A ANTHI INSTITUTE OF ENGINEERING& TECHNOLOGY

GUNTHAPALLY (V), HAYAT NAGAR (M), R. R (D) – 501512

Subject Name : Business Economics & Financial Analysis

Subject Code : SM504MS
Program/Course : B.Tech
Year/Semester : III-I (R-18)
Branch : ECE
Section : A&B
Academic Year : 2020 – 2021
Subject Faculty : Mr. N. RAMANA REDDY, Associate Professor.
M.Tech, MBA(Ph.D)

Unit-I : Introduction to Business and Economics

Business: Structure of Business Firm, Theory of Firm, Types of Business Entities, Limited Liability
Companies, Sources of Capital for a Company, Non-Conventional Sources of Finance.

Economics: Significance of Economics, Micro and Macro Economic Concepts, Concepts and
Importance of National Income, Inflation, Money Supply and Inflation, Business Cycle, Features and
Phases of Business Cycle. Nature and Scope of Business Economics, Role of Business Economist,
Multidisciplinary nature of Business Economics.

Business: Business is a continuous human economic activity which aims to earn to profits by
producing, buying and selling of goods and services and fulfilling the needs of the costumers.

According to L.H. Haney “ Business is defined as human activity directed towards producing
or acquiring through buying and selling of goods “
(or)
Business is an economic activity which is related with continuous and regular production and
distribution of goods and services to the customers.
Business Firm: Business Firm is also called as business enterprises, business organization
and business units under a specific set of policies.

The main characteristics of Business firm are as following ;

➢ Exchange of goods
➢ Management Policies
➢ Ownership
➢ Identity
➢ Risk bearing
➢ Profit motive. etc…

The following are the nature of Business firm ;

1. Exchange of goods and services.

2. No. of transactions in business.
3. Profit is the main objective (or) aim.
4. Business skills are used for economic success.
5. Risk and uncertainties.
6. Buyers and sellers.
7. Utilization of resources( Manpower, Machine, Material and Money).
The main functions/activities of Business firm ;
❖ Human Resource(HR)
❖ Marketing
❖ Production/Operations
❖ Accounting/Finance.
❖ Sales promotion

Structure of Business Firm:

A commercial organization that operates on a for-profit basis and participates in selling
goods or services to customers. One of the decisions that a business owner has to make is what
type of organizational structure their business is going to use.

The main form of Structure of business firm ;

1. Sole proprietorship (or) Own Enterprise
2. Partnership
3. Limited Liability Company(LLC), There are 2 types of LLC ;
i) Private Limited Company
ii) Public Limited Company
a) Public Traded/Listed Company.

Each structure has different Tax, income and liability applications for business owners and
their companies. The main factor which effects while selecting the structure of the business
firm is risk bearing. Each business owner has different risk and equity participants.

Theory of firm:
The theory of the firm consists of a number of economic theories that explain and
predict the nature of the firm, company, or corporation, including its existence, behaviour,
structure, and relationship to the market.

To apply economic to business management, we need a theory of firm, there are no. of
theories of the objectives of the firm. The main profit maximization is considered as the
objectives to all business forms.
The following are the major theories of firm ; 3 Types of theories:
1. Profit Maximization Theory
2. Managerial Theories
3. Behavioural Theories

The objectives of maximization of balanced growth which are managerial and financial
difficulties. Profits are calculated by deducting total revenue from the total cost.

Profit = Total revenue – Total cost.

Types of Business Entities:

The most important forms/types of business entities are as following ;

1. Sole proprietorship (or) Own Enterprise

2. Partnership
3. Limited Liability Company(LLC)

1). Sole proprietorship (or) Own Enterprise :-

Sole Proprietorship from of business organization refers to a business enterprise
exclusively owned, managed and controlled by a single person with all authority,
responsibility and risk bearing.

Features/Characteristics of Sole proprietorship :-

The main important features of Sole Proprietorship ;
➢ He is introducing his own capital/business.
➢ It is easy to start and close a business.
➢ Single person maintain and control.
➢ Unlimited liabilities.
➢ Less legal formulation.
➢ No sharing of profits and loss.

2). Partnership :-
Partnership is an association of two or more persons who pool their financial and
managerial resources and agree to carry on a business, and share its profit and loss. The
persons who form a partnership are individually known as partners and collectively a firm is
called Partnership firm.

