital Budgeting.
7. Write a note on IRR?
8. Write a note on PBP.
9. The machine cost Rs. 1, 00,000 and has scrap value of Rs. 10,000 after 5 years. The
net profits before depreciation and taxes for the five years period are to be projected
that Rs. 20,000, Rs. 24,000, Rs. 30,000, Rs. 26,000 and Rs. 22,000. Taxes are 50%.
Calculate pay-back period, accounting rate of return and NPV @12%.
10. SP Limited company is having two projects, requiring a capital outflow of Rs.
3,00,000. The expected annual income after depreciation but before tax is as follows:
136
2. Cash
1. Year
flow
3. 1 4. 90000
5. 2 6. 80000
7. 3 8. 70000
9. 4 10. 50000
11. 5 12. 50000
Depreciation may be taken as 20% of

original cost and taxation at 50% of net income: You are required to calculate (a) Pay-
back period (b) Net present value@15% (c) According rate of return
UNIT-V
12. What is accounting?
13. Explain accounting concepts and conventions
14. What is the book-keeping?
15. Write about the Journal Entries?
16. What is the ledger?
17. What is the Classification of Accounts?
18. Write about the Balance sheet?
19. Explain the different users of Accounting?
20. Explain the functions of accounting
21. Explain the advantages and disadvantages of accounting?
24. Journalize the following transactions:
 1st Jan George started business with Rs. 50,000.
 Paid travelling Expenses Rs. 1500
 Purchased furniture for office use worth 20,000.
 Miscellaneous expenses paid during the month totaled Rs.3,470
 Withdrew cash due to an emergency need 7,000 from the company.
25. From the following Trial Balance of Messrs Rapido and Co. prepare Trading, Profit & Loss
Account and Balance Sheet for the year ending 31st December 1999.
Debit
Name of the account Credit Balance
balance
137
Capital - 10000
Plant and Machinery 4000 -
Sundry Debtors 2400 -
Sundry Creditors 1200
Drawings 1000 -
Purchases 10500 -
Wages 5000 -
Bank 1000 -
Repairs 50 -
Stock 2000 -
Returns Outwards - 500
Rent 400 -
Sales - 16400
Manufacturing Expenses 800 -
Trade Expenses 700 -
Bad Debts 200 -
Carriage 150 -
Bills Payable - 500
Returns Inwards 400 -
28600 28600
The Closing stock is valued at Rs. 1450
Provide Depreciation on plant and Machinery Rs.400
Allow 5% interest on Capital
Rs. 50 is due for repairs
12. Unit wise assignment Questions
UNIT-I
1. Explain different types of companies with examples.
2. What are the causes of Inflation in India?
3. Compare Indian inflation with any other country.
UNIT-II
1. Prepare a chart for law of demand with related graph.
2. Explain the significance of demand forecasting.
3. What is supply? How supply is different from demand.
UNIT-III
1. Explain different types of production function.
138
2. What is market? Explain various market structures.
3. Explain various types of costs
4. Explain BEA
UNIT-IV
1. Explain various sources of capital with the help of a chart.
2. SP Limited company is having two projects, requiring a capital outflow of Rs.
3,00,000. The expected annual income after depreciation but before tax is as fol-
lows:
14. Cash
13. Year
flow
15. 1 16. 90000
Depreciation may be taken 17. 2 18. 80000 as 20% of

original cost and taxation at 50% of net
income: You are required to calculate (a)
19. 3 20. 70000
Pay-back period (b) Net present
value@15% (c) According rate of return
3. Explain the Features 21. 4 22. 50000 and importance
of capital budgeting proposals
23. 5 24. 50000
UNIT-V
1. Explain the advantages and disadvan-
tages of accounting?
13. Unit wise Quiz Questions

