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on
By
Mr.V.Venugopal
ASSISTANT
PROFESSOR
DEPARTMENT OF CIVIL
ENGINEERING SASURIE
COLLEGE OF ENGINEERING
VIJAYAMANGALAM 638
056
QUALITY
CERTIFICATE
Class
: IV Year CIVIL
Signature of
HD Name: N.SATHISH KUMAR
SEA
L
Table of Contents
CHAPTER
CONTENTS
BASIC ECONOMICS
1.1 Definition of economics
10
11
12
13
13
PAGE NO
14
23
23
25
26
27
28
29
32
35
40
42
43
44
45
50
ORGANISATION
3.1 Forms of business
54
54
54
55
55
56
56
57
57
59
62
FINANCING
4.1 Types of Loans
66
67
68
69
70
71
72
72
73
74
78
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79
79
80
80
81
82
83
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93
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CE 2451
PC
LT
3 003
OBJECTIVE
The main objective of this course is to make the Civil Engineering student know about the
basic law of economics, how to organise a business, the financial aspects related to
business, different methods of appraisal of projects and pricing techniques. At the end of this
course the student shall have the knowledge of how to start a construction business, how to
get finances, how to account, how to price and bid and how to assess the health of a project.
UNIT I
BASIC ECONOMICS
7
Definition of economics - nature and scope of economic science - nature and scope of
managerial economics - basic terms and concepts - goods - utility - value - wealth - factors of
production - land - its peculiarities - labour - economies of large and small scale consumption - wants - its characteristics and classification - law of diminishing
marginal utility - relation between economic decision and technical decision.
UNIT II
DEMAND AND SCHEDULE
8
Demand - demand schedule - demand curve - law of demand - elasticity of demand - types of
elasticity - factors determining elasticity - measurement - its significance - supply - supply
schedule - supply curve - law of supply - elasticity of supply - time element in the
determination of value - market price and normal price - perfect competition monopoly - monopolistic competition.
UNIT III
ORGANISATION
8
Forms of business - proprietorship - partnership - joint stock company - cooperative
organisation
- state enterprise - mixed economy - money and banking - banking - kinds - commercial
banks
- central banking functions - control of credit - monetary policy - credit
instrument.
UNIT IV
FINANCING
9
Types of financing - Short term borrowing - Long term borrowing - Internal generation of
funds - External commercial borrowings - Assistance from government budgeting support and
international finance corporations - analysis of financial statement Balance Sheet - Profit
and
Loss account - Funds flow
statement.
UNIT V
COST AND BREAK EVEN ANALYSES
13
Types of costing traditional costing approach - activity base costing - Fixed Cost
variable cost marginal cost cost output relationship in the short run and in long run
pricing practice full cost pricing marginal cost pricing going rate pricing bid pricing
pricing for a rate of return appraising project profitability internal rate of return pay
back period net present value cost benefit analysis feasibility reports appraisal
process technical feasibility-economic feasibility financial feasibility. Break even
analysis -basic assumptions breakeven chart managerial uses of break even analysis.
TOTAL: 45 PERIODS
TEXT BOOKS
1.
Dewett K.K. & Varma J.D., Elementary Economic Theory, S Chand & Co., 2006
2.
Sharma JC Construction Management and Accounts Satya Prakashan, New Delhi.
REFERENCES
1.
Barthwal R.R., Industrial Economics - An Introductory Text Book, New Age
2.
Jhingan M.L., Micro Economic Theory, Konark
3.
Samuelson P.A., Economics - An Introductory Analysis, McGraw-Hill
4.
Adhikary M., Managerial Economics
5.
6.
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Definition
Economics:
of
Managerial
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and
Small
Scale
Production
Modern times have witnessed a wonderfully rapid growth in the average size of the individual
business. Indeed, the change in the size of the business unit during the past half-century is almost
as striking as the change from house industry to factory industry in the second half of the
eighteenth century. The movement has gone so far and is still proceeding so rapidly as to excite
very general fear as to its social consequences. Certain dangers resulting from the consolidation
of large competing corporations will be discussed elsewhere.; but it is pertinent at this point, in
connection with the subject of the organization of production, to advert briefly to the advantages
claimed for large scale production and to the compensating advantages enjoyed by small scale
producers.
Advantages of Large Scale Production. The advantages claimed for production on a large scale
resolve themselves into two general classes: (1) economies in making the goods, and (2)
economies in marketing the goods. As to the first, it is claimed that in production on a large scale
there is a saving in (a) capital cost, per unit of product, both in fixed and in circulating capital; in
(5) labor cost, owing to the possibility of more efficient organization ; in (c) the possibility of
making improvements, both through the employment of special investigators and inventors, and
through the comparison of methods in different departments of the same factory or in the same
departments of different factories under the same ownership; in (d) the cost of superintendence;
in (e) the utilization of waste, as is instanced by the Standard Oil Company and the large beef
and pork packing companies; in (f) providing their own aids to making and marketingmaking
their own cans, boxes, etc., and owning railways and steamship lines, etc. In businesses enjoying
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OF
'LAW
OF
DIMINISHING
MARGINAL
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EXPLAINS
'LAW
OF
DIMINISHING
MARGINAL
This is the premise on which buffet-style restaurants operate. They entice you with "all you can
eat," all the while knowing each additional plate of food provides less utility than the one before.
And despite their enticement, most people will eat only until the utility they derive from
additional food is slightly lower than the original.
For example, say you go to a buffet and the first plate of food you eat is very good. On a scale of
ten you would give it a ten. Now your hunger has been somewhat tamed, but you get another full
plate of food. Since you're not as hungry, your enjoyment rates at a seven at best. Most people
would stop before their utility drops even more, but say you go back to eat a third full plate of
food and your utility drops even more to a three. If you kept eating, you would eventually reach a
point at which your eating makes you sick, providing dissatisfaction, or 'dis-utility'.
1.9 Economic Concepts And Techniques Used In Managerial
Economics
Managerial economics uses a wide variety of economic concepts, tools, and techniques in
the decision-making process. These concepts can be placed in three broad categories: (1) the
theory of the firm, which describes how businesses make a variety of decisions; (2) the theory of
consumer behavior, which describes decision making by consumers; and (3) the theory of market
structure and pricing, which describes the structure and characteristics of different market forms
under which business firms operate. 1.THE THEORY OF THE FIRM Discussing the theory of
the firm is an useful way to begin the study of managerial economics, since the theory provides a
broad framework within which issues relevant to managerial decisions are analyzed. A firm can
be considered a combination of people, physical and financial resources, and a variety of
information. Firms exist because they perform useful functions in society by producing and
distributing goods and services. In the process of accomplishing this, they use society's scarce
resources, provide employment, and pay taxes. If economic activities of society can be simply
put into two categoriesroduction and consumptionirms are considered the most basic economic
entities on the production side, while consumers form the basic economic entities on the
consumption side. The behavior of firms is usually analyzed in the context of an economic
model, an idealized version of a real-world firm. The basic economic model of a business
enterprise is called the theory of the firm. 2.PROFIT MAXIMIZATION AND THE FIRM.
Under the simplest version of the theory of the firm it is assumed that profit maximization is its
primary goal. In this version of the theory, the firm's owner is the manager of the firm, and thus,
the firm's owner-manager is assumed to maximize the firm's short-term profits (current profits
and profits in the near future). Today, even when the profit maximizing assumption is
maintained, the notion of profits has been broadened to take into account uncertainty faced by
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The demand for a commodity is its quantit y which consumers are able and willing to buy
at various prices during a given period o f time. Demand is a function of Price (P), Income
(Y), Prices o f related goods(P R) and tastes (T) and expressed as D=f(P ,Y,PR,T). When
income, prices of related goods and tastes are given, the demand function is D=f (P
). It shows quantities of a commodity purchased at given prices.
2.1THE VARIOUS
EMAND
TYPES
OF
i. Price demand: Price demand refers to various quantities of a commodity or service that
a consumer would purchase at a given time in a market at various hypothetical prices.
It is
assumed that other things, such as consumers income, his tastes and prices of interrelated goods, remain unchanged. The demand o f the individual consumer is called
individual demand and the total d emand of the entire consumer combined for the co
mmodity or service
is called industr y d emand. The total demand for the product of an individual firm at
various prices is known as firms demand o r individual sellers d emand.
ii. Income demand: Income demand indicates the relationship between income and the
quantity of commodity demanded. It relates to the various quantities of a commod ity or
service that will be bought by the consumer at various level o f income in a given period
of time, other things equal. The inco me demand function for a commodity increases
with the rises in income and d ecreases with fall income. The inco me demand curve has
a positive slope. But this slope is in the case o f normal goods. In the case of inferior goods
the demand curve id is backward sloping
iii. Cross demand: In case o f related goods the change in the price of one affects the demand
of the other this known as cross demand and its written as d=f(pr). Related goods are of
two types, substitutes and co mplementar y. In the case of the substitutes o r competitive
goods, a rise in the price o f one good a raises the demand, arise in the price of one good
a raises the demand for the other good b, the price o f remaining the same the opposite holds
in the case of a fall in the price o f a when demand for b falls.
2.2 INDIVIDUAL DEMAND SCHEDULE AND CURVE AND MARKET
DEMAND SCHEDULE
Individuals demand schedule and curve: An individual co nsumers demand refers to
the quantities of a commodity demanded b y him at various prices. A demand schedule is a
list of prices and quantities and its graphic representation is a demand curve.
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X
axis-quantity
demanded
Y axis- price
DDdemand
curve
Explanation
:
i. The demand schedule reveals that when the price is Rs.P2, quantity demanded is Q2 units.
As the price decreases to P, the quantity demanded increases t o Q.
ii. The individual demand curve focuses on the effects of a fall or rise in the price of one
commodity on the consumers behavior. They are the substation and income
effects.
Market demand schedule and curve: In a market, there is no t one consumer but
many consumers of a commod ity.
The market demand of a commodity is depicted
on a demand schedule and demand curve. The y show the sum total of various quantities
demanded by all the individuals at various prices. S uppose there are three individuals A,
B and C in a market who purchase the commodity. The demand schedule for the
commodity is depicted in table below.
X
axis-quantity
demanded
Y axis- price
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DDcurve
demand
Explanation
:
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i. Suppose there are three individuals A, B and C in a market who b uy OA,OB and
OC
quantities of the commod ity at the p rice OP, as shown in panels (A),(B) and (C)
respectively.
ii. In the market OQ quantity will be bought which is made up b y adding together the
quantities
OA,OB and OC.
iii. The market demand curve DM is obtained b y the lateral summation o f the individual
demand curves DA, DB and Dc
2.3 DIFFERENCE BETWEEN CHANGES IN
QUANTITY D EMANDED
DEMAND AND
CHANGES IN
Change in Quantity demanded: A demand curve is the graphic representation of the law
of demand. Movement alo ng a demand curve is caused b y a change in the own price
of the commodity. Such as change is called extension and contraction of demand. This
means movement on the demand curve resulting in extension of demand. Demand
contracts as price of good increases. This movement on a demand curve is known as
change in quantity demanded. This is be explained with the help of a diagram
X axis -------Quantit y of
X Y axis---------price of
X
DD
------------demand
curve
Explanation
:
The figure shows that as the price increases the demand decreases & as the price
decreases the demand for the commodity increases.
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Change in demand: A shift of the demand curve is brought about b y change in facto rs
other
than the own price eg. It changes in factor like incomes of the consumer prices of
substitute
products, percentage of women going out to work etc, this is known as change in
demand.
This is explained with the help of a
diagram.
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X axis -------Quantit y of
X
Y axis---------price of
X
DD
------------demand
curve
DD1 ------------Shift in Demand
curve
Explanation
:
The purchasing power of the consumer increases at each given price he starts buying more
of the co mmodity. This tendenc y of the consumer leads to shifts in this demand curve. S
imilar results will emerge if other determinants like price of related goods, tastes, etc,
change. All
the other determinants are therefore, called shift factors, which lead to change in d
emand.
