Referencer for Quick

Revision
Foundation Course Paper-4:
Business Economics &
Business and Commercial
Knowledge
A compendium of subject-wise capsules published in the
monthly journal “The Chartered Accountant Student”

Board of Studies
(Academic)
ICAI
INDEX
Edition of
Paper Page
Subject Students’ Topics
No. No.
Journal
January Nature & Scope of Business
1-2
2022 Economics
January Theory of Demand and
2-4
2022 Supply
January
Business 2022, Theory of Production and
4A 4-7
Economics November Cost
2020
September
Price Determination in
8-14 2022, June
Different Markets
2021
14 June 2021 Business Cycles

Business and December An Overview of Selected

15-17
2022 Indian Companies
4B Commercial December An Overview of Selected
Knowledge 17
2022 Global Companies
 BUSINESS ECONOMICS
CA FOUNDATION - PAPER 4 (PART 1) - BUSINESS ECONOMICS
• Economics deals with problems and questions that affect almost all kinds of individuals in their capacities as consumers
and producers. Therefore, economic literacy is essential for everyone.
• Business Economics may be defined as the use of economic analysis to make business decisions involving the best use of
an organization’s scarce resources.
• Students are advised to read the capsule for understanding of the concepts. The graphs and charts will assist them in
revision of concept discussed in study material in minimum time.

BUSINESS ECONOMICS
NATURE AND SCOPE OF
BUSINESS ECONOMICS The scope 1.Internal issues or
There are two
of Business operational issues (this
categories
Economics is can be solved using
of business
quite wide. It Micro Economics)
issues to which
Nature covers most of 2.External issues
Definition Scope economic
the practical or environmental
• A Science theories can
problems a issues (this can be
• Based on Micro be directly
manager or a solved using Macro
Micro Macro Economics applied,
firm faces. Economics)
Economics Economics • Incroporates elements
of Macro Economics
• An Art
• Pragmatic Microeconomics applied to Internal or Operational Issues
• Normative  Demand Analysis and Forecasting
 Production and Cost Analysis
 Inventory Management
 Market Structure and Pricing Policies
 Resource Allocation
The book named ‘An These two fundamental  Theory of Capital and Investment Decisions
Inquiry into the Nature facts are:  Profit Analysis
and Causes of the Wealth • Human beings have  Risk and Uncertainty Analysis
of Nations’ (1776) unlimited wants
usually abbreviated as • ‘The means to satisfy
‘The Wealth of Nations’, these unlimited wants Macroeconomics applied to External or Environmental Issues
by Adam Smith is are relatively scarce’  The type of economic system
considered as the from the subject  Stage of business cycle
first modern work of matter of Economics  The general trends in national income, employment, prices,
Economics. saving and investment.
 Government’s economic policies like industrial policy,
competition policy, and fiscal policy, foreign trade policy and
Micro Economics In Macro-Economics, While Business globalization policies.
is basically we study the behaviour Economics
 Working of central banks and financial sector and capital
the study of of the large economic is basically
market and their regulation.
the behaviour aggregates, such as, the concerned
of different overall levels of output with Micro  Socio-economic organisations like trade unions, producer and
individuals and and employment, Economics, consumer unions and cooperatives.
organizations total consumption, Macro economic  Social and political environment.
within an total saving and total analysis also has
economic system investment, exports, got an important
imports and foreign role to play Business decisions cannot be taken without considering
investment and also these present and future environmental factors. As the
how these aggregates management of the firm has no control over these factors, it
shift over time should fine-tune its policies to minimise their adverse effects.

Nature of Business Economics BASIC PROBLEMS OF AN ECONOMY

• Business Economics is a Science
• Based on Microeconomics What to produce?
• Incorporates elements of Macro Analysis
• Business Economics is also an Art What provisions
Central
• Use of Theory of Markets and Private Enterprises How to are to be made
Economic
• Pragmatic in Approach produce? for economic
Problem
• Interdisciplinary in Nature growth?
• Normative in Nature
For whom to produce?

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 BUSINESS ECONOMICS

Capitalist Economy

Socialist Economy

Mixed Economy
• Private property • The resources • In a mixed
is the mainstay of are allocated economy, the
capitalism and profit according to the aim is to develop
motive is its driving commands of a a system which
force. Decisions central planning tries to include
of consumers and authority and the best features
businesses determine therefore, market of both the
economic activity. forces have no role controlled
Some examples of a in the allocation of economy and the
capitalist economy resources market economy
may include United while excluding
States and United the demerits of
Kingdom, Hong both
Kong, South Korea
etc

MEANING OF DEMAND Elasticity Of Demand

 Elasticity of demand is defined as the responsiveness of
the quantity demanded of a good to changes in one of the
Demand means desire or wish to buy and consume a commodity variables on which demand depends.
or service backed by adequate ability to pay and willingness to pay.

