Unit I

Definition of Business
Business is a „Human activity directed towards providing or acquiring wealth through
buying and selling goods‟--- L.H. Haney

➢ Characteristics of Business:-
1) Easy to start and easy to close: -
The form of business should be such that it should be easy to start and easy to close.
There should not be hassles or long procedures in the process of setting up business
or closing the same.
2) Division of labour: - there should be possibility to divide the work among the
available owners the idea is to poll the expertise of all the people in business and run
the business most efficiently.
3) Liability: - the liability of the owners should be limited to the extent of money
invested in the business. It is better if their personal properties are not brought into
business to make up the losses of the business.
4) Exchange: - Business involves exchange of goods and services for money or
Money’s worth.
5) Profit Motive: - Business activity is motivated by desire to earn profit business has
other objectives apart from. But profit is desired as a fair compensation for the efforts
of the businessman.
6) Secrecy: - The form of business organization you select should be such that it
should permit to take care of the business secrets. We know that century old business
units are still surviving only because they could successfully guard their business
secrets.

➢ Structure of Business Firm

Structure of Business Firm

Sole Proprietorship Partnership Joint Stock Company

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1. Sole Proprietorship: 'Sole' means single and 'proprietorship' means ownership.
It means only one person or an individual becomes the owner of the business.
A business enterprise exclusively owned, managed and controlled by a single
person with all authority, responsibility and risk, is known as sole
proprietorship form of business organization.

➢ Characteristics of Sole Proprietorship

1. Single Ownership: That individual owns all assets and properties of the
business. Consequently, he alone bears all the risk of the business.
2. No sharing of Profit and Loss: The entire profit arising out of sole
proprietorship business goes to the sole proprietor. If there is any loss it is also
to be bear by the sole proprietor alone. Nobody else shares the profit and loss
of the business with the sole proprietor.
3. One man’s Capital: The capital required by a sole proprietorship form of
business organization is totally arranged by the sole proprietor. He provides it
either from his personal resources or by borrowing from friends, relatives,
banks or other financial institutions.
4. One-man Control: The controlling power in a sole proprietorship business
always remains with the owner. The owner or proprietor alone takes all the
decisions to run the business. Of course, he is free to consult anybody as per his
liking.
5. Unlimited Liability: The liability of the sole proprietor is unlimited. This
implies that, in case of loss the business assets along with the personal
properties of the proprietor shall be used to pay the business liabilities.
6. Less Legal Formalities: The formation and operation of a sole proprietorship
form of business organization requires almost no legal formalities. It also does
not require to be registered. However, for the purpose of the business and
depending on the nature of the business, the sole proprietorship has to have a
seal. He may be required to obtain a license from the local administration or
from the health department of the government, whenever necessary.

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 ➢ Advantages of Sole Proprietorship
The sole proprietorship form of business is the most simple and common in our
country. It has the following advantages:
1. Easy to Form and Wind up: A sole proprietorship form of business is very
easy to form. With a very small amount of capital you can start the business.
Just like formation it is also very easy to wind up the business. It is your sole
discretion to form or wind up the business at any time.
2. Direct Motivation: The entire profits of the business go to sole tader. Nobody
will share this reward with him. This provides strong motivation for the sole
proprietor to work hard.
3. Quick Decision and Prompt Action: In a sole proprietorship business the sole
proprietor alone is responsible for all decisions. Of course, he can consult
others. But he is free to take any decision on his own. Since no one else is
involved in decision making it becomes quick and prompt action can be taken
on the basis of this decision.
4. Better Control: In sole proprietorship business the proprietor has full control
over each and every activity of the business. It is possible to exercise better
control over business.
5. Maintenance of Business Secrets: Business secrecy is an important factor for
every business. It refers to keeping the future plans, technical competencies,
business strategies, etc. In the case of sole proprietorship business, the
proprietor is in a very good position to keep his plans to himself. There is no
need to disclose any information to others.
6. Close Personal Relation: The sole proprietor is always in a position to
maintain good personal contact with the customers and employees. Direct
contact enables the sole proprietor to know the individual likes, dislikes and
tastes of the customers. Also, it helps in maintaining close and friendly relations
with the employees and thus, business runs smoothly.
7. Flexibility in Operation: The sole proprietor is free to change the nature and
scope of business operations as and when required as per his decision.
8. Encourages Self-employment: Sole proprietorship form of business
organization leads to creation of employment opportunities for people. Not only
is the owner self-employed, sometimes he also creates job opportunities for
others.
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 ➢ Limitations of Sole Proprietorship.
1. Limited Capital: In sole proprietorship business, it is the owner who
arranges the required capital of the business. It is often difficult for a single
individual to raise a huge amount of capital.
2. Unlimited Liability: In case the sole proprietor fails to pay the business
obligations and debts arising out of business activities, his personal
properties may have to be used to meet those liabilities.
3. Lack of Continuity: The existence of sole proprietorship business is linked
to the life of the proprietor. Illness, death or insolvency of the owner brings
an end to the business. The continuity of business operation is therefore
uncertain.
4. Limited Size: In sole proprietorship form of business organization there is
a limit beyond which it becomes difficult to expand its activities
5. Lack of Managerial Expertise: A sole proprietor may not be an expert in
every aspect of management. He/she may be an expert in administration,
planning, etc., but may be poor in marketing management.

2. Partnership
Indian Partnership Act, 1932, defines partnership as “a relation between persons who
have agreed to share the profits of a business carried on by all or any of them acting
for all”.
➢ Features of Partnership
1. Two or more Members: At least two members are required to start a
partnership business. But the number of members should not exceed 10 in case
of banking business and 20 in case of other business. If the number of members
exceeds this maximum limit then that business cannot be termed as partnership
business.
2. Agreement: Whenever you think of joining hands with others to start a
partnership business, first of all, there must be an agreement between all of you.
3. Sharing of Profit - The main objective of every partnership firm is sharing of
profits of the business amongst the partners in the agreed proportion.

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 4. Unlimited Liability - Just like the sole proprietor the liability of partners is also
unlimited. That means, if the assets of the firm are insufficient to meet the
liabilities, the personal properties of the partners, if any, can also be utilized to
meet the business liabilities.
5. Restriction on Transfer of Interest - No partner can sell or transfer his interest
to any one without the consent of other partners.