2.4 THE NATURE OF THE D EMAND OR THE VARIOUS DEMAND
DISTINCTIONS
i. Derived de mand and autonomous: Those inputs or commodities which are demanded
to help in further production of commodities are said to have in further production
of commodities are said to have derived demand. For example, raw material, labour
machines etc are demanded not because the y serve only direct consumption need o f the
purchaser but because the y are needed for the production of goods having direct
demand (say , food , scooter . building ,etc)
ii. Demand for producers goods and consume rs goods: The difference in these two types
of demand is that consumers goods are needed for producing other goods (cons umers
goods or further prod ucers goods)
iii. Demand for durable goods non durable goods: Durable goods whether prod ucers
durable or consumers durable are the ones which
can be stored and
whose
replacement can be postponed. O n the other
hand, the non durables are needed as a routine and their demand is
their fore made largely to meet da y to- da y
needs.
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iv. Industry demand a nd firm or co mpany de mand: The term company demand
denotes demand for a particular product of a particular firm Industr y demand refers
to the total demand for the product o f a particular industr y.
v. Total demand and ma rket segment de ma nd: Demand for the market segments is to
be studied b y breaking the total demand into different segments like geo graphical areas ,
sub - products, product use, distribution channels, size of customer groups, sensitivity to
price etc.
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The market segments are so demarcated that each segment has its own ho mogenous
demand characteristics. F urther, each o f these market segments must differ significantly
in terms of delivered prices, net profit margins, and number of substitute s, co
mpetition, seasonal, patterns and c yclical sens itivity.
vi. Short run de mand and long run de mand: Short run demand refers to demand with
its immediate reactions to p rice changes,
Income fluctuations etc.
W hereas long run demand is that which will ultimately exist as a result demand of the
change
in pricing promotion or products imp rovement ,
after enough time is allowed to lat the market adjust itself to the new situation.
2.5 THE CAUS ES FOR THE DOWN WARD SLOPING OF THE DEMAND
CURVE
i. Based on the law of diminishing ma rginal utility: The law of demand is based on the
law of diminishing marginal utility. According to this law, when a consumer b uys mo re
units of a commodity, the marginal utility of that commodity continues to decline
therefore the consumer will buy more units of that commodity only when its price falls.
W hen less units are available, utility and the consumer will be prepared to pa y more fo r the
commodity.
ii. Price effect: W ith the increase in the price as of the product many consumers will
either reduce or stop its consumption and the demand will be reduced. Thus to the price
effect when consumer consume more or less of the commodity, the demand curve slope
downward.
iii. Income effect: When the p rice of a commodity falls the real income o f the
consumer increase because he quantity. On the contrar y with the rise in the price of the
commodity the real income of the consumer falls. This is called the income effect.
iv. Substitution effect: The other effect o f change in the prices of the commodit y is
the substitution effect. W ith the falls in the price o f a commodity the prices of its
substitutes remaining the same cons umer will buy more of this commodity rather that the
substitutes. As a result its demand will increase.
v. Persons in different inco me gro ups: There are person in different income groups in
every society but the majority is in low income gro up. The downward sloping
demand curve depends upon this group. Ordinar y people buy more when price falls and
less when prices rise. The rich do not have any some quantity even at a higher price.
vi. Different uses of certain co mmodities: There are different uses of certain commodities
and service that are responsible for the negative slope of the demand curve with the
increase in the price of such products the y will be used only for more impo rtant uses and
their demand will fall.
2.6 THE REASON FOR THE EXCEPTIONAL DEMAND
CURVE
i. War: If a short age is feared in anticipation o f war people ma y start buying for
building stocks, for hoarding even when the price rises.
ii. Depression: During a depression, the prices o f commodities are ver y low and demand
for them is also less. This is because of the lack o f purchasing power with consumer.
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iii. Giffen paradox: If a commodity happens to be necessity o f life like wheat a nd its price
goes up, consumer are forced to curtail the consumption of mo re expensive foods like
meat and
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fish and wheat being s till the cheapest the y will consume more for it. The
marshallion example is applicable to develop ed economies. In the case of
underdevelopment economy, with the fall in the p rice of an inferior commodity
like maize. Co nsumers will start consuming more o f the superior commodity like
wheat. As a result, the demand for maize will fall .this is what Marshall called giffen
parado x whic h makes the d emand curve to have a positive slope.
iv. Demonstration effect: It consumers are affected b y the
principle
of
conspicuous consumption or demonstration effect the y will like to buy more o f those
commodities which confer distinction on the possessor, when their prices rise. On the
other hand, with the fall in the prices of such articles, their demand falls, as is the case with
diamonds.
v. Ignorance effect: Co nsumers buy more at a higher price under goods the influences of
the ignorance effect where a commodity ma y be mistaken for some other co mmodity,
due to its price, deceptive packing, label, etc.
vi. Speculation: Marshall mentions speculatio n as one o f the important exception to
the
downward sloping demand curve. According to him the law of the demand does not apply
to the demand in a campaign between groups of speculato rs. A group, which desire to
upload a
great quantit y of a thing on to the market, often begins b y buying so me of it openly;
it arranges to sell a great deal quietly and through unaccusto med channels.
2.7 THE
DEMAND
VARIOUS
DETERMINATS
OF
MARKET
i. Price of the product: The law of demand states that the quantit y demanded of a p
roduct which its consumers users would like to buy per unit of time, increases when its
price falls and decreases when its p rice increases other factors remaining constant.
ii. Price of the related goods: The demand for a commodity is also affected b y the
changes in the price of its related goods. Related goods may be substitutes or complementar
y goods
iii. Cons umer inco me: Income is the basic determinant of quantity of a product demanded
since it determines the purchasing power o f the consumer. That is why higher current
disposable incomes spend a larger amount on consumer goods and services than
those with lower income.
iv. Cons umer taste and preferences: Taste and preferences generally depend on the life st
yle social customs religious value attached to a commodity, habit of the people, the general
levels
of living of the societ y a nd age and sex of the consumers taste and preferences. As a
result, consumers reduce or give up the consumption of the some goods and add new ones to
their consumption pattern
v. Adve rtisement expenditure: Advertisement costs are incurred with the objective
of promoting sale o f the p roduct. Advertisement helps in increasing demand for the
product.
vi. Cons umers exceptions: Consumers exceptions regarding the future prices incomes
and supply position o f goods, etc pla y an important role in determining the demand for
goods and services in the short run.
vii. Demonstration effect: W hen new commodities or new models of existing one appear in
the market rich people buy them first.
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viii. Cons umer credit facility: Availability of credit to the consumers from to the seller
banks relation and friends, or from other source encourages the consumer to buy mo re
that what
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the y is why consumers who can borrow more can consume more than those who
cannot borrow. Credit facility mostly affects the demand for durable goods, particularly
those which requires bulk pa yment at the time o f purchase.
ix. Population of the country: The total domestic demand for a product of mass consumption
depends also on the size of the population. Give n the price, per capita income taste and
preference etc, the larger the population the larger and demand for a product. With an
increase (or decrease) in the size of population and with the emplo yment
percentage remaining the same demand for the p roduct tends to increase (or decrease).
x. Distribution of National Income: The level of national income is the basic determinant o
f
the
market
demands
a productthe
higher
the national
the higherpattern
the demand
for
all
normal
goodsfor
and
services. A past
from
its level income,
the distribution
of
national
income is also an important determinant of a
product.
2.8
ELASTICITY
DEMAND
OF
Elasticity o f demand may be defined as the ratio of the percentage change in demand to
the percentage change in price. Ep= Perce nta ge c ha nge in a mo unt de ma nded
Percentage change in
price
2.9
TYPES
DEMAND
OF
ELASTICITY
OF
PRICE
ELASTICITY
OF
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X axis-quantity demanded
Y axis- price
DD1- demand curve
Explanation: Price elasticity of demand is infinity when a small change in price leads to
an infinitely large change in the amount demanded. It is perfectly elastic demand. [E=]
ii. Perfectly in elastic demand: Here a large change in price causes no change in
quantit y demanded. It is zero elastic demand [E=0]. This is explained with the help of a
diagram.
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X axis-quantity demanded
Y axis- price
DD1- demand curve
Explanation: P rice elasticity of demand is unity when the change demand is exa ctly
in proportionate to the change in price. [E=1].
iv. Relatively elastic: W here a small change in price causes a more than proportionate change
in quantity demanded. The price elasticity o f demand is greater than unity [E >1].
This is explained with the help o f a d iagram.
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relatively elastic demand.
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Income
DDdemand
curve
Explanation: The curve Ey shows a positive and elastic income demanded. In the case of
necessities, the coefficient of income of income elasticity is positive but low, Ey=1. Income
elasticity o f demanded is low when the demand for a commodity rises less than
proportionate to the rise in the income.
ii. Positive but inelastic income de mand: It is low if the relative change in quantit y
demanded is less tha n the relative change in mone y income. Ey<1. This is explained
with the help of a diagram.
Income
DDdemand
curve
Explanation: The curve Ey shows a positive but in elastic income demand. In the case
o f necessities, the coefficient of income elasticity is positive but low, Ey<1. Income
elasticity o f demand is low when the demand for a commodity rises less than
proportionate to the rises less than proportionate to the rise income.
iii. Unitary inco me elas ticity of demand: The p ercentage change in quantity demanded is
equal to the percentage change in mone y income. This is explained with the help of a
diagram.
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Y
axis
Income
DDdemand
curve
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Explanation: The curve Ey shows unitar y income elastic ity of demand. In the case
of comforts, the coefficient of income elasticity is unity (Ey=1) when the demand
for a commodity rises in the same proportions as the increases in income.
iv. Ze ro inco me elasticity: A change in income will have no effect on the quantity
demanded.
The value of the coefficient Ey is equal to zero. This is explained with the help of a
diagram.
Income
DDdemand
curve
Explanation: The curve shows a vertical inco me, elasticity demand curve Ey with
zero elasticity
If with the increases in income, the quantity demanded remains unchanged the coefficient
of
income
elasticity,
Ey=0.
v. Infe rior goods: Inferior goods have negative income elasticity of demand. It explains
that less is bought at higher inco mes and more is bought at lower incomes. The value
of the coefficient Ey is less than zero or negative in this case. This is explained with the
help of a diagram.
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ed
Y
axis
Income
DDdemand
curve
Explanation: The coefficient of income elasticity of demand in the case of inferior goods
is negative. In the case o f an inferior good, the consumer will reduce his purchases of it,
when his income increases.
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2.12 DIFFERENT
DEMAND
TYPES
OF CROSS
ELASTICITY OF
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X axis -------Quantit y of
X Y axis---------price of
X
DD
------------demand
curve
Explanation: If the elasticity of demand is equal to unity for all prices of the
commodity only fall in price will cause a proportionate increases in the amount bought, and
therefore will make no change in the total outla y which purchases make for the
commodity thus one is the dividing point. If the elasticity is greater than one it is said to
be elast ic and it is less than it is inelastic curve having same elasticity throughout:2. Point elasticity: The concept of price elasticity can be used in comparing the sensitivity
of the different types of goods e.g., luxuries and necessaries) to changes in their prices.
The
elasticity of d emand is alwa ys negative because change in quantit y demanded is in
opposite direction to the change in price that is a fall in p rice is followed b y rise in
demanded and vice versa hence elasticit y less than zero.
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X axis -------Quantit y of
X Y axis---------price of
X
DD
------------demand
curve
Explanation
:
Elasticity is represented b y fraction distance fro m d to a point on the curve divided b y
the distance from the other end to that point. Thus elasticity of demand is seen on the
points P3, P2and P1 respectively. It is seen that elasticity at a lower point on the curve is
less than at a higher point.
3. Arc elasticity: Arc elasticity is a measure of the average responsiveness to price
changes exhibited by a demand curve over some finite stretch of the curve. This is
explained with the help of a diagram b elow.