According to Price Elasticity of Demand

Marshall, the  Price elasticity of demand expresses the responsiveness of
demand curve quantity demanded of a good to a change in its price, given
slopes downwards the consumer’s income, his tastes and prices of all other
due to the goods.
The law of demand states that people will operation of the
buy more at lower prices and less at higher law of diminishing
prices, other things being equal. marginal utility. Point Elasticity
However, according
to Hicks and  The point elasticity of demand is the price elasticity of
Allen it is due to demand at a particular point on the demand curve.
income effect and
substitution effect.
Arc Elasticity
The demand curve The demand curve A demand schedule
 When price and quantity changes are discrete and large, we
usually slopes will shift to the is a table that shows
have to measure elasticity over an arc of the demand curve.
downwards; but right when there various prices and
exceptionally is a rise in income the corresponding
slopes upwards (unless the good q u a n t i t i e s
under certain is an inferior one), demanded. The
Y D
circumstances a rise in the price demand schedules
as in the case of a substitute, a are of two types; P A
of conspicuous fall in the price of individual demand Arc Elasticity
goods, Giffen a complement, a schedule and B
goods, conspicuous rise in population market demand P1
Price

necessities, future and a change in schedule. D

expectations about tastes in favour of
prices, demand for commodity. The
necessaries and opposite changes
speculative goods. will shift the O
Q Q1 X
demand curve to
Quantity Demanded
the left.

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 BUSINESS ECONOMICS
Ep = 0 Ep = 1 Ep = ∞
Y Y D Y
D

P D
Price

Price

Price
D

X X X
O Quantity O Quantity Quantity

Demand curve of zero Demand curve of unitary Demand curve of

elasticity elasticity infinite elasticity

Y Ep > 1 Ep < 1
Y D
D

P P
Price

Price
P1
D P1

X D
O O Q1 X
O Q Q1
Quantity Quantity

Demand curve of elasticity Demand curve of elasticity

greater than one less than one

Income Elasticity Of Demand Utility: The utility of a consumer is a measure of the satisfaction
The income elasticity of demand is a measure of how much the that the consumer expects to obtain from consumption of goods
demand for a good is affected changes in consumers’ incomes. and services when he spends money on a stock of commodity
which has the capacity to satisfy his want.
• Two important theories are (i) Marginal Utility Analysis
Cross - Price Elasticity Of Demand propounded by Alfred Marshall, and (ii) Indifference
The cross-price elasticity of demand between two goods measures Curve Analysis propounded by J R Hicks and R G D
the effect of the change in one good’s price on the quantity Allen.
demanded of the other good. • The law of diminishing marginal utility states that as a
consumer increases the consumption of a commodity,
every successive unit of the commodity gives lesser and
Demand Forecasting: lesser satisfaction to the consumer.
 Forecasting of demand is the art and science of predicting the • The indifference curve theory, which is an ordinal theory,
probable demand for a product or a service at some future shows the household’s preference between alternative
date on the basis of certain past behaviour patterns of some bundles of goods by means of indifference curves.
related events and the prevailing trends in the present. • The important properties of an Indifference curve are
 The commonly available techniques of demand forecasting Indifference curve slopes downwards to the right, it
are survey of buyers’ intentions, collective opinion method, is always convex to the origin, two ICs never intersect
expert opinion method, barometric method, and statistical each other, it will never touch the axes and higher the
methods such as trend projection method, graphical method, indifference curve higher is the level of satisfaction.
least square method, regression analysis, and market studies • The consumer attains equilibrium at the point where the
such as controlled experiments, and controlled laboratory budget line is tangent to the indifference curve and MUx
experiments. / Px =MUy /Py = MUz /Pz

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 BUSINESS ECONOMICS
Y Y S
P 5
R
S 4

N Q 3

Price
IC5
Good Y

IC4 2
T IC3
IC2 1
H S
IC1
O M L X 0 X
10 20 30 40 50 60 70
Good X
Quantity Supplied
(Consumer’s Equilibrium)

(Supply Curve)
Marshall defined the concept of consumer surplus as the “excess
of the price which a consumer would be willing to pay rather Price
than go without a thing over that which he actually does pay”, is Supply
called consumers surplus.”

D
Y E
3
Price & Marginal Utility

R
P
Demand

19 Quantity
D1
MU
O Q X Elasticity of supply means the responsiveness of supply to change
Amount of Commodity in the price of the commodity.