➢ Advantages of partnership form of business organization

Partnership form of business organization has certain advantages, which are as follows
–
A) Easy to form: Like sole proprietorship, the partnership business can be formed
easily without any legal formalities. It is not necessary to get the firm registered.
A simple agreement, either oral or in writing, is sufficient to create a partnership
firm.
b) Availability of large resources - Since two or more partners join hand to start
partnership business it may be possible to pool more resources as compared to sole
proprietorship. The partners can contribute more capital, more effort and also more
time for the business.
c) Better decisions - The partners are the owners of the business. Each of them
has equal right to participate in the management of the business. In case of any conflict
they can sit together to solve the problems. Since all partners participate in decision-
making, there is less scope for reckless and hasty decisions.
d) Flexibility in operations - The partnership firm is a flexible organization. At any
time the partners can decide to change the size or nature of business or area of its
operation. There is no need to follow any legal procedure. Only the consent of all the
partners is required.
e) Sharing risks - In a partnership firm the entire partners share the business risks.
For example, if there are three partners and the firm suffers a loss of Rs. 12,000 in a
particular period, then all partners may share it and the individual burden will be Rs.
4,000 only.
f) Protection of interest of each partner - In a partnership firm every partner has
an equal say in decision making. If any decision goes against the interest of any partner
he can prevent the decision from being taken. In extreme cases a dissenting partner
may withdraw himself from the business and can dissolve it.
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g) Benefits of specialization - Since all the partners are owners of the business they
can actively participate in every aspect of business as per their specialization and
knowledge.

Limitations of Partnership form of Business Organization

In spite of all these advantages as discussed above, a partnership firm also
suffers from certain limitations.
a) Unlimited Liability: All the partners are jointly as well as separately liable
for the debt of the firm to an unlimited extent. Thus, they can share the liability
among themselves or any one can be asked to pay all the debts even from his
personal properties.
b) Uncertain Life: The partnership firm has no legal entity separate from its
partners. It comes to an end with the death, insolvency, incapacity or the
retirement of any partner. Further, any dissenting member can also give notice
at any time for dissolution of partnership.
c) Limited Capital: Since the total number of partners cannot exceed 20, the
capital to be raised is always limited. It may not be possible to start a very large
business in partnership form.
d) No transferability of share: If you are a partner in any firm you cannot
transfer your share of interest to outsiders without the consent of other partners.
This creates inconvenience for the partner who wants to leave the firm or sell
part of his share to others.

➢ Types of Partners
a) Active partners - The partners who actively participate in the day-to-day
operations of the business are known as active or working partners. They
contribute capital and are also entitled to share the profits of the business. They
are also liable for the debts of the firm.
b) Dormant/Sleeping partners - Those partners who do not participate in the
day-to-day activities of the partnership firm are known as dormant or sleeping
partners. They only contribute capital and share the profits or bear the losses, if
any.
c) Nominal partners - These partners only allow the firm to use their name as
a partner. They do not have any real interest in the business of the firm. They
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do not invest any capital, or share profits and also do not take part in the conduct
of the business of the firm. However, they remain liable to third parties for the
acts of the firm.
d) Minor as a partner -A person under 18 years of age is not eligible to become
a partner. However in special cases a minor can be admitted as partner with
certain conditions. A minor can only share the profit of the business. In case of
loss his liability is limited to the extent of his capital contribution for the
business.
e) Partner by estoppels - If a person falsely represents himself as a partner of
any firm or behaves in a way that somebody can have an impression that such
person is a partner and on the basis of this impression transacts with that firm
then that person is held liable to the third party. The person who falsely
represents himself as a partner is known as partner by estoppel.
Example. Suppose in Ram Hari & Co firm there are two partners. One is Ram,
the other is Hari. If Giri- an outsider represents himself as a partner of Ram Hari
& Co and transacts with Madhu then Giri will be held liable for any loss arising
to Madhu. Here Giri is partner by estoppel.
f) Partner by holding out - In the above example, if either Ram or Hari
declares that Gopal is a partner of their firm and knowing this declaration Gopal
remains silent then Gopal will be liable to those parties who suffer losses by
transacting with Ram Hari & Co with a belief that Gopal is a partner of that
firm. Here Gopal is liable to those parties who suffer losses and Gopal will be
known as partner by holding out.

➢ Partnership Deed
Partnership comes into existence as a result of agreement among the partners.
The agreement can be either oral or written. The Partnership Act does not
require that the agreement must be in writing. But wherever it is in writing, the
document, which contains terms of the agreement, is called ‘Partnership Deed’.
Contents of the Partnership Deed the Partnership Deed usually contain the
following details:
• Names and Addresses of the firm and its main business;
• Names and Addresses of all partners;
• Amount of capital to be contributed by each partner;
• The accounting period of the firm;
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 • The date of commencement of partnership;
• Rules regarding operation of Bank Accounts;
• Profit and loss sharing ratio;
• Rate of interest on capital, loan, drawings, etc;
• Mode of auditor’s appointment, if any;
• Salaries, commission, etc, if payable to any partner;
• The rights, duties and liabilities of each partner;
• Treatment of loss arising out of insolvency of one or more partners;
• Settlement of accounts on dissolution of the firm;
• Method of settlement of disputes among the partners;
• Rules to be followed in case of admission, retirement, death of a partner
• Any other matter relating to the conduct of business. Normally, the partnership
deed covers all matters affecting relationship of partners amongst themselves.
However, if there is no express agreement on certain matters, the provisions of
the Indian Partnership Act, 1932 shall apply.

➢ Meaning of Joint Stock Company: It is a voluntary association of persons

who generally contribute capital to carry on a particular type of business, which
is established by law and can be dissolved only by law.
The companies in India are governed by the Indian Companies Act, 1956. The
Act defines a company as an artificial person created by law, having a separate
legal entity, with perpetual succession and a common seal.

➢ Characteristics of Joint Stock Company

1. Legal formation No single individual or a group of individuals can start a
business and call it a joint stock company. A joint stock company comes into
existence only when it has been registered after completion of all formalities
required by the Indian Companies Act, 1956.
2. Artificial person Just like an individual, who takes birth, grows, enters into
relationships and dies, a joint stock company takes birth, grows, enters into
relationships and dies. However, it is called an artificial person as its birth,
existence and death are regulated by law and it does not possess physical
attributes like that of a normal person.

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 3. Separate legal entity Being an artificial person, a joint stock company has
its own separate existence independent of its members. It means that a joint
stock company can own property, enter into contracts and conduct any
lawful business in its own name. The shareholders are not the owners of the
property owned by the company. Also, the shareholders cannot be held
responsible for the acts of the company
4. Common seal A joint stock company has a seal, which is used while dealing
with others or entering into contracts with outsiders. It is called a common
seal as it can be used by any officer at any level of the organization working
on behalf of the company. Any document, on which the company's seal is
put and is duly signed by any official of the company, become binding on
the company.
5. Perpetual existence A joint stock company continues to exist as long as it
fulfills the requirements of law. It is not affected by the death, lunacy,
insolvency or retirement of any of its members.
6. Limited liability in a joint stock company, the liability of a member is
limited to the extent of the value of shares held by him. While repaying
debts.