X axis -------Quantit y of
X Y axis---------price of
X
DD
------------demand
curve
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Explanation:i. Any two points on a demand curve make an arc the area between p and m on the DD
curve is an arc which measures elasticity over a certain range of prices and quantities.
ii. On any two points of a demand curve the price elasticitys of demand are likely to be
different depending upon how we calculate them.
iii. The closer the two po ints p and m are, the more accurate will be the measure of elasticity.
iv. The arc elasticit y is in fact the elasticity o f the midpoint between p and m on the demand
curve .
v. If there is no difference between the two points and the y merge into each o ther o r coincide,
arc elasticit y becomes po int elasticity.
2.14 THE FACTORS DETERMING PRICE ELASTICITY OF DEMAND
i. Necessaries and conventional necessaries:
people buy fixed quantities of such
commodity whatever is the price. The change in the price o f wheat ma y be immaterial for
upp er classes, but its consumption will certainly increase among the poor when the price
falls. It ma y be noted that demand for a necessity life as a whole ma y be inelastic, b
ut in a competitive market, demand for the output of any particular firm is highly elastic.
If it raises the price a bit, it may lose the entire market.
ii. Demand for luxuries is elastic: It stands to reason that lowering of the price of things
like radio will lead to more bring bought i.e. the demand is elastic. Thus for the same article
the demand ma y be elastic for some people and inelastic for others elastic in one
countr y and inelastic in another and elastic at one time and inelastic at another.
iii. Proportion of total expenditure: It a consumption good absorbs only a small proportion
of total expenditure, eg, salt the demand will not be much affected b y a change in p rice
hence, it will be inelastic.
iv. Substitutes: The main cause of difference in the responsiveness of the demand for that
there are more completing substitutes for some goods than for others. When the price of
tea rises,
we ma y curtail its purchase and take of coffee, and vice versa. In a case like this a change in
price will lead to expansion or contraction in demand.
v. Goods having several uses: Coal is such a commodity when it will be used for several
purposes e. g, cooking heating and industrial purposes; and its demand will increase.
But , when the price goes up, it use will be restricted only to ver y urgent uses and
consequently less will be purchased when the prices rises the demand
will thus
contract when wheat becomes ver y cheap it can be used even as cattle feed hence demand
for a commodity having several uses is elastic
vi. Joint demand: If for instance, carriages beco me cheap but the prices of horses continue
to rule high, demand for carriage will not extend much. In other words the demand for
jointly demanded goods is less elastic.
vii. Goods the use of which can be postponed: Most of us during the war postponed
our purchases where we co uld e.g. building a house, buying furniture or having a
number of warm suits. We go in for such things in a large measure when the y are
cheap demand for such goods is elastic.
viii. Level of prices: If a thing is either ver y e xperience or ver y cheap, the demand will be
in elastic. If the price is too high, a fall in it will not increase the demand much. If on the
other
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hand , it is too low, people will have alread y purchased as much as the y wanted: any
further fall will not increase the demand.
ix. Market imperfectio ns: Owing to ignorance about market trends the demand for a good
may not increase hen its price falls for the simple reasons that consumers ma y not be
aware o f the fall in price.
x. Technological factors: Low price elasticit y ma y be due o some technical reasons.
For example lowering of elasticity ma y be electricit y rates ma y not increas e co nsumption
because the consumers are unable to buy the necessar y electric appliances.
xi. Time period: The elasticity of demand is greater in the long run than in the short run for
the simple reasons that the consumer has more time to make adjustment in his scheme
of consumption. In other word he is able to increase or decrease his demand for a
commodity
2.15 PRACTICAL APPLICATION (OR) IMPOR TANCE (OR) SIGNIFICANCE
OF ELASTICITY OF DEMAND
i. Taxation: The tax will no doubt raises the prices but the demand being in elastic,
people must continue to buy the same quantity o f the commodity. Thus the demand
will not decrease.
ii. Monopoly prices: In the same manner, the b usinessman, especially if he is a
monopolist, will have to consider the nature of demand while fixing his price. In case I is in
elastic, it will pay him to him to change a higher price and sell a smaller quantity. If, on the
other hand, the demand is elastic he will lower the prices, stimulate demand and thus
maximize his monopoly net revenue
iii. Joint products: In such cases separate cos ts are not ascertainable the producers will
be guided mostly b y demand and its nature fixing his price. The transport authorities fix
their rates according to this principle when we say that they charge what the traffic will
bear
iv. Increasing returns: W hen an industry is subject to increasing returns the
manufacturer lowers the price4 to develop the market so that he ma y be able to produce
more and take full advantage o f the economies of large scale production.
v. Output: Elasticity o f demand affects indus trial output reduction in price will
certainly increases the sale in the market as a whole.
vi. Wages: Easticity o f demand also exerts its influence on wages. If demand fo r a
particular type of labour is relatively inelastic, it is eas y to raise wages, but not otherwise.
vii. Poverty in plenty: The concept of elasticity explains the paradox of poverty in the midst
of plenty. This is specially so if prod uce is perishable. A rich harvest ma y actually fetch
less mone y a poor one.
viii. Effect on the economy: The working of the economy in general is affected b y the nature
of consumer demand. It affects the total volume of goods and services prod uced in the
countr y.
It also affects prod ucers demand for different factors of production their allocation and
remuneration.
ix. Economies policies: Modern governments regulate output and prices. The government
can create public utilities where demand is inelastic and monopoly element is p resent.
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x. Inte rnational trade: The nature of d emand for the internationally traded goods is
helpful in determining the quantum of again of gain accruing to the respective countries.
Thus is how it determines the terms of trade.
xi. Price dete rminatio n: The concept of elasticity o f demand is used in explaining
the determination of p rice under various market conditions.
xii. Rate of foreign exchange: With fixing the rate o f exchange, the government has to
consider the elasticity or otherwise of its imports and exports.
xiii. Relation between price elasticity average revenue and ma rginal revenue: This
relationship enables us to understand and co mpare the conditions of equilibrium
under different market conditio ns.
xiv. Price determinatio n: Price determination is forced to be profitable if elasticity o f
demand in another. The monopolist can charge a higher price in the market where elasticity
o f demand is less and a lower price where elasticity o f demand is greater
xv. Measuring degree of monopoly powe r: The less is the elasticit y o f demand higher will
be the price and wider the difference between the marginal cost and greater the
monopoly power, and vice versa.
xvi. Classification of goods as substitutes and co mplements: Goods are classified as
substitutes on the basis of cross elasticity. Two commodities may be considered as
substitutes if cross elasticity is positive and complements when elasticity is negative.
xvii. Boundary
between
industries:
is also useful in
indicating boundaries between industries. Goods with high cross elasticitys constitute
one industry,
where as goods with lower elasticity constitute different
industries.
xviii. Market forms: The concept of cross elasticity help[s to understand different market forms
infinite cross elastic ity indicates perfect market forms infinite cross elasticity
indicates perfect competitions, where as zero or hear zero elasticity indicates pure
monopoly and high elasticity indicates imperfect competition
xix. Incidence of taxes: The concept of elasticity o f demand is used in explaining the
incidence of indirect taxes like sales tax and excise duty. less is the elasticity of demand
higher the incidence, and vice versa. In case of inelastic demand the consumer have
to buy the commodity and must bear the tax.
xx. Theory of distribution: Elasticity of demand is useful in the determination of relative
shares of the various factors determination of relative shares of the various factors of
production is loss elastic, its share in the national dividend is higher, and vice versa.
If elasticity of substitution is high the share will be low.
2.16 SUPPLY
The supply o f a commodity means the amount of that commodity which producers are
able and willing to offer for sale at a given price. The supply curve is explained with the
help of a diagram.
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X axis-----Quantity S upp
lied
Y
axis-----Price
Explanation: The figure shows that as the price of a commodity increases from P to P1,
the supply also increases fro m Q to Q1. It means that price & supply are directly related.
Reserve
Price
If the p rice falls too much, supply ma y dr y up altogether. The price below which the
seller will refuse to sell is called Reserve P rice.
At this price, the seller is said
to buy his own stock.
Law of Supply
Other things remaining the same, as the price of a commodity rises, its supply increases;
and
as the price falls, its supply declines.
Supply function
Supply function o f a firm or an industr y (a group of firms) is an algebrate expression
relating the quantity o f a commodity which a seller is willing and able to supply. The
supply function
can be written as: x=f (Px, F E, FP, PR, W, E,
N)
Where certain important determinants of supply are: Product p rice (P x), Factor
productivities
or State of Technology(F E), Factor prices(FP ), rises of other products related
in
production(PR), Weather, strikes and other short-run forces(W), Firms expectations
about
future p rospects for prices, costs, sales and the sate of economy in general(E), N umber
(N)
2.17 Limitations of Law of S
upply
i. Future Prices: When the p rice rises and the seller expects the future price to rise
further, supply will decline as the seller will be induced to withhold supplies so as to
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sell later and earn larger pro fits then.
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2.18 FACTORS INFLUENCING S UPPLY
i. Goals of firms: The supply o f a commodity depends upon the goals of firms.
ii. Price of the commodity: The supply o f a commodity depends upon the price of
that commodity. Ceteris paribus the higher the p rice of the commodity the more p ro
fitable it will be to make that commod ity. O ne expects, therefore, that the higher the price,
the greater will be the supply.
iii. Prices of all other co mmodities: The supply of a commodity depends upon the prices o f
all other commodities. Generally, an increase in the price of other co mmodities will
make production of the commodity whose price does not rise relatively less attractive than
it was previously. We thus expect that ceteris paribus, the supply of one commodity
would fall as the price of other commodities rises.
iv. Prices of factors of production: The supply of a commodity depends upon the prices
of factors of production.
A rise in the price of one factor o f productio n will
cause a large increase in the costs of making those goods which use a great deal of that
factor, and only a small increase in the cost of producing those co mmodities which use a
small amount of the factor.
v. State of technology: The supply o f a commod ity depends upon the state of technolo gy.
vi. Time factor: Time factor can also determine elasticity of supply.Time can be broadly
classified into three categories: Market period is the one where supply is fixed as no factor
of production can be altered.
vii. Short period is the time period when it is possible to adjust supply only b y changing
the variable factors like raw- material, labor, etc., and Long period where supply can be
changed at will because all the factors can b e changed.
viii. Agree ment among the producers: S upply ma y be consciously decreased b y
agreement among the producers.
ix. To raise price: Supply ma y also be destro yed to raise p rice.
x. Taxation on output or imports: Supply ma y also be affected b y taxation on output
or imports.
Government ma y also restrict production of certain commodities on
grounds of health (e. g., opium in Ind ia).
xi. Political disturbances or war ma y also create scarcity of certain goods.
2.19 CHANGE IN S UPPLY AND SHIFT IN SUPPLY
Change in supply means increase o r decrease in quantity supplied at the same price.
This is explained with the help o f a diagram.
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X axis-----Quantity S upp
lied
Y
axis-----Price
SSSupply
Curve
Explanation: The figure shows that as the price of a commodity increases from P to P1, the
supply also increases fro m Q to Q1. It means that price & supply are directly related.
The movement of the supply is along the same curve. In other words increase in supply is
known as extension of supply & decrease in supply is kno wn as contraction of supply.
2.20
SHIFT
SUYPPCLURVE
IN
Shift in supply means shifting the entire supply curve due to various reasons other than
price like changes in technolo gy, government policies etc. This is explained with the
help of a diagram.
X axis-----Quantity S upp
lied
Y
axis-----Price
Explanation: The figure shows that as the price of a commodity does not change but still
the supply curve shifts from SS TO S1S1 OR S2S2. It means shifting the entire supply
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curve is due to various reasons other than price like changes in technolo gy, gover nment
policies etc.