(Consumer Surplus)

• Budget line or price line shows all those combinations of two

Production and Cost
goods which the consumer can buy spending his given money
income on the two goods at their given prices. According to James Bates and J.R. Parkinson “Production is
• The slope of the budget line is determined by the relative prices the organized activity of transforming resources into finished
of the two goods. It is equal to ‘Price Ratio’ of two goods. i.e. PX products in the form of goods and services; and the objective
/PY i.e. It measures the rate at which the consumer can trade of production is to satisfy the demand of such transformed
one good for the other. resources”.
• When two goods are perfect substitutes of each other,
indifference curves for these two goods are straight, parallel
lines with a constant slope along the curve, or the indifference
curve has a constant MRS Labour
• Goods are perfect complements when a consumer is interested
in consuming only in fixed proportions. In such a case, the
indifference curve will consist of two straight lines with a right
angle bent which is convex to the origin, or in other words, it
will be L shaped.
Factors
• The term ‘supply’ refers to the amount of a good or service Land of Capital
that the producers are willing and able to offer to the market at production
various prices during a given period.
• The law of supply can be stated as: Other things remaining
constant, the quantity of a good produced and offered for sale
will increase as the price of the good rises and decrease as the
price falls.
Entrepreneur

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 BUSINESS ECONOMICS

Land includes all those free natural resources whose supply The Law of Variable Proportions:
for the economy as a whole is fixed. The law states that as we increase the quantity of one input which is
combined with other fixed inputs, the marginal physical productivity
of the variable input must eventually decline.
Labour is all human efforts of body or of mind undergone
partly or wholly with a view to secure an income apart from H
the pleasure derived directly from the work.
Inflection Point TP

TP, AP, MP
Capital is that part of wealth of an individual or community
which is used for further production of wealth. Capital, a
stock concept, refers to produced means of production and
it comprises of man- made machines and materials which are F
Stage I Stage II Stage III
used for further production.
S

Entrepreneur is the person who organises business; initiates AP

production, remunerates other factors of production, O N M
introduces innovations and bears the risk and uncertainties of Variable Input MP
business.

Returns to Scale
The production function is a statement of the relationship
between a firm’s scarce resources (i.e., its inputs) and the The Law of returns to scale describes the relationship between
output that results from the use of these resources inputs and output in the long run when all inputs are changed in
the same proportion. Returns to scale may be constant, increasing
and decreasing.
Q = f (L, K). Where Q = Output L= Labour K= Capital • Constant returns to scale occur when the inputs increase by some
proportion and the output also increases by the same proportion.
It is also called linear homogeneous production function.
• Increasing returns to scale occur when the inputs increase
A famous statistical production function is Cobb-Douglas production by some proportion and the output increases more than
function.
proportionately.
Cobb-Douglas production function is stated as: Q = KLa C (1-a) • Decreasing returns to scale occur when the inputs increase
where ‘Q’ is output, ‘L’ the quantity of labour and ‘C’ the quantity of by some proportion and the output increases less than
capital. ‘K’ and ‘a’ are positive constants. proportionately.

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 BUSINESS ECONOMICS
 Indirect costs are those which cannot be easily and
definitely identifiable in relation to a plant, product,
process or department. They not visibly traceable to
any specific goods, services, processes, departments or
operations.
 Incremental cost refers to the additional cost incurred by a
firm as a result of a business decision.
 Sunk costs are already incurred once and for all, and
cannot be recovered.
 Historical cost refers to the cost incurred in the past on the
acquisition of a productive asset.
 Replacement cost is the money expenditure that has to be
incurred for replacing an old asset.
 Private costs are costs actually incurred or provided for by
firms and are either explicit or implicit.
 Social cost, on the other hand, refers to the total cost
borne by the society on account of a business activity and
includes private cost and external cost.
Cost Analysis
It refers to the study of behaviour of cost in relation to one
or more production criteria. It concerned with the financial Cost Function
aspects of production. The cost function refers to the mathematical relation between
cost and the various determinants of cost. It expresses
the relationship between cost and output. Economists are
generally interested in two types of cost functions; the short
Accounting & Economic Costs run cost function and the long run cost function.

Outlay & Opportunity Costs Fixed or constant

costs which are not
Short-run
a function of output.
cost function
These are inescapable or
uncontrollable.
Direct & Indirect Costs Cost
Function is
divided into
Types of two-
Costs Incremental & Sunk Costs Long run cost of production
Long-run is the least possible cost of
cost function producing any given level of
output when all individual
Historical & factors are variable.
Replacement Costs

Private & Social Costs Types of Cost

 Total cost of a business is defined as the actual cost that
must be incurred for producing a given quantity of output.
Fixed & Variable Costs  AFC is obtained by dividing the total fixed cost by the
number of units of output produced.
 Average variable cost is found out by dividing the total
variable cost by the number of units of output produced.
Cost concepts  Average total cost is the sum of average fixed cost and
average variable cost.
 Accounting costs are explicit costs and includes all the
 Marginal cost is the addition made to the total cost by the
payments and charges made by the entrepreneur to the
suppliers of various productive factors. production of an additional unit of output.
 Economic costs take into account explicit costs as well as  Long run cost of production is the least possible cost of
implicit costs. A firm has to cover its economic cost if it producing any given level of output when all individual
wants to earn normal profits. factors are variable.
 Outlay costs involve actual expenditure of funds.
 Opportunity cost is concerned with the cost of the next
best alternative opportunity which was foregone in order Short Run Total Cost
to pursue a certain action.
 The short run total cost is composed of two major elements
 Direct costs are those which have direct relationship with
namely, total fixed cost and total variable cost.
a component of operation. They are readily identified and
 Symbolically TC = TFC + TVC
are traceable to a particular product, operation or plant.

