MANAGERIAL ECONOMICS

DR.J.SURESH
FACULTY
PULCS
• Unit – I
• General Foundations of Managerial Economics - Economic Approach - Circular Flow of Activity - Nature
of the Firm - Objectives of Firms - Demand Analysis and Estimation - Individual, Market and Firm
demand - Determinants of demand - Elasticity measures and Business Decision Making - Demand
Forecasting.
• Unit-II
• Law of Variable Proportions - Theory of the Firm - Production Functions in the Short and Long Run - Cost
Functions – Determinants of Costs – Cost Forecasting - Short Run and Long Run Costs –Type of Costs -
Analysis of Risk and Uncertainty.
• Unit-III
• Product Markets -Determination Under Different Markets - Market Structure – Perfect Competition –
Monopoly – monopolistic Competition – Duopoly - Oligopoly - Pricing and Employment of Inputs Under
Different Market Structures – Price Discrimination - Degrees of Price Discrimination.
• Unit-IV
• Introduction to National Income – National Income Concepts - Models of National Income
Determination - Economic Indicators - Technology and Employment - Issues and Challenges – Business
Cycles – Phases – Management of Cyclical Fluctuations - Fiscal and Monetary Policies.
• Unit – V
• Macro Economic Environment - Economic Transition in India - A quick Review - Liberalization,
Privatization and Globalization - Business and Government - Public-Private Participation (PPP) -
Industrial Finance - Foreign Direct Investment(FDIs).
The Fundamentals Of Managerial Economics
• Prof. Evan J Douglas defines Managerial Economics as “Managerial Economics is
concerned with the application of economic principles and methodologies to the
decision making process within the firm or organization under the conditions of
uncertainty”
• Nature Of Managerial Economics:
• 1. Managerial economics is concerned with the analysis of finding optimal solutions to
decision making problems of businesses/ firms (micro economic in nature).
• 2. Managerial economics is a practical subject therefore it is pragmatic.
• 3. Managerial economics describes, what is the observed economic phenomenon
(positive economics) and prescribes what ought to be (normative economics)
• 4. Managerial economics is based on strong economic concepts. (conceptual in nature)
• 5. Managerial economics analyses the problems of the firms in the perspective of the
economy as a whole ( macro in nature)
• 6. It helps to find optimal solution to the business problems (problem solving)
Circular Flow Of Economic Activity
• These resources (factors of production) are classified into four types.
• Land: It includes all natural resources on the earth and below the earth. Non
renewable resources such as oil, coal etc once used will never be replaced. It will
not be available for our children. Renewable resources can be used and replaced
and is not depleted with use.
• Labour: is the work force of an economy. The value of the worker is called as
human capital.
• Capital: It is classified as working capital and fixed capital (not transformed into
final products)
• Entrepreneurship: It refers to the individuals who organize production and take
risks.
The major four sectors of the economy
• Households: Households fulfill their needs and wants through purchase of goods
and services from the firms. They are owners and suppliers of factors of
production and in turn they receive income in the form of rent, wages and
interest.
• Firms: Firms employ the input factors to produce various goods and services and
make payments to the households.
• Government: The government purchases goods and services from firms and also
factors of production from households by making payments.
• Foreign sector: Households, firms and government of India purchase goods and
services (import) from abroad and make payments. On the other hand all these
sectors sell goods and services to various countries (export) and in turn receive
payments from abroad
Demand Analysis
Shifts in Demand: Shift of the demand curve occurs when the determinants of
demand change. When tastes and preferences and incomes are altered, the
basic relationship between price and quantity demanded changes (shifts).
Extension And Contraction Of Demand Curve: When with a fall in price, more of a
commodity is bought , then there is an extension of the demand curve. When lesser
quantity is demanded with a rise in price, there is a contraction of demand.
• A change in demand occurs when one or more of the determinants of
demand change and it is expressed in the following equation.
• Qd X = f (Px, Pr, Y, T, Ey, Ep, Adv….)
• Where,
• Qd X = quantity demanded of good ‘X’
• Px = the price of good X
• Pr = the price of a related good
• Y = income level of the consumer
• T = taste and preference of the consumers
• Ey = expected income
• Ep = expected price
• Adv = advertisement cost
Determinants Of Demand:
• 1.Price of the good: The price of a commodity is an important determinant of demand. Price and demand are inversely related. Higher the price less is
the demand and vice versa.
• 2.Price of related goods: The price of related goods like substitutes and complementary goods also affect the demand. In the case of substitutes, rise in
price of one commodity lead to increase in demand for its substitute.
• 3.Consumer’s Income: This is directly related to demand. A change in the income of the consumer significantly influences his demand for most
commodities. If the disposable income increases, demand will be more.
• 4.Taste, preference, fashions and habits: These are very effective factors affecting demand for a commodity. When there is a change in taste, habits or
preferences of the consumer, his demand will change. Fashions and customs in society determine many of our demands.
• 5.Population: If the size of the population is more, demand for goods will be more . The market demand for a commodity substantially changes when
there is change in the total population.
• 6.Money Circulation: More the money in circulation, higher the demand and vice versa.
• 7.Value of money: The value of money determines the demand for a commodity in the market. When there is a rise or fall in the value of money there
may be changes in the relative prices of different goods and their demand.
• 8.Weather Condition: Weather is also an important factor that determines the demand for certain goods.
• 9.Advertisement and Salesmanship: If the advertisement is very attractive for a commodity, demand will be more. Similarly if the salesmanship and
publicity is effective then the demand for the commodity will be more.
• 10.Consumer’s future price expectation: If the consumers expect that there will be a rise in prices in future, he may buy more at the present price and so
his demand increases.
• 11.Government policy (taxation): High taxes will increase the price and reduce demand, while low taxes will reduce the price and extend the demand.
• 12.Credit facilities: Depending on the availability of credit facilities the demand for commodities will change. More the facilities higher the demand.
• 13.Multiplicity of uses of goods: if the commodity has multiple uses then the demand will be more than if the commodity is used for a single purpose.
Types Of Demand
• 1.Direct and indirect demand: (or) Producers’ goods and consumers’ goods:
demand for goods that are directly used for consumption by the ultimate
consumer is known as direct demand (example: Demand for T shirts). On the
other hand demand for goods that are used by producers for producing goods
and services. (example: Demand for cotton by a textile mill)
• 2.Derived demand and autonomous demand: when a produce derives its usage
from the use of some primary product it is known as derived demand. (example:
demand for tyres derived from demand for car) Autonomous demand is the
demand for a product that can be independently used. (example: demand for a
washing machine)
• 3.Durable and non durable goods demand: durable goods are those that can be
used more than once, over a period of time (example: Microwave oven) Non
durable goods can be used only once (example: Band-aid)
• 4.Firm and industry demand: firm demand is the demand for the product of a particular
firm. (example: Dove soap) The demand for the product of a particular industry is
industry demand (example: demand for steel in India )
• 5.Total market and market segment demand: a particular segment of the markets
demand is called as segment demand (example: demand for laptops by engineering
students) the sum total of the demand for laptops by various segments in India is the
total market demand. (example: demand for laptops in India)
• 6.Short run and long run demand: short run demand refers to demand with its
immediate reaction to price changes and income fluctuations. Long run demand is that
which will ultimately exist as a result of the changes in pricing, promotion or product
improvement after market adjustment with sufficient time.