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2.21 ELASTICITY OF SUPPLY
X axis-quantity supplied
Y axis- price
SS- supply curve
Explanation: The elasticity o f supply is infinity when a small change in price leads to an
infinitely large change in the quantity supplied. It is perfectly elastic supply. [E=]
ii. Perfectly in elastic s upply: Here a large change in price causes no change in
quantit y supplied. It is zero elastic supply [E=0]. This is explained with the help of a
diagram.
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X axis-quantity supplied
Y axis- price
SS- supply curve
Explanation: The figure shows that even if the price increases from p to p1 there is
no change in the quantit y supplied.
iii. Unitary elastic: W here a given proportionate change in price causes an equally propo
rtionate change in quantit y supplied. This is explained with the help of a diagram.
X axis-quantity supplied
Y axis- price
SS- supply curve
Explanation: Elasticity of supply is unity when the change in supply is exactly propo
rtionate to the change in price. [E=1].
iv. Relatively elastic: Where a small change in price causes a more than proportionate change
in quantity supplied. The price elasticity o f supply is greater than unity [E >1 ].This is
explained with the help of a diagram.
X axis-quantity supplied
Y axis- price
SS- supply curve
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Explanation: The figure shows that there is a small increase in price fro m P to P1, but it
has resulted in a large increase in quantity supplied from Q to Q1. It is also known as
relatively elastic supply.
v. Relatively inelastic Supply: W here a large change in price causes a less than propo
rtionate change in quantit y supp lied. The elasticit y o f supply is lesser than unity [E
<1]. This is explained with the help o f a diagram.
X
axis-quantity
supplied
Y axis- price
SSsupply
curve
Explanation: The figure shows that there is a large increase in price from P to P1, but it has
resulted in only a small increase in quantit y supplied from Q to Q1. It is also known
as relatively inelastic supply.
2.23 THE
UTILITY
LAW
OF
DIMINISHING
MARGINAL
The law of diminishing marginal utility states that as the quantity consumed of a
commodity increases, the utility derived from each successive unit decreases, consumption
of all other commodities remaining the same.
Assumptions of diminishing ma rginal
utility
i. The utility analysis is based on the cardinal co ncept which assumes that utility is
measurable and additive like we ights and lengths of goods.
ii. Utility is measurable in terms of mone y.
iii. The marginal utilit y o f mone y is assumed to be constant.
iv. The consumer is rational who measures, calculates, chooses and co mpares the utilities
of different units of the various commodities and aims at the maximization of utility.
v. He has full knowled ge of the availability of commodities and their technical qualities.
vi. He possesses perfect knowledge o f the choices of commodities open to him and his
choices are certain.
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vii. He knows the exact prices of various commodities and their utilities are not influenced
b y variations in their price.
viii. There are no substitutes.
This is explained with the help o f a diagram.
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iv. Downward sloping demand curve: It is this law which tells us why demand curve
slope downwards.
It is due to this law that smaller utility lines
cut larger portions of the commodity line, i.e., X-axis.
v. Value-in-use and value -in-exchange: It also explains the divergence between value-inuse and value- in-exchange.
vi. Socialis m: The marginal utility to the rich o f the wealth, that the y might lose, is not so
great as the marginal utility o f the wealth which is transferred to the poor.
vii. Basis if some economic laws: Some ver y important laws of econo mics are based on the
law of diminishing marginal utility, ex. Law of demand, the concept of consumers
surplus, the
concept of elasticity o f demand, the law of substitution, etc. These laws and concepts
have
ultimately been derived from the law of diminishing marginal
utility.
2.25
LIMITATIONS
MARGINALILUITTY
OF
DIMINISHING
i. Utility cannot be measured ca rdinally: The basis of the utility analysis- that it
is measurable- is defective because utilit y is a subjective and ps ycholo gical concept
which cannot be measured cardinally. In really, it can be measured o rdinally.
ii. Single co mmodity model is unrealistic: The utility analysis is a single commodity
model in which the utility of one commodity is regarded independent of the other.
Marshall
considered substitutes and complementar y as one commodity, but it makes the utility
analysis unrealistic.
iii. Money is an imperfect measure of utility : Marshall measures utility in terms of mone y,
but mone y is an incorrect and imperfect measure o f utility because the value of mone
y often changes.
iv. Marginal utility of money is not constant: The fact is that a consumer does not buy
only one commodity but a number o f commodities at a time. In this wa y when a major
part of his income is spent on buying commodities, the marginal utility of the remaining
stock of mone y increases.
v. Man is not rational: This assumption is also unrealistic because no co nsumer compares
the utility and disutility fro m each unit of a commodity while buying it. Rather, he buys
them
under the influence of his desires, tastes or habits. Moreover, co nsumers income and p
rices of commodities also influence his purchases. Thus the consumer does not buy
commodities rationally. This makes the utility analysis unrealistic and impracticable.
vi. Utility analysis does not study income effect, substitution effect a nd price effect:
The utility analysis does not explain the effect o f a rise or fall in the income of the
consumer on the demand for the commodities.
It thus neglects the
income effect.
Again when with the change in the price o f one
commodity there is a relative change in the price of the other commodity, the consumer
substitutes one for the other. This is the substitution effect which the utility analysis fails
to discuss.
vii. Utility analysis fails to clarify the study of inferior and giffen goods: Marshalls utility
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analysis of demand does not clarify the fact as to why a fall in the price of inferior and
giffen goods leads to a decline in its demand.
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viii. The assumption that the consume r buys mo re units of a commo dity whe n its price
falls is unrealistic:
It ma y be true in the case of food products like oranges,
bananas, apples, etc. but not in the case of durable goods.
ix.
LAW
OF
-EQUIMARGINAL
It is also called as the law of substitution, or the law of indifference, or the law of maximum
satisfaction. It is called the law of subs titution because when we substitute the more
useful one. It is known as the law of maximum satisfaction, because through its
application we are able to maximize our satisfaction. According to the law of equimarginal utility, it is only when marginal utilities have been equalized, through the
process of substitution. That one gets maximum satisfactio n.
Assumptions of law of equi- ma rginal
utility
i. The utility analysis is bases on the cardinal co ncept which assumes that utility is
measurable and additive like weights and length o f goods.
ii. Utility is measurable in terms of mone y.
iii. The marginal utilit y o f mone y is assumed to be constant.
iv. The consumer is rational who measures, calculates, chooses and co mpares the utilities
of different units of the various commodities and aims at the maximization of utility.
v. He has full knowled ge of the availability of commodities and their technical qualities.
vi. He possesses perfect knowledge o f the choices of commodities open to him and his
choices are certain.
vii. He knows the exact prices o f various commodities and their utilities are not influenced b y
variations in their
prices. viii. There are no
substitutes.
This is explained with the help o f a
diagram.
X
axis
demanded
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Y
axis
Income
Ua-Total Utility of
a
Ub-Total Utility of
b
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3.13.33ChapterCC
C
3333jllolubgfthcxfcxh3.1 FORMS
Chapter 3
Organization
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(c) Less Legal Formalities: The formation and operation of a sole proprietorship form of
business organisation does not involve any legal formalities. Thus, its formation is quite easy and simple
3.4 Merits Of
Organisation
Sole
Proprietorship
Form
Of
Business
(a) Easy to Form and Wind Up: It is very easy and simple to form a sole proprietorship form of
business organisation. No legal formalities are required to be observed. Similarly, the business can be
wind up any time if the proprietor so decides.
b) Quick Decision and Prompt Action: As stated earlier, nobody interferes in the affairs of the
sole proprietary organisation. So he/she can take quick decisions on the various issues relating to
business and accordingly prompt action can be taken.
(c) Direct Motivation: In sole proprietorship form of business organisations. the entire profit of the
business goes to the owner. This motivates the proprietor to work hard and run the business
efficiently.
(d) Flexibility in Operation: It is very easy to effect changes as per the requirements of the business.
The expansion or curtailment of business activities does not require many formalities as in the case of
other forms of business organisation
(e) Maintenance of Business Secrets: The business secrets are known only to the proprietor. He is
not required to disclose any information to others unless and until he himself so decides. He is also not
bound to publish his business accounts
(f) Personal Touch: Since the proprietor himself handles everything relating to business, it is
easy to maintain a good personal contact with the customers and employees. By knowing the likes,
dislikes and tastes of the customers, the proprietor can adjust his operations accordingly. Similarly,
as the employees are few and work directly under the proprietor, it helps in maintaining a harmonious
relationship with them, and run the business smoothly.
3.5 Limitations Of Sole Proprietorship Form Of Business Organisation
(a) Limited Resources: The resources of a sole proprietor are always limited. Being the single owner it
is not always possible to arrange sufficient funds from his own sources. Again borrowing funds
from friends and relatives or from banks has its own implications. So, the proprietor has a limited
capacity to raise funds for his business
(b) Lack of Continuity: The continuity of the business is linked with the life of the proprietor.
Illness, death or insolvency of the proprietor can lead to closure of the business. Thus, the continuity
of business is uncertain.
(c) Unlimited Liability: You have already learnt that there is no separate entity of the business from
its owner. In the eyes of law the proprietor and the business are one and the same. So personal
properties of the owner can also be used to meet the business obligations and debts.
(d) Not Suitable for Large Scale Operations : Since the resources and the managerial ability is limited,
sole proprietorship form of business organisation is not suitable for large-scale business
(e)
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business organisations.
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3.6
Partnership
Partnership is an association of two or more persons who pool their financial and managerial resources
and agree to carry on a business, and share its profit. The persons who form a partnership are
individually known as partners and collectively a firm or partnership firm.
Lets assume that Gopal joins hand with Rahim to start a big grocery shop. Here both Gopal
and Rahim are called partners who are running the partnership firm jointly. Both of them will pool their
resources and carry on business by applying their expertise. They will share the profits and losses in the
agreed ratio. In fact, for all terms and conditions of their working, they have to sit together to decide
about all aspects. There must be an agreement between them. The agreement may be in oral, written or
implied. When the agreement is in writing it is termed as partnership deed. However, in the absence of
an agreement, the provisions of the Indian Partnership Act 1932 shall apply.
Partnership form of business organisation in India is governed by the Indian Partnership Act,
1932 which defines partnership as the relation between persons who have agreed to share the profits of
the business carried on by all or any of them acting for all
3.7 Characteristics
Organisation
Of
Partnership
Form
Of
Business
Based on the definition of partnership as given above, the various characteristics of partnership form of
business organisation, can be summarised as follows
(a) Two or More Persons: To form a partnership firm atleast two persons are
required.
The maximum limit on the number of persons is ten for banking business and 20 for other businesses. If
the number exceeds the above limit, the partnership becomes illegal and the relationship among them
cannot be called partnership
(b) Contractual Relationship: Partnership is created by an agreement among the persons who have
agreed to join hands. Such persons must be competent to contract. Thus, minors, lunatics and
insolvent persons are not eligible to become the partners. However, a minor can be admitted to the
benefits of partnership firm i.e., he can have share in the profits without any obligation for losses.
(c) Sharing Profits and Business: There must be an agreement among the partners to share the profits
and losses of the business of the partnership firm. If two or more persons share the income of jointly
owned property, it is not regarded as partnership.
d) Existence of Lawful Business: The business of which the persons have agreed to share the profit
must be lawful. Any agreement to indulge in smuggling, black marketing etc. cannot be called
partnership business in the eyes of law.
(e) Principal Agent Relationship: There must be an agency relationship between the partners. Every
partner is the principal as well as the agent of the firm. When a partner deals with other parties he/she
acts as an agent of other partners, and at the same time the other partners become the principal.