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 BUSINESS ECONOMICS
Cheaper raw material and
TFC curve starts capital equipments
from a point on the
Y-axis shows that fixed
costs will be incurred even if Technological
the output is zero. On the other external economies.
hand, the TVC curve rises
COST

upward indicating that as output

increases, total variable cost Development of
increases. The TVC curve starts Kinds of skilled Labour
from the origin because variable External
costs are zero when the output Economies and
is zero. The TC curve has Diseconomies
Growth of ancillary industries
OUTPUT been obtained by adding
vertically the TFC curve
Short run Total Cost Curves and the
TVC curve. Better transportation and
marketing facilities

Relationship between Average Cost and Marginal Cost

 When average cost falls as a result of an increase in output, Economies of Information.
marginal cost is less than average cost.
 When average cost rises as a result of an increase in output,
marginal cost is more than average cost.
 When average cost is minimum, marginal cost is equal to
the average cost. In other words, marginal cost curve cuts
average cost curve at its minimum point (i.e. optimum point).

Long run Average Cost Curve(LAC)

The long run average cost curve, often called a planning curve,
is so drawn as to be tangent to each of the short run average
cost curves.

The LAC curve

is tangent to each of
AVERAGE COST

the short run average

cost curves. Every
point on the long run
average cost curve
will be a tangency
point with some
short run
AC curve.
OUTPUT

Economies of Scale and Diseconomies of Scale

 When increase in scale is upto optimum level, then it is
economies of scale. On the other hand, increase in scale
beyond the optimum level, results in diseconomies of scale.
 Economies of scale is of two types-
• Internal economies of scale which accrue to a firm
when it engages in large scale production.
• External economies of scale accrue to a firm due to
factors which are external to a firm.

Technical economies
and diseconomies

Managerial economies
and diseconomies
Kinds of
Internal Commercial economies
Economies and and diseconomies
Diseconomies
Financial economies
and diseconomies

Risk bearing economies

and diseconomies

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 Business Economics
ca foundation - PAPER 4 - PART I - BUSINESS ECONOMICS
The market structure mostly determines a firm’s power to fix the price of its product. The level of profit maximising price
is generally different in different kinds of markets due to differences in the nature of competition. Business Cycles have
tremendous influence in business decisions. The stage of the business cycle is crucial while making managerial decisions
regarding expansion or downsizing. You are advised to read the capsule for understanding of the concepts. The graphs and
charts will assist you in revision of concept discussed in study material in minimum time.

Chapter 4 - PRICE DETERMINATION IN DIFFERENT MARKETS

price determination
in different markets Perfect Competition: Perfect
competition is characterised
by many sellers selling
Behavioural identical products to many
Markets
Principles buyers
Monopoly:
Oligopoly: It is a situation
Determination where there is a single
of Prices There are a few
sellers selling seller producing for
competing products Theoretical many buyers. Its product
to many buyers. For Market is necessarily extremely
example, Telecom differentiated since there
Perfect Monopolistic Industry. are no competing sellers
Monopoly Oligopoly producing products which
Competition Competition are close substitutes.
Monopolistic For example. Indian
Competition: It differs in Railways.
only one respect. Namely, there
Market are many sellers offering
differentiated products to many
Market is the The elements of a In Economics, buyers. For example, shampoo
whole set of market are: generally the manufacturers.
arrangements for • Buyers and classification of
buying and selling sellers; markets is made
of a commodity • A product or on the basis of Distinguishing Features of Major Types of Markets
or service. Here, service; • Geographical
buyers and sellers • Bargaining for a Area Assumption Market Types
bargain over price price; • Time
• Knowledge • Nature of Perfect Monopolistic Oligopoly Monopoly
of a commodity. Competition Competition
about market transaction
conditions; and • Regulation Number of Very large Large Small One
• One price for • Volume of
sellers numbers
a product or business
service at a • Type of Product None Slight None to Extreme
given time. Competition differentiation substantial
Price Infinite Large Small Small
Spot or cash Forward or Wholesale elasticity of
Market: Spot Future Market: Market: The demand of a
transactions or In this market, wholesale firm
spot markets refer transactions market is the
to those markets involve contracts market where Degree of None Some Some Very
where goods are with a promise to the commodities control over considerable
exchanged for pay and deliver are bought and price
money payable goods at some sold in bulk or
either immediately future date. For large quantities. Concepts of Total Revenue, Average Revenue &
or within a short example, purchase Transactions Marginal Revenue
span of time. For of foreign generally take
example, grains currency contract place between Total revenue refers to the amount of money which a firm
sold in the Mandi at future rate from traders. i.e. realises by selling certain units of a commodity.
at the current bank. Business to
prices and cash is Business (B2B).
paid immediately.
Thus is a part of
Spot Market. Average revenue is the revenue earned per unit of output

