Category: Economics Content

Economics Content, and Business, Finance, Microeconomics, and Macroeconomics, It’s the study of scarcity, the study of how people use resources and respond to incentives or the study of decision-making. It often involves topics like wealth and finance, but it’s not all about money. Economics is a broad discipline that helps us understand historical trends, interpret today’s headlines, and make predictions about the coming years.

Also learn, Economics ranges from the very small to the very large. The study of individual decisions is calls microeconomics. The study of the economy as a whole is calling macroeconomics. A microeconomist might focus on families’ medical debt, whereas a macroeconomist might focus on sovereign debt.

Economics focuses on the behavior and interactions of economic agents and how economies work. Microeconomics analyzes basic elements of the economy, including individual agents and markets, their interactions, and the outcomes of interactions. Individual agents may include, for example, households, firms, buyers, and sellers. Macroeconomics analyzes the entire economy (meaning aggregated production, consumption, savings, and investment) and issues affecting it, including unemployment of resources (labor, capital, and land), inflation, economic growth, and the public policies that address these issues (monetary, fiscal, and other policies). See glossary of economic.

  • Unemployment: Meaning, Definition, Types, and Causes

    Unemployment: Meaning, Definition, Types, and Causes

    What does it mean by Unemployment? Unemployment, as defined by the International Labor Organization, occurs when people are without jobs and they have actively looked for work within the past few weeks. This article explains Unemployment in its Meaning, Definition, Types, and Causes. They define it as a situation where someone of working age is not able to get a job but would like to be in full-time employment.

    What is Unemployment? explain into; Meaning, Definition, Types, and Causes.

    It is a term referring to individuals who are employable and seeking a job but are unable to find a job. Furthermore, it is those people in the workforce or pool of people who are available for work that does not have an appropriate job.

    Usually measured by the unemployment rate, which is dividing the number of unemployed people by the total number of people in the workforce, they serve as one of the indicators of an economy’s status. The detailed study of any subject must always start by understanding the definition of the subject at hand. This is because the definition has profound implications for the way the study of the subject stands conducted.

    The study of unemployment [Hindi] is a classic example of this case. We often come across the statistics which exist stated in the newspaper and make certain assumptions. However, in this article, we will have a closer look at the definition of unemployment and see why the assumptions could be wrong.

    Definition of Unemployment:

    The labor force consists of all persons working and all persons though not working, are searching for work. One who is not in the labor force cannot be the employee. What is the definition of unemployment?

    According to A.C. Pigou;

    “Unemployment means, all those who are willing to work are not able to find a job.”

    Unemployment may define as;

    “A situation in which the person is capable of working both physically and mentally at the existing wage rate, but does not get a job to work.”

    The official definition of unemployment is as follows: They occur when a person who is a participant in the labor force and is actively searching for employment is unable to find a job. Economists describe them as a condition of jobless within an economy. It is a lack of utilization of resources and it eats up the production of the economy.

    It can conclude that unemployment inversely relates to the productivity of the economy. They generally define it as the number of persons (It is the percentage of the labor force depending on the population of the country) who are willing to work for the current wage rates in society but do not employ currently.

    They reduce the long-run growth potential of the economy. When the situation arises where there are more other resources for the production and no manpower leads to wastage of economic resources and lost output of goods and services and this has a great impact on government expenditure directly.

    Types of Unemployment:

    The following types of Unemployment below are;

    1] Educated:

    Among the educated people, apart from open unemployment, many stand underemployed because their qualification does not match the job. The faulty education system, mass output, preference for white-collar jobs, lack of employable skills, and dwindling formal salaried jobs are mainly responsible for them among educated youths in India. Educated they may be either open or underemployed.

    2] Frictional:

    It is a temporary condition. This unemployed occurs when an individual is out of his current job and looking for another job. The period of shifting between two jobs exists known as frictional unemployment. The probability of getting a job is high in a developed economy and this lowers the probability of frictional unemployment. There are employment insurance programs to tide over frictional unemployment

    3] Structural:

    Structural it occurs due to the structural changes within an economy. This type of unemployment occurs when there is a mismatch of skilled workers in the labor market. Some of the causes of structural are geographical immobility (difficulty in moving to a new work location), occupational immobility (difficulty in learning a new skill), and technological change (introduction of new techniques and technologies that need less labor force).

    Structural unemployment depends on the growth rate of an economy and also on the structure of an industry. This type of unemployment arises due to drastic changes in the economic structure of a country. These changes may affect either the supply of a factor or demand for a factor of production. Structural employment is a natural outcome of economic development and technological advancement and innovation that are taking place rapidly all over the world in every sphere.

    4] Classical:

    The next Classical unemployment type stands also known as the real wage or disequilibrium unemployment. This type of unemployment occurs when trade unions and labor organizations bargain for higher wages, which leads to a fall in the demand for labor.

    5] Cyclical:

    Cyclic unemployment when there is a recession. When there is a downturn in an economy, the aggregate demand for goods and services decreases, and the demand for labor decreases. At the time of recession, unskilled and surplus laborers become unemployed. Read about the causes of the economic recession.

    It causes trade cycles at regular intervals. Generally, capitalist economies are subject to trade cycles. The downswing in business activities results in unemployment. Cyclical unemployment is normally a shot-run phenomenon.

    6] Seasonal:

    A type of unemployment that occurs due to the seasonal nature of the job exists known as seasonal unemployment. The industries that stand affected by seasonal unemployment are the hospitality and tourism industries and also the fruit picking and catering industries. It is unemployment that occurs during certain seasons of the year.

    In some industries and occupations like agriculture, holiday resorts, ice factories, etc., production activities take place only in some seasons. So they offer employment for only a certain period in a year. People engaged in such types of activities may remain unemployed during the off-season.

    Unemployment Meaning Definition Types and Causes Image
    Unemployment: Meaning, Definition, Types, and Causes; Image from Pixabay.

    Causes of Unemployment:

    There are several causes of unemployment and it depends on prevailing conditions of the economy and also on an individual’s perception. The following are some of the causes of unemployment:

    • Technology change is one of the serious causes of unemployment. As technology changes employers search for people with the latest technical caliber. They look for better substitutes. Job cuts due to changes in technology bring problems to society.
    • A recession is a prime factor for unemployment in most countries. The financial crisis in one country can affect other countries’ economies due to globalization.
    • Changes in global Markets are another important factor. Any country’s economy is adversely affected when its exports are down the line due to changes in global markets, and a price increase. With this production suffers and companies are unable to pay on time and this increases the rate of unemployment.
    • Job dissatisfaction by many employees is another cause, this happens when less attention is given by the employers to the performance of the employee. This leads to a lack of interest and desire to work and they become inevitable, as employees deliberately lose their jobs.
    • Employment discrimination based on caste, religion, race, etc., in the companies, an employee loses the ease to work in the organization.
    • A negative attitude by the employees toward employers creates an unhealthy environment in the organization. And this ultimately leads to unemployment.

    Challenges of Unemployment:

    The following challenges of unemployment below are two types;

    1] Challenges to Individuals;

    It is not only the responsibility of the government to take initiation in reducing the unemployment problem; but, even individuals also have to take the step to overcome this problem. A lot of adjustments are to be done by the individuals to come out of this situation.

    Without taking hasty decisions like suicide, the frustration they can plan and do proper adjustments like debt adjustments, expend their liquid assets when it is required, cut down their expenditures, and also encourage other family members to find jobs so that they can compensate in income generation.

    An individual has to increase their capabilities and participate in proper counseling; and, training sessions to improve their performance levels and enhance their skills. They have to think about self-employment apart from their job with the help of their family members. This also improves their standard of living.

    2] Challenges to Government;

    Several policies have been made to reduce the unemployment problem in the economy. Government just needs to focus on the execution of these policies and work out hard in alleviating this problem. The government can expand capital projects like new roads, construction of new hospitals; and, major infrastructural projects which can become a platform for the creation of more jobs in the economy.

    It increases income generation for the economy. Reduction in taxation can bring higher purchasing power to consumers. It gives some relaxation to consumers in spending their disposable income. The government should take proper steps in investment decisions on huge projects like iron and steel, aviation, etc., proper policies are to be made to boost up these projects thereby creating employment opportunities.

    Proper recruitment, training, and development are needed by every company to increase the capabilities of employees, enhance their skills, and show great performance in the upbringing of the organization. The government can take initiation in reducing the interest rates and it enhances the demand for credit and improves savings by the individuals. Necessary steps are to take by the government in increasing the productivity for the overall development of the country and reducing the unemployment problem in the economy.

  • Minimum Wages: Definition, Arguments, and Objectives

    Minimum Wages: Definition, Arguments, and Objectives

    Minimum wages can stand set by statute, the decision of a competent authority, a wage board, a wage council, or by industrial or labor courts or tribunals. Minimum wages can also exist set by giving the force of law to provisions of collective agreements. It commonly accepts that workers should give at least minimum wages to enable them to lead a minimum standard of living. Then a question arises – What is a minimum wage? It is, however, difficult to define “minimum wage’’. However, it may define as a wage that is just sufficient for the worker to keep his body and soul together.

    Introduction to Minimum Wages: Meaning, Definition, Arguments, and Objectives.

    First, do you know “What does mean the Wages?” Now learn, that the Minimum wage has stood defined as the minimum amount of remuneration; that an employer requires to pay wage earners for the work performed during a given period; which cannot reduce by collective agreement or an individual contract. The purpose of minimum wages is to protect workers against unduly low pay. They help ensure a just and equitable share of the fruits of progress to all; and, a minimum living wage for all who stand employed and in need of such protection.

    Definition of Minimum Wages:

    They can also be one element of a policy to overcome poverty and reduce inequality, including those between men and women. Minimum wage systems should define and design in a way to supplement and reinforce other social and employment policies, including collective bargaining; which uses to set terms of employment and working conditions.

    The committee on fair wages defines the minimum wage as an irreducible (minimum) amount considered necessary for the sustenance of the worker and his family; and, the preservation of his efficiency at work. The Fair Wages Committee considered that “a minimum wage must provide not merely for the bare subsistence of life but the preservation of efficiency of the worker. For this purpose, the minimum wage must also provide for some measure of education, medical requirements and amenities”.