➢ Advantages of Joint Stock Company

1. Large financial resources: A joint stock company is able to collect a large
amount of capital through small contributions from a large number of people.
2. Limited Liability: In case of a company, the liability of its members is limited
to the extent of the value of shares held by them. Private property of members
cannot be attached for debts of the company. This advantage attracts many
people to invest their savings in the company and it encourages the owners to
take more risk.
3. Large-scale production: Due to the availability of large financial resources
and technical expertise it is possible for the companies to have large-scale
production. It enables the company to produce more efficiently and at lower
cost.
4. Research and Development: Only in company form of business it is possible
to invest a lot of money on research and development for improved processes
of production, new design, better quality products, etc. It also takes care of
training and development of its employees
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➢ Limitations of Joint Stock Company
1. Difficult to form: The formation or registration of joint stock company
involves a complicated procedure. A number of legal documents and
formalities have to be completed before a company can start its business. It
requires the services of specialists such as Chartered Accountants, Company
Secretaries, etc. Therefore, cost of formation of a company is very high.
2. Delay in policy decisions: Generally policy decisions are taken at the Board
meetings of the company. Further the company has to fulfill certain procedural
formalities. These procedures are time consuming and therefore, may delay
action on the decisions.
3. Concentration of economic power and wealth in few hands: A joint stock
company is a large-scale business organization having huge resources. This
gives a lot of economic and other power to the persons who manage the
company. Any misuse of such power creates unhealthy conditions in the
society, e.g., having monopoly over a particular business or industry or product;
exploitation of workers, consumers and investors.
4. Excessive government control: Joint stock companies are regulated by
government through Companies Act and other economic legislations.
Particularly, public limited companies are required to adhere to various legal
formalities as provided in the Companies Act and other legislations. Non-
compliance with these invites heavy penalty. This affects the smooth
functioning of the companies.

➢ Procedure for formation of a company

Section 3(1) of the Indian companies Act1956.There are two certificates
obtained in the formation of the company
There are three basic documents, which are prepared and filed with the
Registrar during the formation of a company. These are:
I. Certificate of incorporation
(1) Memorandum of Association (MOA)
(2) Articles of Association (AOA)
1. Memorandum of association (MOA) The Memorandum of Association is
the principal document in the formation of a company. It is called the charter of
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the company. It contains the fundamental conditions upon which the company
is allowed to be incorporated or registered. It defines the limitations of the
powers of the company. The purpose of memorandum is to enable the
shareholders, creditors and those who deal with the company to know what its
permitted range of activities or operations is. It defines the relationship of the
company with the outside world. The Memorandum of Association usually
contains the following six clauses:

(a) Name Clause: It contains the name by which the company will be
established. As you know, the approval of the proposed name is taken in
advance from the Registrar of the companies.
(b) Situation Clause: It contains the name of the state in which the registered
office of the company is or will be situated. The exact address of the company’s
registered office may be communicated within 30 days of its incorporation to
the Registrar of Companies.
(c) Objects Clause: It contains detailed description of the objects and rights of
the company, for which it is being established. A company can undertake only
those activities which are mentioned in the objects clause of its memorandum.
(d) Liability Clause: It contains financial limit up to which the shareholders
are liable to pay off to the outsiders on the event of the company being dissolved
or closed down.
(e) Capital Clause: It contains the proposed authorized capital of the company.
It gives the classification of the authorized capital into various types of shares,
(like equity and preference shares) with their numbers and nominal value. A
company is not allowed to raise more capital than the amount mentioned as its
authorized capital.
However, the company is permitted to alter this clause as per the
guidelines prescribed by the companies Act.
(f) Subscription Clause: It contains the name and address of at least seven
members in case of public limited company and two members in case of a
private limited company, who agree to associate or join hands to get the
undertaking registered as a company. It contains a declaration by persons who
are desirous of being formed into and agree to subscribe to the number of shares
mentioned against their names.

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2. Articles of Association (AOA) The Articles of Association of a company
contain the various rules and regulations for the day to day management of the
company. These rules are also called the bye-laws. It covers various rights and
powers of its members, duties of the management and the manner in which they
can be changed. It defines the relationship between the company and its
members and also among the members themselves. The rules given in the AOA
must be in conformity with the Memorandum of Association.
Articles of Association of a company generally contain rules and regulations
with regard to the following matters: (a) Preliminary contracts (b) Use and
custody of common seal (c) Allotment, calls and lien on shares (d) Transfer and
transmission of shares (e) Forfeiture and re-issue of shares (f) Alteration of
share capital (g) Issue of share certificates and share warrants (h) Conversion
of shares into stock (i) Procedure of holding and conducting company meetings
(j) Voting rights and proxies of members (k) Qualification, appointment,
remuneration and power of Directors (l) Borrowing powers and methods of
raising loans (m) Payment of dividends and creation of reserves (n) Accounts
and audit (o) Winding up.

II. Certificate of commencement of business

Prospectus After getting the Certificate of Incorporation or Registration a
public limited company invites the public to subscribe to its shares. This is done
by issuing a document called Prospectus. Under the Companies Act, a
prospectus has been defined as “any document described or issued as a
prospectus and includes any notice, circular, advertisement or other document,
inviting deposits from the public or inviting offers from the public for the
subscription or purchase of shares or debentures of a company or body
corporate”.
The main objectives of issue of a prospectus are: (a) to inform the public about
the company; (b) to induce people to invest in the shares or debentures of the
company; and (c) to provide an authentic information about the company and
the terms and conditions of issue of shares and debentures.
(a) General information regarding the name, office of the company, stock
exchange where shares are to be listed, date of opening and closing of the
issue, credit rating information, name of underwriters, brokers and bankers.
(b) Capital structure of the company. (c) Terms of payment and application
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 procedure. (d) Company management and details of the project and project
report. (e) Other listed companies under the same management. (f)
Outstanding litigations and defaults. (g)Management perception of risk
factors

➢ Theory of the firm

A firm is an entity that draws various types of factors of production in different
amounts from the economy, and converts them into desirable output(s), through a
process with the help of suitable technology. Every business has some objective,
which provides the framework for all the functions, strategies and managerial
decisions of that business.