Retail Market: When the commodities are sold

in small quantities, it is called retail market. Marginal revenue is the change in total revenue resulting
This is the market for ultimate consumers. i.e. from the sale of an additional unit of the commodity
Business to Consumer (B2C).

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 Business Economics

e-1 S
MR = AR × e Where e = price elasticity of demand. 15 Surplus

10

Price
Behavioural Principle
Shortage
Principle 1- A firm should not produce at all if its total variable 5
costs are not met. D
Principle 2 - The firm will be making maximum profits by
expanding output to the level where marginal revenue is equal 0 50 100 150
to marginal cost. Quantity

Equilibrium of the Firm: Maximisation of Profits Stable Equilibrium

Profit
Maximisation
MC Increase in Demand, causing an increase in
Cost F H equilibrium price and quantity
Revenue E

I
G
MR

A Q* B Output

Profit Total Profit

Profit Increasing Profit Decreasing
MR>MC MC>MR

Q* Output

The firm will maximise profits at the point at which marginal

revenue is equal to marginal cost.

Determination of Prices

In an open competitive market, it is the interaction between

demand and supply that tends to determine equilibrium
price and quantity

Decrease in demand resulting in a decrease in price and

Determination of Equilibrium Price quantity demanded

Stable equilibrium is achieved through price mechanism or

market mechanism. If the market price is above the equilibrium
price, the market supply is greater than market demand and there
is an excess supply or surplus in the market. Competing sellers will Increase in supply, resulting in decrease in equilibrium
lower prices in order to clear their unsold stock. As we know, other price and increase in quantity supplied
things remaining constant, as price falls quantity demanded rises
and quantity supplied falls. In this process, the supply-demand gap
is reduced and eventually eliminated thus restoring equilibrium.

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 Business Economics
When a firm earns supernormal profits, its average revenues are
more than its average total cost. Thus, in addition to normal rate
of profit, the firm earns some additional profits.

Decrease in supply causing an increase in the equilibrium price

and a fall in quantity demanded

It sometimes happens that events shift both the demand and supply
curves at the same time. This is not unusual in real life, supply
curves and demand curves for many goods and services typically
shift quite often because of continuous change in economic
environment. During a war, for example, shortage of goods will
often lead to decrease in their supply while full employment
causes high total wage payments which increase demand.
Short run equilibrium: Supernormal profits of a
competitive firm

Normal Profit: When a firm just meets its average total cost, it
earns normal profits. Here AR = ATC.

Simultaneous change in demand and supply

Perfect Competition

• A firm is in equilibrium when it’s MC = MR and MC curve

cuts the MR curve from below.
• In the short run, firms may be earning normal profits,
supernormal profits or making losses at the equilibrium
price.
• In the long-run all the supernormal profits or losses get
Short run equilibrium of a competitive firm: Normal profits
wiped away with entry or exit of the firms from the industry
and all firms earn only normal profit.
• In the long run, in perfect competition, the market
mechanism leads to an optimal allocation of resources. If a firm is unable to meet its average variable cost, it will be better
for it to shut down. This shutdown may be temporary. When the
market price rises, the firm resumes production.
In the short run, a firm operates with a fixed amount of capital
and must choose the levels of its variable inputs so as to maximise
profit.

Short run equilibrium of a competitive firm: Losses

Equilibrium position of a firm under perfect competition

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Long run equilibrium of the firm in a perfectly

competitive market

Firm’s equilibrium under monopoly: Maximisation of profits

Long run equilibrium of a competitive industry and its firms

In the long run,

LAR = LMR = P = LMC = LAC and there will be
optimum allocation of resources.

Monopoly
Equilibrium of the monopolist: Losses in the short run
• Monopoly is an extreme form of imperfect competition with
a single seller of product which has no close substitute.
• Since the monopolist firm is the only producer of a particular
product, its demand curve is identical with the market
demand curve for the product.
• Since a monopoly firm has market power it has the ability
to charge a price above marginal cost and earns a positive
economic profit.
• The fundamental cause of monopoly is barriers to entry; in
effect other firms cannot enter the market.
• In the long-run, the supernormal profit will be continued
because entry is restricted.