• 7.Joint demand and Composite demand: when two goods are demanded in conjunction
with one another at the same time to satisfy a single want, it is called as joint or
complementary demand. (example: demand for petrol and two wheelers) A composite
demand is one in which a good is wanted for several different uses. ( example: demand
for iron rods for various purposes)
• 8.Price demand, income demand and cross demand: demand for commodities by the
consumers at alternative prices are called as price demand.
• The law of demand does not apply in every case and situation. (Excemption)
• 1. Giffen Goods: Some special varieties of inferior goods are termed as Giffen
goods. Cheaper varieties millets like bajra, cheaper vegetables like potato etc
come under this category.
• 2. Conspicuous Consumption / Veblen Effect: A few goods like diamonds etc are
purchased by the rich and wealthy sections of society. The prices of these goods
are so high that they are beyond the reach of the common man. The higher the
price of the diamond, the higher its prestige value.
• 3. Conspicuous Necessities: Certain things become the necessities of modern life.
So we have to purchase them despite their high price. The demand for T.V. sets,
automobiles and refrigerators etc. has not gone down in spite of the increase in
their price.
• 4. Ignorance: A consumer’s ignorance is another factor that at times induces him
to purchase more of the commodity at a higher price.
• 5. Emergencies: During emergencies like war, famine etc, households behave in
an abnormal way.
• 6. Future Changes In Prices: Households also act as speculators. When the prices are
rising households tend to purchase large quantities of the commodity out of the
apprehension that prices may still go up.
• 7. Change In Fashion: A change in fashion and tastes affects the market for a
commodity. When a digital camera replaces a normal manual camera, no amount of
reduction in the price of the latter is sufficient to clear the stocks.
• 8. Demonstration Effect: It refers to a tendency of low income groups to imitate the
consumption pattern of high income groups. They will buy a commodity to imitate the
consumption of their neighbors even if they do not have the purchasing power.
• 9. Snob Effect: Some buyers have a desire to own unusual or unique products to show
that they are different from others.
• 10. Speculative Goods/ Outdated Goods/ Seasonal Goods: Speculative goods such as
shares do not follow the law of demand. Whenever the prices rise, the traders expect
the prices to rise further so they buy more.
• 11. Seasonal Goods: Goods which are not used during the off-season (seasonal goods)
will also be subject to similar demand behaviour. 12. Goods In Short Supply: Goods that
are available in limited quantity or whose future availability is uncertain also violate the
law of demand.
Elasticity Of Demand
• Elasticity of Demand is a technical term used by economists to describe the
degree of responsiveness of the demand for a commodity due to a fall in its
price. A fall in price leads to an increase in quantity demanded and vice versa.
• The elasticity of demand may be as follows:
• Price Elasticity
• Income Elasticity and
• Cross Elasticity
• The Determinants Of Price Elasticity Of Demand The exact value of price elasticity for a commodity is
determined by a wide variety of factors. The two factors considered by economists are the availability
of substitutes and time.
• The elasticity of demand depends on the following factors:
• 1. Nature of the commodity: The demand for necessities is inelastic because the demand does not
change much with a change in price. But the demand for luxuries is elastic in nature.
• 2. Extent of use: A commodity having a variety of uses has a comparatively elastic demand.
• 3. Range of substitutes: The commodity which has more number of substitutes has relatively elastic
demand. A commodity with fewer substitutes has relatively inelastic demand.
• 4. Income level: People with high incomes are less affected by price changes than people with low
incomes.
• 5. Proportion of income spent on the commodity: When a small part of income is spent on the
commodity, the price change does not affect the demand therefore the demand is inelastic in nature.
• 6. Urgency of demand / postponement of purchase: The demand for certain commodities are highly
inelastic because you cannot postpone its purchase. For example medicines for any sickness should be
purchased and consumed immediately.
• 7. Durability of a commodity: If the commodity is durable then it is used it for a long period. Therefore
elasticity of demand is high. Price changes highly influences the demand for durables in the market.
• 8. Purchase frequency of a product/ recurrence of demand: The demand for frequently purchased
goods are highly elastic than rarely purchased goods.
• 9. Time: In the short run demand will be less elastic but in the long run the demand for commodities
are more elastic.
Income Elasticity
• Income elasticity of demand measures the responsiveness of quantity demanded
to a change in income. It is measured by dividing the percentage change in
quantity demanded by the percentage change in income.
• The following are the various types of income elasticity:
• Zero Income Elasticity: The increase in income of the individual does not make
any difference in the demand for that commodity. ( Ei = 0)
• Negative Income Elasticity: The increase in the income of consumers leads to less
purchase of those goods. ( Ei < 0).
• Unitary Income Elasticity: The change in income leads to the same percentage of
change in the demand for the good. ( Ei = 1).
• Income Elasticity is Greater than 1: The change in income increases the demand
for that commodity more than the change in the income. ( Ei > 1).
• Income Elasticity is Less than 1: The change in income increases the demand for
the commodity but at a lesser percentage than the change in the Income. ( Ei <
1).
Cross Elasticity
• The quantity demanded of a particular commodity varies according to the price of other
commodities. Cross elasticity measures the responsiveness of the quantity demanded of a
commodity due to changes in the price of another commodity.

• Significance Of Elasticity Of Demand:

• The concept of elasticity is useful for the managers for the following decision making activities
• 1. In production i.e. in deciding the quantity of goods to be produced
• 2. Price fixation i.e. in fixing the prices not only on the cost basis but also
• on the basis of prices of related goods.
• 3. In distribution i.e. to decide as to where, when, and how much etc.
• 4. In international trade i.e. what to export, where to export
• 5. In foreign exchange
• 6. For nationalizing an industry
• 7. In public finance
Demand Forecasting
• The steps to be followed:
• Identification of objectives
• Nature of product and market
• Determinants of demand
• Analysis of factors
• Choice of technology
• Testing the accuracy
• Criteria to choose a method of
forecasting are:
• Accuracy
• Plausibility
• Durability
• Flexibility
• Availability
• Demand Forecasting Methods:
• 1. Survey of buyers’ intension
• 2. Delphi method
• 3. Expert opinion
• 4. Collective opinion
• 5. Naïve model
• 6. Smoothing techniques
• 7. Time series / trend projection
• 8. Controlled experiments
• 9. Judgmental approach
Linear Trend Equation: Y = a + b; X Y = demand; X = time period
Supply Analysis
• Supply Schedule: is a table showing how much of a commodity, firms cansell at
different prices.
