TyroCity: Economics 12 Notes

Organization

Economics 12 Notes — Sun, 08 Apr 2012 05:41:42 +0000

The business organization is defined as a firm established and run to earn profit by producing and selling commodities. The main objective of every business organization is to earn profit. To maximize profit, each firm has to fulfill demand for goods or services made by consumers or other firms. For maximum profit, each firm must supply the quantity just equal for demand in the market and there must be maximum difference between revenue and cost of production. There are different types of organizations. There are mainly three types of organization. They are

Sole proprietorship
Partnership
Joint stock

Joint Stock Company

Economics 12 Notes — Sun, 08 Apr 2012 05:41:42 +0000

Joint stock companies first came into being in the 18th century in Britain, and were mainly concerned with foreign trade. Initially, the organizational form was viewed with suspicion, it being supposed that it encouraged managerial efficiency and corruption. A corporation, chartered by the state in which it is headquartered is considered by law to be unique entity, separate and apart from those who own it. A corporation can be taxed; it can be sued; it can enter into contractual agreements. The owners of a corporation are its shareholders. The shareholders elect a board of directors (BOD) to oversee the major policies and decisions. The company has a life of its own and does not dissolve when ownership changes.
A company is a voluntary association, an incorporated association, an artificial person created by law, having a common seal and perpetual succession. Shareholders are owners of the company but management lies in the hands of BOD. Company means a company registered under an act.

According to H.L Haney: “A joint company is a voluntary association of individual for profit, having its capital divided into transferable shares the ownership of which is the condition of membership.”

Characteristics of Joint Stock Company

Compulsory incorporation:
A company is a voluntary association of persons formed and incorporated under the existing Corrine law. Only when it gets certificate of incorporation it comes into existence as a body corporate.

Artificial person:
A company is an artificial person created by law. It is created by legal process and not by natural birth. Even though it has no natural personality, it has legal personality. Therefore, it can enter into contracts, sue and can be sued, own property, appoint employees and borrow money like any other natural person.

Common seal:
Since a company is an artificial person having no physical features like a natural person, it cannot sign. Hence every company by law must have a common seal in which its name is engraved. The common seal can serve as its signature. The common seal is fixed on all important documents and contracts which is witnessed by signature of two directors and countersigned by secretary where ever required. The common seal is kept under the custody of directors.

Perpetual succession:
Since every company has separate existence from its members, directors and employees, their death, insolvency or insanity will not affect its life and existence. Men may come and they may go but a company remains forever. It can be wound up under the provision of the act.

Limited liability:
Usually the liability of members of a company is limited to the extent of uncalled or unpaid shares held by them. Their personal property cannot be seized to meet the company’s liability beyond the above mentioned liability.

Share capital:
The capital required by the company is raised by the issue of its shares. The share is a document that acknowledges the ownership of the company. The members who hold the share of a company can transfer its ownership to any other person, without the company’s permission.

Separation of ownership and capital:
In company organization the ownership and management are separate. The shareholders who are the owners do not take active part in the everyday affairs of the company. Instead they elect their representative known as directors, who with the help of managers and employees manage the company. Thus, there is division of labor and specialization.

Legal entity:
Since the company is created by law, it has separate legal existence compared to its members. Therefore the members cannot be personally held responsible for the acts of company and company cannot be held liable for the acts of the members.

Large membership:
The Company is owned by a large number of members- maximum of 50 in the case of private limited company and unlimited number of member in the case of public limited company.

Merits of joint stock company

Large capital:
A company can collect huge capital for the business through shares and debentures, public deposits, loans etc. Due to huge capital the company can conduct business on a large scale.

Continuity and stability:
Death, insolvency or insanity of any member of the company will not affect its life and existence. Men may come and they may go but a company remains forever. It can be wound up under the provision of the act.

Professional management:
The Company appoints experienced, competent and expert to manage the business. Their services lead to managerial and administrative efficiency and accuracy.

Economies of scale:
A company operates on a high scale and so it enjoys economies in production, distribution, management and financing.

Bargaining power:
Compared to other forms of organization, a joint stock company is a strong power in buying as well as in selling of goods because of its large scale production.

Legal status: Efficiency of labor :
Since the company is created by law, it has separate legal existence compared to its members. Therefore the members cannot be personally held responsible for the acts of company and company cannot be held liable for the acts of the members.

Large membership:
The Company is owned by a large number of members- maximum of 50 in the case of private limited company and unlimited number of member in the case of public limited company.