Unit-I
CHOOSE THE CORRECT ANSWERS

1. The statement that contains the word ‘ought to’ is called
(a)Prescriptive (b) normative (c) assertive (d) negative
2. The pre-requisite for rational decision making is
(a)Logical analysis of one’s choices without error
(b)Consistency between goals and choices
(c)Rigidly defined choices
(d)Choices not involving any trade-offs
3. Which of the following indicates micro approach from national perspective?
(a)Lock out in a factory (b) per capita income of the country
(c) Total investments in India (d) Total employment in the country
4. What is the position of budget line with respect to indifference curve?
(a) Below (b) above (c) tangential (d) intersecting
5. Which of the following goods is an example of substitutes?
139
(a) Tea and sugar (b) tea and coffee (c) shirt and pant (d) car and petrol
6. Which of the following has highest consumer surplus?
(a)Necessities (b) luxury goods (c) comforts (d) conventional necessities
7. Consumer surplus means
(a) The area outside the budget line (b) the difference between AR and M
(c) The difference between the maximum amounts a person is willing to pay for a good and its Market price
(d) The area inside the budget line
8. Total utility is maximum when
(a) Marginal utility is maximum (b) marginal utility is minimum
(c)Marginal utility is zero (d) marginal utility is less than average utility
9. In case of Giffen’s goods, the demand curve
(a) Slopes downwards (b) slopes upwards
(c) Intersects supply curve (d) meets cost curve
10. In short run firms can adjust their production by changing their
(a) Fixed factors (b) variable factors (c) semi-fixed factors (d) both (a) & (b)
FILL IN THE BLANKS:
1. Earlier, economics is defined as a science of Wealth.
2. Managerial economics is prescriptive in nature as it suggests the right course of action for a
given managerial problem.
3. The technique of establishing economical and logical relationship among the given variable is
called Model building.
4. The decision that deals with the changes in the production consequent upon the changes in in-
puts is called input-output analysis.
5. Consumption deals with consumer behavior.
6. Consumer goods are those which are available for ultimate consumption.
7. An extension is the downward movement along a demand curve.
8. The duration of short-run is relatively shorter than that of long-run.
9. The goods on which the consumer spends major portion of his income are called giffen
goods.
10. The relationship between one variable and its determinants with respect to the quantity de-
mand is called demand function.
Unit-II
Multiple Choice Questions:
1. Demand forecasting is not governed by
(a) Forecasting level (b) degree of orientation (c) degree of competition (d) Market support.
2. The total estimate of different trade associations can also be viewed as
(a) Firm’s forecast (b) National forecast (c) Industry forecast (d) Global forecast
3. Forecasts in terms of total sales can be viewed as ……………….forecast.
(a) Specific (b) general (c) determined (d) Leading
4. Market demand is not affected by
(a) Demography factors (b) Economic factors (c) social factors (d) political factors.
5. In…………..an equation is estimated which best fits in the sets of observations of dependent
variables and independent variables.
(a) Correlation (b) regression (c) barometric technique (d) salesforce opinion method
6. If the income elasticity is positive and greater than one, it is a
(a) Necessity (b) inferior good (c) normal good (d) superior good
7. Price elasticity is always
(a) Positive (b) negative (c) consistent (d) declining
140
8. The demand is said to be relatively inelastic when the change in demand is………the change
in the price.
(a) More than (b) less than (c) equal to (d) not related to
9. Elasticity computed at a given point on the demand curve for an infinitesimal change in price
is called
(a) Unit elasticity (b) arc elasticity (C) Point elasticity (d) arc point elasticity
10. For which of the following categories is the income elasticity of demand negative?
(a) Inferior goods (b) luxury goods (c) medium goods (d) necessities
FILL IN THE BLANKS:

1. The ratio of proportionate change in quantity demanded of a particular product to the propor-
tionate change in its price is called price elasticity of demand.
2. Rate of responsiveness in demand of a commodity for a given change in price is called elas-
ticity.
3. The elasticity between two separate points of demand curve is called arc elasticity.
4. A product with lower number of substitutes is enjoys inelastic demand
5. Demand forecasting is relatively easier in case of established products.
6. Census method is also called total enumeration method.
7. The market demand for a given marketing effort is called market forecast.
8. One set of data is used to predict another set in barometric techniques.
9. Exponential smoothing is an improvement over Moving Averages method.
10. The method of launching the product in a limited market to assess its acceptability among
limited number of customers is called test marketing
UNIT-III
Multiple Choice Questions
1. If the level of production changes, the total cost changes and thus the isocost curve
(a)Moves downwards (b) Moves upwards
(c) moves in a linear fashion (d)Moves in a haphazard manner.
2. Which of the following is not a feature of an Isoquant?
(a) Downward sloping (b) convex to origin
(c) One intersecting the other isoquant (d) do not touch axes
3. The long run, as Economists describe, means
(a) When all the factors of production are variable and firms are free to leave or enter the
industry
(b) a period where the law of diminishing returns holds good.
(c) a period where there are no variable inputs.
(d) all inputs are fixed in supply.
4. The Law of returns is also called
(a) law of fixed proportions (b) law of variable proportions (c) law of constant returns (d)
law of increasing returns.
5. According to which of the following experts, production function is defined as the
maximum amount of output produced with a given set of inputs?
(a) samuelson (b) michael R Baye (c) Cobb-Douglas (d) Boney M
6. Which of the following refers to the expenditure incurred to produce a particular product or
service?
(a) profit (b) price (c) capital (d) cost
7. Short run cost curves are called
(a) Operating curves (b) fixed curves (c) variable curves (d) planning curves
8. Which of the following are fixed in the short run?
(a) Variable costs (b) semi variable costs (c) fixed costs (d) semi fixed costs
141
9. The costs of the next best alternative foregone is known as
(a) Implicit cost (b) sunk cost (c) opportunity cost (d) controllable cost
10. Marginal cost concept in economic theory is not useful to matters relating to
(a) Allocation of resources (b) product pricing decisions
(c) Make or buy decisions (d) product promotion strategies.
11. A monopolist can either control the price or ……..but not both.
(a) Cost (b) output (c) input (d) profit
12. Under perfect competition, the price is equal to
(a) AR=MR (b) AR>MR (c) MR>AR (d) MR not equal to AR
13. In a perfect competition, the demand curve for an individual firm is horizontal and
(a) Perfectly inelastic (b) perfectly elastic (c) unit elasticity (d) none of the above
14. In the short period equilibrium, the price at which the available stock can be sold is called
(a) Standard price (b) retail price (c) market price (d) normal price
Price in the long run is called
(a) Standard price (b) retail price (c) market price (d) normal price
15. The cause for monopoly is not due to
(a) Government policies and legal provisions (b) control over outputs
(c) Mergers and acquisitions (d) research & development
16. The nature of demand curve in Monopoly is
(a) Perfect elastic (b) unit elasticity (c) inelastic (d) none of the above
17. Price discrimination is also called as
(a) Standard pricing (b) preferential pricing (d) differential pricing (d) none of the above
18. Which of the following is not a feature of monopoly?
(a) Single firm (b) Includes neither close substitutes nor competitors
(c) Products with elastic demand (d) certain statutory privileges
19. Which of the following refers to the change in revenue by producing and selling one more
unit?
(a) Total revenue (b) average revenue (c) marginal revenue (d) marginal cost
FILL IN THE BLANKS