• Law of Supply: is the relationship between price of the commodity and quantity
of that commodity supplied. i.e. an increase in price will lead to an increase in
quantity supplied and vice versa.
• Supply Curve: A graphical representation of how much of a commodity a firm
sells at different prices. The supply curve is upward sloping from left to right.
Therefore the price elasticity of supply will be positive.
• Graph - Supply curve
Determinants Of Supply
• 1. The cost of factors of production: Cost depends on the price of factors.
Increase in factor cost increases the cost of production, and reduces supply.
• 2. The state of technology: Use of advanced technology increases productivity of
the organization and increases its supply.
• 3. External factors: External factors like weather influence the supply. If there is a
flood, this reduces supply of various agricultural products.
• 4. Tax and subsidy: Increase in government subsidies results in more production
and higher supply.
• 5. Transport: Better transport facilities will increase the supply.
• 6. Price: If the prices are high, the sellers are willing to supply more goods to
increase their profit.
• 7. Price of other goods: The price of other goods is more than ‘X’ then the supply
of ‘X’ will be increased.
• Elasticity of Supply: Elasticity of supply of a commodity is defined as the responsiveness
of a quantity supplied to a unit change in price of that commodity.

• Kinds Of Supply Elasticity

• Price elasticity of supply: Price elasticity of supply measures the responsiveness of
changes in quantity supplied to a change in price.
• Perfectly inelastic: If there is no response in supply to a change in price. (Es = 0)
• Inelastic supply: The proportionate change in supply is less than the change in price (Es
=0-1)
• Unitary elastic: The percentage change in quantity supplied equals the change in price
(Es=1)
• Elastic: The change in quantity supplied is more than the change in price (Ex= 1- ∞)
• Perfectly elastic: Suppliers are willing to supply any amount at a given price (Es=∞)
• Factors Influencing Elasticity Of Supply
• 1. Nature of the commodity: If the commodity is perishable in nature then the
elasticity of supply will be less. Durable goods have high elasticity of supply.
• 2. Time period: If the operational time period is short then supply is inelastic.
When the production process period is longer the elasticity of supply will be
relatively elastic.
• 3. Scale of production: Small scale producer’s supply is inelastic in nature
compared to the large producers.
• 4. Size of the firm and number of products: If the firm is a large scale industry
and has more variety of products then it can easily transfer the resources.
Therefore supply of such products is highly elastic.
• 5. Natural factors: Natural calamities can affect the production of agricultural
products so they are relatively inelastic.
• 6. Nature of production: If the commodities need more workmanship, or for
artistic goods the elasticity of supply will be high.
UNIT – II
Production Function
• Factors of production include resource inputs used to produce goods and
services. Economist categorise input factors into four major categories such as
land, labour, capital and organization.
• Land: Land is heterogeneous in nature. The supply of land is fixed and it is a
permanent factor of production but it is productive only with the application of
capital and labour.
• Labour: The supply of labour is inelastic in nature but it differs in productivity and
efficiency and it can be improved.
• Capital: is a man made factor and is mobile but the supply is elastic.
• Organization: the organization plans, , supervises, organizes and controls the
business activity and also takes risks.
• Formula Pro.Fun = Q = f (Land, Labour, Capital, Organization) Q = f (L, L, C, O)
• Cobb Douglas Production Function: This is a function that defines the maximum
amount of output that can be produced with a given level of inputs. Q = f (K, L)
• Short Run Production Function: In the short run, some inputs (land, capital) are
fixed in quantity. The output depends on how much of other variable inputs are
used. For example if we change the variable input namely (labour) the
production function shows how much output changes when more labour is used.
• Measures Of Productivity
• Total production (TP): the maximum level of output that can be produced with a
given amount of input.
• Average Production (AP): output produced per unit of input AP = Q/L
• Marginal Production (MP): the change in total output produced by the last unit of
an input
• Marginal production of labour = Δ Q / Δ L (i.e. change in the quantity produced to
a given change in the labour)
• Marginal production of capital = Δ Q / Δ K (i.e. change in the quantity produced
to a given change in the capital)
The Law Of Diminishing Returns
• In the combination of input factors when one particular factor is increased continuously
without changing other factors the output will increase in a diminishing manner.
• The Law Of Returns To Scale
• In the long run the fixed inputs like machinery, building and other factors will change
along with the variable factors like labour, raw material etc. With the equal percentage
of increase in input factors various combinations of returns occur in an organization.
• Returns to scale: the change in percentage output resulting from a percentage change
in all the factors of production. They are increasing, constant and diminishing returns to
scale.
• Increasing returns to scale may arise: if the output of a firm increases more than in
proportionate to an increase in all inputs. For example the input factors are increased
by 50% but the output has doubled (100%). Constant returns to scale: when all inputs
are increased by a certain percentage the output increases by the same percentage.
• Diminishing returns to scale: when output increases in a smaller proportion than the
increase in inputs it is known as diminishing return to scale. For example 50% increment
in input factors lead to only 20% increment in the output.
Cost Analysis
• Cost Determinants
• The cost of production of goods and services depends on various input factors used by the organization and it differs from firm
to firm.
• 1.Level of output: The cost of production varies according to the quantum of output. If the size of production is large then the
cost of production will also be more.
• 2.Price of input factors: A rise in the cost of input factors will increase the total cost of production.
• 3.Productivities of factors of production: When the productivity of the input factors is high then the cost of production will fall.
• 4.Size of plant: The cost of production will be low in large plants due to mass production with mechanization.
• 5.Output stability: The overall cost of production is low when the output is stable over a period of time.
• 6.Lot size: Larger the size of production per batch then the cost of production will come down because the organizations enjoy
economies of scale.
• 7.Laws of returns: The cost of production will increase if the law of diminishing returns appliesin the firm.
• 8.Levels of capacity utilization: Higher the capacity utilization, lower the cost of production
• 9.Time period: In the long run cost of production will be stable.
• 10.Technology: When the organization follows advanced technology in their process then the cost of production will be low.
• 11.Experience: over a period of time the experience in production process will help the firm to reduce cost of production.
• 12.Process of range of products: Higher the range of products produced, lower the cost of production.
• 13.Supply chain and logistics: Better the logistics and supply chain, lower the cost of production.