(f) Unlimited Liability: The partners of the firm have unlimited liability. They are jointly as well
as individually liable for the debts and obligations of the firms. If the assets of the firm are
insufficient to meet the firms liabilities, the personal properties of the partners can also be utilised
for this purpose. However, the liability of a minor partner is limited to the extent of his share in the
profits
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analysis But an
(g) Voluntary Registration: The registration Engineering
of partnership
firm isand
notCost
compulsory.
unregistered firm suffers from some limitations which makes it virtually compulsory to be
registered. Following are the limitations of an unregistered firm
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Benefits of Specialisation: All partners actively participate in the business as per their
specialisation and knowledge. In a partnership firm providing legal consultancy to people, one
partner may deal with civil cases, one in criminal cases, another in labour cases and so on as per
their area of specialisation. Similarly two or more doctors of different specialisation may start a clinic
in partnership.
(h) Protection of Interest: In partnership form of business organisation, the rights of each partner
and his/her interests are fully protected. If a partner is dissatisfied with any decision, he can ask for
dissolution of the firm or can withdraw from the partnership.
(i) Secrecy: Business secrets of the firm are only known to the partners. It is not required to disclose
any information to the outsiders. It is also not mandatory to publish the annual accounts of the firm.
3.9 Limitations Of Partnership Form Of Business Organisation
A partnership firm also suffers from certain limitations. These are as follows:
(a) Unlimited Liability: The most important drawback of partnership firm is that the
liability of the partners is unlimited i.e., the partners are personally liable for the debt and
obligations of the firm. In other words, their personal property can also be utilised for payment of
firms liabilities.
(b) Instability: Every partnership firm has uncertain life. The death, insolvency, incapacity or the
retirement of any partner brings the firm to an end. Not only that any dissenting partner can give
notice at any time for dissolution of partnership.
(c) Limited Capital: Since the total number of partners cannot exceed 20, the capacity to raise funds
remains limited as compared to a joint stock company where there is no limit on the number of share
holders.
(d) Non-transferability of share: The share of interest of any partner cannot be transferred to other
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partners or to the outsiders. So it creates inconvenience
forEconomics
the partnerand
who
wants
to transfer his
share to others fully and partly. The only alternative is dissolution of the firm.
(e) Possibility of Conflicts: You know that in partnership firm every partner has an equal right to
participate in the management. Also every partner can place his or her opinion or viewpoint before
the
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management regarding any matter at any time. Because of this, sometimes there is friction and quarrel
among the partners. Difference of opinion may give rise to quarrels and lead to dissolution of the firm.
3.10
Types
Partners
Of
You have learnt that normally every partner in a firm contributes to its capital, participates in the
day-to- day management of firms activities, and shares its profits and losses in the agreed ratio. In
other words all partners are supposed to be active partners. However, in certain cases there are partners
who play a limited role. They may contribute capital and such partners cannot be termed as active
partners. Similarly, some persons may simply lend their name to the firm and make no contribution to
capital of the firm. Such persons are partners only in name. Thus, depending upon the extent of
participation and the sharing of profits, liability
etc., partners can be classified into various categories. These are summarised here
under
(a) Based on the extent of participation in the day-to-day management of the firm partners
can be classified as Active Partners and Sleeping Partners. The partners who actively participate in
the day-to- day operations of the business are known as active partners or working partners. Those
partners who do not participate in the day-to-day activities of the business are known as sleeping or
dormant partners. Such partners simply contribute capital and share the profits and losses
(b) Based on Liability, the partners can be classified as Limited Partners and General Partners.
The liability of limited partners is limited to the extent of their capital contribution. This type of
partners is found in Limited Partnership firms in some European countries and USA. So far, it is not
allowed in India. However, the Limited liability Partnership Act is very much under consideration of
the Parliament. The partners having unlimited liability are called as general partners or Partners with
unlimited liability. It may be noted that every partner who is not a limited partner is treated as a
general partner.
(c) Based on the behaviour and conduct exhibited, there are two more types of partners besides the
ones discussed above. These are (a) Partner by Estoppel; and (b) Partner by Holding out. A person
who behaves in the public in such a way as to give an impression that he/she is a partner of the
firm, is called
partner by estoppel. Such partners are not entitled to share the profits of the firm, but are fully liable if
some body suffers because of his/her false representation. Similarly, if a partner or partnership firm
declares that a particular person is a partner of their firm, and such a person does not disclaim it,
then he/she is known as
Partner by Holding out. Such partners are not entitled to profits but are fully liable as regards the
firms debts
.
3.11 Suitability Of Partnership Form Of Business Organisation
We have already learnt that persons having different ability, skill or expertise can join hands to form
a partnership firm to carry on the business. Business activities like construction, providing legal services,
medical services etc. can be successfully run under this form of business organisation. It is also considered
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suitable where capital requirement is of a medium size.
Thus, business
like a wholesale
trade, professional
services, mercantile houses and small manufacturing units can be successfully run by partnership firms
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3.12 Formation
Organisation
Of
Partnership
Form
Family
Form
Of
Business
After knowing about sole proprietorship and partnership forms of business organisation let us now
discuss about a unique form of business organisation that prevails only in India and that too among the
Hindus. The Joint Hindu Family (JHF) business is a form of business organisation run by Hindu
Undivided Family (HUF), where the family members of three successive generations own the business
jointly. The head of the family known as Karta manages the business. The other members are called coparceners and all of them have equal ownership right over the properties of the business.
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The membership of the JHF is acquired by virtue of
birth in theEconomics
same family.
is no restriction for
minors to become the members of the business. As per Dayabhaga system of Hindu Law, both male and
female members are the joint owners. But Mitakashara system of Hindu Law says only male members of
the family can become the coparceners. While the Dayabhaga system is applicable to the state of West
Bengal, Mitakshara system of
Hindu Law
is
applicable
to
the
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3.14 Characteristics
Organisation
Jhf
Form
Of
Business
From the above discussion, it must have been clear to you that the Joint Hindu family business has
certain special characteristics which are as follows:
(a) Formation: In JHF business there must be at least two members in the family, and family should have
some ancestral property. It is not created by an agreement but by operation of law.
(b) Legal Status: The JHF business is a jointly owned business. It is governed by the
Hindu Succession Act 1956.
(c) Membership: In JHF business outsiders are not allowed to become the coparcener.
Only the members of undivided family acquire co-parcenership rights by birth.. (d) Profit Sharing:
All coparceners have equal share in the profits of the business.
(e) Management: The business is managed by the senior most member of the family known as Karta.
Other members do not have the right to participate in the management. The Karta has the authority to
manage the business as per his own will and his ways of managing cannot be questioned. If the
coparceners are not satisfied, the only remedy is to get the HUF status of the family dissolved by mutual
agreement.
(f) Liability: The liability of coparceners is limited to the extent of their share in the business. But the
Karta has an unlimited liability. His personal property can also be utilised to meet the business liability.
(g) Continuity: Death of any coparceners does not affect the continuity of business.
Even on the death of the Karta, it continues to exist as the eldest of the coparceners takes position of
Karta. However, JHF business can be dissolved either through mutual agreement or by partition suit in
the court.
3.15 Merits Of Jhf Form Of Business Organisation
Since Joint Hindu Family business has certain peculiar features as discussed above, it has the following merits.
(a) Assured Shares in Profits: Every coparcener is assured of an equal share in the profits irrespective of
his participation in the running of the business. This safeguards the interest of minor, sick, physically and
mentally challenged coparceners.
(b) Quick Decision: The Karta enjoys full freedom in managing the business. It enables him to take
quick decisions without any interference.
(c)
Sharing of Knowledge and Experience: A JHF business provides opportunity for the young
members of the family to get the benefits of knowledge and experience of the elder members. It also
helps in inculcating virtues like discipline, self-sacrifice, tolerance etc.
(d) Limited Liability of Members: The liability of the coparceners except the Karta is limited to the
extent of his share in the business. This enables the members to run the business freely just by following the
instructions or direction of the Karta
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(f) Continued Existence: The death or insolvency of any member does not affect the continuity
of the business. So it can continue for a long period of time.
(g) Tax Benefits: HUF is regarded as an independent assessee for tax purposes. The share of
coparceners is not to be included in their individual income for tax purposes.
3.16 Limitation Of Jhf Form Of Business Organisation
(a) Limited Resources: JHF business has generally limited financial and managerial resource.
Therefore, it is not considered suitable for large business.
(b) Lack of Motivation: The coparceners get equal share in the profits of the business
irrespective of their participation. So generally they are not motivated to put in their best.
(c) Scope for Misuse of Power: Since the Karta has absolute freedom to manage the business,
there is scope for him to misuse it for his personal gains. Moreover, he may have his own
limitations.
(d) Instability: The continuity of JHF business is always under threat. A small rift within the
family may lead to seeking partition
3.17 Cooperative organisation
You have learnt about Sole Proprietorship, Partnership and Joint Hindu Family as different
forms of business organisation. You must have noticed that while there are many differences among
them in respect of their formation, operation, capital contribution and liabilities, there is one
similarity that they all are engaged in business to earn profit. However, there are certain
organisations which undertake business activities with the prime objective of providing service to
the members. Although they also earn some amount of profit, but their main intention is to look
after some common interest of its members. They pool available resources from the members,
utilise the same in the best possible manner and share the benefits. These organisations are
known as Cooperative Societies. Let us learn in detail about this form of business organisation.
The term cooperation is derived from the Latin word co-operari, where the word Co means
with and operari mean to work. Thus, the term cooperation means working together. So
those who want to work together with some common economic objectives can form a society,
which is termed as cooperative society.
3.18 Characteristics Of Cooperative Society
Based on the above definition we can identify the following characteristics of cooperative
society form of business organisation:
(a) Voluntary Association: Members join the cooperative society voluntarily i.e., by their
own choice. Persons having common economic objective can join the society as and when
they like, continue as long as they like and leave the society and when they want.
(b) Open Membership: The membership is open to all those having a common economic
interest. Any person can become a member irrespective of his/her caste, creed, religion,
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colour, sex etc.
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Of
Cooperative
You know cooperative organisations are set up in different fields to promote the economic wellbeing of different sections of the society. So, according to the needs of the people, we find
different types of cooperative societies in India. Some of the important types are given below.
(a) Consumers Cooperative Societies: These societies are formed to protect the interest of
consumers by making available consumer goods of high quality at reasonable price.
(b) Producers Cooperative Societies: These societies are formed to protect the interest of
small producers and artisans by making available items of their need for production, like raw
materials, tools and equipments etc.
(c) Marketing Cooperative Societies: To solve the problem of marketing the products,
small producers join hand to form marketing cooperative societies.
(d) Housing Cooperative Societies: To provide residential houses to the members, housing
cooperative societies are formed generally in urban areas.
(e) Farming Cooperative Societies: These societies are formed by the small farmers to get the
benefit of large-scale farming.
(f) Credit Cooperative Societies: These societies are started by persons who are in need of
credit. They accept deposits from the members and grant them loans at reasonable rate of
interest
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3.21 Limitations
Society
Of
Cooperative
Although the basic aim of forming a cooperative society is to develop a system of mutual help
and cooperation among its members, yet the feeling of cooperation does not remain for long.
Cooperative societies usually suffer from the following limitations.
(a) Limited Capital: Most of the cooperative societies suffer from lack of capital. Since the
members of the society come from a limited area or class and usually have limited means, it is
not possible to collect huge capital from them. Again, governments assistance is often
inadequate for them.
(b) Lack of Managerial Expertise: The Managing Committee of a cooperative society is not
always able to manage the society in an effective and efficient way due to lack of managerial
expertise. Again due to lack of funds they are also not able to derive the benefits of
professional management.
(c) Less Motivation: Since the rate of return on capital investment is less, the members do not
always feel involved in the affairs of the society.
(d) Lack of Interest: Once the first wave of enthusiasm to start and run the business is
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exhausted, intrigue and factionalism arise among members. This makes the cooperative lifeless
and inactive.
(e) Corruption: Inspite of governments regulation and periodical audit of the accounts of
the cooperative society, the corrupt practices in the management cannot be completely
ignored.