I. Maximization Theories
1. Profit Maximization Theory Objective of business is generation of the largest
amount of Profit = (Total Revenue-Total Cost). Traditionally, efficiency of a firm
measured in terms of its profit generating capacity
Criticism
Confusion on period of time
Confusion on measure of profit
Validity questioned in competitive markets
2. Baumol’s Theory of Sales Revenue Maximization In competitive markets firms
aim at maximizing revenue through maximization of sales. Dichotomy of managers’
goals and owners’ goalsSales volumes determine market leadership in competition.
Manager’s salary and other benefits linked with sales volumes, rather than
profits. Managers attach their personal prestige to the company’s revenue or sales.
Managers maximize firm’s total revenue, instead of profits.
Criticism
Insufficient empirical evidence
3. Marris’ Hypothesis of Maximization of Growth Rate
Two sets of goals: Owners (shareholders) aim at profits and market share (Uo )
Managers aim at better salary, job security and growth (Um)
Both achieved by maximizing balanced growth of the firm G = GD = GC
Growth rate of demand for the firm’s products (GD) and
Growth rate of capital supply to the firm (GC)
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 Constraints in the objective of maximization of balanced growth:
Managerial Constraint: Non availability of managerial skill sets in required size
creates constraints for growth
Financial Constraint: debt equity ratio (r1), liquidity ratio (r2) and retained profit ratio
(r3)
II Behavioral Theories
1. Simon’s Satisfying Model
Biggest challenge before modern businesses is lack of full information and uncertainty
about future. The objective of maximizing either profit, or sales, or growth is not
possible. The firm has to operate under "bounded rationality". they act as constraints
to rational decision making. Can only aim at achieving a satisfactory level of profit,
sales and growth.
2. Model by Cyert and March The firm should be oriented towards multi goals
and multi decision making instead of dealing with inadequate information and
uncertainty. The firm should fulfill the conflicting goals of various
stakeholders, such as shareholders, employees, customers, financers, govt and
other social interest groups.

➢ Types of Business Entities

There are various forms of business entities
1. Private Ltd Company
2. Public Ltd Company
3. Unlimited Company
4. Sole proprietorship
5. Joint Hindu Family business
6. Partnership
7. Cooperatives
8. Limited Liability Partnership(LLP)
1. Private Ltd Company
A private company has the following features:
1. Restricts the right of the shareholders to transfer their shares.
2. Has a minimum of 2 and maximum of 50 members.
3. does not invite public to subscribe to its share capital
4. Must have a minimum paid up capital of Rs. 1 lakh or such a higher amount which
may be prescribed from time to time.
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 2. Public Ltd Company:
A public Ltd company has the following characteristics:
1. It allows the shareholders to transfer their shares.
2. Has a minimum of 7 members, and for maximum there is no limit.
3. it invites the general public to subscribe to its shares
4. Must have a minimum paid up capital of Rs 5 lakh or such a higher amount as may
be prescribed from time to time.
3. Unlimited Company
Unlimited Company is a form of business organization under which the liability of all
its members is unlimited. The personal assets of the members can be used to settle the
debts. It can at any time re-register as a limited company under section 32 of the
Companies Act.
4. Sole proprietorship
Sole proprietorship is a form of business entity where a single individual handles the
entire business organization. He is the sole recipient of all profits and bearer of all
loses. There is no separate law that governs sole proprietorship.
5. Joint Hindu Family
Joint Hindu Family is a form of business organization wherein the members of a
family can only own and manage the business. It is governed by Hindu Law.
6. Partnership
Partnership is “the relation between persons who have agreed to share the profits of
the business carried on by all or any one of them acting for all”. It is governed by the
Indian Partnership Act 1932.
7. Co-operatives
Co-operatives is a form of voluntary organization, wherein the members work
together for the promotion of the interests of its members. There is no restriction to
the entry or exit of any member. It is governed by Cooperative Societies Act 1912.
8. Limited Liability Partnership
Under LLP (Limited Liability Partnership) the liability of at least one member is
unlimited whereas rest all the other members have limited liability, limited to the
extent of their contribution in the LLP. Unlike general partnership this kind of
partnership does not get terminated by the death or insolvency of the limited partners.
It is governed by Limited Liability Partnership Act of 2008.

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➢ Sources Of Finance Every business requires some amount of money to start
and run the business. Whether it is a small business or large, manufacturing or
trading or transportation business, money is an essential requirement for every
activity. Money required for any activity is known as finance.
Every business needs funds mainly for the following purposes:
1. To purchase fixed assets: Every type of business needs some fixed assets like
land and building, furniture, machinery etc. A large amount of money is
required for purchase of these assets.
2. To meet day-to-day expenses: After establishment of a business, funds are
needed to carry out day-to-day operations e.g., purchase of raw materials,
payment of rent and taxes, telephone and electricity bills, wages and salaries,
etc
3. To fund business growth: Growth of business may include expansion of
existing line of business as well as adding new lines. To finance such growth,
one needs more funds.
4. To meet contingencies: Funds are always required to meet the ups and downs
of business and for some unforeseen problems.
5. Promotion of sales: In this era of competition lot of money is to be spent on
activities for promoting sales. This involves advertisement, personal selling, use
of sales promotional schemes, providing after sales service and free home
delivery, etc. which need huge amount of funds.

1. Long term finance: long term finance available for a long period say five
years and above. The long term methods outlined below are used to purchase
fixed assets such as land and buildings, plant and so on.
a) Own capital: irrespective of the form of organization such as soletrader,
partnership or a company, the owners of the business have to invest their own
finances to start with. Money invested by the owners, partners or promoters is
permanent and will stay with the business throughout the life of business.
b) Share capital: normally in the case of a company, the capital is raised by
issue of shares. The capital so raised is called share capital. The share capital
can be of two types, preference share capital and equity share capital.
c) Debentures: debentures are the loans taken by the company. It is a certificate
or letter by the company under its common seal acknowledging the receipt of

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 loan. A debenture holder is the creditor of the company. A debenture holder is
entitled to a fixed rate of interest on the debenture amount. d) Government
grants and loans: government may provide long term finance directly to the
business houses or by indirectly subscribing to the shares of the companies. The
government gives loans only if the project satisfies certain conditions, such as
setting up a project in a notified area, or ventures into projects which are
beneficial for the society as a whole.
e) Bank loans ; bank loans are extended at a fixed rate of interest. Repayment
of the loan and interest are scheduled at the beginning and are usually directly
debited to the current account of the borrower. These are secured loans.