    As well as:

    Such a minimum wage may fix by an agreement between the employer and the workers but it is generally determined by legislation. The workers generally demand that the minimum wage should base on the standard of living but the employers argue; that it should base on the productivity of labor and the capacity of the industry to pay.

    Minimum wages defines as,

    “The minimum amount of remuneration that an employer requires to pay wage earners for the work performed during a given period; which cannot reduce by collective agreement or an individual contract.”

    But it should note that while fixing the minimum wage, the worker’s family should also take into account. The wage should sufficient not only to maintain himself but also his family in a reasonable standard of living. Then a question arises – What is the size of the worker’s family? It now generally accepts that a worker’s family consists of five-person – the worker and his wife and three children.

    Minimum Wages Definition Arguments and Objectives Image
    Minimum Wages: Definition, Arguments, and Objectives; Image credit by thedailybeast.

    The minimum wage must fix in such a way that it is sufficient to provide a reasonable standard of living to the worker and his family. Thus, while fixing the minimum wage, three principles should take into account – the living wage, the fair wage, and the capacity of the industry to pay. While fixing the minimum wage, the capacity of the industry should take into account. If a particular industry is not able to pay the minimum wages to its workers; then it has no right to exist in the business.

    Background:

    A minimum wage was introduced by the Labour government on 1 April 1999 at a rate of £3.60 per hour for workers over 21 years of age, and £3 per hour for 18–21-year-olds; this was raised by 10p per hour in 2000. At the time, the Low Pay Unit estimated that 2 million people (8.3 percent of the workforce) would gain from this, the main beneficiaries being women, especially in social care (e.g. child care) and cleaning jobs. Other areas where there is traditionally low pay, and which would benefit, were young people (200 000); hospitality (295 000); and retail (300 000).

    Arguments for introducing a Minimum wage and also Against:

    The following are;

    For introducing:
    Arguments for introducing a Minimum wage
    Arguments for introducing a Minimum wage.
    For Against:
    Arguments against introducing a Minimum wage
    Arguments against introducing a Minimum wage.

    Objectives of Minimum wages:

    The objectives of minimum wages are as follows:

    • To prevent the sweating of workers in organizing or unorganized industries.
    • Prevent the exploitation of workers and enable them to obtain wages according to their productive capacity, and.
    • Maintain industrial peace.

    In organized industries where the trade unions are powerful; the employers generally yield to the demands of the workers for fixing a proper wage. But in the unorganized industries where the trade unions are not found, government interference and legislation become essential to ensure that the laborers do not exploit and pay at least the minimum wage.

  • Utility Analysis; Meaning, Definition, Features, and Concept

    Utility Analysis; Meaning, Definition, Features, and Concept

    Understand utility analysis and its significance in consumer behavior. Learn about cardinal utility, its assumptions, features, and concept. Utility Analysis; The Cardinal Approach or Utility Analysis to the theory of consumer behavior is based upon the concept of utility. This article is to explain Utility Analysis Meaning, Definition, Assumptions, Features, and Concept. It assumes that utility is capable of measurement. It can add, subtract, multiply, and so on. Cardinal utility analysis is the oldest theory of demand which provides an explanation of consumer’s demand for a product and derives the law of demand which establishes an inverse relationship between price and quantity demanded of a product.

    Utility Analysis or Cardinal Approach; Meaning, Definition, Assumptions, Features, and Concept.

    Recently, cardinal utility approach to the theory of demand has been subjected to severe criticisms and as a result, some alternative theories, namely, Indifference Curve Analysis, Samuelson’s Revealed Preference Theory, and Hicks’ Logical Weak Ordering Theory have been propounded.

    According to this approach, the utility can be measured in cardinal numbers, like 1,2,3,4, etc. Fisher has used the term “Util” as a measure of utility. Thus in terms of cardinal approach, it can be said that one gets from a cup of tea 5 utils, from a cup of coffee 10 utils, and a Rasgulla 15 utils worth of utility.

    Meaning and definition of Utility Analysis:

    The term utility in Economics is used to denote that quality in a good or service by which our wants are satisfied. In, other words utility is defined as the want satisfying power of a commodity.

    According to Mrs. Robinson,

    “Utility is the quality of commodities that makes individuals want to buy them.”

    According to Hibdon,

    “Utility is the quality of a good to satisfy a want.”

    Assumptions of Utility Analysis:

    Cardinal utility analysis of demand is based upon certain important assumptions. Before explaining how cardinal utility analysis explains consumer’s equilibrium regarding the demand for a good, it is essential to describe the basic assumptions on which the whole utility analysis rests. As we shall see later, cardinal utility analysis has been criticized because of its unrealistic assumptions.

    The utility analysis is based on a set of following assumptions:

    • The utility analysis is based on the cardinal concept which assumes that utility is measurable and additive like weights and lengths of goods.
    • Cardinal or Utility is measurable in terms of money.
    • The marginal utility of money is assumed to be constant
    • The consumer is rational who measures, calculates, chooses and compares the utilities of different units of the various commodities and aims at the maximization of utility.
    • He has full knowledge of the availability of commodities and their technical qualities.
    • He possesses perfect knowledge of the choice of commodities open to him and his choices are certain.
    • They know the exact prices of various commodities and their utilities are not influencing by variations in their prices.
    • There are no substitutes.

    Features of Utility Analysis:

    The utility analysis has the following main features;

    • Subjective.
    • Relative.
    • Usefulness, and.
    • Morality.

    Now, explain each one;

    The utility is Subjective:

    The utility is subjective because it deals with the mental satisfaction of a man. A commodity may have different utility for different persons. Cigarette has utility for a smoker but for a person who does not smoke, the cigarette has no utility. Utility, therefore, is subjective.

    The utility is Relative:

    The utility of a good never remains the same. It varies with time and place. The fan has utility in the summer but not during the winter season.

    Utility and usefulness:

    A commodity having utility need not be useful. Cigarette and liquor are harmful to health, but if they satisfy the want of an addict then they have utility for him.

    Utility and Morality:

    The utility is independent of morality. Use of liquor or opium may not be proper from the moral point of views. But as these intoxicants satisfy wants of the drunkards and opium eaters, they have utility for them.

    Concept of Utility Analysis:

    There are three concepts of utility analysis;

    1. Initial.
    2. Total, and.
    3. Marginal.

    Now, explain them;

    Initial Utility:

    The utility derived from the first unit of a commodity calls initial utility. Utility derived from the first piece of bread calls initial utility. Thus, the initial utility is the utility obtained from the consumption of the first unit of a commodity. It is always positive.

    Total Utility:

    Total utility is the sum of utility derived from different units of a commodity consumed by a household.

    According to Leftwitch,

    “Total utility refers to the entire amount of satisfaction obtained from consuming various quantities of a commodity.”

    Supposing a consumer four units of apple. If the consumer gets 10 utils from the consumption of first apple, 8 utils from the second, 6 utils from third, and 4 utils from the fourth apple, then the total utility will be 10+8+6+4 = 28.

    Accordingly, the total utility can calculate as:

    TU = MU1 + MU2 + MU3 +                                       + MUn

    or 

    TU = EMU

    Here TU = Total utility and MU1, MU2, MU3, +                       MUn =

    The Marginal Utility derived from the first, second, third………………….and nth unit.

    Marginal Utility:

    The Marginal Utility is the utility derived from the additional unit of a commodity consumed. The change that takes place in the total utility by the consumption of an additional unit of a commodity calls marginal utility.

    According to Chapman,

    “Marginal utility is the addition made to total utility by consuming one more unit of commodity.”

    Supposing a consumer gets 10 utils from the consumption of one mango and 18 utils from two mangoes, then. the marginal utility of second .mango will be 18-10=8 utils.

    The marginal utility can measure with the help of the following formula MUnth = TUn – TUn-1

    Here;

    • MUnth = Marginal utility of nth unit.
    • TUn = Total utility of “n” units, and.
    • TUn-1 = Total utility of n-1 units.
    Types of Marginal utility:

    The following marginal utility can be; positive marginal utility, zero marginal utility, or negative marginal utility.

    1. Positive: If by consuming additional units of a commodity, total utility goes on increasing, marginal utility will be positive.
    2. Zero: If the consumption of an additional unit of a commodity causes no change in total utility, the marginal utility will be zero.
    3. Negative: If the consumption of an additional unit of a commodity causes falls in total utility, the marginal utility will be negative.
  • Monopoly; Introduction, Meaning, Concept, and Features

    Monopoly; Introduction, Meaning, Concept, and Features

    Understanding Monopoly: Explore the concept of monopoly and its impact on markets. Learn how a single seller dominates an industry and affects prices. Introduction; Monopoly is defined as a single seller or credit in the market. The monopoly refers to a market situation in which there is only one seller of a particular product. This means that the firm itself is the industry and the firm’s product has no close substitute. The monopolist is not bothered about the reaction of rival firms since it has no rival. So the demand curve faced by the monopoly firm is the same as the industry demand curve.

    Here are economics explain Monopoly; Introduction, Meaning, Concept, and Features.

    Three features characterize a monopoly — a market in which there is only one supplier. First, the firm is in it’s in motivated by profits. Secondly, it stands alone and barriers prevent new firms from entering the industry; and thirdly, the actions of the monopolist itself affect the market price of its output—it is not a price-taker.

    Can there be a complete monopoly in the real commercial world? Some economists feel that by maintaining some barriers to entry a firm can act as the single seller of a product in a particular industry. Others feel that all products compete for the limited budget of the consumer. Therefore, no firm, even if it is the only seller of a particular product, is free from competition from the sellers of other products. Thus complete monopoly does not exist in reality.

    The monopolist is the sole seller of a particular product. Therefore, if the monopolist is to enjoy excess profit in the long run that must exist certain barriers to the entry of new firms into the industry. Such barriers may refer to any force which prevents rival firms (competing producers) from enter­ing the industry.

    What is the Meaning of the term Monopoly?