1. The quantities of output throughout a given isoproduct or isoquant are equal.
2. Expansion path is also called scale line.
3. The points of tangency represent least cost combination of inputs.
4. L-shaped isocost denotes fixed coefficients of production.
5. Returns to scale are also called factor productivities.
6. When the average cost is falling marginal cost is less than average cost.
7. Timing of cashflows are determined in economic costs.
8. The firm reaches the optimum scale when its marginal cost = average cost.
9. The classification of fixed costs and variable costs holds good only in short run.
10. Telephone bill is an example of semi fixed or semi variable costs.
11. The market with many producers, each producing a differentiated product, is called monopo-
listic competition.
12. A market in which there is freedom of entry and exit for the traders is called perfect market.
13. In a monopolistic competition , the products are similar but not identical.
14. The seller is a price taker in perfect competition.
15. The main feature of monopolistic competition is price differentiation/differential pricing.
16. The market with a single buyer is called monopsony.
142
17. Tenders are based on sealed bid pricing.
18. The pricing strategy where the company fixes very high price for its new product is called
market skimming.
19. The method of pricing where the firm uses the profiles accrued from one of its products to
product diversification is called cross subsidisation.
20. In a perfect market, there is perfect mobility of factors of productio.
14. Tutorial problems Tutorial problems: Nil
15. Known gaps, if any and inclusion of the same in lecture

schedule: Nil
16. Discussion topics
1. Nature and importance of managerial Economics

2. Scope and application areas of Managerial Economics
3. Principles of M.E.
4. Importance of Consumer Laws
5. Demand and factors affecting demand
6. Elasticity of demand
7. Demand Forecasting methods
8. Factors governing the demand forecasting
9. Importance of production & Production functions
10. Laws of returns
11. Returns to scale and returns to factors
12. cost concepts
13. B.E.P. Analysis
14. Differentiate between market structures.
15. price determination under perfect and imperfect competition
16. Price determination under monopoly and monopolistic competition.
17. pricing strategies
18. Features of different business organizations
19. Globalization
20. Liberalization
21. Privatization
22. Industrial Policies and Resolutions
23. Scope for future development
24. Indian reforms towards EXIM policy
25. Types of capital
26. Working capital cycle, components and factors
27. Capital budgeting techniques
28. Advantages and disadvantages of each technique of capital budgeting
29. Accounting process
30. Users of accounting.
31. accounting concepts and conventions
32. classification of revenue and capital expenses
33. preparation of cash book
34. preparation of balance sheet
35. Importance of ratios
36. Different types of ratios.
37. Limitations of ratios
143
38. The use of ratios in financial analysis.
17. References, Journals, websites and E-links if any

References and Journals
 Aryasri, Managerial Economics & Financial Analysis, TMH , 2009