2. Short Term Finance

a. Commercial paper: it is new money market instrument introduced in india
in recent times. Cps are issued in large denominations by the leading, nationally
reputed, highly rated and credit worthy, large manufacturing and finance
companies in the public and private sector. The proceeds of the issue of
commercial paper are used to finance current transactions and seasonal and
interim needs for funds.
b. Bank overdraft: this is special arrangement with the banker where the
customer can draw more than what he has in his saving/ current account subject
to a maximum limit. Interest is charged on a day to day basis on the actual
amount overdrawn.
c. Trade credit: this is short term credit facility extended by the creditors to
the debtors, normally; it is common for the traders to buy the materials and other
supplies from the suppliers on credit basis. After selling the stocks the traders
pay the cash and buy fresh stocks again on credit. Sometimes, the suppliers may
insist on the buyer to sign a bill.

➢ Non Conventional sources of finance

The different types of alternative sources of finance are listed as below:

1. Leasing
2. Franchising
3. Forfeiting
4. Peer-to-peer Platform
17
5. Crowdfunding
6. Angel Investors
7. Venture Capitalists
Leasing
1. A lease is defined as an agreement between the lessor (owner of the asset) and
the lessee (user of the asset), wherein, the lessor purchases an asset for the lessee
and allows him to use it in exchange of periodic payments called lease rentals
or minimum lease payments (MLP).
2. The lessee is bound to pay the lease rental to the lessor for the use of the assets.
After the end of the period of the contract, the asset is transferred back to the
lessor.
3. It refers to the renting of an asset for a certain period of time.
4. Parties involved include lease broker, lessor, lessee, and the lease assets.

Franchising
1. Franchising is the model in which the Company that does not have enough
capital to expand, gives its franchise rights to an individual or a company.
2. The company giving rights is called ‘franchisor’ while the company being given
the franchise is called ‘franchisee’.
3. It is an arrangement where one party grants or licenses some rights and
authorities to another party.
4. Franchising is a well-known marketing strategy to expand the business.
Types of Franchise:
1. Product franchise: An agreement where manufacturers allow retailers to
distribute their products and use names and trademarks.
2. Business format franchise: An agreement in which the franchisor provides the
franchisee with an established business, including name and trademarks for the
franchisee to run independently.
3. Management franchise: The franchisee provides the management expertise,
format and/ or procedure for conducting the business.

18
 Forfeiting
1. It is a form of financing of receivables arising out of international business.
Wherein, a bank or financial institution undertakes the purchase of trade bills
or promissory notes without recourse to the seller.
2. Purchases are made through discounting of the documents, hence covering the
entire risk of payment failure at the time of collection.
3. All risks become the full responsibility of the purchase
4. Forfeiture pays cash to the seller after the discounting of the said notes or bills.

Peer-to-peer (P2P) Lending

1. Peer-to-peer lending is a form of direct lending of money to businesses or
individuals without any official participation of any financial institution as an
intermediary in the agreement
2. It is generally done through online platforms that relate lenders with potential
borrowers
3. Peer-to-peer lending offers both secured and unsecured loans. However, most
of the loans are unsecured personal loans. Secured loans are an exception and
are usually backed by luxury goods.

Services provided by P2P Platforms:

1. Finding new lenders and borrowers
2. Verification of borrower identity, bank account, income, and employment
history
3. Legal compliance and reporting
4. Performing borrower credit checks and sorting out the unqualified ones
5. Servicing loans, providing customer service to borrowers, and attempting to
collect payments from borrowers who are in default

Crowdfunding
1. It is the practice of funding a project by raising money from a large group of
people.
2. It is a way of raising capital using the social networking sites like Facebook or
Twitter or by using some popular crowdfunding websites
3. Crowdfunding helps improve the presence of small businesses and startups
across social media, it increases their investment base, and funding prospects.
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4. Various types of crowdfunding include debt-based, equity-based, cause-based,
rewards-based, software value token, litigation, etc.
Venture Capital
1. It refers to that capital and knowledge which are given for the formation and
setting up of companies, especially to those who possess any new
methodologies or technology.
2. It is not merely a way of acquiring funds into a new firm but also a parallel
support of the skills required to set up the firm, devising its marketing strategy,
organizing, and its management as well.
Angel Investors
1. They are an individual or a group of individuals who invest their own money
2. They invest in the early stages of the company and in return opt for a share in
the company
3. Angel investors typically invest less money that the venture capitalists
4. They are not involved much in the functions and management of the company.
However, they may advise and ask for reports and status.

➢ Economics is the science that deals with production, exchange and consumption
of various commodities in economic systems. It shows how scarce resources can
be used to increase wealth and human welfare.
• Wealth Definition: Adam smith (1723 - 1790), in his book “An Inquiry into
Nature and Causes of Wealth of Nations”
• Lionel Robbins published a book “An Essay on the Nature and Significance of
Economic Science” in 1932.According to him, “economics is a science which
studies human behavior as a relationship between ends and scarce means which
have alternative uses”

➢ Types of Economics
1. Micro Economics: Microeconomics is the branch of economics that
concentrates on the behaviour and performance of the individual units, i.e.
consumers, family, industry, firms. Here, the demand plays a key role in
determining the quantity and the price of a product along with the price and
quantity of related goods (complementary goods) and substitute products, so

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 as to make a judicious decision regarding the allocation of scarce resources,
concerning their alternative uses.
Examples: Individual Demand, Price of a product, etc.
2. Macro Economics: Macroeconomics is the branch of economics that
concentrates on the behaviour and performance of aggregate variables and
those issues which affect the whole economy. It includes regional, national
and international economies and covers the major areas of the economy like
unemployment, poverty, general price level, GDP (Gross Domestic Product),
imports and exports, economic growth, globalization, monetary/ fiscal policy,
etc. It helps in resolving the various problems of the economy, thereby
enabling it to function efficiently.
Examples: Aggregate Demand, National Income, etc.

Key Differences between Micro and Macro Economics

The points given below explain the difference between micro and macro
economics in detail:
1. Microeconomics studies the particular market segment of the economy,
whereas Macroeconomics studies the whole economy that covers several
market segments.
2. Micro economics stresses on individual economic units. As against this, the
focus of macro economics is on aggregate economic variables.
3. While microeconomics is applied to operational or internal issues,
environmental and external issues are the concern of macro economics.
4. Microeconomics deals with an individual product, firm, household,
industry, wages, prices, etc., while Macroeconomics deals with aggregates
like national income, national output, price level, etc.
5. Microeconomics covers issues like how the price of a particular commodity
will affect its quantity demanded and quantity supplied and vice versa while
Macroeconomics covers major issues of an economy like unemployment,
monetary/ fiscal policies, poverty, international trade, etc.
6. Microeconomics determines the price of a particular commodity along with
the prices of complementary and the substitute goods, whereas the
Macroeconomics is helpful in maintaining the general price level.
7. While analyzing any economy, micro economics takes a bottom-up
approach, whereas the macroeconomics takes a top-down approach into
consideration.