Features/Characteristics of Partnership :-
The main important features of Partnership ;
➢ Agreement
➢ Two or more persons
➢ Lawful means legal process.
➢ Unlimited liabilities.
➢ Good faith and honesty relationship.
➢ Sharing of profits and loss.
➢ Restrictions of shares and work responsibilities.
3. Limited Liability Company (LLC):-
Limited Liability Company(LLC) is also called as Joint stock company. It is an
artificial persons created by law with a fixed capital. The company has a separate legal entity.
It must be compulsorily registered as per Government rules.

Features/Characteristics of Limited Liability Company :-

The main important features of Limited Liability Company ;
➢ Separate legal entity.
➢ Limited liabilities.
➢ Continuity of existence.
➢ Benefits of sharing.
➢ Social responsibility.
➢ Professional management.
Sources of Capital for a Company:
The two types of company finance security are shares and debentures. So that it can useful for long
period of time capital investment. These issue of securities are concerned according to SEBI (Security
Exchange Board of India).
There are 3 different types of Sources of Capital for a Company are as following ;
1. Long– term source of capital.
2. Medium– term source of capital.
3. Short– term source of capital.
1). Long– term source of Capital :-
Long term finance available for a long period say ten years and above. The long term methods
outlined below are used to purchase fixed assets such as land and buildings, plant, machines and so on.
a). Own capital : 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 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.
2). Medium– term source of capital :-
a). 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.
b). Hire purchase: It is a facility to buy a fixed asset while paying the price over a long period of
time. In other words, the possession of the asset can be taken by making a down payment of a part of
the price and the balance will be repaid with a fixed rate of interest in agreed number of installments.
c). Leasing or renting: where there is a need for fixed assets, the asset need not be purchased. It can
be taken on lease or rent for specified number of years. Venture capital: this form of finance is
available only for limited companies.
3). Short– term source of capital :-
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.

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.

Non-Conventional Sources of Finance:

The Non –conventional source of finance is one of the oldest forms of finance which usually operate
by most of the companies. Some of the important types of Non –conventional source of finance are as
following ;
1. Leasing or renting finance
2. Hire purchase
3. Factoring services.
Business Economics: Business Economics is also called Managerial Economics, it is the
application of economic theory and methodology to business.
“Economics is the social science of studying the production distribution and consumption of
goods and services to the customers. Economics is the study of nature and uses of national
wealth provides for its needs. Its most basic need is survival which requires food, clothing and
shelter.”

“Economics is the study of how to direct scarce resources in a way that most efficiently
achieves a management goal”. --- Michael R.baye
Features/Characteristics of Economics:-
The following are the Features of Economics are ;
1. Unlimited wants
2. Scarce Resources
3. Alternative uses
4. Choice.
Significance of Economics:-
The knowledge of economics helps in solving many problems and the study has different
Significance of Economics as following :
1. Business economics is concerned with those aspects of traditional economics which are
relevant for business decision making in real life.
2. The modern methods of production.
3. To helping in proper budgeting.
4. To increase National wealth.
5. Business economics helps in reaching a variety of business decisions in a complicated
environment.
Micro and Macro Economics Concepts:
Micro Economics: -
The word micro economics is derived from the Greek word, the term ‘micro’ means small.
Therefore, micro-economics deals with the economic actions of individuals and groups of
individuals and firms. This can be stated in another way that micro economics.
The Scope of micro economics is related to different problems are as following ;
➢ Theory of demand
➢ Theory of production
➢ Theory of distribution
➢ Economic of welfare.
Macro Economics: -
The word macro economics is derived from the Greek word, the term ‘macro’ means
large. Macro-economics is concerned with the economic behaviour of the whole nation
economy in terms of allocation of productive resources, consumption pattern, distribution of
income and employment of nation etc.
The Scope of micro economics is related to different problems are as following ;
➢ Theory of income and employment
➢ Theory of International trade.
➢ Economic development
➢ Fiscal theories.

Concepts and Importance of National Income:

National income of a country means the sum total of incomes earned by the citizens of
that country during a given period, say one year. It should be noted that national income is not
the sum of all incomes earned by all citizens, but only those incomes which accrue due to
participation in the production process.