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3.22 Formation
Society
Of
Cooperative
A cooperative society can be formed as per the provisions of the Cooperative Societies Act, 1912,
or under the Cooperative Societies Acts of the respective states. The various common
requirements prescribed for registration of a cooperative society are as follows:
(a) There must be at least ten persons having common economic interest and must be capable of
entering into contract. For multi-state cooperative societies at least 50 individual members
from each state should be present.
(b) A suitable name should be proposed for the society. (c) The
draft bye-laws of the society should be prepared.
(d) After completing the above formalities, the society should go for its
registration.
(e) For registration, application in prescribed form should be made to the Registrar
of
Cooperative Societies of the state in which the society is to be formed.
(f)
The application for registration shall be accompanied by four copies of the proposed byelaws of the society.
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for indicative economic planning and/or large public enterprisesectors.
There is not one single definition for a mixed
economy,
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with it defined variously as a mixture of free markets with state interventionism, or as a mixture
of public and private enterprise, or as a mixture between markets and economic planning. The
relative strength or weakness of each component in the national economy can vary greatly
between countries. Economies ranging from the United States to Cuba have been termed mixed
economies. The term is also used to describe the economies of countries which are referred to
as welfare states, such as the Nordic countries. Governments in mixed economies often
provide environmental
protection,
maintenance
of employment
standards,
a
standardized welfaresystem, and maintenance of competition.
As an economic ideal, mixed economies are supported by people of various political persuasions,
typically centre-left andcentre-right, such as social democrats or Christian democrats. Supporters
view mixed economies as a compromise between state socialism and free-market capitalism that
is superior in net effect to either of those.
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Mortgages
Mortgages are loans distributed by banks to allow consumers to buy homes they cant pay
for upfront. A mortgage is tied to your home, meaning you risk foreclosure if you fall
behind on loan payments. Mortgages have among the lowest interest rates of any loans.
Auto Loans
Like mortgages, auto loans are tied to your property. They can help you afford a vehicle, but
you risk losing the car if you miss payments. This type of loan may be distributed by a bank or
by the car dealership directly. While loans from the dealership may be more convenient, they
often cost more overall.
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foreign currency and exchangeable into equity share of another company, to be called the
Offered Company, in any manner, either wholly, or partly or on the basis of any equity related
warrants attached to debt instruments. The FCEBs must comply with the Issue of Foreign
Currency Exchangeable Bonds (FCEB) Scheme, 2008, notified by the Government of India,
Ministry of Finance, Department of Economic Affairs vide Notification G.S.R.89(E) dated
February 15, 2008. The guidelines, rules, etc. governing ECBs are also applicable to FCEBs.
ECB can be accessed under two routes, viz., (i) Automatic Route outlined in paragraph I (A) and
(ii) Approval Route outlined in paragraph I
(B).
ECB for investment in real sector-industrial sector, infrastructure sector and specified service
sectors in India as indicated under para I (A) (i) (a) are under the Automatic Route, i.e. do not
require Reserve Bank / Government of India approval. In case of doubt as regards eligibility to
access the Automatic Route, applicants may take recourse to the Approval Route. It is clarified
that eligibility for an ECB in respect of eligible borrowers, recognised lenders, end-uses, etc.
have to be read in conjunction and not in isolation.
4.3
International
Corporations.
Finance
The International Finance Corporation (IFC) is an international financial institution that offers
investment, advisory, and asset management services to encourage private sector development in
developing countries. The IFC is a member of the World Bank Group and is headquartered in
Washington, D.C., United States. It was established in 1956 as the private sector arm of the
World Bank Group to advance economic development by investing in strictly for-profit and
commercial projects that purport to reduce poverty and promote development.[1][2][3] The IFC's
stated aim is to create opportunities for people to escape poverty and achieve better living
standards by mobilizing financial resources for private enterprise, promoting accessible and
competitive markets, supporting businesses and other private sector entities, and creating jobs
and delivering necessary services to those who are poverty-stricken or otherwise vulnerable.[4]
Since 2009, the IFC has focused on a set of development goals that its projects are expected to
target. Its goals are to increase sustainable agriculture opportunities, improve health and
education, increase access to financing for microfinance and business clients, advance
infrastructure, help small businesses grow revenues, and invest in climate health.[5]
The IFC is owned and governed by its member countries, but has its own executive leadership
and staff that conduct its normal business operations. It is a corporation whose shareholders are
member governments that provide paid-in capital and which have the right to vote on its matters.
Originally more financially integrated with the World Bank Group, the IFC was established
separately and eventually became authorized to operate as a financially autonomous entity and
make independent investment decisions. It offers an array of debt and equity financing services
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and helps companies face their risk exposures, while refraining from participating in a
management capacity. The corporation also offers advice to companies on making decisions,
evaluating their impact on the environment and society, and being responsible. It advises
governments on building infrastructure and partnerships to further support private sector
development.
The corporation is assessed by an independent evaluator each year. In 2011, its evaluation report
recognized that its investments performed well and reduced poverty, but recommended that the
corporation define poverty and expected outcomes more explicitly to better-understand its
effectiveness and approach poverty reduction more strategically. The corporation's total
investments in 2011 amounted to $18.66 billion. It committed $820 million to advisory services
for 642 projects in 2011, and held $24.5 billion worth of liquid assets. The IFC is in good
financial standing and received the highest ratings from two independent credit rating agencies in
2010 and 2011.
4.4 Objectives of Funds Flow:
Profit & Loss Account and Balance Sheet are not able to give answer to some basic questions.
For this purpose Funds Flow Statement is prepared. According to Perry Mason who points out in
AICPA Research Study No. 2 that without such a statement, the following questions will remain
unanswered:
Meaning of the term Fund: - The term Fund has been assigned different meanings by
different people. In narrow sense Funds means cash and Bank balance. To many people funds
is nothing but having the net effect of various business events on the basis of cash. This explains
the trend towards the preparation and presentation of "Cash Flow Statement" in published report
of accounts.
But in wider sense the term Fund is the sum of cash and assets, which are easily convertible
into cash minus current liabilities. In other words Fund means excess of current assets over
current liabilities. Where current assets include cash in hand, cash at bank, bills receivable,
sundry debtors, stock, marketable securities and prepaid expenses etc. The current liabilities
include sundry creditors, bills payable, outstanding expenses, short-term loans and bank
overdraft etc.
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Meaning of the term Flow: - The term Flow means change. Therefore flow of funds means
change in working capital. The change in funds may be either positive or negative. It may be
inflow of funds or outflow of funds.
4.5 Financial Statement Analysis
The process of reviewing and evaluating a company's financial statements (such as the balance
sheet or profit and loss statement), thereby gaining an understanding of the financial health of the
company and enabling more effective decision making. Financial statements record financial
data; however, this information must be evaluated through financial statement analysis to
become more useful to investors, shareholders, managers and other interested parties.
Financial ratio analysis
Financial ratios are very powerful tools to perform some quick analysis of financial statements.
There are four main categories of ratios: liquidity ratios, profitability ratios, activity ratios and
leverage ratios. These are typically analyzed over time and across competitors in an industry.
Liquidity ratios are used to determine how quickly a company can turn its assets into cash if it
experiences financial difficulties or bankruptcy. It essentially is a measure of a company's ability
to remain in business. A few common liquidity ratios are the current ratio and the liquidity index.
The current ratio is current assets/current liabilities and measures how much liquidity is available
to pay for liabilities.
Profitability ratios are ratios that demonstrate how profitable a company is. A few popular
profitability ratios are the breakeven point and gross profit ratio. The breakeven point calculates
how much cash a company must generate to break even with their start up costs. The gross profit
ratio is equal to (revenue - the cost of goods sold)/revenue. This ratio shows a quick snapshot of
expected revenue.
Activity ratios are meant to show how well management is managing the company's resources.
Two common activity ratios are accounts payable turnover and accounts receivable turnover.
These ratios demonstrate how long it takes for a company to pay off its accounts payable and
how long it takes for a company to receive payments, respectively.
Internal financing
In the theory of capital structure, internal financing is the name for a firm using its profits as a
source of capital for new investment, rather than a) distributing them to firm's owners or other
investors and b) obtaining capital elsewhere. It is to be contrasted with external financing which
consists of new money from outside of the firm brought in for investment. Internal financing is
generally thought to be less expensive for the firm than external financing because the firm does
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not have to incur transaction costs to obtain it, nor does it have to pay the taxes associated with
paying dividends. Many economists debate whether the availability of internal financing is an
important determinant of firm investment or not. A related controversy is whether the fact that
internal financing is empirically correlated with investment implies firms are credit constrained
and therefore depend on internal financing for investment
Long-term liabilities
Long-term liabilities are liabilities with a future benefit over one year, such as notes payable that
mature longer than one year.
In accounting, the long-term liabilities are shown on the right wing of the balance-sheet
representing the sources of funds, which are generally bounded in form of capital assets.
Examples of long-term liabilities are debentures, mortgage loans and other bank loans. (Note:
Not all bank loans are long term as not all are paid over a period greater than a year, an example
of this is a bridging loan.)
By convention, the portion of long-term liabilities that must be paid in the coming 12-month
period are classified as current liabilities. For example, a loan for which two payments of $1000
are due, one in the next twelve months and the other after that date, would be 'split' into two: the
first $1000 would be classified as a current liability, and the second $1000 as a long-term
liability (note this example is simplified, and does not take into account any interest or
discounting effects, which may be required depending on the accounting rules).
4.6 LONG-TERM BORROWING
Twice a year (generally in the Spring & Fall following the Annual General Meeting and SemiAnnual respectively) the MFA will fund the loan requests of clients which have been vetted
through all appropriate approval processes. Dates for regional district submission of loans
requests are typically one month prior to the Annual General Meeting and Semi-Annual meeting.
Once a loan has been approved, clients can generally expect funding to occur in April for the
Spring Issue or October for the Fall Issue. On occasion, the funding date may vary so please
monitor the website for updates. If funds are required prior to issuance, please access our Short
Term Borrowing page. The MFA will determine the exact date of funding as it monitors the
capital market for the best interest rates available.
Proceeds on a loan request will be 98.40% of the gross amount of the loan. 1.00% is deducted by
the MFA for security against loan default (this is held in trust by the MFA in its Debt Reserve
Fund* and will be refunded to clients, with interest, at loan expiry). The other 0.60% is deducted
as issue expenses to cover the costs of raising money - Bank Syndicate costs.
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Each new issue will generally be for a 10 year term, which means the lending rate will be set
from the date of funding for a period of 10 years. Members have the option to borrow for periods
ranging from of 5 to 30 years, therefore, any terms that exceed the 10 year period will have the
lending rate reset starting in year 11. Typically, the rate will be reset for the next 5 years
covering the start of year 11 to the end of year 15, and this 5 year reset process will continue as
required (i.e. until loan obligations mature). Interest payments will be required semi-annually;
with the first interest payment being 6 months after proceeds are received. Interest costs over the
life of the loan are based on the original amount borrowed.
4.7 Short-Term Borrowing:
An account shown in the current liabilities portion of a company's balance sheet. This account is
comprised of any debt incurred by a company that is due within one year. The debt in this
account is usually made up of short-term bank loans taken out by a company.
Definition of Short-Term Borrowings
Under the proposed rule, short-term borrowings would be defined by reference to
the various categories of arrangements that comprise the short-term obligations reflected in a
registrants financial statements, and all registrants would be required to present information
for each category of short-term borrowings. Specifically, as proposed, short-term
borrowings would mean amounts payable for short-term obligations that are:
1. Federal funds purchased and securities sold under agreements to repurchase;
2. Commercial paper;
3. Borrowings from banks;
4. Borrowings from factors or other financial institutions; and
5. Any other short-term borrowings reflected on the registrants balance sheet.
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Unit costing: This method is also known as "single output costing." This method of costing is
used for products that can be expressed in identical quantitative units. Unit costing is suitable for
products that are manufactured by continuous manufacturing activity: for example, brick
making, mining, cement manufacturing, dairy operations, or flour mills. Costs are ascertained for
convenient units of output.