• 14.Government incentives: If the government provides incentives on input factors then the cost of production will be low.
Types Of Costs
• Opportunity cost: The revenue which could have been earned by employing that good or service in
some other alternative uses. (Eg. A land owned by the firm does not pay rent. Thus a rent is an income
forgone by not letting it out)
• Sunk cost: Are retrospective (past) costs that have already been incurred and cannot be recovered.
• Historical cost: The price paid for a plant originally at the time of purchase.
• Replacement cost: The price that would have to be paid currently for acquiring the same plant.
• Incremental cost: Is the addition to costs resulting from a change in the nature of level of business
activity. Change in cost caused by a given managerial decision.
• Explicit cost: Cost actually paid by the firm. If the factors of production are hired or rented then it is an
explicit cost.
• Implicit cost: If the factors of production are owned by a firm then its cost is implicit cost.
• Book cost: Costs which do not involve any cash payments but a provision is made in the books of
accounts in order to include them in the profit and loss account to take tax advantages.
• Social cost: Total cost incurred by the society on account of production of a good or service.
• Transaction cost: The cost associated with the exchange of goods and services.
• Controllable cost: Costs which can be controllable by the executives are called as controllable cost.
• Shut down cost: Cost incurred if the firm temporarily stops its operation.
Economic costs are related to future. They play a vital role in business decisions as the costs considered in
decision - making are usually future costs.
• Determinants Of Short –Run Cost
• Fixed cost: Some inputs are used over a period of time for producing more than
one batch of goods. The costs incurred in these are called fixed cost. For example
amount spent on purchase of equipment, machinery, land and building.
• Variable cost: When output has increased the firm spends more on these items.
For example the money spent on labour wages, raw material and electricity
usage. Variable costs vary according to the output. In the long run all costs
become variable.
• Total cost: The market value of all resources used to produce a good or service.
• Total Fixed cost: Cost of production remains constant whatever the level of
output.
• Total Variable cost: Cost of production varies with output.
• Average cost: Total cost divided by the level of output.
• Average variable cost: Variable cost divided by the level of output.
• Average fixed cost: Total fixed cost divided by the level of output.
• Marginal cost: Cost of producing an extra unit of output.
• Factors Causing Economies Of Scale:
• There are various factors influencing the economies of scale of an organization. They are
generally classified in to two categories as Internal factors and External factors.
• Internal Factors:
• 1. Labour economies: if the labour force of a firm is specialized in a specific skill then the
organization can achieve economies of scale due to higher labour productivity.
• 2. Technical economies: with the use of advanced technology they can produce large quantities
with quality which reduces their cost of production.
• 3. Managerial economies: the managerial skills of an organization will be advantageous to
achieve economies of scale in various business activities.
• 4. Marketing economies: use of various marketing strategies will help in achieving economies
of scale.
• 5. Vertical integration: if there is vertical integration then there will be efficient use of raw
material due to internal factor flow.
• 6. Financial economies: the firm’s financial soundness and past record of financial transactions
will help them to get financial facilities easily.
• 7. Economies of risk spreading: having variety of products and diversification will help them to
spread their risk and reduce losses.
• 8. Economies of scale in purchase: when the organization purchases raw material in bulk
reduces the transportation cost and maintains uniform quality
• External Factors:
• 1. Better repair and maintenance facilities: When the machinery and equipments
are repaired and maintained, then the production process never gets affected.
• 2. Research and Development: research facilities will provide opportunities to
introduce new products and process methods.
• 3. Training and Development: continuous training and development of skills in
the managerial, production level will achieve economies of scale.
• 4. Economies of location: the plant location plays a major role in cutting down the
cost of materials, transport and other expenses.
• 5. Economies of Information Technology: advanced Information technology
provides timely accurate information for better decision making and for better
services.
• 6. Economies of by-products: Organizations can increase the economies of scale
by minimizing waste and can be environmental responsible by using the by-
products of the organization.
• Factors Causing Diseconomies Of Scale:
• 1. Labour union: continuous labour problem and dissatisfaction can lead to
diseconomies of scale.
• 2. Poor team work: Poor performance of the team leads to diseconomies of scale.
• 3. Lack of co-ordination: lack of coordination among the work force has a major
role to play in causing diseconomies of scale.
• 4. Difficulty in fund raising: difficulties in fund raising reduce the scale of
operation.
• 5. Difficulty in decision making: the managerial inability, delay indecision making
is also a factor that determines the economies of scale.
• 6. Scarcity of Resources: raw material availability determines the purchase and
price. Therefore there is a possibility of facing diseconomies in firms.
• 7. Increased risk: growing risk factors can cause diseconomies of scale in an
organization. It is essential to reduce the same.
Break Even Analysis
• Break even analysis helps to
identify the level of output and
sales volume at which the firm
‘breaks even’. It means the
revenues are sufficient to cover
all costs of production. Various
managerial decisions of firms are
taken by the managers based on
the break- even point.
• Types Of Risks:
• Economic risk: Choice of loss due the fact that all possible outcomes and their probability of
occurrence are unknown.
• Uncertainty: When the outcomes of managerial decisions cannot be predicted with absolute
accuracy but all possibilities and their associated probabilities of occurrence are known.
• Business risk: Chance of loss associated with a given managerial decision.
• Market risk: Chance that a portfolio of investments can lose money due to volatility in the
financial market.
• Inflation risk: A general increase in the price level will undermine the real economic value of
any legal agreement that involves a fixed promise to pay over an extended period.
• Interest rate risk: The changing interest rates affect the value of any agreement that involves a
fixed promise to pay over a specified period.
• Credit risk: May arise when the other party fails to abide by the contractual obligations.
• Liquidity risk: Difficulty of selling corporate assets and investments.
• Derivative risk: Chance that volatile financial derivatives could create losses on investments by
increasing price volatility.
• Cultural risk: Risk may arise due to loss of markets differences due to distinctive social customs.
• Currency risk: Is the probable loss due to changes in the domestic currency value in terms of
expected foreign currency.
• Government policy risk: Chance of loss because of domestic and foreign government policies.
• There are four ways to manage the risk and uncertainty:
• 1. Insurance ( Business risks are transferred through Insurance Policies)
• 2. Hedging is a mechanism whereby the expected loss is to be offset by an expected
profit from another contract.
• 3. Diversification is a method of managing the risk where the risk is spread to various
investments and thus the risk is minimized to each investment.
• 4. Adjusting risk is the mechanism whereby the provision is made to offset the expected
loss.
• Decision Under Uncertainty:
• 1. The maximax rule: Deals with selecting the best possible outcome for each decision
and choosing the decision with the maximum payoff for all the best outcomes.
• 2. The Maximin rule: Deals with selecting a worst outcome for each investment decision
and choosing the decision with the maximum worst payoff.