 Varshney & Maheswari, Managerial Economics, Sultan Chand, 2009
 Ambrish Gupta, Financial Accounting for Management, Pearson Education, New
Delhi
 Shim & Siegel, Financial Accounting, Schaum’s Outline Series, 2004
 Chary, Production & Operations Management, TMH, 2004
 Domnick & Salvatore, Managerial Economics in a Global Economy, Thomson, 2003
 Peterson & Lewis, Managerial Economics, Pearson Education, 2004
 Narayanaswamy, Financial Accounting A Management Perspective, PHI, 2005
 Raghunadha Reddy & Narasimha Chary, Managerial Economics & Financial Analy-
sis, Scitech, 2005
 SN Maheswari & SK Maheswari, Financial Accounting, Vikas Publications
 Truet & Truet, Managerial Economics Analysis, Problems & Cases- Weily, 2004
 Dwived, Managerial Ecnomics, Vikas, 2002
 Yogesh Maheswari, Managerial Economics, PHI, 2005
 Prasanna Chandra, Financial Management, TMH
 IM Pandey, Financial Management, Vikas
 Prasanna Chandra, Financial Management, TMH
 Khan & Jain, Financial Management, TMH
 Rastagi, Financial Management, TMH
 VK Bhala, Financial Management, TMH
 SN Maheswari, Financial Management, Vikas Publications
 CNBC TV18 CDs:
 Systematic Investment Planning,2008
 Wizards of Dalal Street 2008
 Simplifying Technical Analysis 2005
 Derivatives: Trader Psychology 2005
 Global Investment Gurus-Focus on India 2006
 PROWESS CMIEPL
 ACCESS Accord Fin Tech Ltd.
Websites
o NSE.com, BSE.com, Capital Infoline.com & Money Control.com
Journal & Articles
o Journal of Financial Management
o Finance India
o Journal of Management
o Journal of Strategic Management
o Journal of Marketing Management
o Journal of Entrepreneurship
o Journal of Economics
o Indian Journal of Chartered Accountant
144
Magazines & News Papers & Electronic Media

o Financial Express, Business Line & Economic Times
o India Today & Business Outlook
18. Quality Measurement Sheets:

Note: Quality measurement sheet will be added at the end of the semester
19. Student List
GEETHANJALI COLLEGE OF ENGINEERING & ENGINEERING

Cheeryal (V), Keesara (M). Medchal Dist, TS 501 301
AUTONOMOUS
Student Nominal Roll
NO:Admin/B.Tech/SR/12 Rev No: 0
Academic Year 2020-21 Date: 03.03.2021
Class & Branch : B.Tech (CSE) II Year II sem Section: A Batch : 2019
SlNo AdmnNo StudentName SlNo AdmnNo StudentName
1 19R11A0501 Mr. ADIT S KUMAR 28 19R11A0528 Mr. NUNE SAI ANIKETH
2 19R11A0502 Mr. AKULA RAVI PRAKASH 29 19R11A0529 Miss PAMMI SESHU MANASA
3 19R11A0503 Mr. ALIMI UDAYKIRAN 30 19R11A0530 Mr. PEESARI DILEEP REDDY
4 19R11A0504 Mr. CHAMAKURA DINESH 31 19R11A0531 Mr. POLISETTY ANDREW BALA ABHILASH
5 19R11A0505 Mr. DUGGIRALA HIMAA SAMIIRR 32 19R11A0532 Mr. POTHUGANTI DHEERAJ REDDY
6 19R11A0506 Mr. DEVAPATHNI GAURAV 33 19R11A0533 Mr. R MADHAVA SAI
7 19R11A0507 Miss DEVULAPALLI SREE NAGA BHAVYA 34 19R11A0534 Mr. ROHIT ACHYUTUNI
8 19R11A0508 Miss ESLAVATH AKHILA 35 19R11A0535 Mr. SAMBARI MANIKANTA
9 19R11A0509 Mr. G EESHWAR 36 19R11A0536 Mr. SHAIK AASIM
10 19R11A0510 Miss GANTAA JHANSI LAKSHMI 37 19R11A0537 Mr. SHIVALINGALA SAI TEJA GOUD
11 19R11A0511 Mr. GATTIGORLA DINESH 38 19R11A0538 Mr. SRIRANGAM VENKATA KRISHNA NAGA SAI
12 19R11A0512 Mr. GOVARDHANAM SREEMANT 39 19R11A0539 Mr. T SHAILENDRA SAINATH
13 19R11A0513 Mr. GOUTE BHANU PRAKASH 40 19R11A0540 Mr. TAMMALI SAKETH SAI
14 19R11A0514 Miss GOUTE BHARGAVI 41 19R11A0541 Mr. V ARUN VALLIAPPAN
15 19R11A0515 Miss GUNDAMALLA BHAVANA 42 19R11A0542 Miss V JEESHITHA
16 19R11A0516 Miss JATOTHU MAIBU 43 19R11A0543 Miss VALLURU POOJA
17 19R11A0517 Mr. KAMUJU NOVA 44 19R11A0544 Miss VANKAYALAPATI VINITHA
18 19R11A0518 Miss KEMSARAM SOWMYA SREE 45 19R11A0545 Mr. VANAMALA TEJA
19 19R11A0519 Miss KORAPOLU SRIYA 46 19R11A0546 Mr. VARKUTI DINESH REDDY
20 19R11A0520 Mr. KUNCHE RAVI KUMAR 47 19R11A0547 Mr. VATTURI PARITOSH
21 19R11A0521 Mr. BYRAGOUNI KUSHAL SAI 48 19R11A0548 Miss VUDHANTHI NEERAJA
22 19R11A0522 Miss MAMIDI LIKHITHA 49 20R15A0501 Miss DUPPALI NIKHITA
23 19R11A0523 Mr. MADISHETTI RAVINDER 50 20R15A0502 Mr. AMRAJ RAJESH KUMAR
24 19R11A0524 Miss MAPATI BHANU SRI 51 20R15A0503 Mr. BALABADRA SRIKANTH
25 19R11A0525 Mr. MEESA SUMITH 52 20R15A0504 Mr. ORAGANTI ROHITH GOUD
26 19R11A0526 Mr. MEHAKAR MAHESH 53 20R15A0506 Mr. VARUSA MAHESH CHANDRA
27 19R11A0527 Miss NALAMACHU SHREYA
145