The twin Condition for Equilibrium is a monopoly market and are

the same as that of a firm in a competitive industry.
• The marginal revenue should be equal to the marginal cost.
i.e., MR = MC.
• The MC curve should cut MR curve from below. In other
words, MC should have a positive slope.
Long run equilibrium of a monopolist

Price Discrimination

Price discrimination is a method of pricing adopted by a

monopolist in order to earn abnormal profits. It refers to the
practices of charging different prices for different units of the same
commodity.
Equilibrium of a monopolist (Short run)

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Condition for Price Discrimination Equilibrium under price discrimination
In order to reach the equilibrium position, the discriminating
The seller should have some monopolist has to make three decisions:
control over the supply of his • How much total output should he produce?
product i.e. the firm should The seller should be able to • How the total output should be distributed between the
have price-setting power. divide his market into two or two sub-markets? and
Monopoly power in some form more sub-markets. • What prices he should charge in the two sub-markets?
is necessary (not sufficient) to
discriminate price.
Y SUB-MARKET A Y SUB-MARKET B Y TOTAL MARKET
B

PRICE
The price-elasticity of the MC

PRICE
product should be different

PRICE
in different sub-markets. The P1
monopolist fixes a high price P2 Aggregate
demand
for his product for those It should not be possible for curve
E1 B E2
buyers whose price elasticity the buyers of low-priced E
of demand for the product market to resell the product
is less than one. This implies to the buyers of high-priced Da Db C AMR
MRa MRb
that, when the monopolist market i.e there must be no O M1 X O M2 X O M X
charges a higher price from market arbitrage.
QUANTITY QUANTITY QUANTITY
them, they do not significantly (I) (II) (III)
reduce their purchases in
response to high price. Fixation of total output and price in the two sub-markets by the
discriminating monopolist

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 BUSINESS ECONOMICS
Y
D

cost and revenue

MC
Q AC
P
S
R
E D
AR

MR
O M X
output
(Price-output determination under monopolistic competition)

Y
MC AC

revenue and cost

Prof. Pigou classified three degrees of price discrimination
H
G
K
Under the first degree price discrimination, the T
monopolist separates the market into each individual
consumer and charges them the price they are willing E
and able to pay and thereby extract the entire consumer
surplus. Doctors, lawyers, consultants etc AR
MR
Under the second degree price discrimination, different O N X
prices are charged for different quantities of sold. The output
monopolist will take away only a part of the consumers’ (Short Run equilibrium of the Firm: losses)
surplus.

Y
LMC LAC
cost and revenue

Under the third degree price discrimination, price varies

by attributes such as location or by customer segment,
example dumping.
T L
P
E

AR
Monopolistic Competition MR
O Q R X
The essential feature of monopolistic competition is the existence output
of large number of firms, product differentiation, non price
competition, high selling costs and freedom of entry and exit of (Long Run equilibrium of the Firm in Monopolistic Competition)
firms.
Oligopoly
In monopolistic competition, the features of monopoly and perfect
competition are partially present: Prof. Stigler defines oligopoly as that “situation in which a firm
bases its market policy, in part, on the expected behaviour of a
Features of Monopolistic Competition few close rivals”.

• Large number of sellers Types of Oligopoly

• Product differentiation
Pure oligopoly Collusive and
Open and closed
or perfect Competitive
• Freedom of entry and exit oligopoly
oligopoly oligopoly

• Non-price competition
Syndicated
Partial or full
and organized
oligopoly
oligopoly

The Chartered Accountant Student June 2021 29

13
BUSINESS ECONOMICS
Characteristics of Oligopoly Market: Phases of business cycle
• Expansion
Strategic Interdependence • Peak
• Contraction
Group behavior • Trough

Importance of advertising and selling costs

Expansion:
The expansion
Price and output decisions in an oligopolistic market phase is characterised
by increase in national Peak: The term
output, employment, peak refers to
When an oligopolistic firm changes its price, its rival firms will aggregate demand, the top or the
retaliate or react and change their prices which in turn would capital and consumer highest point
affect the demand of the former firm. Therefore, an oligopolistic expenditure, sales, of the business
profits, rising stock prices cycle
firm cannot have sure and determinate demand curve, since the
and bank credit.
demand curve keeps shifting as the rivals change their prices in
reaction to the price changes made by it.
Contraction: The
economy cannot Trough: At
Price Leadership continue to grow the depth of
depression, all
endlessly. Once peak
is reached, increase economic activities
A group of firms that explicitly agree (collude) to coordinate their touch the bottom
in demand is halted
activities is called a cartel. and starts decreasing and the phase of
in certain sectors. trough is reached

Kinked Demand Curve

The demand curve facing an oligopolistic, according to the kinked
demand curve hypothesis, has a ‘kink’ at the level of the prevailing
price. It is because the segment of the demand curve above the A noteworthy characteristic of these economic fluctuations is
prevailing price level is highly elastic and the segment of the demand that they are recurrent and occur periodically.
curve below the prevailing price level is inelastic
Y d Y