• 3. The Minimax rule: Deals with determining the worst potential regret associated with
each, decision, then choosing the decision with the minimum worst potential regret.
UNIT III
• Market
• classified on the basis of:
• Area: family market, local, regional, national and international
• Time: very short period, short period, long period, very long period
• Commodity: produce exchange, bullion market, capital market, stockmarket
• Nature of Transaction: spot market, forward market and futures market
• Volume of business: whole sale market, retail market
• Importance: primary market, secondary market, territory market
• Regulation: regulated market, unregulated market
• Economics: Perfect market and imperfect market
• Classification Of Market Structure Based On The Nature Of Competitor:
• 1. Perfect market
Characteristic features of perfect market:
• 1. Large number of buyers and sellers - 2. Homogeneous product - 3. Perfect
knowledge about the market - 4. Ruling prices - 5. Absence of transport cost - 6. Perfect
mobility of factors - 7. Profit maximization - 8. Freedom in decision making
• 2. Imperfect market
• Monopoly market: a market with only one seller and a large number of
• buyers.
• Monopolistic competition: a market in which firms can enter freely, each
• producing its own brand or version of a differentiated product.
• Oligopoly market: market in which only a few firms compete with one
• another and entry by new firms is impeded/restricted.
• Duopoly: market in which two firms compete with each other.
• Monopsony: is a market with only one buyer, and a few/large sellers.
Monopoly Market
Monopolistic Competition

Therefore the profit = TR – TC

Oligopoly Market
Types Of Oligopoly:
1.Pure and perfect oligopoly: if the firm produced homogeneous products it is perfect oligopoly. If there is product differentiation
then it is called as imperfect or differentiated oligopoly.
2.Open and closed oligopoly: entry is not possible. When it is closed to the new entrants then it is closed oligopoly. On the other
hand entry is accepted in open oligopoly.
3.Partial and full oligopoly: under partial oligopoly industry is dominated by one large firm who is a price leader and others
follow. In full oligopoly no price leadership.
4.Syndicated and organized oligopoly: where the firms sell their products through a centralized syndicate. On the other hand
firms organize themselves into a central association for fixing prices, output and quotas.
• Price Discrimination
• Price discrimination means that the producer charges different prices for
different consumers for the same goods and service. Price discrimination occurs
when prices differ even though costs are same.
• They are: 1. Personal Discrimination 2. Place Discrimination 3. Trade
Discrimination 4. Time Discrimination 5. Age Discrimination 107 6. Sex
Discrimination 7. Location Discrimination 8. Size Discrimination 9. Quality
Discrimination 10. Special Service 11. Use of services 12. Product Discrimination
• Objectives Of Price Discrimination: 1. To dispose the surpluses 2. To develop new
market 3. To Maximize use of unutilized capacity 4. To Earn monopoly profit 5. To
Retain export market 6. To Increase the sales
UNIT –IV
• Macro Economics

• Macro economics is the study of aggregate economic behaviour of the economy

as a whole. Macro economics deals with the output, (total volume of goods and
services produced) levels of employment and unemployment, average prices of
goods and services.
• Aggregate demand: The total quantity of output demanded at prevailing price
levels in a given time period, ceteris paribus.
• Aggregate supply: The total quantity of the output the producers are willing and
able to supply at prevailing price levels in a given time period.
• Objectives Of Economic Policies:
• The major macro level economic policies framed by the government of India to
achieve the objectives are:
• 1. To achieve national level full employment
• 2. To stabilize the price fluctuations in the market
• 3. To achieve overall economic growth
• 4. To develop regions economically
• 5. To improve the standard of living of the people
• 6. To reduce income inequalities
• 7. To control monopoly market structure
• 8. To avoid cyclical fluctuations in various economic activities of the country
• 9. To improve the Balance of Payment of the country and
• 10. To bring social justice in various aspects.
• 11. Now let us understand the various macroeconomic concepts.
• Gross Domestic Product is the total market value of all final goods and services currently
produced within the domestic territory of a country in a year. It measures the market value of
annual output of goods and services currently produced and counted only once to avoid
double counting. It includes only final goods and services.
• Gross National Product is the market value of all final goods and services produced in a year.
GNP includes net factor income from abroad. GNP = GDP + Net factor income from abroad
(income received by Indian’s abroad – income paid to foreign nationals working in India)
• Net National Product at market price is the market value of all final goods and services after
providing for depreciation. NNP = GNP – Depreciation
• National income is the sum of the wages, rent, interest and profits paid to factors for their
contribution to the production of goods and services in a year. Nnp = Nnp (Market Price) –
Indirect Tax + Subsidies
• Personal income (PI) is the sum of all incomes earned by all individuals / households during a
given year. Certain incomes are received but not earned such as old age pension etc.,
• Pi = Ni – Social Security Contribution – Corporate Income Tax – Undistributed Corporate Profits
+ Transfer Payments.
• Disposable income is calculated by deducting the personal taxes like income tax, personal
property tax from the personal income (PI).
• Disposable Income = Personal Income – Personal Taxes = Consumption + Saving
• Supernumerary income: the expenditure to meet necessary living costs deducted from
disposable consumer income is called as supernumerary income.
Approaches To Calculate National Income:
• The Income Approach:
• The income of individuals from employment and business, the profits of the firms
and public sector earnings are taken into consideration.
• National Income is the income of individuals + self employment
• + profits of firms and public corporate bodies + rent + interest (transfer
• payments, scholarships, pensions are not included)
• this includes the sum of the income earned by individuals from various input
factors such as rent of land, wages and salaries of employees, interest on capital,
profits of entrepreneurs and income of self employed people.
• The Expenditure Approach:
• In this approach national income is calculated by using the expenditure of
individuals, private, government and foreign sectors. i.e. the sum of all the
expenditure made on goods and services during a year. i.e.
• National Income = Expenditure Of Individuals + Govt. + Private Firms + Foreigners

The Output Approach:

In this approach we measure the value of output produced by firms and other
organization in a particular time period.
i.e. the National Income = income from agriculture + fishery + forestry +
construction + transportation + manufacturing + tourism + water + energy …
Gdp At Market Price + Subsidies –Taxes
Gnp At Factor Cost + Net Income From Abroad
• Problems In Measuring National Income In India:
• 1. Non monetized sector: there are number of sectors in which the wages and
salaries are provided in kind, not in monetary measures.
• 2. Illiteracy: due to higher illiteracy rate the results may be biased.
• 3. Lack of occupational specification: we have difficulty in classifying the nature of
the job existing in India.
• 4. Unorganized productive activities: people involved in unorganized productive
activities are not fully covered in the calculation of national income.
