Managerial Economics EXTRACTS FROM ATTEMPTED QUESTIONS AND of several books like “Intermediate Economics - A Modern Approach” and Pappas. PREFACE Dear Reader, This book on Managerial Economics is written to present a simple text to the students who have limited exposure to Economics and are. SCDL - PGDBA - Finance - Sem 1 - Managerial Economics - Free download as Word Doc .doc), PDF File .pdf), Text File .txt) or read online for free. Managerial .
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SCDL. Page of 1 7. Program Name: C-PGDBA. Subject: Managerial Economics. Assessment Name: ME - Exam . 4] Book cost. 5] Sacrifice. 6] Both explicit and. Book Description HTML. Managerial Economics or Business Economics subject is covered in simple explanation by this book and requires special attention as it . scdl assignments ,scdl assignments ,scdl assignments ,scdl assignments ,SCDL Assignments Batch,SCDL New.
What is a Joint Stock Company? Explain the merits and demerits of a Joint Stock Company. Due to this it is suitable for activities demanding business capital. In highly developed countries it is one of the most frequent forms of doing business. It is one of the oldest kinds of capital association. Joint Stock Company is suited for cases where the number of shareholders is large or when its shares are to be traded on the Stock Exchange. A joint-stock company is a company the basic capital of which is divided into certain number of shares, which are securities with nominal value.
The company is liable for the breach of its obligations up to the extent of the entire property. Doing business with the aim of making a profit does not have to represent its only business activity. Its goal may also be accumulation of certain basic capital.
A share represents a security connected with which are rights of a shareholder to act as a partner and to participate in the management of the company, in profit and in the liquidation balance at the dissolution of the company. The law does not specify the external form of the share but it must always be in a written form. The shares may be bearer shares and inscribed shares. They may be employee shares, preference shares, capital stock, normal shares, etc. Issuing of shares connected with a right for certain interest regardless of the economic results of the company is not permitted.
According to the last amendment of the Civil Code a share may be issued as a materialized or listed security. Bearer shares may be issued only as listed securities. The removal of the anonymity of the bearer shareowner should mostly contribute to better transparency of ownership relations in the process of privatization. The company statutes must determine the value of all kinds of shares, which are to be issued. The total sum of pars of these shares must correspond to the amount of the basic capital.
The par of a share must be expressed by a positive integer. State and Explain the Law of Demand. What are its exceptions? The law of demand states that if price declines, then the quantity demanded of the product will increase. The inverse relationship between price and quantity leads to the downward sloping demand curve.
This section provides a graphical derivation of the law of demand. The law of demand and it's application to fundamental analysis of commodities rests upon an understanding of consumer behavior. The factors which characterize consumer choice, and how individual consumer responses are reflected in the market place are key components of this economic theory.
Understanding what factors have affected demand in the past will help to develop expectations about demand in the future and the impact on market price. Demand for a particular product or service represents how much people are willing to download at various prices.
Thus, demand is a relationship between price and quantity, with all other factors remaining constant. Demand is represented graphically as a downward sloping curve with price on the vertical axis and quantity on the horizontal axis figure above Demand for a particular product or service represents how much people are willing to download at various prices.
Demand is represented graphically as a downward Page 3 sloping curve with price on the vertical axis and quantity on the horizontal axis figure above Generally the relationship between price and quantity is negative.
This means that the higher is the price level the lower will be the quantity demanded and, conversely, the lower the price the higher will be the quantity demanded. In recent decades, however, the course of prices has almost always been upward. The s, s and s saw a period of Managerial Economics. Inflation reduces the downloading power of money and savings.
It is closely related to the amount of money in the economy. Money is the invention of human beings, not of nature, and the amount in existence can be controlled by them. Economists ask many questions about the causes and consequences of changes in the quantity of money and the effects of such changes on the price level. They also ask about other causes of inflation. Why the capacity to produce grows rapidly in some economies, slowly in others, and not at all in yet others is a critical problem which has exercised the minds of some of the best economists since the time of Adam Smith.
Although a certain amount is now known in this field, a great deal remains to be discovered. Define Managerial Economics. Explain the Nature and Scope of Managerial Economics.
What is the Significance of Marginal Economics? What is an economics problem? There is something Universal about and economic problem Discuss. The level at which this is done is the level of a firm. Production with the profit motive is modern concept, in the sense that it has become dominant only after the Industrial Revolution. Before the Industrial Revolution, most of the economies of the world were agricultural economies.