AUTONOMOUS
Class & Branch : B.Tech (CSE) II Year II sem Section: B Batch : 2019
1 19R11A0549 Mr. ABDUL SUBHAN PASHA 28 19R11A0576 Mr. MOGULLA AKASH REDDY
2 19R11A0550 Miss AQSA ZAREEN 29 19R11A0577 Mr. MOHAMMED MASLIUDDIN
3 19R11A0551 Miss BANDARU VAISHNAVI 30 19R11A0578 Mr. MOSARAMTHOTA VARUN RAJ
4 19R11A0552 Miss BANURI BHAVANA REDDY 31 19R11A0579 Miss NAGULAPALLI LASYA PRIYA
5 19R11A0553 Mr. BHARATAM SAI SACHIN 32 19R11A0580 Miss NANDINI TRIPATHI
6 19R11A0554 Mr. BINDESH YADAV 33 19R11A0581 Mr. NANDULA ROHAN KAUSIK
7 19R11A0555 Miss BOLLABOINA MADHAVI 34 19R11A0582 Mr. NUNE SAI KRISHNA
8 19R11A0556 Mr. CHINTALA ABHISHEK 35 19R11A0583 Mr. P VIVEKVARDHAN
9 19R11A0557 Mr. CHINTALA HEMANTH KUMAR 36 19R11A0584 Mr. PAMIDITI V N SIDDHARTHA
10 19R11A0558 Miss CHINTHAKINDI BHAVANI 37 19R11A0585 Mr. PARKIBANDA NAREN CHARY
11 19R11A0559 Miss CHINTHAPANDU SRAVYA SRI 38 19R11A0586 Mr. PATTAPU KETHAN
12 19R11A0560 Mr. DASARI KARTHIK REDDY 39 19R11A0587 Miss PEDDURI VEENA VANI
13 19R11A0561 Mr. DHARANGULA DAYAKAR 40 19R11A0588 Mr. RAVULA BALA SUBRAMANYAM
14 19R11A0562 Miss FARANISHATH 41 19R11A0589 Miss RITIKAA KAILAS
15 19R11A0563 Miss G VAISHNAVI 42 19R11A0590 Mr. SAMMETA ASHOK KUMAR
16 19R11A0564 Mr. GANDEM SIVANAGA SAI AKHIL 43 19R11A0591 Mr. SIRISANAGANDLA VENU
17 19R11A0565 Mr. GUMPULA RAJU BABU 44 19R11A0592 Miss TARAKA SANJANA
18 19R11A0566 Miss GURRM SHRUTHI 45 19R11A0593 Mr. THALLA LOKESH REDDy
19 19R11A0567 Miss JONDHALE PALLAVI 46 19R11A0594 Mr. TUMMEDA AMITH PAAVAN
20 19R11A0568 Mr. KATTA SURYA VARDHAN REDDY 47 19R11A0595 Miss V SRIKRUTHI
21 19R11A0569 Mr. KEMIDI BHARATH KUMAR 48 19R11A0596 Miss VEERAMOSU SRI PRIYA
22 19R11A0570 Mr. KHAMBHAMMETTU GUNA 49 20R15A0507 Miss BANDOJU RAVALI
23 19R11A0571 Mr. L SHASHIDHAR 50 20R15A0508 Miss VELLANKI MOUNIKA
24 19R11A0572 Miss MAANIKONDA SWETHA 51 20R15A0509 Mr. DUSARI UDAY KUMAR
25 19R11A0573 Mr. MACHERLA CHANDAN SAI 52 20R15A0510 Mr. KALAVENI ARAVIND KUMAR
26 19R11A0574 Mr. MANNE VINAY REDDY 53 20R15A0511 Mr. NEMURI SHARATH CHANDRA
27 19R11A0575 Miss MARKALA MANASWINI
146
AUTONOMOUS
Class & Branch : B.Tech (CSE) II Year II sem Section: C Batch : 2019
1 18R11A05B1 Mr. KASTHALA SAI KALYAN 29 19R11A05C4 Mr. MUSTHYALA SRAVANI
2 19R11A0597 Mr. A KOSHIK KUMAR 30 19R11A05C5 Miss NAMALA DEEPTHI
3 19R11A0598 Mr. BATHULA SREENU 31 19R11A05C6 Mr. NANUVALA TULASI RAM
4 19R11A0599 Mr. BETHI VISHWAMBHAR 32 19R11A05C7 Miss NARRA NAVYA SRI
5 19R11A05A0 Mr. BHOOPALAM KUSHAL 33 19R11A05C8 Miss PALLEM BHOOMIKA
6 19R11A05A1 Mr. BHUVAN VARMA K 34 19R11A05C9 Mr. PANYAM BADRINATH REDDY
7 19R11A05A2 Mr. DHEERAVATH RAMESH NAYAK 35 19R11A05D0 Miss PEDDINENI JAHNAVI
8 19R11A05A3 Mr. DONTHAM S V ABHIRAM 36 19R11A05D1 Mr. PINJARI JUNAID AHMED