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 ➢ Inflation: is the sustained increase in the general price level of goods and
services in an economy over a period. Inflation will lead to an overall increase
in the prices of goods. Inflation is measured as an annual change to the
percentage of increase in prices of goods or services. Under inflation, the prices
of goods increase over time and thus the ability to buy goods or services with
the same amount of money will reduce. When prices rise and currencies fall, it
is known as inflation.
➢ Causes of Inflation
1. Demand-Pull inflation:
According to this hypothesis. An increase in the demand for certain goods increases
their prices. If the demand for a goods or services is high and their supply is less, then
prices will increase. This happens when economies are growing fast.
2. Cost-Push Inflation:
The hypotheses states that inflation happens under the circumstances that the
production costs of the company manufacturing the goods rises and therefore leading
to an increase in the prices of the goods.
3. Monetary inflation:
According to the theory, inflation is caused when there is an increased supply of cash
or money in the economy.

➢ National Income: NI is the money value of all the final goods and services
produced by a country during a period of one year.NI consists of a collection of
different types of goods and services. Since these goods are measured in different
physical units (i.e. kgs, litres, metres).we can’t state national income in terms of
kgs, litres, metres.so it has common measure i.e. called money value.

The important concepts of national income are:

1. Gross Domestic Product (GDP)
2. Gross National Product (GNP)
3. Net National Product (NNP) at Market Price
4. Net National Product (NNP) at Factor Cost or National Income

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5. Personal Income
6. Disposable Income
1. Gross Domestic Product (GDP): Gross Domestic Product (GDP) is the total
market value of all final goods and services produced within the domestic territory
of a country in a year.
GDP=P*Q; P=price of goods and services= Quantity of goods and services.

GDP indicate economic wealth of a country as well as standard living of the residence.

2. Net Domestic Product (NNP): Production of goods and services involves

consumption or reduction in value of assets is called depreciation.

. NDP= GDP- depreciation

3. Gross National Product (GNP): GNP refers to market value of all final goods and
services produced by residence of a country within and outside its border.

• GNP=GDP (+) Income earned by India from abroad (NFIA) (-)

Income earned by foreigners in India.

4. Net National Product (NNP) at Market Price: NNP is the market value of all
final goods and services after providing for depreciation. That is, when charges for
depreciation are deducted from the GNP we get NNP at market price. Therefore’
NNP = GNP – Depreciation
Depreciation is the consumption of fixed capital or fall in the value
of fixed capital due to wear and tear.
5. Personal Income: Personal income is the sum of all incomes actually received by
all individuals or households during a given year. In National Income there are some
income, which is earned but not actually received by households such as Social
Security contributions, corporate income taxes and undistributed profits. On the
other hand there are income (transfer payment), which is received but not currently
earned such as old age pensions, unemployment doles, relief payments, etc. Thus, in
moving from national income to personal income we must subtract the incomes
earned but not received and add incomes received but not currently earned.
Therefore,

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 Personal Income = National Income – Social Security contributions – corporate
income taxes – undistributed corporate profits + transfer payments.

6. Disposable Income: From personal income if we deduct personal taxes like

income taxes, personal property taxes etc. what remains is called disposable
income. Thus,
Disposable Income = Personal income – personal
taxes.
Disposable Income can either be consumed or saved. Therefore,
Disposable Income = consumption + saving.

➢ Importance of National Income

1. Since income is a flow of wealth changes in the national income give some
indication of economic welfare.

2. National income is used to compare standards of living in different countries.

3. National income figures are used to measure the rate of growth of a country.

4. The national income accounts make it possible for an analysis of the behavior
of the different sectors of the economy.

5. Inflationary and deflationary pressures can be estimated with the help of

national income statistics.

6 National income statistics can be used to forecast the level of business activity
at later date, and to find out trends in other annual data.

7. The national income figures are useful in providing a correct sense of

proportion about the structure of the economy.

8. In war time, the study of components of national income is of great

importance because they show the maximum possible production possibilities
of the country.

9. National income statistics can be used to determine how an international

financial burden should be an apportioned between different countries. The
quantum of national income measures the ability of a country to pay

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 contributions for international purposes, just as the income of a person measures
his ability to pay for the upkeep of his country.

Inflation and Money Supply

The money supply is the total amount of money in an economy, including

currency and deposit money. The money supply can affect inflation, which is
the rate at which the average price of goods and services increases over
time. According to the quantity theory of money, inflation occurs when the
money supply increases faster than the economy's output

• M1 (Narrow Money): Currency with the public + Deposit money of the public
(Demand deposits with the banking system + ‘Other’ deposits with the RBI).
• M2: M1 + Savings deposits with Post office savings banks.
• M3 (Broad Money): M1+ Time deposits with the banking system = Net bank
credit to the Government + Bank credit to the commercial sector + Net foreign
exchange assets of the banking sector + Government’s currency liabilities to
the public – Net non-monetary liabilities of the banking sector (Other than Time
Deposits).
• M4 (Broad Money): M3 + All deposits with post office savings banks
(excluding National Savings Certificates).

➢ Business cycle: The term business cycle refers to economy wide fluctuations in
production, trade and general economic activity. The business cycle is the upwards
and downwards movements of levels of GDP and refers to the period of expansion
and contraction in the level of economic activities around a long term growth
trends.

➢ Features of Trade Cycle

The characteristics or features of trade cycle are:-
• Movement in Economic Activity: A trade cycle is a wave-like
movement in economic activity showing an upward trend and a
downward trend in the economy.
• Periodical: Trade cycles occur periodically but they do not show the
same regularity.