The profit motive was always a secondary motive in an agricultural economy. But in modern times the profit motive became the only dominant motive of production. A firm is a unit of production where production is done with the sole aim of profit maximization. Definition of a firm as a producing unit. For the sake of understanding this concept of the firm, let us study some definitions of the firm given by eminent economists.
The firm may be defined as an independently administered business unit. Harvey Leibenstein: A firm is " an independent organization whose destiny is determined by the magnitude of the aggregate pay off and in which the aggregate pay off depends directly on its performance and especially on the production and sale of services or goods. Lipsey, "The firm is defined as the unit that uses factors of production to produce commodities that it then sells either to other firms, to households or to the central authorities meaning government, public agencies etc.
The firm is thus the unit that makes the decisions regarding the employment of factors of production and the output of commodities. In keeping with preferences of the consumers, the firms decide how much to produce, how to produce etc. Through advertisements, a firm may try to increase its sales, but the decisions to download belong to the downloaders. The decisions regarding choice of techniques and quantify of a commodity are taken by the firm. The firm is assumed to take consistent decisions in relation to the choice open to it.
The internal problems regarding the process of decision - making i. We take firm as a single unit - smallest possible unit. It is taken as our atom of behavior on the demand side. Again, just as the household is assumed to seek satisfaction maximization, the firm is assumed to seek maximization of its profits.
The firm may be a proprietorship firm or a partnership firm or a Multi-National Corporation. That it is a unit of decision - making is our criterion. Again, what form of business organization and management experts?
An economist assumes that the firm is internally properly organized and is capable of taking decisions. From the above definitions, it will be seen that there is a substantial difference in all these definitions and still in their own way they describe the firm correctly.
This is so because these economists have given prominence to the questions which were more important for them or for their country or when they were writing, and so if we study the various features of firm as revealed by these definitions, the concept will be more clear. The following features of a firm emerge from these definitions: It is a centre where the means of production are hired or downloadd and used for production.
It is a centre, where the success of production is reviewed in its entire context and decisions are taken. It is a centre, where the means of production are collected, the production is done, and the sale and distribution of production is also affected. It is a centre, where all the decisions about production are taken. These include decisions regarding the distribution of the product, advertising, sale and those regarding facing competition also.
From the above features of a firm, it will be clear that a firm has to perform several functions simultaneously - i. To cap it all, the firm is expected to make as much profits as possible.
Theoretically speaking, a firm is expected to organize all the factors of production in the most profitable manner. If one studies the structure and function of modern firm the above definitions will appear to be too simple, because in modern times the firm is expected to perform so many other functions. Formerly, the entrepreneur was taken to be an independent factor of production. Even today the entrepreneur is no doubt a very important factor of production but he has become so highly indispensable that it is very difficult to separate him from the production unit of the firm because ultimately the will to produce is provided by the entrepreneur.
The mere presence of all the factors of production and a market does not guarantee production. The will be to produce is very important and it cannot be separated from the entrepreneur. Thus, the entrepreneur becomes inseparable from the firm.
The firm and the industry. For understanding the difference between a firm and an industry, it would be advisable to understand the nature of a competitive industry.
A competitive industry has three basic characteristics: In a competitive industry, there is a large number of firms so that the action of a single firm has no effect on the price and output of the whole industry. Every firm therefore enjoys the freedom to increase or decrease its output substantially by taking the price of the product as given. Secondly, every firm in a purely competitive industry, it must be making a product which is accepted by customers as being identical with that made by all the other producers in the industry.
This is known as the condition of homogeneity.
This ensures that all firms have to charge the same price. The downloaders, of course, are to decide that the product is the same. The downloaders should not find any real or imaginary differences between the products sold by any two pairs of firms, Finally, there should be no barriers to the entry of new firms or exit of old firm to or from the industry.
We considered competitive industry because we wanted to contrast such an industry with a monopoly. Under monopoly, there is only one firm producing a product. Entry into the industry is not free; because if entry of an additional firm is allowed, it no longer remains a monopoly. Thus, under monopoly, the firm is the industry or the distinction between the firm and the industry disappears under conditions of monopoly.