    Monopoly is said to exist when one firm is the sole producer or seller of a product which has no close substitutes. Three points are worth noting in this definition. First, there must be a single producer or seller of a product if there is to be a monopoly. This single producer may be in the form of an individual owner or a single partnership or a joint-stock company.

    If many producers are producing a product, either perfect competition or monopolistic competition will prevail depending upon whether the product is homogeneous or differential. On the other hand, when there are few producers or sellers of a product, oligopoly is said to exist. If then there is to be a monopoly, there must be one firm in the industry. Even literally monopoly means one seller.

    “Mono” means one and “Poly” means the seller. Thus monopoly means one seller or one producer. But to say that monopoly means one seller or producer is not enough. A second condition which is essential for a firm to be called monopolistic is that no close substitutes for the product of that monopolistic firm should be available in the market.

    Meaning of Monopoly:

    The word monopoly has been deriving from the combination of two words i.e., “Mono” and “Poly”. Mono refers to a single and poly to control. In this way, the monopoly refers to a market situation in which there is only one seller of a commodity. There are no close substitutes for the commodity it produces and there are barriers to entry. The single producer may be in the form of an individual owner or a single partnership or a joint-stock company.

    In other words, under a monopoly, there is no difference between firm and industry. The monopolist has full control over the supply of the commodity. Having control over the supply of the commodity he possesses the market power to set the price. Thus, as a single seller, the monopolist may be a king without a crown. If there is to be a monopoly, the cross elasticity of demand between the product of the monopolist and the product of any other seller must be very small.

    Definition of Monopoly:

    The following definitions are below;

    1. According to Bilas as;

    “Pure monopoly is represented by a market situation in which there is a single seller of a product for which there are no substitutes; this single seller is unaffected by and does not affect the prices and outputs of other products sold in the economy.”

    2. According to Koutsoyiannis as;

    “Monopoly is a market situation in which there is a single seller. There are no close substitutes of the commodity it produces, there are barriers to entry.”

    3. According to A. J. Braff as;

    “Under pure monopoly, there is a single seller in the market. The monopolist demand is market demand. The monopolist is a price-maker. Pure monopoly suggests no substitute situation.”

    Concept of Monopoly:

    Analysis of the working of a competitive system was the main task done by classical economists such as Adam Smith, David Ricardo, and J.S. Mill. Considering the earlier views, later economists of the 19th century developed the “ideal” system of perfect competition. Many economists, since the time of Adam Smith, were more interested in theoretical perfections than in the actual development of the capitalist system. They tried to explain the meaning of an economic system based on the model of perfect competition.

    According to them, perfect competition would mean;

    • Production at the minimum possible cost, and.
    • Consumer satisfaction at its maximum.

    But in real words, we hardly come across such a system of perfect competition. The exception to perfect competition which attracted serious attention during the 19th century was the concept of monopoly. This is in fact, the antithesis of perfect competition.

    Monopoly market is one in which there is only one seller of the product having no close substitutes. The cross elasticity of demand for a monopolized product is either zero or negative. There being only one firm, producing that product, there is no difference between the firm and industry in case of monopoly. Monopoly is a price maker, not the price taker.

    In the words of Koutsoyiannis, “Monopoly is a market situation in which there is a single seller, there are no close substitutes for the commodity it produced there are barriers to entry of other firms”.

    Features of Monopoly:

    The following are the features of a monopoly;

    One seller of the product.

    In the case of a monopoly, there is only one seller of the product. He may be a sole proprietor or a partnership firm or a joint stock company or a state enterprise. There is no difference between firm and industry. The firm is a price maker and not a price taker.

    No close substitute.

    The commodity which the monopolist produces has no close substitutes. Lack of substitutes means no other firm in the market is producing the same type of commodity.

    Restriction no entry of the new firm.

    There are powerful restrictions to the entry of new firms in the industry, under the Monopoly. There are either natural or artificial restrictions on the entry of firms into the industry, even when the firm is making abnormal profits.

    Monopoly is also an Industry.

    Under monopoly, there is only one firm which constitutes the industry. Difference between firm and industry comes to an end.

    Price Maker.

    Under monopoly, the monopolist has full control over the supply of the commodity. But due to a large number of buyers, the demand of any one buyer constitutes an infinitely small part of the total demand. Therefore, buyers have to pay the price fixed by the monopolist.

    Monopoly explain – For instance;

    There is one firm in India which produces “Binaca” toothpaste but this firm cannot be called monopolist since there are many other firms which produce close substitutes of Binaca toothpaste such as Colgate, Promise, Forhans, Meclean, etc. These various brands of toothpaste compete with each other in the market and the producer of any one of them cannot say to have a monopoly.

    Prof. Bober rightly remarks,

    “The privilege of being the only seller of a prod­uct does not by itself make one a monopolist in the sense of possessing the power to set the price. As one seller, he may be a king without a crown.”

    We can express the second condition of monopoly in terms of cross elasticity of demand also. Cross elasticity of demand shows a change in the demand for a good as a result of the change in the price of another good. Therefore, if there is to be monopoly the cross elasticity of demand between the product of the monopolist and the product of any other producer must be very small. The fact that there is one firm under monopoly means that other firms for one reason or other are prohibiting to enter the monopolistic industry.

    In other words, strong barriers to the entry of firms exist wherever there is one firm having sole control over the production of a commodity. The barriers which prevent the firms to enter the industry may be economic in nature or else of institu­tional and artificial nature. In the case of monopoly, barriers are so strong that prevent the entry of all firms except the one which is already in the field.

  • Business Economics; Definition, Nature, Scope, and Importance

    Business Economics; Definition, Nature, Scope, and Importance

    Business Economics, also know as Managerial Economics, is the application of economic theory and methodology to business with their pdf. Also, Economics is the study of human beings (e.g., consumers, firms) in producing and consuming goods and services amid a scarcity of resources. Managerial or business economics apply a branch of organizing and allocating a firm’s scarce resources to achieve its desired goals. Discuss Business Economics – the topic is Meaning, Definition, Nature, Scope, and Importance PDF.

    Here is the article to explain, Business Economics Meaning, Definition, Nature, Scope, and Importance PDF.

    Business involves decision-making. Decision-making means the process of selecting one out of two or more alternative courses of action. Also, The question of choice arises because the basic resources such as capital, land, labor, and management are limiting and can employ in alternative uses.

    The decision-making function thus becomes one of making choices and taking decisions that will provide the most efficient means of attaining the desired end, say, profit maximation. Also, Different aspects of the business need the attention of the chief executive.

    He may call upon to choose a single option among the many that may be available to him. It would be in the interest of the business to reach an optimal decision- the one that promotes the goal of the business firm. A scientific formulation of the business problem and finding its optimal solution requires that the business firm is equipped with a rational methodology and appropriate tools.

    Definition of Business Economics:

    Different author by different definitions are below;

    According to McNair and Meriam,

    “Managerial Economics consists of the use of Economic modes of thought to analyze business situations.”

    According to M. H. Spencer and L. Siegelman,

    “Managerial Economics is the integration of economic theory with business practice for the purpose of facilitating decision making and forward planning.”

    According to Hauge,

    “Managerial Economics is concerned with using the logic of economics, mathematics & statistics to provide effective ways of thinking about business decision problems.”

    Business Economics or Managerial Economics generally refers to the integration of economics theories with business practices with their pdf. Also, Economics provides various conceptual tools like – Demand, Supply, Price, Competition, etc. They apply these tools to the management of the business. In this sense, business economics also is known as applied economics.

    Therefore, define business economic as that discipline which deals with the application of economic theory to business management. Also, Business economic thus lies on the borderline between economics and business management and serves as a bridge between the two disciplines.

    Nature of Business Economics:

    How to explain the Nature of Business Economics? Traditional economic theory has developed along two lines; viz., normative, and positive. Also, Normative focuses on prescriptive statements and helps establish rules aimed at attaining the specified goals of the business.

    Positive, on the other hand, focuses on the description it aims at describing how the economic system operates without staffing how it should operate. The emphasis in business economics is on normative theory. Also, they seek to establish rules which help business firms attain their goals; which indeed is also the essence of the word normative.

    However, if the firms are to establish valid decision rules; they must thoroughly understand their environment. Also, This requires the study of positive or descriptive theory. Thus, they combine the essentials of the normative and positive economic theory; the emphasis being more on the former than the latter.

    Scope of Business Economics:

    As regards the scope of business economics, no uniformity of views exists among various authors. The scope of business economics (micro and macro variety) is a wider one since it “uses the logic of Economics, Mathematics, and Statistics to provide effective ways of thinking about business decision problems.” Because of this saying of Prof. D. C. Hague, we can argue that there are links between managerial economics and management science. The boundaries between the two subjects are not clear-cut but overlapping.

    However, the following aspects are said to generally fall under business economics.

    1. Forecasting and Demand Analysis.
    2. Cost Analysis and Production Analysis.
    3. Pricing Decisions, policies, and practices.
    4. Profit Management, and.
    5. Capital Management.

    These different aspects are considered to involve in the subject matter of business economics.

    Forecasting and Demand Analysis:

    A business firm is an economic organization that transforms productive resources into goods to sell in the market. Also, A major part of business decision-making depends on accurate estimates of demand.

    A demand forecast can serve as a guide to management for maintaining and strengthening market position and enlarging profits. Also, Demand analysis helps identify the various factors influencing the product demand and thus provides guidelines for manipulating demand.

    Also, Demand analysis and forecasting provided the essential basis for business planning and occupy a strategic place in managerial economics. How to learn the main topics covered are; Demand Determinants, Demand Distinctions, and Demand Forecasting.

    Cost Analysis and Production Analysis:

    A study of economic costs, combined with the data drawn from the firm’s accounting records, can yield significant cost estimates which are useful for management decisions. An element of cost uncertainty exists because all the factors determining costs are not known and controllable.

    Discovering economic costs and the ability to measure them are the necessary steps for more effective profit planning, cost control, and sound pricing practices. Production analysis is narrower, in scope than cost analysis.