Transferability of shares:
Shares of Joint Stock Company, especially public companies, are freely transferable. A member who wants to sell his shares can easily do so in the stock market. This encourages the public and other to invest in shares.

Employment:
Joint Stock Company provides employment to a large number of people directly and indirectly. This leads to higher national income for the country and higher living standard of living for the people.

Government revenue:
Joint Stock Companies provide revenue to the government in the form of taxes charged directly and indirectly.

Research and development:
Joint Stock Companies undertakes R&D continuously thus bringing about new and improved products which benefits people.

Economic development:
Because of Joint Stock Companies there is all round development of trade, commerce and industry. The society in general gains the benefit of the industrial development. Large capital, government revenue, economic development etc. are the advantages of Joint Stock Companies.

Demerit of Joint Stock Company

Difficult formation:
Formation of Joint Stock Company is an expensive and time consuming process as a number of legal formalities have to be undertaken in order to register the company.

Lacks flexibility:
The working of a Joint Stock Company is less flexible s compared to other organizations. For very small thing they either have to follow a detailed procedure or obtain sanctions from various authorities. This results in lack of flexibility.

No business secrecy:
This form of organization lacks business secrecy because it is compulsory for the company to publish accounts and other records

Excessive government regulation:
The Company is a subject to excessive government control. It has to follow the numerous provision of the companies act. This makes working difficult.

Delay in decision:
The Joint Stock Company is completely not free to take all decisions and to implement the decisions. Due to excessive government control and democratic set up all decisions are taken in meetings and some decisions require shareholder’s approval. All this leads to delay in decisions.

Lack of contact with customer:
A company can’t be in a position to maintain intimate contacts with customers. It cannot be able enter to the requirements of each and every customer. Then there is no close personal touch which decreases the competitive strength of the business due to large scale operation.

Lack of contact with employees:
The top management may not have contact with their employees. This may cause friction and disputes amongst the management and the employees with may affect the worker’s and employee’s morale.

Conflict of interest:
Many persons are the owners of Joint Stock Company. There can be misunderstanding and jealousy among them and these cause problems in operation of business and profit making.

Not suitable for all type of business:
This type of organization is not suitable for business where personalized services are required.

Exploitation of shareholders:
Sometimes the BOD may misappropriate the fund and mislead the shareholders by window dress report. The directors may even manipulate the trading on the stock exchange. Thus shareholders can be exploited by corrupt directors.

Types of money

Economics 12 Notes — Sun, 08 Apr 2012 05:41:42 +0000

There are different types of money. In the ancient time, the goods of primary importance were used as money in different societies. Money made up of metal, clay, baked leather, hard rocks etc were used but the different types of money can be classified into mainly 4 types. They are

Commodity money The different types of goods durable in nature were commodity money used in ancient times. In the ancient India cow was used as money, in the seashore side fishing hooks and the shells were used as money. Among the hunting commodities, the bows and arrows were used as money. These types of commodity money lacked uniformity and were not usable in all societies. They had more or less importance in different communities. There was difficulty in store measurement of value and transfer from one place to another place.
Metallic money Money made up of metals is called metallic money. It was introduced to overcome the problems in the use of commodity money. The coins were supposed minted in the temple of Goddess Juno. That's why the coins were known as money. There are two types of metallic money. They are:
- Standard metallic money: It is metallic money made up of pure and superior metals like gold and silver. This type of metallic money has the face value just equal to the intrinsic value. The value inscribed in the coins is called face value of money. The value of metal used to mint the coin is called intrinsic value.
- Token money: It is metallic money made up of impure and inferior metals. This type of metallic money has the face value greater than the intrinsic value. Since, the prices of metals change with the time; the standard metallic money is not proper type of money. Moreover, there is need of large quantity of superior and pure metals to mint the large amount of coins. The metallic money is uniform and durable in nature. It is difficult to carry in large amount,. There Is also problem of scarcity of metals to mint the coins.
Paper money It is made up of paper. It is legally tendered. It is issued by monetary authority or central bank of the nation against the reserve of gold. The value of gold kept reserve may be equal to or less than the amount of money issued. It is main type of legally tendered money used in every country. It is lighter less costly to print and safe type of money. But if it is lost, theft or caught fire then owner of the money suffers loss. However, it is easy to carry. There are two types of paper money. They are
- Representative paper money: It is the paper money issued against the reserve of gold equal to the paper money issued. It represents gold kept as security of money issued. It is convertible to gold at any time. It is also called convertible paper money.
- Flat paper money: It is the paper money issued against the reserve of gold of value less than the amount paper money issued. It is not convertible to gold at any time. It is also called non-convertible paper money The face value of paper money is far greater than intrinsic value. Its intrinsic value is infinitely small.
Bank money: It is short term credit instruments issued by banks. They can be cheques, travel cheques, bills of exchange, letter of credit, promissory notes, overdrafts, debit/credit/ATM cards and so on. They are issued for 1 or less than 1 year. They are called liquid assets. They are discounted within one year, before the time of maturation. Most of the bank money are usable only if there are electronic devices.