Between these two extremes, we get a wide range of marked structures where there are more than one firms product. Strictly speaking, all firms producing the same i. In practice, however, we speak of the cotton textile industry, though all cotton textile units do not produce identical textile products. Though the sugar produced by sugar factories might have different grades of quality, we speak of one sugar industry. Similarly, we speak of the automobile industry, steel industry, cement industry and so on.
It should, therefore, be clear that all firms, producing a given product, together make an industry. The firm and the plant. A plant is a technical unit of a given capacity of output. For example, we speak of sugar plant What is it? It is nothing but an assembly of several machines, linked together not necessarily physically but by processes also capable of producing a given quantity of sugar per day.
There is, for example, a weighing system which weighs the sugarcane, the conveyor system what takes the cane for crushing, the crushing machinery, and the machinery for removing impurities and so on, until finally sugar is filled in gunny bags. This whole plant taken together is capable of producing a given quantity of one product sugar. A plant thus produces any one product, obviously in cooperation with other factors of production. A sugar plant will produce sugar in co-operation with workers, managers, technicians etc.
The firm, on the other hand, is an economic unit. The decisions are taken by the firm. What quality of sugar is to be produced, how much of it is to be produced, to which market it should be sold and from which farmers the sugarcane should be downloadd etc.
It is not necessary that a firm has only one plant. Thus, for example, a sugar factory i. When we say one management, we are implying one firm though there are various plants, it is also possible that a plant supplies goods to more than one firms. The difference, basically, is that between a technical unit and an economic unit.
One last word about a firm. We speak of the producer or the entrepreneur. Whenever we speak of a producer or an entrepreneur we imply a firm that takes decisions. Internally the decisions might be taken by a group of directors, managers or a sole proprietor - our unit on the supply side is the firm. Types of Business Organisations. A business organization is concerned with how production and sale of a commodity are organized.
In this chapter, we study various forms of business organization. The main types of business organization are as follows: In a capitalist economy, the first four types of business organizations are set up in the private sector.
The private sector is owned by private individuals, families or groups of individuals. It is characterized by private ownership in the means of production, economic freedoms and profit motive. In addition to the first three types of business organization, there are also Joint Hindu Family Firms in the private sector in India and Business Organizations of the New Millennium.
Public Sector:. The public sector includes public or state enterprises like railways, post sand telegraphs, etc. The public sector is owned and controlled by the State. They are constituted as companies, public corporations and departmental undertakings. There are many co-operative organizations in the private sector. But they are non-capitalist in nature, e. Joint Sector:. Joint sector organizations or enterprises are jointly owned by the public and private sectors.
But day-today management is left to the private sector. The following chart indicates various forms of business organization: Types of Business Organization. A Definition: Individual or sole proprietorship which is also called sole trader ship or single entrepreneurship or proprietary firms is the most common, the simplest and the oldest form of business organization.
In such a unit, a single man called proprietor organizes a business. It is owned, managed, controlled and directed by him. He fixes the amount of capital to be invested, his own or borrowed , uses his own labour and that of his family members, hires factors, whenever necessary, organizes production as efficiently as possible and markets the product at the highest possible prices.
He assumes full responsibility for all business risks. He alone enjoys all profits, if he is successful and suffers all losses, if his business fails. B Characteristics: The definition of sole proprietorship Proprietary Firm gives its characteristics or features which are as follows: A single person initiates a business whose ownership lies in his hands.
He enjoys full powers to fix the lay-out of his business firm. Organization and Control: A single person organizes and manages his business according to his experience and efficiency. He has full powers to conduct his business in any manner he likes. He need not consult any one. He is also not required to take approval or agreement from others. The owner uses his own capital. He may also borrow capital to invest it in his business and thereby expand it. All the profits of business earned by the owner are enjoyed by him alone.
These profits of business are not shared with other persons. On the other hand, if there are losses, he has to bear them alone entirely. Unlimited Liability: His liability is unlimited for all his debts. If he fails to clear his business debts, all his private property can be attached by his creditors. Easy to Form: It can be easily set up. It is not subject to any special legislation.
So no legal formalities are involved in starting such a concern by any person who is of major age, i. A sole trading concern cannot be legally separated from its owner or proprietor. The owner and organization are the same. The life of such a concern depends upon the life of its proprietor. This type of organization is found in agriculture, retail trade, hotel, printing press, tailoring etc.