Real GDP
P
p
price

D O X
Time

CAUSES OF BUSINESS CYCLE

O M output X Internal Causes:

• Fluctuations in Effective Demand

Important market forms: • Fluctuations in Investment
• Variations in government spending
• Duopoly, a subset of oligopoly, is a market situation in which
• Macroeconomic policies
there are only two firms in the market.
• Money Supply
• Psychological factors
• Monopsony is a market characterized by a single buyer of a
product. or service and is mostly applicable to factor markets
External Causes:
in which a single firm is the only buyer of a factor.
• War
• Oligopsony is a market characterized by a small number of • Post War Reconstruction
large buyers and is mostly relevant to factor markets. • Technology shock
• Natural Factors
• Population growth
• Bilateral monopoly is a market structure in which there is
only a single buyer and a single seller i.e. it is a combination Examples of Business Cycle:
of monopoly market and a monopsony market.
 Great Depression of 1930
 Information Technology bubble burst of 2000
 Global Economic Crisis (2008-09)
Business Cycle
 Business cycles are contagious and are international in
character. They begin in one country and mostly spread to other
Business cycle refers to alternate expansion and contraction of
countries through trade relations.
overall business activity as manifested in fluctuations in measures
of aggregate economic activity, such as, gross national product,
employment and income.  The phase of the business cycle is important for a new business
to decide on entry into the market.

30 June 2021 The Chartered Accountant Student

14
business and commercial knowledge
ca foundation - paper 4 (Part II) - BUSINESS AND COMMERCIAL KNOWLEDGE
This capsule on Foundation Paper 4 (Part II): Business and Commercial Knowledge broadly covers the companies discussed
in detail in Chapter 3 of the Study Material. To facilitate easy understanding of the significant changes in the year 2022, an
attempt has been made to give an overview of the significant changes in the companies in tabulated form.
It may be kept in mind that the capsule is not the replacement of the Study Material. Reading of Study Material is absolute
essential. This capsule is intended to assist you in the process of quick revision.

A. AN OVERVIEW OF SELECTED INDIAN COMPANIES

Ranking Ranking
in Forbes in Forbes
S. Incorpo- Present Chief Chief World’s World’s
Company’s Name ration Headquarters Chairman Managing Executive Financial Largest Public Best
No. year Director Officer Officer Corporations Employer’s
List 2022 List 2022

Adani Ports and Ahmedabad, Gautam Gautambhai

Karan Muthukumaran
1 Special Economic 1998 Gujarat, Gautambhai 1566th
Adani Shantilal Adani Doraiswami
Zone Ltd. India Adani

Asian Mumbai, Amit

1942 Amit RJ
2 Paints Maharashtra, Syngle 1686th
Syngle Jeyamurugan
Ltd. India

Mumbai, Amitabh Amitabh Puneet

3 1993 Maharashtra, 433rd
Chaudhry Chaudhry Sharma
Axis Bank Ltd. India

Pune, Rahul
Bajaj Auto 1945 Maharashtra, Rajiv Bajaj
Dinesh 1756th
4 Ltd. Bajaj Rajiv Bajaj Thapar
India

Bharti Sunil Gopal

New Delhi, Gopal Soumen
5 Airtel Ltd. 1995 Bharti 710th
India Vittal Vittal Ray
Mittal

Bharat Mumbai, Vetsa Vetsa Vetsa

6 Petroleum 1952 Maharashtra, Ramakrishna Ramakrishna Ramakrishna 616th
Corporation Ltd. India Gupta Gupta Gupta

Mumbai, YK Umang Umang

7 1935 Ashish
Cipla Ltd. Maharashtra, Hamied Vohra Vohra Adukia
India

Kolkata, Pramod Pramod

Coal India 1975
Sunil Kumar 726th
8 West Bengal, Agrawal Agrawal
Ltd. Mehta
India

Hyderabad, Kallam
9 1984 Telangana, Satish Erez Israeli Parag Agarwal
Dr. Reddy’s Lab. Ltd. India Reddy

Singapore
(legal
domicile),
Bengaluru, Kalyan Sriram
10 2007 Karnataka,
Flipkart Krishnamurthy Venkataraman
India
(Operational
Headquarters)

24 December 2022 The Chartered Accountant Student

15
 business and commercial knowledge
Ranking Ranking
in Forbes in Forbes
S. Incorpo- Present Chief Chief World’s World’s
Company’s Name ration Headquarters Chairman Managing Executive Financial Largest Public Best
No. year Director Officer Officer Corporations Employer’s
List 2022 List 2022

New Delhi, Sandeep

Sandeep Rakesh 1215th
11 1984 India Kumar
Kumar Gupta Kumar Jain
GAIL (India) Ltd Gupta