Job costing: Under this method, costs are ascertained for each work order separately as each job
has its own specifications and scope. Job costing is used, for example, in painting, car repair,
decoration, and building repair.
Contract costing: Contract costing is performed for big jobs involving heavy expenditure, long
periods of time, and often different work sites. Each contract is treated as a separate unit for
costing. This is also known as terminal costing. Projects requiring contract costing include
construction of bridges, roads, and buildings.
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Batch costing: This method of costing is used where units produced in a batch are uniform in
nature and design. For the purpose of costing, each batch is treated as an individual job or
separate unit. Industries like bakeries and pharmaceuticals usually use the batch costing method.
Operating costing or service costing: Operating or service costing is used to ascertain the cost
of particular service-oriented units, such as nursing homes, busses, or railways. Each particular
service is treated as a separate unit in operating costing. In the case of a nursing home, a unit is
treated as the cost of a bed per day, while, for busses, operating cost for a kilometer is treated as
a unit.
Process costing: This kind of costing is used for products that go through different processes.
For example, the manufacturing of clothes involves several processes. The first process is
spinning. The output of that spinning process, yarn, is a finished product which can either be sold
on the market to weavers, or used as a raw material for a weaving process in the same
manufacturing unit. To find out the cost of the yarn, one needs to determine the cost of the
spinning process. In the second step, the output of the weaving process, cloth, can also can be
sold as a finished product in the market. In this case, the cost of cloth needs to be evaluated. The
third process is converting the cloth to a finished product, for example a shirt or pair of trousers.
Each process that can result in either a finished good or a raw material for the next process must
be evaluated separately. In such multi-process industries, process costing is used to ascertain the
cost at each stage of production.
Multiple costing or composite costing: When the output is comprised of many assembled parts
or components, as with television, motor cars, or electronics gadgets, costs have to be ascertained
for each component, as well as with the finished product. Such costing may involve different
methods of costing for different components. Therefore, this type of costing is known as
composite costing or multiple costing.
Uniform costing: This is not a separate method of costing, but rather a system in which a
number of firms in the same industry use the same method of costing, using agreed-on principles
and standard accounting practices. This helps in setting the price of the product and in inter-firm
comparisons..
Types of costing :
Different cost accounting techniques are used in different industries to analyze and present costs
for the purposes of control and managerial decisions. The generally-used types of costing are as
follows:
Marginal costing: Marginal costing entails the allocation of only variable costs, i.e. direct
materials, direct labour and other direct expenses, and variable overheads to the production. It
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does not take into account the fixed cost of production. This type of costing emphasizes the
distinction between fixed and variable costs.
Absorption costing: In absorption costing, the full costs (that is, both fixed and variable costs)
are absorbed into production.
Standard costing: In standard costing, a cost is predicted in advance of production, based on
predetermined standards under a given set of operating conditions. Standard costs are compared
with actual costs periodically, and revised to avoid losses due to outdated costing.
Historical costing: Historical costing, unlike standard costing, uses actual costs, determined
after they have been incurred. Almost all organizations use the historical costing system of
accounting for costs.
Traditional costing
Basically, the traditional costing is used commonly by manufacturing companies to assign
manufacturing overheads to the units they produce. Using this, only the products are assigned an
overhead cost by the accountant. The downside of this method of costing is that it neglects to
consider the non-manufacturing costs like administration expenses which are associated with
production. Today, such method is considered outdated because a lot of the manufacturing
companies already use computers and machines for their production. Also business accounting
software is already being used widely. On the brighter side, the traditional costing is easy to use
especially for those companies that have one product.
Activity-based costing
On the other hand, the activity-based costing (ABC) is a more logical method of assigning
manufacturing overhead costs to products. Unlike traditional costing that simply assigns costs
based on the machine work hours, the ABC assigns costs first to the activities and processes that
cause the overhead. Then, these costs are assigned only to the products that require the activities.
Simply saying, the ABC is typically used as a supplemental costing system for businesses.
Difference between
Costing
The difference between ABC or Activity Based Costing and TCA or Traditional Cost
Accounting is that ABC is complex whereas TCA is
simple.
The ABC system began in 1981 whereas TCA methods were designed and developed between
1870 to 1920. In the TCA system, the cost objects and used up resources are required to evaluate
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the cost whereas in the ABC system the cost is dependent upon the activities used up by the cost
objects.
Activity Based Costing is accurate and preferred over the TCA cost management system. The
ABC method of cost management system is adopted when the overheads of the company are
high and there are large numbers of miscellaneous products. Inaccuracy or errors are most
unwanted and undesirable because of the competitive rates set by the competitors in the market.
Due to this heavy and stiff competition, a highly reliable and accurate method is required for the
cost management.
TCA or Traditional Cost Accounting uses a single overhead pool and is not able to calculate the
true cost. The costs of the objects are allocated randomly based upon the labor or machine hours
etc. ABC costing includes identifiable products parts or labor whereas TCA arbitrarily
accumulates expenses, salaries, depreciations etc.
Smaller targeted costs that are built upon activities are calculated with the help of the ABC
system. The ABC system is advantageous since it helps in simplifying the decision making
process and it makes management concepts become clear and target -oriented. It also helps in
evaluating performances and sets standards which can help the manager to use this information
for comparison purposes.
In the Traditional Cost Accounting System, the company determines the cost of production after
the products have been produced whereas in the target or Activity Based Accounting System, the
value or cost of the product is determined on the basis of customer feedback and pocket range.
The ABC system helps the company to determine whether to lower or raise the activities cost to
grab the consumers. The ABC system also helps in keeping up with the competitors without
sacrificing the quality and the quantity of the products.
Summary:
1. Traditional cost accounting is obsolete whereas Activity Based Accounting is used more by
various target-oriented companies.
2. ABC methods help the company to identify the needs of keeping or eliminating certain
activities to add value to the products.
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3. TCA methods focus on the structure rather than on processes whereas ABC methods focus on
the activities or processes rather than on the structure.
4. ABC provides accurate costs whereas TCA accumulates values
arbitrarily.
5. TCA is almost obsolete whereas ABC methods are largely in use since
1981.
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While there is not yet an agreed definition of budget support, the following terms are those
used most frequently in discussion about it. It is useful to list them here and make some
comparisons for better understanding the budget support concept. The definitions below
take into account the different positions of donor organisations engaged in the use of these
instruments.
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approach because the incremental profit of 10 cents from the transaction is better than no sale at
all.
In the mid-20th century, proponents of the ideal of perfect competitiona scenario in which
firms produce nearly identical products and charge the same pricefavoured the efficiency
inherent in the concept of marginal-cost pricing. Economists such as Ronald Coase, however,
upheld the markets ability to determine prices. They supported the way in which market pricing
signals information about the goods being sold to buyers and sellers, and they observed that
sellers who were required to price at marginal cost would risk failing to cover their fixed costs.
5.7 DEFINITION OF 'BID PRICEING'
The price a buyer is willing to pay for a security. This is one part of the bid with the other being
the bid size, which details the amount of shares the investor is willing to purchase at the bid
price. The opposite of the bid is the ask price, which is the price a seller is looking to get for his
or her shares.
A bid price is the highest price that a buyer (i.e., bidder) is willing to pay for a good. It is usually
referred to simply as the "bid."
In bid and ask, the bid price stands in contrast to the ask price or "offer", and the difference
between the two is called the bid/ask spread.
An unsolicited bid or purchase offer is when a person or company receives a bid even though
they are not looking to sell. A bidding war is said to occur when a large number of bids are
placed in rapid succession by two or more entities, especially when the price paid is much
greater than the ask price, or greater than the first bid in the case of unsolicited bidding.
In the context of stock trading on a stock exchange, the bid price is the highest price a buyer of a
stock is willing to pay for a share of that given stock. The bid price displayed in most quote
services is the highest bid price in the market. The ask or offer price on the other hand is the
lowest price a seller of a particular stock is willing to sell a share of that given stock. The ask or
offer price displayed is the lowest ask/offer price in the market (Stock market).
The bid price is the highest price that a prospective buyer is willing to pay for a specific security.
The "ask price," is the lowest price acceptable to a prospective seller of the same security. The
highest bid and lowest offer are quoted on most major exchanges, and the difference between the
two prices is called the "bid-ask spread."
5.8 Rate of return pricing.
Target rate of return pricing is a pricing method used almost exclusively by market leaders or
monopolists. You start with a rate of return objective, like 5% of invested capital, or 10% of
sales revenue. Then you arrange your price structure so as to achieve these target rates of return.
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For example, assume a firm invests $100 million in order to produce and market designer
snowflakes, and they estimate that with demand for designer snowflakes being what it is, they
can sell 2 million flakes per year. Further, from preliminary production data they know that at
that level of output their average total cost (ATC) is $50 per flake. Total annual costs would be
$100 million (2 million units at $50 each). Next, management decides they want a 20% return on
investment (ROI). That works out to be $20 million (20% of a $100 million investment). Profit
margin will need to be $10 per flake ($20 million return over 2 million units). So the price must
be set at $60 per designer flake ($50 costs plus $10 profit margin). Similar calculations will
determine price based on rate of return to sales revenue.
An unusual consequence of this pricing model is that to keep the target rate of return constant,
the firm will have to continuously be changing its price as the level of demand changes. This can
be seen in the diagram below. Based on market demand expectations, the firm estimates it will
be operating at 70% capacity. Given its production function and cost structure, it knows its
average total costs at that output level will be represented as point A . If its predetermined rate of
return requirement is amount A, B, then it will set its price at P*. Because profit is equal to (PATC)*Q, then their total profit will be defined by area P*, B, A, P70%.
5.9 Basics for Assessing Rate of
Return.
The goal of rate-of-return regulation is for the regulator to evaluate the effects of different price
levels on potential earnings for a firm in order for consumers to be protected while ensuring
investors receive a "fair" rate of return on their investment. There are five criteria utilized by
regulators to assess the suitable rate of return for a firm.
The first criterion is whether the rate of return is at a level substantial enough to attract capital
from investors. Government regulation of this fashion is meant to ensure that firms don't abuse
their monopoly powers to take advantage of consumers; however, they must also ensure that
regulation does not prevent customers from acquiring their essential goods and services. If the
rate of return is too low, investors will not be compelled to invest in the firm, preventing it from
having the financial capital to operate and invest in physical capital and labor, which in turn
would result in consumers being unable to receive their sufficient level of service, such as
electricity for their homes.
The second criterion that regulators must consider is the efficient consumer-rationing of services
provided by regulated firms. To promote consumer efficiency, prices should reflect marginal
costs; however, this must also be balanced with the first criterion.
Thirdly, regulators must ensure that the regulated monopolistic firm utilizes efficient
management practices. Here a regulator can examine whether or not the firm's leadership is
taking advantage of loopholes in regulation by overstating costs in order to be permitted to
operate at a higher price level.
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A fourth criterion a regulator must investigate is the firm's long-term stability. As above
mentioned, one of government's chief concerns is to ensure consumers are able to receive their
required level of service. Therefore, regulators must take into account the future prospects of the
firm, similarly to the way in which a stock-trader would evaluate a company's future potential.
The fifth and final criterion the regulator must take into account is fairness to the investors. This
is a separate concern from the first criterion since the regulator must both ensure that the
company receives the capital it needs to continue operating and that private investors are
receiving fair profits on their investment, otherwise such regulation would likely correspond to a
decrease in investment.
Appraising project:
The main task of the financial appraisal ofinnovation projects is to refine
the information that implies the projectsviability. The financial appraisal of
innovation projects is a resource investmentto reduce the uncertainty degree of the
information referring to the projectsfeasibility.The detailed financial appraisal of
an innovation project is elaborated for finalizethe project form and to select the
most
successful variant of the project. Also, thefinancial appraisal of an innovation project isworked
out every time it is necessary tosubstantiate the decision of continuing or
stopping the evolution of an innovationproject.