• 5. Lack of adequate statistical data: Inadequate data leads to approximation of
the calculation.
• 6. Self consumption: Farm products kept for self consumption are not considered
for the national income calculation.
• 7. Unpaid Services: services of house wives are not reckoned as national income
Employment And Unemployment In India
• Employment: When persons are holding a job and they perform for any paid
work. Also if workers hold jobs because of illness, strike or vacation, they are
considered as employed.
• Full Employment: When 94-95% of them are employed or highest sustainable
level of employment over the long run is called as full employment.
• Under Employment: Less than full employment is called as under employment.
• Unemployment: When people are not working and are actively looking for work
or waiting to return to work, such a situation may be called as unemployment.
• Self-Employed: Persons who operate their own farm or non-farm enterprises or
are engaged independently in a profession or trade on own-account or with one
or a few partners are self-employed in household enterprises.
• Types Of Unemployment
• 1. Frictional unemployment: unemployment that occurs naturally during the
normal working of an economy. voluntary switching of jobs, fired or seeking re
employment
• 2. Structural unemployment: The change in industrial structure of a country,
change in Demand and technology ,change in requirement of skills. Mismatch
between demand and supply.
• 3. Cyclical unemployment: unemployment is more at a particular time that is due
to economic recession, depression and others.
• 4. Technological unemployment: due to change in technology, new production
and process leads to reduction in work requirement.
• 5. Seasonal unemployment: in some industries the work cannot be there through
out the years as it is seasonal in nature.
• 6. Disguised unemployment: lack of work of the type which would fully utilize the
degree of skill possessed by the workers.
Business Cycle
• Characteristic Features Of Business Cycle:
• 1. It occurs periodically: the fluctuations in economic activities occur periodically
but not at a fixed period of interval.
• 2. It is international in character: the changes in any economic activity of a
country have impact on economies of the world (for example financial crisis in US
had impact on various other countries economic activities).
• 3. It is wave like: the fluctuations indicate ups and downs in various economic
indicators of a country.
• 4. The process is cumulative: the process is cumulative in nature, that means
change in income level, savings or any other activity will be in aggregates.
• 5. The cycles will be similar but not identical: the cycle has ups and downs but
not identical spacing that means the time period of occurrence will differ.
Phases Of A Business Cycle
Theories On Business Cycle
• 1. Sunspot theory / climate theory: depending on climatic changes agricultural
products are produced.
• 2. Psychological theory: during depression or crisis of any business organization it
is completely based on the psychology of the entrepreneur as to whether the
organization can be revived or shut down.
• 3. Monetary theory: means the demand and supply of money is the primary
reason for economic fluctuations of a country.
• 4. Over investment theory: if the organizations and individuals save more and
invest a huge amount then their expectations on increase in their returns.
• 5. Over savings/ under consumption theory: As per this theory the increase in
savings and investment will bring down the consumption which will reduce the
demand for goods in the market.
• 6. Innovation theory: According to this theory more innovations lead to new
technology and new business that leads to prosperity in the economy.
Inflation
• Inflation is an economic condition in which the aggregate prices are always
increasing in a country. The value of money is falling. Inflation is nothing but too
much of money chasing too few goods.
• Types Of Inflation On The Basis Of Speed:
• 1. Creeping inflation: the inflationary rate is less than 2% that means prices are
increasing gradually.
• 2. Walking inflation: the inflationary rate of a country is around 5% little more
than creeping.
• 3. Running inflation: the rate of growth in prices are more i.e. the inflation is
growing at the rate of 10%.
• 4. Galloping inflation: higher growth rate compared to the earlier stages i.e. the
change is around 25%.
• On The Basis Of Inducement:
• 1. Deficit induced: the deficit in the balance of payments of the country or fiscal deficit is the reasons
for inflation. The value of the currency is falling due to the above mentioned reasons.
• 2. Wage induced: due to higher wages and salaries the money supply in the country increases leading to
inflation.
• 3. Profit induced: higher the profit the organizations earn, they tend to share with their stakeholders
which induces the money supply and reduces the value of money.
• 4. Scarcity induced: the raw material and other input factor scarcity (for example petrol) may induce the
price hike in the market.
• 5. Currency induced: the value of currency fluctuates due to various internal and external forces.
• 6. Sectoral inflation: a particular sector of a country may be the reason for economic growth or money
supply. (for example in India the growth in service sector particularly IT)
• 7. Foreign trade induced: if the country has unfavorable balance of payments, that means the country’s
exports are less than the imports, then we need more of foreign currency to make payments to the
exporters ultimately this increases the demand for other currencies in the market.
• 8. War time, Post war, Peace time: During war period the government expenditure on various amenities
will induce the inflation and the production, availability of the commodities will be low which leads to
price hike. To settle down the economy after war or natural calamities the government spending will be
more.
• On the basis of extent of coverage:
• 1. Open and repressed;
• 2. Comprehensive and sporadic.
• Effects Of Inflation On Various Economic Activities Of The Country:
• On Producers: Producers will earn more profit due to higher prices.
• On debtors and creditors: Creditors will be happy to receive more returns on
their lending.
• On wage and salary earners: Wage holders will struggle to purchase the goods
and services.
• On fixed income group: Income is fixed but the value of the currency is falling and
prices are increasing therefore it is difficult to manage the normal life. i.e. they
are affected.
• On investors: Investors will receive more returns on their investments.
• On farmers: Farmers will suffer.
• On social, moral and political effects: Due to money supply and higher the cash in
hand the social, moral values are declining in the society with political
disturbances.
• Demand Pull Inflation:
• Inflation will result if there is too much spending when compared to output.
Aggregate demand is greater than aggregate supply which leads to price hike and
inflation.
• Cost Push Inflation:
• Inflation is caused by change in the supply side of the economy, it increases cost
of production, prices and inflation. Initially increase in costs leads to a chain of
wage increases which leads to increase in demand and cost.
Methods Of Controlling Inflation
• 1.Monetary measures :
• Bank rate
• Open market operations
• Higher reserve ratio
• Consumer credit control
• Higher margin requirements
• 2.Fiscal measures:
• Regulating to Government expenditure
• Taxation
• Public borrowing
• Debt management
• Over valuation of home currency
• 3.Others:
• Wage policy
• Price control measures and rationing the essential supplies
• Moral suasion
Monetary Policy
• Objectives Of Monetary Policy Of India:
• 1. To achieve Price stability
• 2. To attain Exchange rate stability
• 3. To avoid the negative impacts of business cycle
• 4. To experience full employment position
Instruments
• Bank rate: The rate of interest charged by the RBI against the commercial bank
borrowings. (Decrease the Savings Interest rate and Increase the borrowing rate)
• Reserve ratio: CRR (Cash Reserve Ratio), SLR (statutory Liquidity Ratio) the RBI insist on
commercial banks to keep a certain percentage as reserve in their hands for ensuring
liquidity and regulating credit.