NI/NP is single measure of the total amount of goods and services produced by the country
during a given period. National income is continuous flow of production process which
generates goods and services over a period of time.

Importance of National Income:

❖ Economic Policy
❖ Economic Planning
❖ Inflationary and Deflationary Gaps
❖ Budgetary Policies
❖ National Expenditure
❖ Standard of Living Comparison
❖ Defense and Development
❖ Public Sector

Concepts of National Income:

The total amount of National income according to a country from economic activities
in a certain year is known as National Income. It includes all resources in the form of wages,
interest, tax, rent etc.
National Income calculate formula ;

National Income = C+I+G+(X-M)

Where ,
C = Consumption expenditure
I = Investment expenditure
G = Government expenditure
X-M = (Export – Import)
The following are the various concepts of National Income measuring ;
1). GDP (Gross Domestic Product)
Gross domestic product (GDP) is the total market value of all the finished goods and services
produced within a country's borders in a specific time period. GDP is one of the most common
indicators used to track the health of a nation's economy. The calculation of a country's GDP takes into
consideration a number of different factors about that country's economy, including its consumption
and investment.
2). GNP (Gross National Product)
Gross National Product (GNP) is the value of all finished goods and services owned by a
country's residents over a period of time. Both GDP and GNP are two of the most commonly used
measures of a country's economy, both of which represent the total market value of all goods and
services produced over a specific time period.
3). NNP (Net National Product)
4). NDP (Net Domestic Product)
5). NDI (National Domestic Income)

Inflation:
Inflation refers to a continuous rise in general Prices measured valve level which
reduces the value of money against a Standard Level of Purchasing Power over a period of
time.
Inflation is a state in which the value of money is failing (or) rising. The change of price level
within the time is rate of inflation. Inflation rate is the measure of the rate of increase (or)
decrease in the general price of selected goods and services over a specific period of time.

Money Supply and Inflation:

The money supply measures the total amount of money in the economy at a particular
time. It includes actual notes and coins and also any deposits which can be quickly converted
into cash.

The total stock of money circulating in an economy is the money supply. The circulating
money involves the currency, printed notes, money in the deposit accounts and in the form of
other liquid assets.
There are 3 motive of money supply and inflation ;
➢ Transaction motive
➢ Precautionary motive
➢ Speculative motive
Business Cycle, Features and Phases of Business Cycle:
Business Cycle :-
The alternating periods of expansion and contraction in economic activity has been
called business cycles. They are also known as “trade cycles”.

According J.M Keynes define “Business cycle are a specific of fluctuation in the
business activities of nations. Business cycles are marked by the alternation of the phases of
expansion (increase) and contraction (decrease) in aggregate economic activity.

The term “business cycle” refers to economy-wide fluctuations in production, trade,

and general economic activity. The business cycle is the upward and downward movements of
levels of GDP (Gross Domestic Product) and refers to the period of expansions and
contractions in the level of economic activities (business fluctuations) around a long-term
growth trend.

Features of Business Cycles :-

The following are the features of Business Cycle ;
1. Business cycles occur periodically fluctuations.
2. Business cycles are synchronic.
3. Business cycle is time duration.
4. Phenomenon of crisis.
5. Alternative business process.
6. Important feature of business cycles is that profits fluctuate more than any other type of
income.

Phases of Business Cycle :-

There are 4 different phases of Business Cycle are as following ;
1) Expansion (Boom, Upswing or Prosperity)
2) Peak (upper turning point)
3) Contraction (Downswing, Recession or Depression)
4) Trough (lower turning point)

Figure: Four Phases of Business Cycle

Nature and Scope of Business Economics :-
Business Economics (BE) is called as Managerial Economics (ME).
According to M. H. Spencer, “Business Economics is the integration of economic theory with
business practice for the purpose of facilitating decision making and forward planning.”
Business economics combines the essentials of the normative and positive economic theory.
Business companies or organizations face many problems in day to day basis. These problems
require careful analysis and good thinking.
For example, organizations are always concentrated with producing maximum output in the
way of economically. To solve the problems of such a nature, managers are required to apply
various economic techniques and theories in the business decision making.
Nature of Business Economics:-
The nature of Business Economics are as following ;
➢ Close to Micro Economics
➢ Business Economics is a Art and Science
➢ Normative Economics
➢ Interdisciplinary Approaches (like mathematics, statistics, accounting, marketing, etc.)
➢ Goal oriented nature.