    Production analysis frequently proceeds in physical terms while cost analysis proceeds in monetary terms. The main topics covered under cost and production analysis are; Cost concepts and classification, Cost-output Relationships, Economies and diseconomies of Scale, Production function, and Cost control.

    Pricing Decisions, Policies, and Practices:

    Pricing is an important area of business economics. Also, Price is the genesis of a firm’s revenue, and as such its success largely depends on how correctly the pricing decisions are taken.

    The important aspects dealt with under-pricing include. Also, Price Determination in Various Market Forms, Pricing Method, Differential Pricing, Product-line Pricing, and Price Forecasting.

    Pricing is a very important area of managerial economics. Also, Price is the origin of the revenue of a firm. As such the success of a business firm largely depends on the accuracy of the price decisions of that firm. The important aspects dealt under the area, are as follows:

    • Price determination in various market forms.
    • Pricing methods, and.
    • Differential pricing product-line pricing and price forecasting.
    Profit Management:

    Business firms are generally organized to make profits and in the long run, profits earned are taken as an important measure of the firm’s success. If knowledge about the future were perfect, profit analysis would have been a very easy task.

    However, in a world of uncertainty, expectations do not always realize. So, profit planning and measurement constitute a difficult area of business economics. The important aspects covered under this area are; Nature and Measurement of profit, Profit policies, and Technique of Profit Planning like Break-Even Analysis.

    Capital Management:

    Among the various types of business problems, the most complex and troublesome for the business manager are those relating to a firm’s capital investments. As well as, Relatively large sums are involved and the problems are so complex that their solution requires considerable time and labor.

    Often the decision involving capital management are taken by the top management. Briefly Capital management implies planning and control of capital expenditure. The main topics dealt with are; Cost of capital Rate of Return and Selection of Projects.

    Business Economics Definition Nature Scope and Importance
    Business Economics Meaning, Definition, Nature, Scope, and Importance PDF. #Pixabay.

    Importance of Business Economics:

    The significance or importance of business economics can discuss as under:

    It also incorporates useful ideas from other disciplines such as psychology, sociology, etc. If they are found relevant to decision making. Also, they take the help of other disciplines having a bearing on the business decisions about various explicit and implicit constraints subject to which resource allocation is to optimize.

    They concern with those aspects of traditional economics which are relevant for business decision making in real life.

    These are adapting or modifying to enable the manager to make better decisions. Thus, business economic accomplishes the objective of building a suitable tool kit from traditional economics. It helps in reaching a variety of business decisions in a complicated environment.

    Certain examples are;

    • What products and services should produce?
    • What input and production technique should use?
    • How much output should produce and at what prices it should sell?
    • What are the best sizes and locations of new plants?
    • When should equipment replace? and.
    • How should the available capital allocate?

    They take cognizance of the interaction between the firm and society; and, accomplish the key role of an agent in achieving its social and economic welfare goals. It has come to realize that business, apart from its obligations to shareholders, has certain social obligations.

    Also, they focussing attention on these social obligations as constraints subject to which business decisions are taken. It serves as an instrument in furthering the economic welfare of society through socially-oriented business decisions.

  • Introduction to Wages: Meaning, Definition, Types, and Methods

    Introduction to Wages: Meaning, Definition, Types, and Methods

    What does it mean by Wages? A fixed regular payment earned for their services typically paid on an hourly, daily or weekly basis. Wage compensation pays to employees for work for a company during a period. Wages or labor charges always pay based on a certain amount of time, the article explains below along with their topics Meaning, definition, types, and methods. For example; Employees who receive labor charges cannot also receive a salary, but they can receive a commission. A commission is a payment for a specific action. Commissions are most commonly found in the sales industry. Salesmen and women often pay a base wage and then paid a commission based on how many sales they make during a period.

    Know and Understand the Wages and their Introduction, Meaning, Definition, Types, and Methods.

    Lower-level employees pay based on the amount of time worked. These employees usually have a timesheet or time card to keep track of the hours worked per week. Most modern employers have computerized systems to keep track of hourly employee hours. Employees must log into the system and log out to record their hours worked. Depending on the state, these employees then pay once a week or once every other week. Hourly employees must receive overtime benefits if they work more than 40 hours each week.

    Meaning of Wages:

    Wages are the reward paid to the worker for his labor. The term “labor”, as used in Economics, has a broad meaning. It includes the work of all who work for a living, whether this work is physical or mental.

    It also includes the exertions of independent professional men and women like doctors, lawyers, musicians and painters who render service for money. In fact, “labor” in Economics means all kinds of work for which a reward is paid. Any type of reward for human exertion whether paid by the hour, day, month or year and paid in cash, kind, or both call labor charges.

    Definition of Wages:

    Here are below the definition of wages defines by different authors.

    According to Benham;

    “A wage may be defined as the sum of money paid under contract by an employer to the worker for services rendered.”

    According to A.H. Hansen;

    “Wages is the payment to labor for its assistance to production.”

    According to Mc Connell;

    ‘Wage rate is the price paid for the use of labor.”

    According to J.R. Turner;

    “A wage is a price, it is the price paid by the employer to the worker on account of labor performed.”

    Types of Wages:

    Labor charges typically paid on an hourly, daily or weekly basis. In real practice, wages are of many types as follows, and also you’ll understand their methods below are:

    1] Piece Wages:

    Piece wages are the wage paid according to the work done by the worker. To calculate the piece wages, the number of units produced by the worker takes into consideration.

    2] Time Wages:

    If the laborer pays for his services according to time, it calls a time wage. For example, if the labor pays a dollar $5 per day, it will term as a time wage.

    3] Cash Wages:

    Cash wage refers to the labor charges paid to labor in terms of money. The salary paid to a worker is an instance of cash wages.

    4] Wages in Kind:

    When the laborer pays in terms of goods rather than cash, it calls the wage in kind. These types of wages are popular in rural areas.

    5] Contract Wages:

    Under this type, the wage fixes at the beginning of complete work. For instance, if a contractor tells that he will pay a dollar $5,000 for the construction of the building, it will term as contract wage.

    Understand the Nominal and Real Wages.

    The money paid to a worker as a reward for his work knows as a nominal wage. But what money wants for? Obviously for the goods and services it can buy. By ‘real wage’, we understand the satisfaction that a laborer gets from spending his money wage in the form of necessaries, comforts, and luxuries. It means the total benefits, whether in cash or kind, that a worker enjoys by working at a certain job.

    The following are the two main concepts of wage:

    • Nominal Wage.
    • Real Wage.

    Now explain;

    1] Money or Nominal Wages:

    The total amount of money received by the laborer in the process of production calls the money wage or nominal wage. The nominal or money value of labor charges express at current prices and is not adjusted for the effects of inflation. In contrast, the value of the wage or earning that someone earns each year expresses at constant prices and therefore have been adjusting to taking into account price changes.

    2] Real Wages:

    Real wages mean the translation of money wage’s into real terms or in terms of commodities and services that money can buy. They refer to the advantages of worker’s occupation, i.e. the amount of the necessaries, comforts, and luxuries of life which the worker can command in return for his services. An example will make things clear. Suppose “A” receives Dollar $100 p.m. as money wage’s during the year.

    Suppose also that midway through the year the prices of commodities and services, that the worker buys, go up, on average, by 50%. It means that though the money wage remains the same, the real wages (consumption basket in terms of commodities and services) reduce by 50%. Real wage’s also included extra supplementary benefits along with the money wage.

    Introduction to Wages Meaning Definition Types and Methods
    Introduction to Wages: Meaning, Definition, Types, and Methods, #Pixabay.

    Understand the Methods of Wage Payment.

    From the payment, wage’s can classify as:

    • Cash wages or wage’s in kind, according to as the payment makes in cash or kind.
    • Time wages, when the wage rate fixes per hour, per day or month.
    • Piece wages, when the worker pays according to the work done, and.
    • Task wages, which is a payment on a contract basis, i.e., payment for finishing a specified job.

    Wage’s give different names, e.g., salaries for the higher staff, pay to the lower staff like clerks and typists, wage’s for the workers, fees for persons in independent professions like lawyers and doctors, commission for middlemen, brokers, etc., and allowance for special work or special reasons, e.g., traveling allowance, dearness allowance, etc.

  • Know the Characteristics of Monopolistic Competition And understand how to Determine the Price and output in their Competition

    Know the Characteristics of Monopolistic Competition And understand how to Determine the Price and output in their Competition

    Monopolistic Competition; Know the Characteristics of Monopolistic Competition, before knowing their definition – Monopolistic competition is a type of imperfect competition such that many producers sell products that are differentiated from one another and hence are not perfect substitutes. “It has been more fully realized that every case of exchange is a case of what may be called partial monopoly and partial monopoly is looked at from the other said a case of imperfect competition. There is a blending of both competition element and monopoly element in each situation.” by According to Prof. J. K. Mehta.

    Know and Understand the Characteristics of Monopolistic Competition.

    Concept of Monopolistic Competition: Monopolistic competition is a market structure which combines elements of monopoly and competitive markets. Essentially a monopolistic competitive market is one with freedom of entry and exit, but firms can differentiate their products. Therefore, they have an inelastic demand curve and so they can set prices.

    However, because there is freedom of entry, supernormal profits will encourage more firms to enter the market leading to normal profits in the long term. Monopolistic Competition refers to the market situation in which there is a keen competition, but neither perfect nor pure, among a group of a large number of small producers or suppliers having some degree of monopoly because of the differentiation of their products.

    Thus, we can say that monopolistic competition (or imperfect competition) is a mixture of competition and a certain degree of monopoly, on the basis of a correct appraisal of the market situation. Chamberlin has asserted that monopoly and competition are not mutually exclusive rather both are frequently blended together. In short, we can say that a market with a blending of Monopoly (What do you think of Monopoly?) and competition is called monopolistic competition or imperfect competition.

    Characteristics of Monopolistic Competition:

    Important characteristics of monopolistic competition are as follows:

    Minimum Number of Buyers and Sellers:

    In this market, neither buyers nor sellers are too many as under perfect competition nor there is only one seller as under monopoly. Mostly, it is a situation in between. Every producer for his produced commodity has some special buyers. Every consumer and seller can influence demand and supply in the market.