Such a concern can be easily started without any legal formalities. There is also little government interference. Also it is simple to manage and control and. He can also get finance on personal credit. The proprietor can take quick decisions and prompt action regarding his business, its location, method of production etc.
He need not consult others about these problems. He would always take personal interest in the business with a view to finding out causes of loss and waste of resources.
He would then take measures to remove them. Thus he would maximize his profits. He has direct contact with his customers, so he can personally attend to all their requirements.
He can produce goods according to their desires, tastes and needs. His attempts to meet their needs will help him to increase his sales and profits. Thus it is suitable for small business. He has direct and continuous contact with his employees. So he can establish cordial relations with them. This is because he will be in a continuous touch with them. He can also supervise them directly. Hence any scope for conflict between workers and himself can be avoided. He will always attempt to work hard, efficiently and continuously.
This helps to enjoy maximum profits and avoid any loss for his liability is unlimited. He can carry on his business in secrecy.
He is not required to give publicity to the activities of his concern nor disclose his profits to the public. He can also make use of any new idea for his business. Just as a sole trader can easily start a business, so also he may easily wind up his business at any time.
Its overhead expense are low. Hence it is economical. The number of employees employed by him is low. Hence the working expenses can be minimized. Any change in business can be easily introduced without consulting any body. So it is flexible and elastic. It can easily and quickly adapt to changes in the market conditions.
It is easily transferable to heirs. It promotes self-employment, self-reliance, development of one's personality, self-confidence etc. It is also subject to lower tax burden than other forms of business organizations. It helps prevent concentration of wealth and income in the hands of a few persons.
The amount of capital which an individual can command is limited. He has to depend mainly on his own savings. So it would be difficult for him to expand his business activities much. It may also be difficult for him to raise additional capital by borrowing from banks. Hence the size of his business is small. Unlimited Liability and Risks: It may be very risky for him to invest in a particular business. This is because if he adopts a wrong policy, he may lose everything and also become insolvent.
This is because his liability is unlimited. This implies that if his debts exceed his business assets and if he suffers a loss, he will have to use his private property to clear his debts. So the unlimited liability restricts his business activities. It may not also be possible for him to attend personally to all the activities of his concern such as correspondence, maintaining accounts, advertisements, supervision, arrangement of finance etc.
He cannot undertake all activities alone efficiently. Further his business activities may be spread in different places and he may not possess all the qualities and skill required for an efficient management, supervision and control. The limited managerial ability may make it difficult for a sole proprietor to face competition in his business which is subjected to many changes.
A sole trader cannot secure many of the economies of large - scale production such as download of raw materials at low prices, advantages of specialization etc. On account of the limitations of capital, ability and skill, the proprietor is likely to remain weak in respect of bargaining and competition. All the decisions about his business are taken by the sole proprietor. Some of his decisions may prove to be wrong.
This may involve him in losses and ruin. Such a concern may be closed on the death of the proprietor. This is because he may not have heirs to run it or they may not like to continue in his business. Hence the business may not be continued. A Definition and Meaning: The Indian Partnership Act, , defines the partnership as "the relation between two or more persons who have agreed to share profits of a business carried on by all or any one of them acting for all.
They pool their capital and undertake all risks associated with their business. Thus there is joint ownership, management, control and risk - taking. The persons who own the partnership concern are called "partners" Collectively, all partners constitute a "firm". B Characteristics or Features of a Partnership Firm: It is formed voluntarily by an agreement between two or more persons carrying on a particular business for common benefit.
It may also be formed to carry on certain trade, profession or lawful occupation. Age Limit: Only persons who have attained the major status can become partners. In other words, minors cannot become partners. A partnership is formally based upon a partnership deed or agreement. It indicates the names of partners, the shares of individual partners in the capital, their rights and duties, proportion for sharing profits and losses by each of them etc.
The registration of a partnership firm is voluntary. It may or may not be registered. However, if the partners so desire, it can be registered at any time. The partners are joint owners of the property of the firm. Its property must be used only for the business purpose for which the partnership was formed. It cannot be used by any partner for his personal purposes.
All the partners enjoy equal rights of management. So every partner can participate in management. But for the sake of convenience, a single partner may be given right to manage the firm. No remuneration is paid to any partner for services rendered by him to the firm.