Scope of Business Economics :-

The following diagram representing the concept of Business Economics ;

The scope of Business Economics are as following ;

1. Demand Analysis and Forecasting
2. Cost and production Analysis.
3. Pricing Decisions, policies and practices.
4. Investment Decisions
5. Profit Management means Maximization
6. Capital Management.
7. Product policy, sales promotion, and Market Strategy
Role of Business Economist:-
Business Economist means Business person is analysis of company information. The role of
Business Economist becomes increasingly important in view of the different objectives of the firm.
He has a significant role to play in assisting the management of the firm in decision-making
and forward planning by using specialized skills and techniques.
Some of the important Role and Responsibilities of Business Economists are as following ;
➢ To make business planning and polices.
➢ To analyze the market survey day to day changes.
➢ To observe internal and external factors in the business.
➢ To bring maximum profits to the company.
➢ To build micro and macro economics.
➢ To participate in public debates and other related meetings.
➢ To maintain good relations with other industries.
Multidisciplinary nature of Business Economics:-
The Multidisciplinary nature of Business Economics deals with different areas applied. Some
of the various Multidisciplinary nature of Business Economics deals are as following ;
1. Business/ Managerial Economics.
➢ Micro Economics
➢ Macro Economics
2. Operations Research and Business Economics
3. Mathematics and Business Economics.
4. Statistics and Business Economics.
5. Accounting and Business Economics.
6. Marketing and Business Economics.
7. Production and Business Economics.
8. Financial and Business Economics.
Prepared by,
Mr. N. RAMANA REDDY
M.Tech, MBA(Ph.D)
Associate Professor.
Ph. No: 9640789300

Important Questions
1. Define Business? Explain the concepts of business organization?
2. Write short notes on Theory of Firm?
3. What do you mean by sole proprietorship? Explain its salient features.
4. Define partnership from of business. Explain its salient features
5. Define a joint stock company & explain its salient features?
6. Write short notes on
(a) Commercial Papers (b) Hire Purchase.
7. Define Business Cycle? Explain various Phases of Business Cycle?
8. Discuss the relationship of Money Supply with Inflation?
9. Discuss the nature & Scope of Business economics?
10. Evaluate the Multidisciplinary nature of Business Economics?
11. Explain the role and responsibilities of a Business Economist?
Objective Questions
1. Which subject studies the behaviour of the firm in theory and practice? [ ]
(a) Micro Economics (b) Macro Economics (c) Managerial Economics (d) Welfare Economics

2. Business Economics is close to_________Economics. [ ]

(a) National (b) Business (c) Micro (d) Industrial

3. The theory of firm also called as_____________. [ ]

(a) Welfare Economics (b) Industrial Economics (c) Micro Economics (d) None

4. “Any activity aimed at earning or spending money is called ____activity”. [ ]

(a) Service activity ( b) Accounting activity (c) Economic activity ( d) None

5. “One man one vote” Principle is adopted in ______. [ ]

(a) Partnership firms (b) Company (c) Co-operative enterprises (d) Hindu family business

6. The management of ‘Joint Hindu Family’ business vests in the eldest member of the family,
called _____. [ ]
(a) Director (b) Grandfather (c) Kartha (d) Manager
8. Minimum Two and maximum ____ members are permitted in Private limited
company. [ ]
(a) Un-limited (b) 20 (c) 50 (d) 10
8. Minimum ___ and maximum ____ members are permitted in Public limited company.[ ]
(a) 50; Un-limited (b) 20 ; 50 (c) 7 ; Un-limited (d) 7 ; 50

9. Liability of sole proprietor is _______________. [ ]

(a) Limited (b) Minimum (c) Un-limited (d) None

10. Liability of Shareholder _______________. [ ]

(a) Un-limited (b) Maximum (c) Limited to the share capital (d) None
11. Certificate of commencement of business should be obtained by ___ company to start its
functions. [ ]
(a) Private (b) Statutory (c) Public (d) Chartered
12. Company operates in more than one Country is called as _____. [ ]
(a) Private company (b) Government company (c) Multinational company (d) Indian company.

****** All the Best ******