Others:Besides the 4 types of money there were money made up of baked clay, leather, plastic and so on used in ancient time.

Demand for capital

Economics 12 Notes — Sun, 08 Apr 2012 05:41:42 +0000

Demand for capital
The amount the entrepreneurs want to invest is called demand for capital. It is the amount that the entrepreneurs need to purchase capital goods like equipments, plants, machines, tools etc which can be used for production of goods and services. It is inversely related to interest rate. If the interest rate is high, entrepreneurs want to make less investment and vice versa. It is because of marginal physical productivity.
Symbolically,

In the above table, when interest rate is increased from 4% to 6% and 8% demand for capital ( investment) decreases from Rs 10 billions to Rs 8 billions and Rs 6 billions respectively. If we represent investment with respect to interest rate, we obtain a downward sloped curve.

Balance of trade

Economics 12 Notes — Sun, 08 Apr 2012 05:41:42 +0000

It is defined as net export i.e. relative export to import. It is systematic records of export and import. The difference between total export and total import of a country in a fiscal year gives balance of trade. On the basis of total export and total import, there are three types of balance of trade. They are

1. Favorable balance of trade:
If the total export is greater than total import, the country is said to have favorable balance of trade. In this case, the inflow of money from export is greater than outflow of money due to import. This type of international trade is said to be in surplus.

2. Unfavorable balance of trade:
If the total import is greater than total export, the country is said to have unfavorable balance of trade. In this case, the inflow of money from export is less than outflow of money due to import. This type of international trade is said to be in deficit.

3. Zero balance of trade:
If the total export is equal to total import, the country is said to have zero balance of trade. In this case, the inflow of money from export is equal to outflow of money due to import. This type of international trade is said to be in balance.

Weighted price index

Economics 12 Notes — Sun, 08 Apr 2012 05:41:42 +0000

The price index constructed by giving different weights to different commodities is called weighted price index. Weights are given on the basis of regularity in consumption and the amount spent and the number of consumers. The commodities consumed by all or majority of consumers spending large amount of income is given more weights and vive versa. The average price is calculated dividing the sum of weighted price by sum of weights.

weighted average price = sum of weighted prices / sum of weights
The major methods of weighted price index are fisher’s method, Laspeyre’s method, Pasche’s method etc. Weighted price index is calculated under

We can explain it with the help of table as following

commodities	Weight (W)	Price in 2011 (P1)	P1*W	Price in 2012 (P2)	P2*W
Rice	10	Rs 35	Rs 350	Rs 40	Rs 400
Pulses	4	Rs 80	Rs 320	Rs 95	Rs 380
Clothes	3	Rs 250	Rs 750	Rs 275	Rs. 825
Vegetables	5	Rs 50	Rs 250	Rs 70	Rs 350
Firewood	2	Rs 100	Rs 200	Rs 150	Rs 300
total	24	Rs 515	Rs 1870	Rs 630	Rs 2255
Average			77.92		93.96
Price index			100		120.58

In the above table, we have taken only 5 commodities. Sum of the weighted prices of the base year 2011 is Rs 1870. The sum of weighted price of 2012 is Rs 2255. If we divide these sums of weighted prices by the sum of weights we obtain average price of the year2011 as Rs 77.92 and of the year 2012 Rs 93.95. Indexing price level of base year as 100 we can obtain the price index of the year 2012 as 1220.58. There is said to be rise in price level by 20.58%.

Consumer Surplus

Economics 12 Notes — Sun, 08 Apr 2012 05:41:42 +0000

Firstly, this theory was developed by French Engineer A.J. Dupit in 1844. Later on it was reformulated by Professor Marshall. This theory is related to the expenditure of daily life. While buying the commodity the consumer always thinks about the utility that he/she can get from the commodity. If consumer can get higher amount of utility in comparison to sacrifice made for the commodity than consumer have surplus. Consumer surplus is the excess amount of utility over sacrifice made for the commodity.