Each partner is supposed to work in the best possible manner for promoting the interest of the firm. It consists of minimum two persons and maximum 20 persons in the case of general business and maximum 10 persons in the case of banking.
Any business selected by the partners can be undertaken. All of them or any of them can carry on business activity for all. There is a sharing of profits and losses. Profits can be distributed according to the partnership agreement or the capital ratio.
Profit may be shared equally by partners, if nothing is mentioned in the partnership deed. A manager who is an employee of the firm may also be given a part of the profits.
A partnership is based upon mutual confidence and trust of partners in each other or one another. Every partner must be honest regarding the partnership dealings and should provide all the facts and information regarding their business to all partners. In a partnership firm, some offer capital, some management and organizational abilities and others, technical skills etc. Some of the partners who provide only capital, and enjoy limited liability as in England are called Sleeping or Dormant or Special Partners while others who run and manage the concern are called Active or Working or General Partners.
But, in India all partners have unlimited liability. The liability of all partners is unlimited. Hence all partners are, jointly and severally, held responsible for the losses or debts of the firm to the full extent of their personal assets.
Creditors are entitled to attach assets of any one partner or those of others so as to recover their dues. A partner cannot transfer his powers or rights to any third party to do any work of the firm on his behalf.
If he cannot do it himself, he has to retire from the partnership firm. However, a partner may admit another person as a new partner if other partners give their consent.
Every partner carries on business activities on behalf of the firm. So he binds the firm and other partners for every commitment that he makes in conducting business.
Likewise he is bound by the business activities of the other partners. Thus every partner becomes a principal at one time and an agent of the firm at another time. Hence a partnership firm can be run by one or more partners acting on behalf of all partners. A partnership firm may not last long. It may be dissolved by any partner after giving a written notice to other partners and a new partnership may be formed by the remaining partners.
It may also be dissolved due to the death of a partner or due to an adjudication of a partner as an insolvent. Such partnership firms are found among builders, solicitors, chartered accountants, small factories etc. A partnership firm can be easily formed. Its formation does not involve legal formalities. More or Additional Capital: Under the partnership, more funds can be raised by all partners to start a business on a large scale.
Because of the reputation of the partners and their contacts, it will not be difficult for a partnership concern to borrow from banks on easy terms. There is a greater efficiency in the working of partnership concerns because different partners can be assigned those tasks for which they are best suited as per their qualifications, experience, abilities, talents and aptitude.
Thus, there would be specialization in the task of every partner. A partnership firm can expand its business by admitting more partners and raising more capital from them and thereby attempt to earn more profits. It is also quite flexible and capable of adapting itself to changed circumstances of business by means of quick decisions and prompt action by the partners, i. Thus the organizational structure of a partnership firm is flexible.
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The decision taking by a partnership firm does not involve any legal procedure. Its operations are not also subject to any restriction by a government. It may elicit full co-operation from workers by keeping a close touch with them, by understanding and solving their difficulties. It can secure all the advantages of large scale production such as advantages of division of labour, bulk downloads of raw materials at lower price, best use of machinery etc.
All the activities of partnership concerns need not be given any publicity. Hence they can carry on their activities under secrecy so far as the outsiders are concerned.
It is not compulsory for a partnership concern to publish its profit and loss account and its balance sheet. Outsiders are not given its business secrets. Business risks are equally shared by all the partners. In case business fails, they would suffer losses. But if it succeeds, they will enjoy profits. Hence, they will try to manage it efficiently and make their business profitable by putting the assets of the firm to the best uses so as to avoid waste.
Every partner has a right to take part in the partnership business. Since there is unlimited liability, every partner will keep a close watch on the activities of other partners so that losses are avoided and profits are maximized. Thus the interest of every partner is protected. Since there is unlimited liability, the business status of a partnership firm is raised.
Hence it will be easy for it to get loans from financers. In a partnership firm, there is a combination of capital, abilities and skill. Some partners offer capital. Some partners are experts in management and organization.
Some of them possess technical skill. As a result of the pooling of the expert services of all partners, it is possible to run a partnership firm efficiently. In case a partner is not happy with the working of his partnership firm, he can legally dissolve it. He can do so by giving a written notice to the other partners indicating his decision to resign from it. All the business decisions are taken with mutual consent of all partners. They hold mutual consultations and discussions on important matters.