    Maximum Number of Buyers and Sellers:

    There are a large number of firms but not as large as under perfect competition. That means each firm can control its price-output policy to some extent. It is assumed that any price-output policy of a firm will not get a reaction from other firms that means each firm follows the independent price policy. If a firm reduces its price, the gains in sales will be slightly spread over many of its rivals so that the extent to which each of the rival firms suffers will be very small. Thus these rival firms will have no reason to react.

    Ignorance of the Buyers:

    There are some people who think that high priced goods will be better and of higher quality. So, they avoid buying low priced goods.

    The difference in the Quality and Shape of the Goods:

    Although the commodities produced by different producers can serve as perfect substitutes to those produced by others, yet they are different in color, form, packing, design, name, etc. So there is product differentiation in the market.

    Differentiated Products:

    Sellers sell differentiated products, but they are close— but not perfect—substitutes. Buyers may not mind if they do not get Lux soap rather than Rexona. Different varieties of soap that are available in the Indian market are slightly differentiated products and, hence, close substitutes. It is the degree of differentiation that creates both monopoly and competitive elements. Every product is unique to the buyers. So every seller enjoys some degree of monopoly of his own product over other sellers. But since these goods are close substitutes, sellers face competition.

    Because of the brand loyalty of buyers, sellers exercise some monopoly power. And sales of closely related goods create a competitive environ­ment. Thus monopolists compete among themselves. It is product differentiation that enables Monopolistically competitive firms to possess market power with competition amongst the firms. In this market, monopoly power is, therefore, small.

    Product Differentiation:

    Another feature of the monopolistic competition is product differentiation. Product differentiation refers to a situation when the buyers of the product differentiate the product with others. Basically, the products of different firms are not altogether different; they are slightly different from others. Although each firm producing differentiated product has the monopoly of its own product, yet he has to face the competition. This product differentiation may be real or imaginary. Real differences are like design, the material used, skill, etc. whereas imaginary differences are through advertising, trademark and so on.

    Lack of Knowledge on the Part of Consumers:

    Neither consumers nor sellers have full knowledge of market conditions, so there is an international difference in the price of goods from those of others.

    High Transportation Cost:

    In this high transportation cost play an important role in order to create discrimination among commodities. Similar goods because of different transport costs are bought and sold at different prices.

    Advertisement:

    Here, advertisement plays an important role because buyers are influenced to prefer by advertisement, which plays upon their mind and makes them the product of one firm to those of another. Through advertisement, they are brought to his notice through radio, television and other audio-visual aids in a more pleasing and more forceful manner. Thus, rival firms compete against each other in quantity, in facilities as well as in price.

    Differences in the Establishment of Industry:

    In the imperfectly competitive market, there is neither freedom of entry or exit as is under perfect competition nor there is perfect control as in monopoly but there are some restrictions on the entry of industry only.

    Elastic Demand Curve:

    Since the product of each seller is slightly different from his rivals he enjoys some degree of monopoly power and, hence, can raise the price of his product without losing most customers. But as other rival firms produce closely related goods, every firm faces competition and its influence over the price of the product is rather limited.

    Thus, each firm has a downward sloping demand curve implying that it behaves as a price-maker. Since a seller faces a large number of competitors to whom buyers may turn, the demand curve is more elastic.

    Non-Price Competition:

    Besides price competition, Chamberlin suggested cases of non-price competition that arise due to product variation and selling activities. Seller always tries to establish the fact that his product is superior to others by improving the quality of his product. And in doing so, he incurs selling costs or makes advertise­ment to attract more customers in his fold.

    It is the product differentiation that causes selling costs to emerge, in addition to production costs. In Chamberlin’s model, demand for any commodity is not only affected by the price of a commodity but also by non-price competition (i.e., product variation and selling activities). Selling costs or advertising outlays are peculiar to this market.

    Know the Characteristics of Monopolistic Competition And understand how to Determine the Price and output in their Competition
    Know the Characteristics of Monopolistic Competition And understand how to Determine the Price and output in their Competition. #Pixabay.

    Now, Understand basically how to Determine the Price and output in their Competition?

    You’ll understand the Characteristics of Monopolistic Competition upstairs, now study Determine the Price and output in their Competition. Under monopolistic competition, organizations need to make optimum adjustments in the prices and output sold to attain equilibrium. Apart from this, under monopolistic competition, organizations also need to pay attention to the design of the product and the way the product is promoted in the market.

    Moreover, an organization under monopolistic competition is not only required to study its individual equilibrium but group equilibrium of all organizations existing in the market. Let us first understand the individual equilibrium of an organization under monopolistic competition. As we know every seller, irrespective of the market structure, is willing to maximize his/her profits. In monopolistic competition, profits are maximized at a point where marginal revenue is equal to marginal cost.

    The price determined at this point is known as equilibrium price and the output produced at this point is called equilibrium output. If the marginal revenue of a seller is greater than marginal cost, he/she may plan to expand his/her output. On the other hand, if marginal revenue is lesser than marginal cost, it would be profitable for the seller to reduce his/her output to the level where marginal revenue is equal to marginal cost.

    Equilibrium in Long-term Run:

    In the preceding sections, we have discussed that in the short run, organizations can earn supernormal profits. However, in the long run, there is a gradual decrease in the profits of organizations. This is because, in the long run, several new organizations enter the market due to freedom of entry and exit under monopolistic competition. When these new organizations start production the supply would increase and the prices would fall. This would automatically increase the level of competition in the market.

    Consequently, the AR curve shifts from right to left and supernormal profits are replaced with normal profits. In the long run, the AR curve is more elastic than that of in the short run. This is because of an increase in the number of substitute products in the long- run. The long-run equilibrium of Monopolistically competitive organizations is achieved when average revenue is equal to average cost. In such a case, organizations receive normal profits.

    Equilibrium in Short-term Run:

    The short-run equilibrium of a monopolistic competitive organization is the same as that of an organization under monopoly. In the short run, an organization under monopolistic competition attains its equilibrium where marginal revenue equals marginal cost and sets its price according to its demand curve. This implies that in the short run, profits are maximized when MR=MC.

  • Capital Formation: Significances, Process, Stages, and also Meaning

    Capital Formation: Significances, Process, Stages, and also Meaning

    What does Capital Formation Mean? Capital formation means increasing the stock of real capital in a country. The following points highlight the Capital Formation: Significances, Process, Stages, and also Meaning; Significances of Capital Formation, Process of Capital Formation, Stages of Capital Formation, and Meaning of Capital Formation! Capital-formation refers to all the produced means of further production, such as roads, railways, bridges, canals, dams, factories, seeds, fertilizers, etc. Read and share the given article in English. Understand the Indian Capital Market!

    Explain and Introduction to Capital Formation.

    In other words, capital formation involves making more capital goods such as machines, tools, factories, transport equipment, materials, electricity, etc., which are all used for the future production of goods. For making additions to the stock of Capital, saving and investment are essential.

    #Meaning of Capital Formation:

    Capital-formation or accumulation plays a predominant role in all types of economics whether they are of the American or the British type, or the Chinese type. Development is not possible without capital-formation.

    According to Professor Nurkse,

    “The meaning of (Capital Formation) is that society does not apply the whole of its current productive activity to the needs and desires of immediate consumption, but directs a part of it to the tools and making of capital goods: tools and instruments, machines and transport facilities, plant and equipment— all the various forms of real capital that can so greatly increase the efficacy of productive effort. The essence of the process, then, is the diversion of a part of society’s currently available resources to the purpose of increasing the stock of capital goods so as to make possible an expansion of consumable output in the future.”

    Saving and investment are essential for capital formation. According to Marshall, saving is the result of waiting or abstinence. When a person postpones his consumption to the future, he saves his wealth which he utilizes for further production, If all people save like this, the aggregate savings increase which is utilized for investment purposes in real capital assets like machines, tools, plants, roads, canals, fertilizers, seeds, etc.

    But savings are different from hoardings. For savings to be utilized for investment purposes, they must be mobilized in banks and financial institutions. And the businessmen, the entrepreneurs, and the farmers invest these community savings on capital goods by taking loans from these banks and financial institutions.

    #The Top significance of Capital the Formation:

    Capital formation or accumulation is regarded as the key factor in the economic development of an economy. The vicious circle of poverty, according to Prof. Nurkse, can easily be broken in underdeveloped countries through capital formation.

    It is the capital formation that accelerates the pace of development with fuller utilization of available resources. As a matter of fact, it leads to an increase in the size of national employment, income, and output thereby the acute problems of inflation and balance of payment.

    The following top Significance below is:

    Use of Human Capital Formation:

    Capital formation plays an extraordinary role in the qualitative development of human resources. Human capital formation depends on people’s education, training, health, social and economic security, freedom and welfare facilities for which sufficient capital in needed.

    Labor force needs up-to-date implements and instruments is sufficient quantity so that with the increase in population there will be an optimum increase in production and increased labor is easily absorbed.

    Improvement in Technology:

    In underdeveloped countries, capital formation creates overhead capital and necessary environment for economic development.

    This helps to instigate technical progress which makes impossible the use of more capital in the field of production and with an increase of capital in production, the abstract form of capital changes.

    It is seen that present changes in the capital structure lead to changes in the structure and size of technique and public is thereby more influenced.

    High Rate of Economic Growth:

    The higher rate of capital formation in a country means the higher rate of economic growth. Generally, the rate of capital formation or accumulation is very low in comparison to advanced countries.

    In the case of poor and underdeveloped countries, the rate of capital formation varies between one percent to five percent while in the latter’s case, it even exceeds 20 percent.

    Agricultural and Industrial Development:

    Modern agricultural and industrial development needs adequate funds for the adoption of the latest mechanized techniques, input, and setting of different heavy or light industries.

    Without sufficient capital at their disposal, leads to a lower rate of development thus, capital formation. In fact, the development of these both sectors is not possible without capital accumulation.