9 19R11A05A4 Mr. GADE HARSHAVARDHAN 37 19R11A05D2 Miss PRAJNA S
10 19R11A05A5 Miss GAJJI AKSHITHA 38 19R11A05D3 Mr. SAI NARENDER REDDY BORA
11 19R11A05A6 Mr. GALIGUTTA VINAY REDDY 39 19R11A05D4 Miss SAMYUKTHA ALFRED
12 19R11A05A7 Mr. GANGAPURAM SAI RAM 40 19R11A05D5 Mr. SARALA VINEETH
13 19R11A05A8 Miss GILAKATHULA APOORVA 41 19R11A05D6 Mr. SHIVA PAVAN SUSHANTH
14 19R11A05A9 Mr. K BHARATH KUMAR 42 19R11A05D7 Mr. SHAIK RAHUL PASHA
15 19R11A05B0 Miss K MEGHANA 43 19R11A05D8 Miss T N D S SNIGDHA
16 19R11A05B1 Mr. K VEEREN VISHWANTH SAI 44 19R11A05D9 Miss TADEM MANVITHA
17 19R11A05B2 Mr. KANKANALA HEMANTH REDDY 45 19R11A05E0 Miss TADOORI LAKSHMI PRASANNA
18 19R11A05B3 Miss KONDA HARSHITA 46 19R11A05E1 Mr. V SAI PRAKASH CHARY
19 19R11A05B4 Mr. L GOVIND NAYAK 47 19R11A05E2 Mr. V TEJA
20 19R11A05B5 Mr. LAKKIREDDY VINAY REDDY 48 19R11A05E3 Miss VALLAPUREDDY NIKHITA REDDY
21 19R11A05B6 Mr. LIKKI ABHINAY REDDY 49 19R11A05E4 Miss VANKADOTH LIKITHA
22 19R11A05B7 Mr. MADDULA MAHESH REDDY 50 19R11A05H5 Miss KOMAROOL SAI KEERTHANA
23 19R11A05B8 Mr. MADUPU SWARAN SUJITH 51 20R15A0512 Mr. PADIDOJU SAI GYANESHWAR CHARY
24 19R11A05B9 Miss MANDAVA LIKITHA 52 20R15A0513 Mr. SIRRA SANDEEP
25 19R11A05C0 Mr. MANNAVA KRISHNA CHAITANYA 53 20R15A0514 Mr. THATIKONDA SAI MANISH
26 19R11A05C1 Miss MARAM TEJASWI 54 20R15A0515 Mr. VALU ROUTHU PAVAN KUMAR
27 19R11A05C2 Miss MERUGU DEEPIKA 55 20R15A0516 Mr. VANAMALA NITHIN
28 19R11A05C3 Mr. MUKKOLLU DINESH
147
AUTONOMOUS
Class & Branch : B.Tech (CSE) II Year II sem Section: D Batch : 2019
1 18R11A05N6 Mr. SANKALP SAI VUDATHALA 28 19R11A05H1 Mr. KANAMARLAPUDI REVANTH
2 18R11A05P9 Mr. REGUNTA HEMANTH RAJ 29 19R11A05H2 Miss KANCHUMARTHY SRILEKHA
3 19R11A05E5 Miss ARRAM AKHILA 30 19R11A05H3 Mr. KANITHI HEMANTH
4 19R11A05E6 Miss B MAINA 31 19R11A05H4 Miss KATUKAM AKHILA
5 19R11A05E7 Miss BANDI RASMI REDDY 32 19R11A05H6 Miss KOMMU NIHARIKA
6 19R11A05E8 Mr. BEERAM NUTAN PAVAN SAI 33 19R11A05H7 Mr. KRISTAPURAM PAVAN KUMAR
7 19R11A05E9 Miss BHEEMREDDY POOJITHA 34 19R11A05H8 Miss MALLARAPPU MAHESHWARI
8 19R11A05F0 Mr. BOLLEPALLI SHUBHAM GOUD 35 19R11A05H9 Mr. MUKKU DEERAJ REDDY
9 19R11A05F1 Mr. BUTATI PREETHAM 36 19R11A05J0 Miss MULI MANASA
10 19R11A05F2 Mr. CHALLAGOLLA VENKATA VIKRAM 37 19R11A05J1 Miss P SHIVANI
11 19R11A05F3 Mr. CHINDAM MANI RAJ 38 19R11A05J2 Miss PALLAPU MANISHA
12 19R11A05F4 Mr. CHINMAI KANALA 39 19R11A05J3 Mr. PULIPAKA SAI ABHIGNU
13 19R11A05F5 Mr. DATLA SRIHARSHITH SAI VARMA 40 19R11A05J4 Miss PUVVADA ABHINAYA
14 19R11A05F6 Mr. DANDU ARUN KUMAR REDDY 41 19R11A05J5 Miss RACHAPUDI JAYANI
15 19R11A05F7 Mr. DASARI MANNA 42 19R11A05J6 Mr. RAKESH KUMAR BOMSETTY
16 19R11A05F8 Mr. DODLE VENKATESH 43 19R11A05J7 Miss S ASHVITHA
17 19R11A05F9 Miss G MAITHREYI 44 19R11A05J8 Mr. SARABUDLA VIKRAM REDDY