Thus every partner benefits form the advice of other partners. As a result, their wisdom is pooled for the benefit of the firm. On account of the principle of unlimited liability, any bad or irresponsible partner may ruin all the partners. This is because his activities will be binding on all other partners. Every partner runs a considerable risk for any one of them is, jointly or severally, held responsible for the debts or losses of the firm.
Further due to unlimited liability, the partners may not undertake any risk in business or take any hasty step to expand business. Hence the spirit of enterprise is checked. Limited on Size of Business: It is also difficult to increase the size of business on account of limited amount of capital which the partners can raise or provide from their own sources.
A partnership firm cannot also admit more than 20 members for raising additional resources. This limitation on the number of partners restricts the growth of a partnership form. A partnership can be dissolved by any partner by giving a written notice to other partners.
So this type of business is short-lived. Also default, bankruptcy or insanity of any one of the partners leads to dissolution of the firm unless a provision is made in the partnership deed to the contrary.
A share in a partnership firm cannot be transferred by any partner without the consent of all the partners. He cannot also transfer his powers or rights to any third party to do any work of the firm on his behalf. The partners may not agree upon certain matters of business policy.
There might by differences of opinion, clashes of interest, mistrust, disputes etc.
Such differences among partners may result in dissolution of partnership firms. The activities of a partnership firm are kept secret from outsiders. It is not required to publish its accounts.
It is also not subject to legal restrictions. Hence people may not fully trust a partnership concern. There is no government control or supervision on the activities of a partnership concern. Hence there is lack of public confidence in such concerns. Some of the partners may leak important information to outsiders. This may happen when there are differences of opinion among the partners. Hence it may be difficult to maintain business secrecy in a partnership firm. The activities of a partner are binding on the partnership firm.
Some partners may not behave properly. Some of them may be dishonest.
Hence they may misuse their rights and bring the firm into difficulties and ruin its business. As a result, the honest and efficient partners will have to suffer losses. In a modern economy, the predominant form of business organization is the Joint - Stock Company which is called Corporation in the U. Such form of business organization is necessary to undertake any business or industry on a large scale. This is because it overcomes the drawbacks of sole proprietorship and partnership.
In the words of Mr.
SCDL - PGDBA - Finance - Sem 1 - Managerial Economics
Kuchhal, a joint -stock company is "an incorporated association which is an artificial legal person, having independent legal entity, with a perpetual succession, a carrying a limited liability. Thus a joint-stock company is a voluntary incorporated association of shareholders or stockholders who contribute to the common stock, i. But all of them do not directly manage it. It is managed by some directors elected by shareholders.
Their liability is limited to the value of shares held by them. They share in profits and losses. B How Is It Formed? Minimum seven persons have to come together to start a joint stock company. Those who take initiative to start it are called promoters. The promoters of a company have to get it incorporated by filing with the Registrar of Companies various documents such as Memorandum of Association, Articles of Association, Prospectus, List of Persons who have agreed to act as directors etc.
The Memorandum of Association: This gives information about the company, namely, its place of location, its objects, the amount of capital to be raised etc. The Articles of Association: This gives us information about the rules and regulations and bye-laws of the company. The Registrar of Joint - Stock Companies is given these documents. After going through these documents, the Registrar issues a Certificate of Incorporation. After this, the company comes into existence.
Hence the registration of a joint - stock company is compulsory. C Features of a Joint - Stock Company: A joint - stock company is a voluntary organization or association of shareholders. Legal Person: It is a legal or an artificial person as a result of law. It has no physical existence.
But it functions as a separate and independent legal person. It is distinct from its shareholders and its directors. It has a perpetual or continuous succession under the law because it continues to exist even if some shareholders or directors die or become insolvent or leave the company by transferring their shares.
It has a common seal to be affixed on its contracts and legal documents. Its membership is open to any person in any part of a country. Liability of shareholders is limited to the nominal value of shares held by them.
The shareholders are free to transfer or sell their shares to any person.
It is owned by its shareholders. But it is managed by a Board of Directors elected by shareholders. The profits of a joint - stock company are annually distributed as dividends among its shareholders. A company raises its capital in two ways, namely, i ii Through the sale of shares or stocks and Through the sale of bonds or debentures.
Sale of shares of stocks b Types of Share Capital: A company divides its share capital as: Authorized Capital refers to the maximum amount which can be raised by a company by selling shares. This may be, say, Rs. Issued Capital: Issued Capital refers to that part of the authorized capital which is issued to the public for subscription by dividing into shares. Subscribed Capital refers to that part of the issued capital which is actually subscribed by the public.