• Open market operation: RBI selling the government securities to the public. In that case
instead of having money in the hands the public will receive certificates for a fixed time
period and they will receive interest against the same. But the money circulation among
the public will be reduced.
• Margin requirements: Margin requirement for mortgaging against the loans will be
increased to reduce to credit and it will be reduced to increase the credit flow.
• Credit rationing: The loans and advances are provided only for production purpose and
for essential activities to cut down the money in circulation.
• Moral suasion: RBI controls the commercial banks for creating loans and advances by
persuasion through issue of circular.
• Direct actions: Sometimes RBI takes direct action against the credit created by the
banks in contravention of the RBI guide line to overcome the inflationary situation.
• Limitations Of Monetary Policy:
• 1. Monetary policy operates in a broad front
• 2. Success and failure depends on the banking system of the country
• 3. It has Institutional restrictions
• 4. Unorganized money market does not support the monetary policy
• 5. Existence of non monetized sector also defies RBI’s regulation
• 6. It is not very effective in overcoming depression.
• Monetary Policy And Economic Development:
• 1. Economic development needs the support of credit planning
• 2. Improving the efficiency of banking system
• 3. Decide interest rates
• 4. Public debt management
Fiscal Policy
• Fiscal policy is defined as the conscious attempt of the government to achieve
certain macro economic goals of policy by altering the volume and pattern of its
revenue and expenditures and the balance between them.
• Objectives Of Fiscal Policy:
• 1. To maintain economic stability in the country
• 2. To bring Price stability
• 3. To achieve full employment
• 4. To provide social justice
• 5. To promote export and introduce import substitution
• 6. To mobilize more public revenue
• 7. To reallocate available resources
• 8. To achieve balanced regional growth.
i. Calculate GDP and GNP with both the expenditure and income approach
ii. Calculate NDP, NNP,NI and Domestic income
iii. Calculate Personal income.
iv. Calculate Disposable Personal income.
UNIT V
Economic Environment And Transition In Indian
Economy
• Sources Of Economic Growth And Development:
• Economic Factors:
• 1. Natural resources: Without natural resources it is difficult to achieve economic development. It highly
depends on factor endowment.
• 2. Human Resource and population growth: Labour is the most active factor of production. Therefore
sufficient number of quality labour force is essential.
• 3. Capital formation and accumulation: Economic growth is a function of capital formation of a country.
Without capital mobilization it is impossible to develop the economy.
• 4. Technological progress: Advancement of technology is a key factor for development and it helps to
utilize resources in an effective manner.
• 5. Entrepreneurship: Without strong risk taking entrepreneurs an industry cannot innovate and
introduce new products to the society.
• 6. Investment criteria: The investment policy and regulation of a country improves the investment and
in turn helps the economy to grow at a faster rate.
• 7. Removal of market imperfection: To develop a countries economy removal of imperfect market and
reducing monopoly market are essential.
• 8. Capital output ratio: High capital output ratio indicates the increase in productivity of capital invested.
• Non Economic Factors:
• 1. Desire for development: Desire to grow in the right direction is important for the
economic development of a country.
• 2. Widespread education: The growth in the educational sector will help the society to
grow at a faster rate.
• 3. Social and industrial reforms: Liberal social system, and reduced disparity helps the
economy to grow.
• 4. Good government: Establishment of consistent law and order is essential to grow
internationally.
• Pre Requisites Of Economic Growth:
• 1. Population growth
• 2. Removal of monopoly
• 3. Optimum utilization of resources
• 4. Development planning and
• 5. Financial stability
• Pre Transition:
• 1. Highly autarkic economy: India was experiencing autarky and closed economic system.
• 2. Centralized planning: All economic plans were centralized and controlled at the centre.
• 3. Protectionist trade policies: Trade policy was closed and not opened to the world. I.e. it was
following a protectionist trade policy.
• 4. High tariffs and non tariff barriers: India had high level of tariff and non tariff trade barriers
• 5. Capital controls: The capital market was controlled by the government of India.
• 6. Import substitution: Our country had been adopting import restrictions with large import
substitutions.
• 7. State owned public sector industries: Most of the industries were owned by the central or
state government before economic reforms.
• 8. State controlled financial sector: The financial sector was controlled and monitored by the
government.
• 9. Import Restrictions: Reservation policies like quota system were followed for imports.
• 10. Regulated markets: Market for all commodities was regulated by the government.
• 11. Administrative prices: Market price was regulated with the help of price ceiling and by
adopting dual pricing policy.
• Post Transition: (After 1991)
• 1. Deregulation and liberalization of the Industries
• 2. Lowering of the tariffs and easing of import licensing requirements.
• 3. Export incentives were provided to the exporters to promote exports.
• 4. Special Economic Zones were established to promote exports and encourage
exports.
• 5. Single window licensing policy.
• 6. Declining incidence of poverty.
• 7. Divestment of public sector units.
• 8. Liberalization of the banking and financial sectors.
• 9. Promotion of Foreign Direct Investments.
• 10. Tax incentives for capital investment in domestic and foreign markets
• 11. Managed exchange rate in the place of controlled exchange rate.
• 12. Portfolio investment strengthened.
• Barriers To The Faster Economic Growth:
• 1. Low productivity levels: The economy was opened up but the productivity level was low to
compete in the market.
• 2. Infrastructure deficiencies: Infrastructure facilities of our country have not fully improved to
meet the targeted economic growth.
• 3. Rising public sector debts: The government borrowings and accumulated debt were high.
• 4. High subsidies fostering inefficiency: Government provided more subsidies which in turn
increased the inefficiency of the organizations.
• 5. Low literacy levels: The literacy rates have not increased at a faster rate to compete in the
open economy.
• 6. Demographic deficiencies: The demographic deficiencies, did not support the transitional
policies of our country.
• 7. Rigid labour laws: The labour laws were not favorable to bring in more Human Resource
• 8. Functioning of judicial system: Our legal environment also has not been supportive towards
the liberalization of the country.
• 9. Campaigns against cultural consumerism: Due to transition the consumer behaviour of the
society has changed and hence we are able to see the cultural commonality, and also
campaigns against the cultural consumerism.
• 10. Corruption: Along with economic changes corruption has been pervasive at all levels and
has increased.
• Growth Potentials Of The Indian Economy Especially After Transition:
• 1. Large potential markets: Both urban and rural markets of India are growing at a
faster rate.
• 2. Booming IT and Biotech sectors: India occupies a leading position in the world
in these sectors.
• 3. Highly professional and scientific manpower: India is having the third largest
technically qualified man Power.