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 • Different Phases: Trade cycles have different phases such as Prosperity,
Recession, Depression and Recovery.
• Different Types: There are minor and major trade cycles. Minor trade
cycles operate for 3-4 years, while major trade cycles operate for 4-8
years or more. Though trade cycles differ in timing, they have a common
pattern of sequential phases.
• Duration: The duration of trade cycles may vary from a minimum of 2
years to a maximum of 12 years.
• Dynamic: Business cycles cause changes in all sectors of the economy.
Fluctuations occur not only in production and income but also in other
variables like employment, investment, consumption, rate of interest,
price level, etc.
• Phases are Cumulative: Expansion and contraction in a trade cycle are
cumulative, in effect, i.e. increasing or decreasing progressively.
• Uncertainty to businessmen: There is uncertainty in the economy,
especially for the businessmen as profits fluctuate more than any other
type of income.
• International Nature: Trade Cycles are international in character. For
e.g. Great Depression of 1930s.
➢ Four Phases of Business Cycle
Business Cycle (or Trade Cycle) is divided into the following four phases:-
1. Prosperity Phase: Expansion or Boom or Upswing of economy.
2. Recession Phase: from prosperity to recession (upper turning point).
3. Depression Phase: Contraction or Downswing of economy.
4. Recovery Phase: from depression to prosperity (lower turning Point).
5. Expansion: Also known as a boom or upswing, this phase is when the economy
expands.

26
The business cycle starts from a trough (lower point) and passes through a recovery
phase followed by a period of expansion (upper turning point) and prosperity. After
the peak point is reached there is a declining phase of recession followed by a
depression. Again the business cycle continues similarly with ups and downs.
1. Prosperity Phase: When there is an expansion of output, income, employment,
prices and profits, there is also a rise in the standard of living. This period is termed
as Prosperity phase.
The features of prosperity are:-
• High level of output and trade.
• High level of effective demand.
• High level of income and employment.
• Rising interest rates.
• Inflation.
• Large expansion of bank credit.
• Overall business optimism.
• A high level of MEC (Marginal efficiency of capital) and investment.
Due to full employment of resources, the level of production is Maximum and there
is a rise in GNP (Gross National Product). Due to a high level of economic activity, it
causes a rise in prices and profits. There is an upswing in the economic activity and
economy reaches its Peak. This is also called as a Boom Period.
2. Recession Phase: The turning point from prosperity to depression is termed as
Recession Phase. During a recession period, the economic activities slow down. When
demand starts falling, the overproduction and future investment plans are also given
up. There is a steady decline in the output, income, employment, prices and profits.
The businessmen lose confidence and become pessimistic (Negative). It reduces
investment. The banks and the people try to get greater liquidity, so credit also
contracts. Expansion of business stops, stock market falls. Orders are cancelled and

27
people start losing their jobs. The increase in unemployment causes a sharp decline in
income and aggregate demand. Generally, recession lasts for a short period.
3. Depression Phase: When there is a continuous decrease of output, income,
employment, prices and profits, there is a fall in the standard of living and depression
sets in.
The features of depression are:-
• Fall in volume of output and trade.
• Fall in income and rise in unemployment.
• Decline in consumption and demand.
• Fall in interest rate.
• Deflation.
• Contraction of bank credit.
• Overall business pessimism.
• Fall in MEC (Marginal efficiency of capital) and investment.
In depression, there is under-utilization of resources and fall in GNP (Gross National
Product). The aggregate economic activity is at the lowest, causing a decline in prices
and profits until the economy reaches its Trough (low point).
4. Recovery Phase: The turning point from depression to expansion is termed as
Recovery or Revival Phase. During the period of revival or recovery, there are
expansions and rise in economic activities. When demand starts rising, production
increases and this causes an increase in investment. There is a steady rise in output,
income, employment, prices and profits. The businessmen gain confidence and
become optimistic (Positive). This increases investments. The stimulation of
investment brings about the revival or recovery of the economy. The banks expand
credit, business expansion takes place and stock markets are activated. There is an
increase in employment, production, income and aggregate demand, prices and profits
start rising, and business expands. Revival slowly emerges into prosperity, and the
business cycle is repeated.
Thus we see that, during the expansionary or prosperity phase, there is inflation and
during the contraction or depression phase, there is a deflation.
5. Expansion and Boom: The various characteristics of economy in its expansion
phase are increase in output, increase in investment, increase in employment, increase
in aggregate demand, and increase in sales, increase in profits, increase in wholesale
and retail prices, increase in per capita output and rise in standard of living. There is

28
absence of involuntary unemployment but structural and frictional unemployment
prevails in the economy.

➢ Business Economics
Introduction: Business Economics is playing an important role in our daily economic
life and business practices. Manager of business firm uses the economic thoughts and
concepts to solve the problems prevailing in business activities. Everyday business
manager has to face different problems, while running the business. They would be
solved with the help of economic theories.
Managerial Economics was formerly known as "Business Economics." It is also called
as "Applied Economics". The world Business Economics is formed from the two
worlds Business and Economics.

Business Economics

Business Economics

Definition: 'McNair and Meriam' defined it as "Managerial Economics consists of the

use of Economic modes of thought to analyze business situations.

Applications

1. Use of optimum techniques to improve organizational decisions

2. Understanding individual and market demand decisions to forecast demand
3. Understanding markets
4. Analyze cost and supply structure to understand supply decisions
4. Understanding external factors like unemployment, inflation.

➢ characteristics of business economics

29
 1. Close to microeconomics: Managerial economics is concerned with finding
the solutions for different managerial problems of a particular firm. Thus, it is
more close to microeconomics.
2. Operates against the backdrop of macroeconomics: The macroeconomics
conditions of the economy are also seen as limiting factors for the firm to
operate. In other words, the managerial economist has to be aware of the limits
set by the macroeconomics conditions such as government industrial policy,
inflation and so on.
3. Normative statements: A normative statement usually includes or implies
the words ‘ought’ or ‘should’. They reflect people’s moral attitudes and are
expressions of what a team of people ought to do. For instance, it deals with
statements such as ‘Government of India should open up the economy. Such
statement are based on value judgments and express views of what is ‘good’ or
‘bad’, ‘right’ or ‘ wrong’. One problem with normative statements is that they
cannot to verify by looking at the facts, because they mostly deal with the
future. Disagreements about such statements are usually settled by voting on
them.
4. Prescriptive actions: Prescriptive action is goal oriented. Given a problem
and the objectives of the firm, it suggests the course of action from the available
alternatives for optimal solution. If does not merely mention the concept, it also
explains whether the concept can be applied in a given context on not. For
instance, the fact that variable costs are marginal costs can be used to judge the
feasibility of an export order.
5. Applied in nature: ‘Models’ are built to reflect the real life complex
business situations and these models are of immense help to managers for
decision-making. The different areas where models are extensively used
include inventory control, optimization, project management etc. In managerial
economics, we also employ case study methods to conceptualize the problem,
identify that alternative and determine the best course of action. 6. Offers scope
to evaluate each alternative: Managerial economics provides an opportunity
to evaluate each alternative in terms of its costs and revenue. The managerial
economist can decide which is the better alternative to maximize the profits for
the firm.