This may be say, Rs. Paid - up Capital refers to that part of the subscribed capital which the public directly pay-up to the company, as a part payment of the value of their shares. The remaining amount of the subscribed capital is paid after further calls from the company.
Types of Shares: The capital of a company can be divided into three types of shares: Equity or Ordinary Shares: Such shares form the main basis of the finance of a company. The holders of such shares get dividend only after the preference shareholders are paid out of its profits.
Hence they bear maximum risk. This is because they do not get any dividend if the company does not make any profit. At times when profits are high, they get much more than the rate of dividend paid to preference shareholders. The ordinary shareholders have the right to vote to elect the Board of Directors of the Company. They have also the right to vote on policy decisions of the company. Hence they control the affairs of their company. Preference Shares: These shareholders enjoy a preferential or prior right over equity shareholders to the profit of a company.
They are entitled to a fixed rate of dividend after paying interest on debentures and before any dividend is paid to equity shareholders. However, preference shares are classified as: Simple or Non-Cumulative Preference Shares: People holding such shares are entitled to a fixed rate of dividend only in the year in which profits are made. They get the dividend before it is paid to other types of shareholders. Cumulative Preference Shares: Such shareholders are entitled to a fixed rate of dividend even when there are no profits in any year.
These claims will stand as arrears to be paid first out of subsequent year's profit before it is paid to other types of shareholders. Participating Preference Shares: The holders of such shares are paid a fixed rate of dividend before it is paid to other classes of shareholders.
They are also entitled to participate in the balance of profits,in a certain proportion along with equity shareholders, after reasonable claims of these equity shareholders are met. Redeemable Preference Shares: Capital raised by issuing such shares must be paid back after a certain period of time either out of profits or by raising fresh capital by issuing new shares or by selling some of the assets of the company.
The preference shareholders do not enjoy normal voting rights. However they have a prior claim on the assets of the company in the event of its liquidation. They are called the Promoters' or Management's of Founders' shares. The holders of such shares are paid dividend last out of the profits left after meeting the claims of ordinary and preference shareholders and the reserve funds. Normally they are issued to promoters of a company but they may also be issued to public.
If dividend paid to other classes of shareholders is restricted, the deferred shareholders will enjoy a bigger share of profits. But if there are no profits, they do not get anything. The deferred shareholders enjoy special or preferred voting rights. But the Indian Companies Act. Of , has eliminated the system of issuing deferred shares by public limited companies.
However a private limited company can issue deferred shares also. Sale of Bonds or Debentures Debentures: A company may also raise additional finance by borrowing from the public for a specific period of time, say, 15 to 25 years, at a particular rate of interest.
This is done by issuing debentures or bonds. A debenture is an undertaking by a company to repay the borrowed money on or before the specified date at a particular interest rate, irrespective of profit or loss made by the company. The capital raised by selling debentures is like taking loans form the public.
Hence, a debenture-holder is a creditor of a company with no voting right. As such, he cannot directly interfere with the activities of its management. A secured debenture is secured against the assets or property of a company. A simple debenture is not secured against its assets or property. A company is also free to issue convertible debentures which can be converted into equity shares after a period of time, say, 5 to 10 years, at a ratio fixed in advance.
Types of Joint - Stock Companies: On Ownership Basis, all types of the registered companies in the private sector can be classified as: But a public limited company can have any number of the members of the public but it should have a minimum 7 members.
Public limited companies are required to issue prospectus before allotting shares. But it is not necessary in the case of private limited companies. Public limited companies must submit statutory reports to the Registrar of Companies.
But private limited companies are not required to do so. A public limited company has to send its duly audited accounts to its shareholders. But a private limited company is not required to publish its accounts for the information of the public. However a private limited company must send three certified copies of its balance sheet to the Registrar of Companies. The shares of a private limited company cannot be freely transferred on stock exchanges.
But the shares of public limited companies can be freely transferred on stock exchanges. The share of a private limited company openly invites public to subscribe to its shares or debentures. But a private limited company cannot appeal to the public to do so.
A private limited company can start its business after it is registered. But a public limited company can do so only after it gets a certificate for commencement of business.