    Increase in National Income:

    Capital formation improves the conditions and methods for the production of a country. Hence, there is much increase in national income and per capita income. This leads to an increase in the quantity of production which leads to again rise in national income.

    The rate of growth and the quantity of national income necessarily depends on the rate of capital formation.

    So, the increase in national income is possible only by the proper adoption of different means of production and productive use of the same.

    Expansion of Economic Activities:

    As there is an increase in the rate of capital formation, productivity increases quickly and available capital is utilized in a more profitable and extensive way. In this way, complicated techniques and methods are utilized for the economy.

    This results in the expansion of economic activities. Capital formation increases investment which effects economic development in two ways.

    Firstly, it increases the per capita income and enhances the purchasing power which, in turn, creates a more effective demand.

    Secondly, investment leads to an increase in production. In this way, by capital formation, economic activities can be expanded in underdeveloped countries, which in fact, helps to get rid of poverty and attain economic development in the economy.

    Less Dependence on Foreign Capital:

    In underdeveloped countries, the process of Capital formation increases dependence on internal resources and domestic savings by which dependence on foreign capital is declined.

    Economic development leaves the burden of foreign capital, hence to give interest to foreign capital and bear expenses of foreign scientists, the country has to be burdened by improper taxation to the public.

    This gives a setback to internal savings. Thus, by the way of capital formation, a country can attain self-sufficiency and can get rid of foreign capital’s dependence.

    Increase in Economic Welfare:

    By the increase in the rate of capital formation, the public is getting more facilities. As a result, the common man is more benefited economically. Capital formation leads to an unexpected increase in their productivity and income and this improves their standard of living.

    This leads to improvement and enhancement in the chances of work. This helps to raise the welfare of the people in general. Therefore, capital formations the principal solution to the complex problems of poor countries.

    Capital Formation Significances Process Stages and also Meaning
    Capital Formation: Significances, Process, Stages, and also Meaning! Image credit from #Pixabay.

    #The Top 3 Process of Capital Formation:

    The process of capital formation involves three steps:

    1. Increase in the volume of real savings.
    2. Mobilization of savings through financial and credit institutions, and.
    3. Investment of savings.

    Thus the problem of capital formation becomes two-fold: one, how to save more; and two, how to utilize the current savings of the community for capital formation. We discuss the factors on which capital accumulation depends.

    1. How to Increasing Savings?

    The following savings below are:

    Power and Will to Save: 

    Savings depend upon two factors: the power to save and the will to save. The power to save the community depends upon the size of the average income, the size of the average family, and the standard of living of the people.

    Highly progressive income and property taxes reduce the incentive to save. But low rates of taxation with due concessions for savings in provident fund, life insurance, health insurance, etc. encourage savings.

    The perpetuation of Income Inequalities: 

    A perpetuation of income inequalities had been one of the major sources of capital formation in 18th century England and early 20th century Japan. In most communities, it is the higher income groups with a high marginal propensity to save that do the majority of savings.

    Increasing Profits: 

    Professor Lewis is of the view that the ratio of profits to national income should be increased by expanding the capitalist sector of the economy, by providing various incentives and protecting enterprises from foreign competition. The essential point is that the profits of business enterprises should increase because they know how to use them in productive investment.

    Government Measures: 

    Like private households and enterprises, the government also saves by adopting a number of fiscal and monetary measures. These measures may be in the form of a budgetary surplus through an increase in taxation (mostly indirect), reduction in government expenditure, expansion of the export sector, raising money by public loans, etc.

    2. How to Mobilization can Savings?

    The next step for capital formations the mobilization of savings through banks, investment trusts, deposit societies, insurance companies, and capital markets. “The Kernal of Keynes’s theory is that decisions to save and decisions to invest are made largely by different people and for different reasons.”

    To bring the savers and investors together there must be well-developed capital and money markets in the country. In order to mobilize savings, attention should be paid to the starting of investment trusts, life insurance, provident fund, banks, and cooperative societies.

    Such agencies will not only permit small amounts of savings to be handled and invested conveniently but will allow the owners of savings to retain liquidity individually but finance long-term investment collectively.

    3. How to Investment can Savings?

    The third step in the process of capital formations the investment of savings in creating real assets. The profit-making classes are an important source of capital formation in the agricultural and industrial sectors of a country.

    They have an ambition for power and save in the form of distributed and undistributed profits and thus invest in productive enterprises, besides, there must be a regular supply of entrepreneurs which are capable, honest and dependable. To these may be added, the existence of such infrastructure as well-developed means of transport, communications, power, water, educated and trained personnel, etc.

    #The Top 3 Stages of Capital Formation:

    The following stages below are:

    Creation of savings:

    Capital formation depends on savings. Saving is that part of national income which is not spent on consumption goods. Thus, if national income remains unchanged more saving implies less consump­tion. In other words, in order to save more and more people have to curtail their consumption voluntarily.

    If people reduce their consumption savings will increase. If consumption falls some resources used in the production of consumption goods will be released. The creation of money-savings in a country depends mainly on the people’s ability to save and partly on their willingness to save.

    Conversion of savings into investment:

    However, generation of sav­ings is not enough. Often people save money but this saving largely goes waste because saving is held in the form of idle balance (as in rural areas), or to purchase unproductive assets like gold and jewelry. This is why society’s actual savings falls below its potential savings. Thus, the genera­tion of savings is just a necessary and not a sufficient condition of capital formation.

    The actual production of capital goods:

    This stage involves the con­version of money-savings into the making of capital goods, or what is known as investment. The latter, in turn, hinges on the existing technical facilities available in the country, existing capital equipment, entrepreneurial skill, and venture, the rate of return on investment, the rate of interest, govern­ment policy, etc. 

    Thus the third stage of capital formations concerned with the actual production of capital goods. The process of capital formation is not complete unless business firms acquire capital goods so as to be able to expand their production capacity.

  • What does Welfare Economics mean? Measuring and Value decisions!

    What does Welfare Economics mean? Measuring and Value decisions!

    Welfare Economics is a normative branch of economics that is concerned with the way economic activity ought to be arranged so as to maximize economic welfare. The hallmark of welfare economics is that policies are assessed exclusively in terms of their effects on the well-being of individuals. Welfare economics has been defined by Scitovsky as “That part of the general body of economic theory which is concerned primarily with policy.” So, what is the question of the topic we are going to discuss; What does Welfare Economics mean? Measuring and Value decisions!

    Explain about Welfare Economics mean, Measuring Welfare, and their Value decisions!

    Accordingly, whatever is relevant to individuals well-being is relevant under welfare economics, and whatever is unrelated to individuals well-being is excluded from consideration under welfare economics. Economists often use the term utility to refer to the well-being of an individual, and, when there is uncertainty about outcomes, economists use an ex-ante measurement of well-being, so-called expected utility.

    Welfare economics employs value judgment s about what ought to be produced, how production should be organized, the way income and wealth ought to be distributed, both now and in the future. Unfortunately, each individual in a community has a unique set of value judgments, which are dependent upon his or her attitudes, religion, philosophy and politics, and the economist has difficulty in aggregating these value judgments in advising policymakers about decisions that affect the allocation of resources (which involves making interpersonal comparisons of utility).

    Definition of Welfare Economics:

    The branch of economics called welfare economics is an outgrowth of the fundamental debate that can be traced back to Adam Smith, if not before. It is the economic theory of measuring and promoting social welfare.

    In The Wealth of Nations, Book IV, Smith wrote:

    “Every individual necessarily labors to render the annual revenue of the society as great as he can. He generally indeed neither intends to promote the public interest nor knows how much he is promoting it…. He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”

    J. De V. Graff,

    “The proof of the pudding is indeed in the eating. The welfare cake, on the other hand, is so hard to taste, that we must sample its ingredients before baking.”

    R.W. Emerson, Work and Days,

    “The greatest meliorator of the world is selfish, huckstering trade.”

    The literature on welfare economics has grown rapidly in recent years. The utilitarians were the first to talk of welfare in terms of the formula, ‘the greatest happiness of the greatest number’. Vilfredo Pareto considered the question of maximizing social welfare on the basis of general optimum conditions.

    Marshall and Pigou, the neo-classical economists, concentrated on particular sectors of the economic system in their postulates of welfare economics. It was Professor Robbins’ ethical neutrality view about economics that led to the development of welfare economics as an important field of economic studies. Kaldor, Hicks, and Scitovsky have laid the foundations of the New Welfare Economics with the help of the ‘compensation principle’ avoiding all value judgments.

    On the other hand, Bergson, Samuelson, and others have developed the concept of the Social Welfare Function without sacrificing value judgments. In the discussion that follows we shall refer to certain basic concepts of welfare economics and then pass on to Pareto’s welfare conditions for an understanding of modern welfare economics.

    Explanation of Welfare Economics:

    Economists have tried for many years to develop criteria for judging economic efficiency to use as a guide in evaluating actual resource deployments. The classical economists treated utility as if it was a measurable scale of consumer satisfaction, and the early welfare economists, such as Pigou, continued in this vein so that they were able to talk in terms of changes in the pattern of economic activity either increasing or decreasing economic welfare.

    However, once economists rejected the idea that utility was measurable, then they had to accept that economic welfare is immeasurable and that any statement about welfare is a value judgment influenced by the preferences and priorities of those making the judgment. This led to a search for welfare criteria, which avoided making interpersonal comparisons of utility by introducing explicit value judgments as to whether or not welfare has increased.

    The simplest criterion was developed by Vilfredo Pareto, who argued that any reallocation of resources involving a change in goods produced and/or their distribution amongst consumers could be considered an improvement if it made some people better off (in their own estimation) without making anyone else worse off. This analysis led to the development of the conditions for Pareto Optimality, which would maximize the economic welfare of the community, for a given distribution of income.

    Pareto optimality is thus a dominance concept based on comparisons of vectors of utilities. It rejects the notion that utilities of different individuals can be compared, or that utilities of different individuals can be summed up and two alternative situations compared by looking at summed utilities. When ultimate consumers do not appear in the model, as in the pure production framework, a situation is said to be Pareto optimal if there is no alternative that results in the production of more of some output, or the use of less of some input, all else equal.