5.10 INTERNAL RATE OF RETURN IRR
The discount rate often used in capital budgeting that makes the net present value of all cash
flows from a particular project equal to zero. Generally speaking, the higher a project's internal
rate of return, the more desirable it is to undertake the project. As such, IRR can be used to rank
several prospective projects a firm is considering. Assuming all other factors are equal among
the various projects, the project with the highest IRR would probably be considered the best and
undertaken first.
The internal rate of return (IRR) is a rate of return used in capital budgeting to measure and
compare the profitability of investments. It is also called the discounted cash flow rate of return
(DCFROR) or simply the rate of return (ROR).[1] In the context of savings and loans the IRR is
also called the effective interest rate. The term internal refers to the fact that its calculation does
not incorporate environmental factors (e.g., the interest rate or inflation).
Internal Rate of Return
This method equates the net present value of the project to zero. The project is evaluated by
comparing the calculated Internal rate of return to the predetermined required rate of return.
Projects with Internal rate of return that exceed the predetermined rate are accepted. The major
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weakness is that when evaluating mutually exclusive projects, use of Internal rate of return may
lead to selecting a project that does not maximize the shareholders' wealth.
Definition
The internal rate of return on an investment or project is the "annualized effective compounded
return rate" or discount rate that makes the net present value of all cash flows (both positive and
negative) from a particular investment equal to zero.
In more specific terms, the IRR of an investment is the interest rate at which the net present
value of costs (negative cash flows) of the investment equals the net present value of the benefits
(positive cash flows) of the investment.
Internal rates of return are commonly used to evaluate the desirability of investments or projects.
The higher a project's internal rate of return, the more desirable it is to undertake the project.
Assuming all other factors are equal among the various projects, the project with the highest IRR
would probably be considered the best and undertaken first.
A firm (or individual) should, in theory, undertake all projects or investments available with
IRRs that exceed the cost of capital. Investment may be limited by availability of funds to the
firm and/or by the firm's capacity or ability to manage numerous projects.
Uses
Important: Because the internal rate of return is a rate quantity, it is an indicator of the efficiency,
quality, or yield of an investment. This is in contrast with the net present value, which is an
indicator of the value or magnitude of an investment.
An investment is considered acceptable if its internal rate of return is greater than an established
minimum acceptable rate of return or cost of capital. In a scenario where an investment is
considered by a firm that has equity holders, this minimum rate is the cost of capital of the
investment (which may be determined by the risk-adjusted cost of capital of alternative
investments). This ensures that the investment is supported by equity holders since, in general,
an investment whose IRR exceeds its cost of capital adds value for the company (i.e., it is
economically profitable).
5.11 Net Present Value
A project's net present value is determined by summing the net annual cash flow, discounted at
the project's cost of capital and deducting the initial outlay. Decision criteria is to accept a project
with a positive net present value. Advantages of this method are that it reflects the time value of
money and maximizes shareholder's wealth. Its weakness is that its rankings depend on the cost
of capital; present value will decline as the discount rate increases.
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organizational objectives. Other aspects of individual employees are considered as well, such as
organizational citizenship behavior, accomplishments, potential for future improvement,
strengths and weaknesses, etc.
To collect PA data, there are three main methods: objective production, personnel, and
judgmental evaluation. Judgmental evaluations are the most commonly used with a large variety
of evaluation methods. Historically, PA has been conducted annually (long-cycle appraisals);
however, many companies are moving towards shorter cycles (every six months, every quarter),
and some have been moving into short-cycle (weekly, bi-weekly) PA . The interview could
function as providing feedback to employees, counseling and developing employees, and
conveying and discussing compensation, job status, or disciplinary decisions PA is often
included in performance management systems. PA helps the subordinate answer two key
questions: first, "What are your expectations of me?" second, "How am I doing to meet your
expectations
Performance management systems are employed to manage and align" all of an organization's
resources in order to achieve highest possible performance. How performance is managed in an
organization determines to a large extent the success or failure of the organization. Therefore,
improving PA for everyone should be among the highest priorities of contemporary
organizations.
Some applications of PA are compensation, performance improvement, promotions, termination,
test validation, and more. While there are many potential benefits of PA, there are also some
potential drawbacks. For example, PA can help facilitate management-employee
communication; however, PA may result in legal issues if not executed appropriately, as many
employees tend to be unsatisfied with the PA process. PAs created in and determined as useful in
the United States are not necessarily able to be transferable cross-culturally.
Applications of results
A central reason for the utilization of performance appraisals (PAs) is performance improvement
(initially at the level of the individual employee, and ultimately at the level of the
organization). Other fundamental reasons include as a basis for employment decisions (e.g.
promotions, terminations, transfers), as criteria in research (e.g. test validation), to aid with
communication (e.g. allowing employees to know how they are doing and organizational
expectations), to establish personal objectives for training programs, for transmission of
objective feedback for personal development, as a means of documentation to aid in keeping
track of decisions and legal requirements and in wage and salary administ ration. Additionally,
PAs can aid in the formulation of job criteria and selection of individuals who are best suited to
perform the required organizational tasks. A PA can be part of guiding and monitoring
employee career development. PAs can also be used to aid in work motivation through the use of
reward systems.
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Potential benefits
There are a number of potential benefits of organizational performance management conducting
formal performance appraisals (PAs). There has been a general consensus in the belief that PAs
lead to positive implications of organizations. Furthermore, PAs can benefit an organizations
effectiveness. One way is PAs can often lead to giving individual workers feedback about their
job performance. From this may spawn several potential benefits such as the individual workers
becoming more productive.
5.16 Feasibility report:
Feasibility studies aim to objectively and rationally uncover the strengths and weaknesses of an
existing business or proposed venture, opportunities and threats present in the environment, the
resources required to carry through, and ultimately the prospects for success. In its simplest
terms, the two criteria to judge feasibility are cost required and value to be attained.
A well-designed feasibility study should provide a historical background of the business or
project, a description of the product or service, accounting statements, details of the operations
and management, marketing research and policies, financial data, legal requirements and tax
obligations. Generally, feasibility studies precede technical development and project
implementation.
A feasibility study evaluates the project's potential for success; therefore, perceived objectivity is
an important factor in the credibility of the study for potential investors and lending
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One of the important indicators of success of the start-up company is the time from starting
the business till the moment when revenues of product sales equals the total costs
associated
with the sale of product it is also called break-even point. In other words profit = 0.
Breakeven analysis is accounting tool to help plan and control the business operations.
Break-even point represents the volume of business, where companys total revenues (money
coming into a business) are equal to its total expenses (total costs). In its simplest form,
breakeven
analysis provides insight into whether or not revenue from a product or service has
the ability to cover the relevant costs of production of that product or service.
THE ALGEBRA OF BREAK-EVEN ANALYSIS
Let QBE denote the break-even output level. By definition
TR (at QBE) = TC (at QBE)
or TR (at QBE) = TFC + TVC (at QBE) (1)
The break-even condition (1) holds true for any cost and demand functions.
Hence, in general, when costs and demand are complex, the analysis of this
condition might not be any simpler than the analysis of profit maximization. Yet,
what is widely known in business as break-even analysis is indeed much easier than
profit analysis, although it also starts with the above identity, because it makes a very
important assumption: that price and average variable cost do not change with output level.
Break-even analysis is based on categorizing production costs between those which are:
VARIABLE cost that do vary with the number of units produced and sold
(raw materials, fuel, direct labor, revenue-related costs), and those that are
FIXED costs that dont vary with the number of units produced and sold
(salaries, rent and rates, depreciation, marketing costs, administration costs, R&R,
insurance)
Calculating Break-even Point
To calculate break-even point we need to know following information:
The price that the company is charging,
variable costs (direct costs) of each unit and
fixed costs (or indirect costs/overheads).
1. TR = Total revenue
2. P = Selling price
3. Q = Number of units sold
4. TC = Total costs
5. F = Fixed costs
6. V = Variable costs
7. FC = Total fixed costs
8. VC = Total variable costs
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All costs are classified as either fixed or variable. If not impossible or impractical,
dividing costs into the variable and fixed cost elements as an extremely difficult job. This
is attributable to the inherent nature or characteristics of the cost per se.
Fixed costs remain constant within the relevant range. Fixed costs remain unchanged at
any level of activity within the relevant range, even at the zero level.
The behavior of total revenues and total costs will be linear over the relevant range, i.e.
will appear as a straight line on the BE chart. This is based on the idea that variable costs
vary in direct proportion to volume; the fixed costs remain unchanged, hence drawn as a
straight horizontal line on the graph within the relevant range; and that selling price is
constant.
In case of multiple product companies, the selling prices, costs and proportion of units
(sales mix) sold will not change. This cannot always be correct. Sales mix ratio may be
due to the change in the consuming habits of customers. Selling prices of the individual
products may likewise change due to competition, popularity and salability of the
products, etc.
There is no significant change in the inventory levels during the period under review.
Stated in another way, production volume is assumed to be almost (if not exactly) equal
to the sales volume, which causes an immaterial (or none at all) difference between the
beginning and ending inventories.
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4. What sort of relationship exists between the demand for goods and the price of complementary goods?
The relationship between the demand for goods and the price of complementary goods is inverse. when
the price of complementary goods falls its demand would increase. it would increase the demand for
goods as they are going to be used along with the complementary goods.
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7. What are the factors which affect the price elasticity of demand for a commodity?
a) Nature of the commodity
b)Availability of substitutes
c) Share in the total expenditure d) Different
uses of a commodity
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17. Classify
wants.
a)
Necessaries
b)
Comforts
c)
Luxuries
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6. List
the
external
sources
of
7. What
are
the
responsibilities
of
good
financial
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11. Name the state level financing institution for advancing loans to industries.
Tamilnadu industrial development corporation
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19. What are the systems of book keeping? a)Double entry system b) Single entry
system
20. What are the functions of financial management? a)determining financial needs b) Determining
sources of funds c) Financial analysis
d) Profit planning and control
UNIT: 3
ORGANISATION
2 MARKS
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costs.
a)electricity charges
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b) Telephone charges c)
Depreciation
d)maintenance expenses.
10. Explain the relationship between cost and output.
The cost of production in an industry depends on the rate of output which is important in economic
analysis of cost .the relationship between cost and output determines the cost function. Once the
cost function is determined estimates of future cost of production at various output levels can usuall
y be obtained.
11. List the main difference between short term cost & long term cost.
The short term cost are cost which are recurring but the long term costs are used over a period
of time.
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ENGINEERING ECONOMICS AND COST ANALYSIS
4. Who are benefitted through Break even
Analysis?
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CE2451
Break even Analysis is useful for business executives, but also for an entrepreneur who is
on the threshold of setting up his own unit.
5. What is the usefulness Break even Anal ysis?
Break even Analysis is valuable for project appraisal executives, business
students, accountants etc.
6. How is the knowledge of Break even Analysis is helpful to business consultant?
The knowledge of Break even Analysis is helpful to business consultant is useful in order
to provide right recommendations to their clients.
7. What does break even Analysis involves?
Break even Analysis the study of revenue and costs of a firm in relation to its volume of
sales and specificall y the determination of that volume at which the firms costs and revenue will
be equal.
8. What is breakeven point?
Breakeven point is defined as that level of sales at which total revenue is equal to
total costs and the net income is equal to zero.
9. Write the relationship between breakeven point and variable
cost? Write the formula for breakeven point and contribution per
unit?
106
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CE2451
Unit 5
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CE2451
Break even Analysis the study of revenue and costs of a firm in relation to its volume of
sales and specificall y the determination of that volume at which the firms costs and revenue will
be equal.
8. What is breakeven point?
Breakeven point is defined as that level of sales at which total revenue is equal
to total costs and the net income is equal to zero.
9. Write the relationship between breakeven point and variable cost?
SCE
107
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CE2451
12. Write the formula for breakeven point and contribution per unit?
SCE
108
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