Mumbai, Atanu Sashidhar Sashidhar Srinivasan

12 1994 Maharashtra, Chakraborty Jagdishan 154th 137th
Jagdishan Vaidyanathan
HDFC Bank Ltd. India

Mumbai, Girish Sandeep

1994 Sandeep Anindya
13 Maharashtra, Chandra Bakhshi Bakhshi Banerjee
205th 365th
ICICI Bank Ltd. India Chaturvedi

Indian Oil New Delhi, Shrikant

1959 Sanjay
14 Corporation India Madhav 359th
Ltd. Kaushal
Vaidya

Bengaluru,
1981 Nandan 540th 688th
15 Karnataka, Salil Parekh Salil Parekh Nilanjan Roy
Nilekani
Infosys Ltd. India

Kolkata, Supratim
16 ITC Ltd. 1910 West Bengal, Sanjiv Sanjiv Puri Sanjiv Puri 845th
Puri Dutta
India

Larsen & Mumbai, Anil S.N. S.N.

17 1938 Shankar 515th 354th
Toubro Ltd. Maharashtra, Manibhai Subrahmanyan Subrahmanyan
Raman
India Naik

New Delhi, Gurdeep Gurdeep Jaikumar 485th

18 1975 India Singh Singh Srinivasan
NTPC Ltd.

Oil & Rajesh

Natural Gas 1956 Uttarakhand, Kumar Rajesh Kumar Pomila
19 Corporation 229th
India Srivastava Srivastava Jaspal
Ltd.

Gurugram,
Haryana, Sreekant Sreekant Ravisankar 822nd
1989
20 India Kandikuppa Kandikuppa Ganesan
Power Grid
Corporation of
India Ltd.

Reliance Mumbai, Mukesh Srikanth

Mukesh Mukesh Venkatchari
21 Industries 1966 Maharashtra, Ambani Ambani 54th 20th
Ambani and Alok
Ltd. India Agarwal

C.S. Setty,
Alok Kumar
22 Mumbai, Dinesh Charanjit
Choudhary, 499th
1806 Maharashtra, Kumar Surinder Singh 105th
Swaminathan J.,
India Khara Attra
Ashwini Kumar
State Bank of India Tewari

The Chartered Accountant Student December 2022 25

16
business and commercial knowledge

Ranking Ranking
in Forbes in Forbes
S. Incorpo- Present Chief Chief World’s World’s
Company’s Name ration Headquarters Chairman Managing Executive Financial Largest Public Best
No. year Director Officer Officer Corporations Employer’s
List 2022 List 2022

Tata Motors-
Bombay House, 729th
23 Mumbai, Natarajan Natarajan Saurabh
Tata Sons 1868 TCS – 386th
Private Ltd. Maharashtra, Chandrasekaran Chandrasekaran Agrawal
India Tata Steel –
409th

Wipro Bengaluru, Rishad Thierry Thierry Jatin

24 1945 Karnataka, 821st
Ltd. Premji Delaporte Delaporte Dalal
India

B. AN OVERVIEW OF SELECTED GLOBAL COMPANIES

Ranking in Ranking Ranking
Incorpo- Chief Executive Chief Forbes World’s in Forbes in Fortune
S. World’s Best
Company’s Name ration Headquarters Chairman Officer Financial Largest Public 500
No. year Officer Corporations Employer’s Companies
List 2022 List 2022 List 2022

Seattle, Jeff Andy Brian T.

1 1994 Washington, 6th 14th 2nd
Bezos Jassy Olsavsky
Amazon U.S.

American New York, Stephen Stephen Jeffery C

2 1850 United States 77th 186th 85th
Express Squeri Squeri Campbell
of America

California,
1977 Luca 3rd
3 Apple United States Tim Cook 7th 5th
Maestri
of America

Goldman New York, David M.

1869 David M. Denis 57th
4 Sachs United States Solomon 37th 758th
Solomon Coleman
of America

California, Enrique Enrique Marie

5 HP Inc. 1939 United States Lores Lores Myers 259th 101st 59th
of America

New York,
1911 Arvind Arvind James J.
6 United States 98th 3rd 49th
Krishna Krishna Kovnaugh
IBM Corporation of America

California, Omar Patrick Paul David

7 Intel 1968 United States Ishrak 51st 77th 46th
Gelsinger Zinsner
Corporation of America

Washington, Satya Satya Amy 12th

8 1975 2nd 14th
Microsoft U.S. Nadella Nadella Hood
Corporation

Vevey, Paul Ulf Mark Francois-

9 1866 Bulcke 47th 301st
Switzerland Schneider Xavier Roger
Nestle

Arkansas,
10 1969 United States Gregory Dough
John Rainey 23rd 1st
Walmart of America B. Penner McMillon

26 December 2022 The Chartered Accountant Student

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