    Obviously saying that a situation is Pareto optimal is not the same as saying it maximizes GNP, or that it is best in some unique sense. The Pareto criterion avoids making interpersonal comparisons by dealing only with uncontroversial cases where no one is harmed. However, this makes the criterion inapplicable to the majority of policy proposals that benefit some and harm others, without compensation. There are generally many Pareto optimal.

    However, optimality is a common good concept that can get common assent: No one would argue that society should settle for a situation that is not optimal because if A is not optimal, there exists a B that all prefer. Nicholas Kaldor and John Hicks suggested an alternative criterion (the compensation principle), proposing that any economic change or reorganization should be considered beneficial if, after the change, gainers could hypothetically compensate the losers and still be better off.

    In effect, this criterion subdivides the effects of any change into two parts:
    • Efficiency gains/losses, and.
    • Income‐distribution consequences.

    As long as the gainers evaluate their gains at a higher figure than the value that losers set upon their losses, then this efficiency gain justifies the change, even though (in the absence of actual compensation payments) income redistribution has occurred. Where the gainers from a change fully compensate the losers and still show a net gain, this would rate as an improvement under the Pareto criterion.

    Where compensation is not paid, then a second-best situation may be created where the economy departs from the optimum pattern of resource allocation, leaving the government to decide whether it wishes to intervene to tax gainers and compensate losers. In addition to developing welfare criteria, economists such as Paul Samuelson have attempted to construct a social welfare function that can offer guidance as to whether one economic configuration is better or worse than another.

    The social‐welfare function can be regarded as a function of the welfare of each consumer. However, in order to construct a social‐welfare function, it is necessary to take the preferences of each consumer and aggregate them into a community preference ordering, and some economists, such as Kenneth Arrow, have questioned whether consistent and noncontradictory community orderings are possible.

    Despite its methodological intricacies, welfare economics is increasingly needed to judge economic changes, in particular, rising problems of environmental pollution that adversely affect some people while benefiting others. Widespread adoption of the ‘polluter pays’ principle reflects a willingness of governments to make interpersonal comparisons of utility and to intervene in markets to force polluters to bear the costs of any pollution that they cause.

    How to Measuring Welfare?

    There are mainly two concepts for measuring welfare. The first relates to a Pareto improvement whereby social welfare increases when society as a whole is better off without making any individual worse off. This proposition also includes the case that when one or more persons are better off, some persons may be neither better off nor worse off. It is, thus, free from making interpersonal comparisons.

    Hicks, Kaldor and Scitovsky have explained social welfare in the Paretian sense in terms of ‘the compensation principle’. In the second place, social welfare is increased, when the distribution of welfare is better in some sense. It makes some persons in society better off than others so that the distribution of welfare is more equitable. Also study, Why Entrepreneurs Required the Capital? to Pursue Business!

    This is known as distributional improvement and relates to the Bergson social welfare function. Dr. Graaf, however, refers to another concept which he calls the paternalist concept. A state or a paternalist authority maximizes social welfare according to its own notion of welfare without any regard to the views of individuals in society.

    Economists do not make use of this concept to measure social welfare because it is related to a dictatorial regime and does not fit in a democratic set-up. Economic welfare, thus, implies social welfare which is concerned primarily with the policy that leads either to a Pareto improvement or distributional improvement, or both.

    What does Welfare Economics mean Measuring and Value decisions
    What does Welfare Economics mean? Measuring and Value decisions! Image credit from #Pixabay.

    Value Decisions in Welfare Economics:

    The following Value Judgments or Decisions below are:

    Alt ethical judgments and statements which perform recommendatory, influential and persuasive func­tions are value judgments. According to Dr. Brandt a judgment is a value judgment if it entails or contradicts some judgment which could be formulated so as to involve any one of the following terms in an In ordinary sense: “Is a good thing that” or “Is a better thing that”, “Is normally obligatory”, “Is reprehensible”, and “Is normally praiseworthy”.

    Value judgments describe facts in an emotive way and tend to influence people by altering their beliefs or attitudes. Such statements as “This change will increase economic welfare”, “Rapid economic development is desirable”, “Inequalities of incomes need be reduced”, are all value judgments. Welfare is an ethical term. So all welfare propositions are also ethical and involve value judgments.

    Such terms as “Satisfaction”, “Utility” are also ethical in nature since they are emotive. Similarly, the use of a highly emotive word as “social”, “community” or “national” in place of “economic” is ethical. Since welfare economics is concerned with policy measures, it involves ethical terminology, such as the increase of “social welfare” or “social advantage” or “social benefit”. Thus welfare economics and ethics cannot be separated.

    They are inseparable, according to Prof. Little, “because the welfare terminology is a vague terminology. Since welfare propositions involve value judgments, the question arises whether economists should make value judgments in economics.” Economists differ over this issue. The neo-classical were concerned with the measurability of utility and the inevitable interpersonal comparisons of utility.

    Pigou’s income-distribution policy, based on Marshall’ postulate of equal capacity for satisfaction, implied that interpersonal comparisons of utility were possible. Robbins, in 1932, led a frontal attack against this view. He maintained that if economics was to be an objective and scientific study, economists should refrain from making interpersonal comparisons, for policy recommendations tend to make some people better off and others worse off.

    It is, therefore, not possible to make interpersonal comparisons, i.e. the welfare of one person cannot be compared with that of another. The majority of economists agreeing with Robbins switched over to the Paretian ordinal method in order to avoid interpersonal comparisons of utility. Kaldor, Hicks, and Scitovsky formulated the ‘compensation principle’ free from value judgments.

    Accordingly, economists can make policy recommendations on the basis of efficiency considerations. The objective test of economic efficiency is that the gainers from a change can more than compensate the losers. But this test of increased efficiency implies a value judgment because the gainers from a change are able to compensate the losers.

    The very idea of compensation involves value prescriptions. So even the formulators of the ‘New Welfare Economics’ have not been successful in building value-free welfare economics. Prof. Bergson also agrees with Robbins that interpersonal comparisons involve value judgments. But he along with Samuelson and Arrow holds that no meaningful propositions can be made in welfare economics without introducing value judgments.

    Welfare economics, thus, becomes a normative study which, however, does not prevent economists from studying it scientifically. Even the Paretian general optimum theory is not value-free. It states that an optimum position is one from which it is not possible to make everyone better off without making at least one person worse off, even by re­allocation of resources. This welfare proposition contains certain value judgments.

    The Paretian optimum is related to the welfare of the individual. In order to attain the optimum position every individual act as the best judge of his welfare. If any re-allocation of resources makes at least one person better off without making others worse off, then the welfare of the society is said to have increased. These are all value judgments which Pareto could not avoid despite the fact that he used the method of ordinal measurement of utility.

    Boulding’s view merits consideration in this controversy:

    “Whatever may be the case in the Elysian Fields of pure economics, the social fact is that we make… interpersonal comparisons all the time, and that hardly any social policy is possible without them, for almost every social policy makes some people worse-off and some better-off. The Paretian optimum itself is a special case of a social welfare function, for if we assume this to be a social ideal it implies that nobody should ever be made worse-off, whereas most societies have defined certain groups (e.g., criminals or foreigners) who should be made worse off…”

  • Indian Capital Market: Understand their concept by Nature, Classification, Growth, and Development!

    Indian Capital Market: Understand their concept by Nature, Classification, Growth, and Development!

    What does the Capital Market mean? The capital market is a market which deals in long-term loans. It supplies industry with fixed and working capital and finances medium-term and long-term borrowings of the central, state and local governments. The Capital Market functions through the stock exchange market. A stock exchange is a market which facilitates buying and selling of shares, stocks, bonds, securities, and debentures. The capital market deals in ordinary stock are shares and debentures of corporations, and bonds and securities of governments. So, what is the topic we are going to discuss; Indian Capital Market: Understand their concept by Nature, Classification, Growth, and Development!

    Here are explained; Indian Capital Market: The Concept of Market understand by their Nature, Classification, Growth, and Development!

    The capital market plays an important role in immobilizing saving and channel is in them into productive investments for the development of commerce and industry. It is not only a market for old securities and shares but also for new issues shares and securities. In fact, the capital market is related to the supply and demand for new capital, and the stock exchange facilitates such transactions.

    Thus the capital market comprises the complex of institutions and mechanisms through which medium-term funds and long­-term funds are pooled and made available to individuals, business and governments. It also encompasses the process by which securities already outstanding are transferred.

    Nature of Indian Capital Market:

    Like the money market, capital market in In­dia is dichotomized into organized and unor­ganised components. The institution of the stock exchange is an im­portant component of the capital market through which both new issues of securities are made and old issues of securities are pur­chased and sold. The former is called the “new issues market” and the latter is the “old issues market”. The stock exchange is, thus, a specialist market place to facilitate the exchanges of old securities. It is known as a “secondary market” for securities.

    The stock exchange dealings for “listed” securities are made in an open auction market where buyers and sellers from all over the country meet. There is a well-defined code of bye-laws according to which these dealings take place and complete publicity is given to every transaction. As far as the primary mar­ket or new issues market is concerned, it is the public limited companies instead of a stock market that deals in “old issues” that raises funds through the issuance of shares, bonds, debentures, etc. However, to conduct this busi­ness, the services of specialized institutions like underwriters and stockbrokers, merchant banks are required.

    The capital market in India is divided into the gilt-edged market and the industrial securities market. The gilt-edged market refers to the market for Govt. and semi-govt. securities. The industrial securities market refers to the market for equities and deben­tures of companies.

    The industrial securities mar­ket is further divided into:

    • New issues market, and.
    • Old capital market.

    Both markets are equally important but often the new issue market is much more important from the point of economic growth. Economic liberalization provides a strong stimulus to the security market. There is a tremen­dous growth in the number of issues, the amount raised, listed companies, listed stock, market turno­ver, and capitalization etc. Security market wit­nessed steep rising curve in the decades of 80s.