• 4. Trend towards political decentralization: Now the trend has started towards
decentralization.
• 5. Dominant player in south Asian region in certain areas of economic activity.
• 6. Competitive Environment has already set in almost all spheres of life.
Liberalisation, Privatisation And Globalisation (LPG)
• 1. End of the private sector: The government decided to transfer the loss making
public sector units to the private, but there were no takers, therefore the
government went for disinvestment of the public enterprises including profit
making units.
• 2. Government permitted private sector to set up individual units without license.
• 3. The investment ceiling was lifted and hence the private investment
• could go up to any level.
• 4. The Government approved up to 51% FDI. No permission was required for
hiring foreign technicians and technology.
• 5. Rehabilitation schemes to reconstruct the sick public sector enterprises. (board
for industrial and financial reconstruction) BIFR was established.
• 6. Greater autonomy was given to manage Public sector units.
• 7. Economy was opened to other countries to encourage exports.
• Reasons For Implementing The Policy Of Liberalization, Privatization And
Globalization:
• 1. Excess consumption and expenditure over revenue have been experienced resulting in
heavy government borrowings.
• 2. Growing in-efficiency in the use of resources.
• 3. Mismanagement of firms and the economy.
• 4. Losses of public sector enterprises.
• 5. Various distortions like poor technological development, shortage of foreign exchange,
borrowing, mismanagement of foreign exchange reserves etc., have distorted the Economic
growth.
• 6. Low foreign exchange reserves.
• 7. Burden of national debt and
• 8. Inflationary pressure on the economy.
• Weakness Of LPG Model:
• 1. Narrow focus
• 2. Free entry of MNCs
• 3. Agricultural sector was bypassed
• 4. Facilitated more imports
• 5. Capital intensive development
Business and Government
• Role Of Government In India:
• 1. Individual freedom: Consumers enjoy freedom of consumption, production
and process,
• 2. Coexistence of public and private sector: Basic industries requiring heavy
investment, and social welfare activities belong to the public sector and the rest
to the private sector.
• 3. Planning: Detailed planning is for public sector, broader targets are for the
private.
• 4. Social welfare: Policies are framed to develop backward regions, increasing
employment and infrastructure facilities.
Various ways- Government influence business operations
• 1. Public Enterprises: If the commodity is a necessary one and the supply of the
commodity is optimized by the government, It may maximizes the social welfare
of the society.
• 2. Price fixation: The government insists on maximum retail price to stabilize the
price level in the market.
• 3. Subsidies: States and the Central Government of India provides various kinds of
subsidies to the domestic producers and for the exporters through various
schemes.
• 4. Direct and Indirect Intervention: Through taxation, Government intervenes in
the business directly and indirectly through the quota system .
• 5. Control of Monopoly: The government of India passed Monopoly and
Restrictive Trade Practice Act (MRTP) to control them.
Public and Private Participations (PPPs)
• 1. Institutional cooperation.
• 2. Long term infrastructure contracts. Like construction of Roads for the public
use which reduces the pressure on the exchequer, but benefits the private
through way toll fee.
• 3. Community development
• 4. Urbanization and
• 5. Economic development
• Characteristic Features Of PPPs:
• 1. Cooperative and contractual relationship: Normally PPPs are for more than 10
years therefore cooperation is essential to build and strengthen the relationship
in a contractual agreement.
• 2. Shared responsibilities: The responsibilities are shared based on the nature of
the project and are not always equal.
• 3. A method of procurement: Through PPPs government procures the capital,
assets or infrastructure and is allowed to play major roles in planning, finance,
design, operation and maintenance.
• 4. Risk transfer: The government sector transfers the risks to the private sector
that has skills and experience to manage the same.
• 5. Flexible ownership: The ownership of PPP projects may or may not be retained
by the government .Sometimes private sector provides only facilities and
planning but does not take up the ownership.
Industrial Finance And Foreign Direct Investments
• Purpose Of Industrial Finance:
• To finance fixed assets
• To finance the permanent part of working capital
• To finance the growth and expansion of business.
• Foreign Direct Investment
• Foreign capital plays a vital role in the industrialization and economic
development of a country, as it forms one of the essential determinants of
economic growth of developing countries.
• FDI = Equity capital + reinvestment of earnings + short term capital + long term
capital.
Need For FDI In India
• Sustaining a high level of investment: As all the under-developed and the developing
countries want to industrialize and develop themselves,
• Technological gap: In Indian scenario we need technical assistance from foreign source
for provision if expert services, training of Indian personnel and educational, research
and training institutions in the industry.
• Exploitation of natural resources: in India we have abundant natural resources such as
coal, iron and steel but to extract the resources we require foreign collaboration.
• Understanding the initial risk: In developing countries as capital is a scare resource, the
risk of investments in new ventures or projects for industrialization is high.
• Development of basic infrastructure: In the recent years foreign financial institutions
and government of advanced countries have made substantial capital available to the
under developed countries.
• Improvement in the balance of payments position: The inflow FDI will help in improving
the balance of payment.
• Foreign firm’s helps in increasing the competition: Foreign firms have always come up
with better technology, process, and innovations comparing with the domestic firms.
Determinants Of FDI
• Stable Policies: India’s stable economic and socio policies have attracted investors
across border.
• Economic factors: Different economic factors encourage inward FDI. These
include interest loans, tax breaks, grants, subsidies and the removal of
restrictions and limitation.
• Cheap and skilled labour: There is abundant labor available in India in terms of
skilled and unskilled human resources. Foreign investors will to take advantage of
the difference in the cost of labor as we have cheap and skilled labors.
• Basic infrastructure: India though is a developing country, it has developed
special economic zone where there have focused to build required infrastructure.
• Unexplored markets: In India there is large scope for the investors because there
is a large section of markets have not explored or unutilized.
• Availability of natural resources: India has large volume of natural resources such
as coal, iron ore, Natural gas etc.
• Advantages Of FDI To The Host • Advantages Of FDI To Home Country:
Country: • 1. Improves the availability of raw
• 1. Availability of scarce factors of material
production • 2. Improves the Balance of payments of
• 2. Improves the balance of payments the country
• 3. Building of economic and social • 3. It creates more Employment
infrastructure • 4. Creates more Revenue
• 4. Fostering the economic linkage • 5. Builds Political relations
• 5. Strengthening of the government • 6. Gets better investment opportunity.
budget.
• Disadvantages To Home Country:
• Disadvantages To Host Country: • 1. Too much Exploitation of factors of
• 1. Balance of payment depends on production
improvement of technology • 2. Conflict with the government of host
• 2. Employment of expatriates country.
• 3. Unhealthy competition
• 4. Cultural and political issues
Important Questions