Consumer surplus is the excess amount of price that the consumer is ready to pay over actual price of commodity. Therefore, Consumer surplus = Ready to pay – Actual price of commodity.

We can explain this concept of commodity on the basis of given table:

Units of Commodity	Ready to pay M.U	Actual Price	Consumer Surplus
1	12	4	8
2	10	4	6
3	8	4	4
4	6	4	2
5	4	4	0
	Total = 40	Total = 20	20

On the above table, when consumer purchase first unit of he/she is ready to pay Rs 12 but actual price is Rs 4. So consumer gets surplus. Similarly, the consumer is trady to pay Rs. 10, 8, 6, 4 for 2, 3, 4, and 5th commodity where actual price is Rs 4 and he/she gets 6, 4, 2, and 0 surpluses respectively. Hence, total consumer surplus = T.U – T.E = 40 – 20 = 20.

The same concept can be explained by given figure:

On the above figure, x and y-axis measures unit of commodity and price/M.U respectively. The shaded area is consumer surplus because it is the excess amount of satisfaction over the actual sacrifice made for the commodity.

Importance of the law of diminishing marginal utility

Economics 12 Notes — Sun, 08 Apr 2012 05:41:42 +0000

Importance of the law of diminishing marginal utility:

1. Basis of economic laws: Various laws of economics are derived on the basis of marginal utility. For example law of demand, law of substitution, concept of consumers’ surplus, etc.

2. Importance to the finance minister: This law helps finance minister to formulate fiscal policy. Finance minister impose high tax to the rich people and low tax to the poor people on the basis of the law.

3. Importance to consumer: This law is useful to consumer because by consuming the more units of commodity, satisfaction starts to decline. On the basis of this law consumer spends his/her money to purchase suitable quantity of commodity which maximizes his/her satisfaction.

4. Useful to reduce unequal distribution of wealth: This law is useful for the government to reduce the unequal distribution of wealth because marginal utility of wealth for poor is high and for rich is low. So to maintain M.U of wealth government imposes the progressive tax (i.e. high tax to rich and low tax to poor).

5. Price determination: This law is useful to determine the price. Basically price of commodity depends on utility so if seller wants to sell more quantity he must reduce the price or for more quantity to sell a unit price is low.

Economics XII: Meaning of Cost

Economics 12 Notes — Sun, 08 Apr 2012 05:41:42 +0000

While producing the commodities, producer uses several factors of production. So, payment paid to the factors of production according to their contribution in production process is known as cost.

Mathematically, C = F (X, T, CF)

where,
C = cost
F = functional relationship
X = price of variable factor
T = technology
CF = fixed capital

Concept of fixed cost:
Fixed cost are those cost which are incurred on fixed factors of production such as capital equipment, plant, building, land, salary of permanent staff, etc. Fixed costs don’t change with the level of output in the short run. It remains same even at zero level of output.

Concept of variable cost:
Variable costs are those cost which are incurred on variable factors of production. Variable cost changes with the change in level of output in the short run. For example the expenditure made on raw materials, wages and salaries of casual (temporary) workers, running expenses like charges of water supply, electricity, tax is variable cost. Variable cost is zero if there is no production of output.

Movement Along Demand Curve

Economics 12 Notes — Sun, 08 Apr 2012 05:41:42 +0000

Movement along demand curve can be defined as graphical representation of change in demand for a commodity brought by change in its own price other things remaining constant. If price changes demand too changes. The change in demand is graphically shown by movement from a point to another point of same demand curve.

Rightward movement:
It is the graphical representation of expansion in demand brought by fall in price, other things remaining constant. If price falls, consumes demand more. It is called expansion in demand. It is shown by movement from a point in left side to another point in right side of same demand curve.

Leftward movement:
It is the graphical representation of contraction in demand brought by rise in price, other things remaining constant. If price rises, consumes demand less. It is called contraction in demand. It is shown by movement from a point in right side to another point in left side of same demand curve.

Shift in demand curve:
It can be defined as diagrammatic representation of change in demand brought by change in any other factor determining demand other than price. If any one of the factors changes, demand too changes at all possible prices. To show the change in demand, we need o construct another demand curve.