➢ Scope Of Business Economics

30
 1. Demand Analysis: The manager thinks about the demand for his firm's
product. A firm can survive if it is able to cater the demand for its product in market
at the proper time and in the right quantity. A firm can economically stand in the
market, when its goods are cautiously demanded and sold in the market. Manager
looks to the market demand of his firm's product.
He made the accurate estimate of demand and makes the decisions. Before he
come to the final conclusions manager of every business firm can study the basic
concepts and theories of demand analysis in economics as law of demand, demand
forecasting, elasticity of demand and their variant factors.
2. Theory of production: Theory of production is also called as the theory of
firm. Along with the cost of production it also consists the firm's revenue. It includes
the rel1ationship between various factors of production, input-output analysis,
capital - labour ratio, optimum production, break even analysis etc. These economic
concepts help to business manager in solving the problems related with the
production.

3. Cost-Analysis: Cost of production is very significant factor in the process of

production. Therefore every manager must to possess a good knowledge of cost
analysis it includes various kinds of costs, which are very essential in decision
making. The various factors responsible for the variation in cost estimates must be
given due weightage. These cost estimates are necessary in future planning. There
is uncertainty in regards to cost due to unknown factors. Cost estimates are very
essential for most sound profit planning. Hence to find out the firms cost of
production the knowledge of cost analysis is very essential for business manager. It
includes various costs concepts cost output analysis, economies of scale,
production function, cost control etc.

31
4. Pricing theories: Managerial economics deals with the pricing theories. Pricing
of a product incurs income to the firm. The success of the firm can be comprised in a
sound pricing policy of its product, how the price is to be determined in various
forms of market such as perfect competition, monopoly, monopolistic competition,
oligopoly, duopoly etc. What conditions are affecting on the pricing process in
different markets should be known by the manager of a business firm. Therefore he
has to possess the good knowledge of market forms with the help of this knowledge
he can form a sound pricing policy. It means that knowledge of pricing theories
helps him to formulate good pricing policy and it further assists to decision making.

5. Theory of profit: Profit maximization is a aim of business firm making profit in

long run is a sign of successful entrepreneur. Profit depends on various factors such
as internal factors and external factors. These factors are many in number e. g.
demand for product, input prices, factor prices, competition, economic policy,
business risks and the amount of investment etc. Knowledge of sound profit earning
policy and techniques of profit planning are also important to business manager.
Economic theory provides this knowledge.

6. Resource Allocation: Managerial economics also deals with the problem of

optimum allocation of resources. Resources are scare, so they should be allocated
efficiently to different uses by the manager. In order to solve the problem of resource
allocation the manager should possess the knowledge of input-output analysis, linear
programming etc. With the help of these economic analysis methods manager
arrives to the final conclusions in respect of his decision making.

7. Capital-Investment Analysis: The capital budgeting involves planning and

control of capital expenses. This topic consists of cost of capital, rate of return.
Selection of project, Cost-benefit analysis etc. The knowledge of Capital Theory
helps to take investment decisions.
8. Inventory Management: Every firm requires raw material. It would be stored in
inventories. What would be the ideal stock of inventories? How the stock of
inventories should be maintained and controlled? These are some of the problems
which the manager has to solve. Knowledge of this stock inventory is achieved from
economic theory.

➢ Business Economics in Relation with other Disciplines(Multi-disciplinary

nature)

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Business economics has a close linkage with other disciplines and fields of study. The
subject has gained by the interaction with Economics, Mathematics and Statistics and
has drawn upon Management theory and Accounting concepts. Managerial economics
integrates concepts and methods from these disciplines and brings them to bear on
managerial problems.
1. Business Economics and Economics:
Business Economics is economics applied to decision making. It is a special branch
of economics, bridging the gap between pure economic theory and managerial
practice.
2. Business Economics and Theory of Decision Making:
The theory of decision making is relatively a new subject that has significance for
managerial economics. In the process of management such as planning, organizing,
leading and controlling, decision making is always essential. Decision making is an
integral part of today’s business management. A manager faces a number of problems
connected with his/her business such as production, inventory, cost, marketing,
pricing, investment and personnel.
3. Business Economics and operation Research
Business economics depends heavily on the models and tools of operation research.
Operation research subject used for solving complex problems of planning and
allocation of scarce resources, primarily in defense industries. Linear programming,
inventory models, game theory are a few tools that have useful to the operation
researchers.

4. Business Economics and Mathematics:

Mathematical approach to economic theories makes them more precise and logical.
For the estimation and prediction of economic factors for decision making and
forward planning, mathematical method is very helpful. The important branches of
mathematics generally used by a managerial economist are geometry, algebra and
calculus.
5. Business Economics and Statistics:
Statistical tools are a great aid in business decision making. Statistical tools are used
in collecting, processing and analyzing data. The statistical tools like, theory of
probability, forecasting techniques, help the decision makers in predicting the future.
6. Business Economics and Accounting:
33
Managerial economics is closely related to accounting. It is recording the financial
operation of a business firm. A business is started with the main aim of earning
profit. Accounting provides the accounting data for taking business decisions. The
accounting techniques are very essential for the success of the firm.

7. Business Economics and Psychology:

Psychology is the science of mind. It deals with all kind of human behavior. Business
economics plays a vital role to understand the behavior of consumers, suppliers,
investors, workers or an employee.

8. Organizational Behavior and Business Economics: OB helps the managers

to understand the human behavior of employees for developing the firm.

Role of Business economist:

Business economists help businesses make decisions by providing a

quantitative foundation for planning and decision-making. They use their
expertise and experience to conduct research, collect and analyze data, monitor
economic trends, and develop forecasts. They also apply economic theory to a
variety of fields, including banking, finance, manufacturing, and education.

Business economists can help businesses in many ways, including:

Identifying problems

Business economists can help identify problems that a business may be facing.

Providing advice

Business economists can advise on business strategy, trade, and public

relations. They can also help businesses pose questions that can guide the
development of products, marketing, and investments.

Forecasting

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Business economists can forecast spending, sales, and environmental
conditions. They can also help businesses create strategic timelines for
expansion and new services.

Analyzing trends

Business economists can compare consumer demand and sales trends to help
optimize profits. They can also analyze changing economic situations in the
country and abroad.

Managing capital and profit

Business economists can help businesses earn reasonable profits on invested

capital by providing relevant information for making plans and strategies.

Business economists also need to maintain good relationships with internal and
external parties, such as employees, suppliers, financial institutions, and
government agencies.

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