    Many new financial instruments were introduced; new institutions like Stock Holding Corporation of India Ltd, National Stock Exchange, Over the Coun­ter Exchange of India Ltd. etc. were created. Further, various steps were taken to protect the interests of investors and streamlining the trading mechanism. Computerization is done for faster set­tlement of transactions. Screen-based trading pro­vides the full transparency of the transactions. After the abolition of the managing agency system in 1970, the importance of the capital market in India cannot be overemphasized.

    The Indian capi­tal market has now been a very vibrant and grow­ing market. It is one of the leading capital markets in developing countries. We have the second largest number of listed companies (6500) in the world, next only to the USA have the largest number of exchanges in any country—23 Stock Exchanges. We have 15 million investors. And in the decade of 80s, the amount raised from the Indian capital mar­ket went up from Rs. 200 crores a year to Rs. 10,000 crores a year.

    The Indian capital market is the market for long term loanable funds as distinct from money market which deals in short-term funds. It refers to the facilities and institutional arrangements for borrowing and lending “term funds”, medium term, and long term funds. In principal capital market loans are used by industries mainly for fixed investment. It does not deal in capital goods but is concerned with raising money capital or purpose of investment.

    The Classification of Indian Capital Market:

    The capital market in India includes the following institutions;

    • Commercial Banks.
    • Insurance Companies (LIC and GIC).
    • Specialized financial institutions like IFCI, IDBI, ICICI, SIDCS, SFCS, UTI etc.
    • Provident Fund Societies.
    • Merchant Banking Agencies, and.
    • Credit Guarantee Corporations.

    Individuals who invest directly on their own insecurities are also suppliers of the fund to the capital market. Thus, like all the markets the capital market is also composed of those who demand funds (borrowers) and those who supply funds (lenders). An ideal capital market attempts to provide adequate capital at a reasonable rate of return for any business, or industrial proposition which offers a prospective high yield to make borrowing worthwhile.

    The Indian capital market is divided into the gilt-edged market and the industrial securities market. The gilt-edged market refers to the market for government and semi-government securities, backed by the RBI. The securities traded in this market are stable in value and are much sought after by banks and other institutions. The industrial securities market refers to the market for shares and debentures of old and new companies. This market is further divided into the new issues market and old capital market meaning the stock exchange.

    The new issue market refers to the raising of new capital in the form of shares and debentures, whereas the old capital market deals with securities already issued by companies. The capital market is also divided between the primary capital market and secondary capital market. The primary market refers to the new issue market, which relates to the issue of shares, preference shares, and debentures of non-government public limited companies and also to the realizing of fresh capital by government companies, and the issue of public sector bonds.

    The secondary market, on the other hand, is the market for old and already issued securities. The secondary capital market is composed of industrial security market or the stock exchange in which industrial securities are bought and sold and the gilt-edged market in which the government and semi-government securities are traded.

    The Growth of the Indian Capital Market:

    The following growth below are;

    Before Independence of Indian Capital Market:

    Indian capital market was hardly existent in the pre-independence times. Agriculture was the mainstay of the economy but there was hardly any long term lending to the agricultural sector. Similarly, the growth of industrial securities market was very much hampered since there were very few companies and the number of securities traded in the stock exchanges was even smaller.

    Indian capital market was dominated by the gilt-edged market for government and semi-government securities. Individual investors were very few in numbers and that too was limited to the affluent classes in the urban and rural areas. Last but not least, there were no specialized intermediaries and agencies to mobilize the savings of the public and channelize them to invest.

    After Independence of Indian Capital Market:

    Since independence, the Indian capital market has made widespread growth in all the areas as reflected by the increased volume of savings and investments. In 1951, the number of joint stock companies (which is a very important indicator of the growth of capital market) was 28,500 both public limited and private limited companies with a paid up capital of Rs. 775 crore, which in 1990 stood at 50,000 companies with a paid up capital of Rs. 20,000 crore. The rate of growth of investment has been phenomenal in recent years, in keeping with the accelerated tempo of development of the Indian economy under the impetus of the five-year plans.

    Indian Capital Market Understand their concept by Nature Classification Growth and Development
    Indian Capital Market: Understand their concept by Nature, Classification, Growth, and Development! Image credit from #Pixabay.

    The Development of Indian Capital Market:

    Here we detail about the eight developments in the Indian capital market.

    Financial Intermediation:

    The Indian capital market has grown due to the innovation of the mechanism of indirect financing. This innovation has enhanced the efficiency of the flow of funds from ultimate savers to ultimate users through newly established financial intermediaries like UTI, LIC, and GIC. The LIC has been mobilizing the savings of households to build a “life fund”.

    It has been deploying a part of “life fund” to purchase the shares and debentures of the companies. Until 1991 UTI was amongst the top ten shareholders in one out of every three companies listed in the Stock Exchange in which it had a shareholding. Likewise, UTI has been mobilizing savings of households through the sale of “units” to invest in securities of “blue-chip” companies.

    In short, financial intermediaries like LIC, UTI, and GIC have activated the growth process of the Indian capital market. It is evident from the rising intermediation ratio. The intermediation ratio is a ratio of the volume of financial instruments issued by the financial institutions, i.e., secondary securities to the volume of primary securities issued by non-financial corporate firms rose from 0.27 during 1951-56 to 0.37 during 1979-80 to 1981-82.

    Underwriting of Securities:

    The New Issue Market as a segment of the capital market can be activated through institutional arrangements for the underwriting of new issues of securities. During the pre-independence period, the volume of securities underwritten was quite minimal due to lack of an adequate institutional arrangement for the provision of underwriting. Stockbrokers and banks used to perform this function.

    In recent years, the volume and amount of securities underwritten have tremendously increased owing to the increasing participation of specialized financial institutions like LIC and UTI and the developed banks like 1FC1,1CICI and IDBI in underwriting activities. It is evident from the fact that the number of securities underwritten was only 55 percent in 1960-61, whereas at present it is about 99 percent.

    Response to the Offer of Public Issues of Shares and Bonds:

    Traditionally investors in India being risk-investors had been reluctant to invest in shares of public limited companies. Hence, industrial securities as a form of investment were not popular in India before 1951. However, since 1991 public response to corporate securities has been improving. But equity-cult has yet to be developed in rural areas.

    It is important to point out that the public response to new issues of shares and bonds depends upon number of factors such as rates of return on industrial securities relative to rates of return on non-marketable financial assets and real assets, government’s monetary policy and fiscal policy and above all legal protection to investors in recent years.

    All the above-mentioned factors have contributed to the growth of public response to the new issue of corporate securities. In short, growing response to public issues has strengthened the Indian capital market. It is evident from the fact that the number of shareholders rose from 60 lakh in 1985 to 160 lakh in 1994.

    Merchant Banking:

    The role of merchant banking in India’s capital market can be traced back to 1969 when Grind lays Bank established a special cell called the “Merchant Banking”. Since then all the commercial banks have set up the “Merchant Banking Division” to play an important role in the capital market. The merchant banking division of commercial banks advises the companies about economic viability, financial viability and technical feasibility of the project.

    They conduct the initial ‘spade work” to find out the investment climate to advise the company whether the public issue floated would be fully subscribed or under-subscribed. The merchant banks in India act as the underwriter as well as the manager of new issues of securities. The Securities and Exchange Board of India (SEBI) regulates all merchant banks as far as their operations relating to issue activity are concerned. To sum up, the emergence of merchant banking has strengthened the institutional base of the Indian capital market.

    Credit Rating Agencies:

    Of late, credit rating agencies have emerged in the financial sectors. This is an important development for the growth of the Indian capital market. Investment Information and Credit Rating Agency of India (ICRA) rates bonds, debentures, preference shares, Corporate Debentures, and Commercial Papers.

    As Credit Rating Information Services of India Ltd. (CRISIL) is a pioneer in credit rating, it rates debt instruments of banks, financial institutions, and corporate firms. The credit assessment of companies issuing securities helps in the growth of New Issue Market segment of the capital market.

    Mutual Funds:

    Mutual funds companies are investment trust companies. Mutual funds schemes are designed to mobilize funds from individuals and institutional investors, who in exchange get units which Can be redeemed after a certain lock-in period, at their Net Asset Value (NAV). The mutual fund schemes provide tax benefits and buyback facility. The Unit Trust of India (UTI) can be regarded as the pioneer in the setting up of mutual funds in India. Of late, commercial banks have also launched in India mutual funds schemes.

    Can-stock scheme of the Canara bank and LIC’s scheme, such as Dhanashree, Dhanaraksha, and Dhanariddhi are mutual funds schemes. Since mutual funds schemes help to mobilize small savings of the relatively smaller savers to invest in industrial securities, so these schemes contribute to the growth of the capital market. The total assets of mutual funds companies increased from Rs. 66,272 crore in 1993-94 to Rs. 99,248 crore in 2005 and to Rs. 4,13,365 crore in 2008. The investment of mutual funds in the secondary market influences the share prices in the stock exchange.

    Stock Exchange Regulation Act:

    The growth of capital market would not have been possible had the Government of India not legislated suitable laws to protect the investors and regulate the Stock Exchanges. Under this Act, only recognized stock exchanges are allowed to function. This Act has empowered the Government of India to inquire into the affairs of a Stock Exchange and regulate it’s working. into the affairs of a Stock Exchange and regulate it’s working.

    The Government of India established the Securities and Exchange Board of India (SEBI) on April 12, 1988, through an through an extraordinary notification in the Gazette of India. In April 1992, SEBI was granted statutory recognition by passing an Act. Since 1991, SEBI has been evolving and implementing various measures and practices to infuse greater transparency in the capital market in the interest of investing public and orderly development of the securities market.

    Liberalization Measures:

    Foreign Institutional Investors (FII) have been allowed access to the Indian capital market. Investment norms for NRIs have been liberalized, so that NRIs and Overseas Corporate Bodies can buy shares and debentures, without prior permission of RBI. This was expected to internationalize the Indian capital market.

    To sum up, the Indian capital market has registered an impressive growth since 1951. However, it is only since the mid-1980s that new institutions, new financial instruments, and new regularity measures have led to speedy growth of the capital market. The liberalization measures under the New Economic Policy (NEP) gave a further boost to the growth of the Indian capital market.