A private limited company should have minimum two directors. But a public limited company must have at least three directors. A private limited company may increase its number of directors without the government's approval. But a public limited company can do so only after getting the government's approval. But a private limited company can appoint a firm a as its manager. But there are restrictions in this respect on a public limited company. A partnership may be converted into a private limited company to enjoy the advantages of limited liability.
G Management of Joint - Stock Companies: There is separation between ownership and management in a joint-stock company.
Its ownership is in the hands of shareholders. But they do not manage it directly. They elect a Board of Directors which manages the company.
The policies of the company are laid down by the directors. These policies are executed by salaried managers and executives. The principle of limited liability is applicable to a joint-stock company. Hence we write word "Ltd. Since the liability of shareholders is limited, risk faced by them are reduced. Hence even if a company suffers losses, they need not pay more than the face value of shares downloadd by them.
So the creditors of the company cannot make personnel attachments on their private property. Hence people are induced to invest their money in such companies. Large Amount of Capital: Large - scale production is facilitated under the company form of business organization. This is because it is easy for a company to raise a large amount of capital, by accepting fixed deposits from the public.
Thus the savings of the people can be productively used. The shares of a company are transferable whenever one likes. Hence it would encourage small savers to invest in the shares of companies.
If they do not like to keep their funds in a particular company, they would be free to sell their shares on stock exchange and invest in some other companies. Thus the money of a share holder is not blocked. At the same time, this does not affect the company in any way. This is because the sales of shares of a company by some are counterbalanced by the download of these shares on a stock exchange by others.
The shares of a company are of different types, namely, equity shares, simple preference shares, cumulative preference shares etc. The equity shares may be downloadd by people who want take greater risks.
On the other hand, those who do not want to take any risk may invest in cumulative preference shares. Thus, by providing a wide choice to shareholders, it is possible for a company to raise a large amount of capital.
Risky Enterprises: A joint-stock company can start a risky enterprise. This is because the risks associated with a business are greatly reduced due to the limited liability of shareholders and a small value of the shares of each shareholder. Further an individual may download shares of different companies so as to minimize the loss still further. So even if there is a loss in the case of one company, the individual shareholders may not be affected much. There is a less danger of misappropriation of funds.
This is because the audited accounts of the companies must be published. Many individuals possessing a large amount of capital and not having capacities to start and run a business can invest in companies. Other persons, having no capital but possessing capacities to manage a business, can secure jobs as managers and executives in companies. In a joint-stock company, the ownership and management are separated. The shareholders are owners but they do not manage it.
It is managed by experts in different fields, who work under the direction of the Board of Directors. A joint - stock company can enjoy the economics of scale such as advantages of specialization and division of labour etc. Since it has a perpetual succession, a company continues to carry on its business even if some of the original shareholders leave the company or die or become insolvent.
So it is permanent and stable in nature. So the business activities can be undertaken with a long-term objective. Since companies are subject to rules and regulations of the Companies Act, they are supposed to work in the interest of their shareholders.
There is democratic management in a joint-stock company.
This is because the directors are elected by shareholders from time to time. The elected board of directors manage the company successfully because of their wide experience, abilities and efficiencies. Because of its continuous existence and a large amount of resources at its disposal, a company can conduct research and experiments, and apply the fruits of research to industrial uses. This will enable it to improve the quality of its product, reduce its cost of production and thereby enjoy good profits in due course.
The actual management of a joint - stock company is in the hands of salaried executives. They have no personal interest in the functioning of their company. Hence they may not always manage the Some of them might even leak out secrets of their company to rival companies.
On account of their: They may not take an active part in the affairs of their company. They are also scattered. They are interested only in dividend. So a few big shareholders manage to get directorships and take all decisions.Labour Relations: More or Additional Capital: Such societies are controlled and regulated by the government. To cap it all, the firm is expected to make as much profits as possible. It is a centre, where the means of production are collected, the production is done, and the sale and distribution of production is also affected.
But a private limited company cannot appeal to the public to do so. Since the liability of shareholders is limited, risk faced by them are reduced. Issued Capital refers to that part of the authorized capital which is issued to the public for subscription by dividing into shares. Marginal efficiency of capital, in its turn, is determined by the supply price of capital asset and the propensity yield of capital asset 9.
Uncertainty and risk arise mainly due to uncertain behaviour of the market forces, i.