18 19R11A05G0 Mr. G VENNEL YADAV 45 19R11A05J9 Miss SHANKRAPOLLA SOWMYA REDDY
19 19R11A05G1 Mr. GANTA SANVITH 46 19R11A05K0 Mr. VEESAMSHETTY VARUN
20 19R11A05G2 Miss GAZULA SHEBA RANI 47 19R11A05K1 Miss VISWANADHAPALLI MYTHILI
21 19R11A05G3 Miss GOPAGONI HARIKA 48 19R11A05K2 Miss Y NANDINI
22 19R11A05G4 Mr. GUDUMALA R ANISH CHANDRA 49 20R15A0517 Miss KARRA EVA
23 19R11A05G5 Mr. GUNDABATTINA REVANTH TEJA 50 20R15A0518 Mr. JAVVAJI SHOBHAN BABU
24 19R11A05G6 Miss GUNDETI SANNIHITHA 51 20R15A0519 Mr. KONDA KRISHNASAI
25 19R11A05G7 Mr. HEMANTH NELLURI 52 20R15A0520 Mr. MADA SAI KIRAN
26 19R11A05G8 Mr. JAYYARAPU SAI VAMSHI 53 20R15A0521 Mr. METTU MADHURI
27 19R11A05H0 Mr. KALAVAKOLANU SUDARSHAN SHARMA
148
AUTONOMOUS
Class & Branch : B.Tech (CSE) II Year II sem Section: E Batch : 2019
1 19R11A05K3 Mr. AERVA NAVEENKUMAR 27 19R11A05M9 Mr. MANDA KARTHIK
2 19R11A05K4 Miss AKURATHI PREETHI PAVANI 28 19R11A05N0 Mr. MOHD WAHEEDUDDIN
3 19R11A05K5 Mr. ALLALA ROHITH 29 19R11A05N1 Miss MULA POOJA
4 19R11A05K6 Miss BASANGARI SREENIDHI REDDY 30 19R11A05N2 Mr. MURAHARI AKASH
5 19R11A05K7 Miss BATTU S SHRADDHA PRIYA 31 19R11A05N3 Mr. MUTHYALA VIVEK
6 19R11A05K8 Mr. BAHATAM LOKESH VENKATA ABHINAVA
32 19R11A05N4
RAJU Mr. MYSON SUNNY RAJ
7 19R11A05K9 Miss BOTTA SWATHI 33 19R11A05N5 Miss N J SANJANA
8 19R11A05L0 Mr. BURSU VARUN KUMAR 34 19R11A05N6 Miss N SRI KIRTHANA
9 19R11A05L1 Mr. CHALLA SAIKRISHNA 35 19R11A05N7 Mr. PASALA BALA NIKHIL
10 19R11A05L2 Miss CHERUKU SAHITHISRI 36 19R11A05N8 Mr. PATURI KAUSTUBH
11 19R11A05L3 Miss D VISHNU PRIYA 37 19R11A05N9 Mr. PONNALA SRINIVAS
12 19R11A05L4 Miss DUGGIRALA RAJYALAKSHMI DEVI 38 19R11A05P0 Miss RAYELA BHARGAVI
13 19R11A05L5 Miss G NANDINI LAXMI PRIYA 39 19R11A05P1 Miss SAMPATH VARSHITHA
14 19R11A05L6 Mr. GADDAM VIKAS YADAV 40 19R11A05P2 Mr. SANGISHETTY VAMSHI
15 19R11A05L7 Miss GAIKWAD ASHLESHA 41 19R11A05P3 Miss SANKE INDHUMATHI
16 19R11A05L8 Mr. GANTI YASHWANTH 42 19R11A05P4 Miss SATYA SRAVANI SAMAYAM
17 19R11A05L9 Mr. GORA CHARAN KUMAR GOUD 43 19R11A05P5 Miss SHAIK MEHANAZ ZAMAN
18 19R11A05M0 Miss INALA JAHNAVI 44 19R11A05P6 Mr. SHYAMALA SAI KIRAN
19 19R11A05M1 Miss JAGILLAPURAM BHAVANA 45 19R11A05P7 Miss SIDDAM ROJA
20 19R11A05M2 Mr. JAYADHWAJ REDDY MOTHEY 46 19R11A05P8 Mr. SURAM MAHESH REDDY
21 19R11A05M3 Miss KARRA PRANATHI PRIYA 47 19R11A05P9 Mr. VINAY SARTHAK VODAPALLI
22 19R11A05M4 Miss KARUNYA DUBEY 48 19R11A05Q0 Mr. YERVA KOUSHIK REDDY
23 19R11A05M5 Miss KATEPALLY SATHVIKA 49 20R15A0522 Mr. BATTU SAI RAM
24 19R11A05M6 Mr. KEVIN BRYANT NERELLA 50 20R15A0523 Miss RANGU SRINIJA
25 19R11A05M7 Mr. KOLLIMARLA SAI SANJAY 51 20R15A0524 Mr. VUTPALA LOVEKUSH RAO
26 19R11A05M8 Miss KRISHNA SUPRIYA
28. GROUP-WISE STUDENTS LIST FOR DISCUSSION TOPICS