Rightward shift:
It is graphical representation of increase in demand brought by change in any other determinant other than price. To show rightward shift or increase in demand, we construct another demand curve on the right side of initial demand curve

Causes of rightward shift:

Increase in prices of substitutes,
Increase in income,
Favorable change in taste and preference,
Increase in population,
Increase in advertisement,
Increase in government expenditure, money supply,
Decrease in prices of complementary goods and taxes

Leftward shift:
It is graphical representation of decrease in demand brought by change in any other determinant other than price. To show leftward shift or decrease in demand, we construct another demand curve on the left side of initial demand curve

Causes of leftward shift:

Decrease in prices of substitutes,
Decrease in income,
Unfavorable change in taste and preference,
Decrease in population,
Decrease in advertisement,
Decrease in government expenditure, money supply,
Increase in prices of complementary goods and taxes

Deflation

Economics 12 Notes — Sun, 08 Apr 2012 05:41:42 +0000

It is defined as persistent fall in price level. During deflation the goods and services become less and less expensive in average, as value of money increases with decrease in price level. The deflation can be defined as the persistent rise in value of money too. Deflation is long term fall in price level. The temporal fall in price level is not said to be deflation. Fall in price level should be for more years to be deflation. The deflation is caused by less aggregate demand than aggregate supply. During deflation, the goods and services demanded in the country are less than goods and services supplied. If aggregate demand is less than aggregate supply due to any reason, the price level falls the process continuously takes place till the aggregate demand remains less than aggregate supply.

Causes of deflation

decrease in income level
decrease in population
decrease in remittance
decrease in propensity to consume
decrease in government expenditure
decrease in export and decrease in import
Demonstration effect and modernization
Rise of internal debt and foreign borrowing
decrease in prices of raw materials, fuels and energies
decrease in wage rate, interest rate and rate of rent
decrease in profit margin desired by firm
introduction of technology and increase in resources available

Functions of commercial banks

Economics 12 Notes — Sun, 08 Apr 2012 05:41:42 +0000

Commercial banks act as intermediates between those, who have surplus money and those who need it. To receive deposits and advance loans are the main functions of all commercial banks. In brief, they borrow to lend. They work to earn profit. The main functions of the commercial banks are discussed below:

Accepting Deposits: Bank attracts idle saving of people in the form of deposits. These deposits may be of the following types:
- Current account/ Demand deposits: These are repayable on demand without any notice. Since, the bank should keep all the money in reserve and can’t make investment; no interest is paid in this account. On the other hand a little commission is charged for the management of the money. Sometimes, however, a small interest is paid for the people who keep large balance.
- Saving Account: In this account certain percent interest is paid to the depositors. There is given cheque or ATM facilities to withdraw money. Depositors can withdraw only the predetermined amount or to withdraw big amount of money pre-notice should be given to the bank.
- Fixed/Time Account: Generally, the deposit in the account will be from 3 months to 5 yrs. The deposit can be withdrawn only after the expiry of the maturity period of the deposit. Higher interest is paid in this account.
Advancing loans and Advances: The deposits received by commercial banks are lent to others for short period only. But in present time, it also provides medium and long term loan to some extent. The banks advance loan in any one of the following ways:
- Overdraft: Commercial banks provide overdraft facility to its customers by which they are allowed to withdraw more than their deposits. But they have to pay interest on the extra amount, which has to be repaid within a short period.
- By creating deposit: Under this type of loan, banks advance loan to the borrower against his current assets such as Bonds, Stocks, Debentures, etc or fixed assets like Gold, Silver, Land, House, etc.
- Discounting bills: It is another way of lending money. The bank purchase bills from bill broker and discount them. These bills provide very liquid form of assets, which can be easily turned into cash. Banks immediately pay cash for the bill after deducting the discount (interest) from its face value.
Remitting funds: Commercial banks remit funds for their customers through bank drafts from one place to another.
Agency function: The commercial bank works as an agent of their customers. The bank receives the rent, dividend, interest of shares and debentures. Similarly, it receives and make payments of insurance premium, income tax, electricity fee, etc on behalf of its customers.
Credit creation: This is an unique function of commercial bank. When a bank advances loan to its customers, it doesn’t lend all cash but opens account on the name of borrower and deposits only the required amount. Creation of such deposit is called credit creation by which there increases money stock in an economy.
Issue credit instruments: The bank issues the letter of credit, travelers’ cheque, draft, master card to the customers.
General utility functions: In addition to agency services, the modern banks provide many general utility services, which are given below:
- Purchase and sale of securities
- Providing valuable advisory service to its customers
- Exchanging the foreign currency of its customers
- Providing various economic and statistical information
- Helps to the central bank to implement various fiscal and monetary policies.