 Not Applicable
149

B.tech IT-II-II EEA (18MB2202) AY-2020-21

Uploaded by

Copyright:

Available Formats

B.tech IT-II-II EEA (18MB2202) AY-2020-21

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

B.tech IT-II-II EEA (18MB2202) AY-2020-21

Uploaded by

Copyright:

Available Formats

B.Tech.

Geethanjali College of Engineering and Technology

ENGINEERING ECONOMICS AND ACCOUNTING (18MB2202)

Department of Information Technology 1

S.No Topic Page. No.

Department of Information Technology 2

(Name of the Subject) 18MB2202- ENGINEERING ECONOMICS AND ACCOUNTING

Branch: IT Version No: 2

Verified by : * For Q.C Only.

Approved by: (HOD ) 1) Name : Dr.K.Srinivas

Department of Information Technology 3

ENGINEERING ECONOMICS AND ACCOUNTING (18MB2202)

II Yr B.Tech IT II SEM L T P/D C

Department of Information Technology 4

Department of Information Technology 5

GEETHANJALI COLLEGE OF ENGINEERING AND TECHNOLOGY

Department of Information Technology

VISION OF THE INSTITUTE

MISSION OF THE INSTITUTE

VISION OF THE DEPARTMENT

The department of Information Technology endeavors to bring out technically competent,

MISSION OF THE DEPARTMENT

Department of Information Technology 6

Department of Information Technology 7

PROGRAM EDUCATIONAL OBJECTIVES (PEOs) OF B.Tech.(IT) PROGRAM:

PROGRAM OUTCOMES (POs) OF B.Tech.(IT) PROGRAM:

Engineering Graduates would be able to:

1. Engineering knowledge: Apply the knowledge of mathematics, science,

Department of Information Technology 8

2. Problem analysis: Identify, formulate, review research literature, and analyze

3. Design/development of solutions: Design solutions for complex engineering

4. Conduct investigations of complex problems: Use research-based

5. Modern tool usage: Create, select, and apply appropriate techniques,

Department of Information Technology 9

6. The engineer and society: Apply reasoning informed by the contextual

7. Environment and sustainability: Understand the impact of the professional

8. Ethics: Apply ethical principles and commit to professional ethics and

9. Individual and team work: Function effectively as an individual, and as a

10. Communication: Communicate effectively on complex engineering activities

11. Project management and finance: Demonstrate knowledge and

PROGRAM SPECIFIC OUTCOMES (PSOs):

1. To inculcate algorithmic thinking and problem solving skills, applying

2. Develop an ability to design and implement various

1. Course Objectives and outcomes

Course Objective: Develop the ability to:

2. Course mapping with PEOs and POs

Course PEOs Pos

S.No. Course Outcome POs

Mapping of Course outcomes to Program Outcomes

Course Name Program Outcomes

3-Substantial(High) 2-Moderate(Medium) 1-Slight(Low) -:Not Related

a. What role does this course play within the Program?

As a practicing professional Computer Scientist in industry topics studied under business

10. Instructional learning outcomes

2 II Impact of economy on business firms  Demand, determinants of

 Production, Factors of Production,

4 IV Capital budgeting  Capital and its significance

Year/Sem/Sec: II-B.Tech II-Semester Batch - 2

S.No Subject(T/P) Course Code Faculty Name

TT. Coord: HOD: Dean Academics:-_ Principal:_____________

TT. Coord: HOD: Dean Academics:-_ Principal:_____________