CA-Foundation

CA Foundation Business & Commercial Knowledge Study Material – Objectives of Business

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CA Foundation Business & Commercial Knowledge Study Material Chapter 1 Introduction to Business – Objectives of Business

Every business enterprise has certain objectives which regulate and generate its activities. Objectives are needed in every area where performance and results directly affect survival and prosperity of a business. Various objectives of business may be classified into four broad categories as follows:

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Economic Objectives

Business is basically an economic activity. Therefore, its primary objectives are economic in nature.

The main economic objectives of business are as follows:

  1. Earning profits –
    A business enterprise is established for earning some income. It is the hope of earning profits that inspires people to start business. Profit is essential for the survival of every business unit. Just as a person cannot live without food, a business firm cannot survive without profit. Profits enable a businessman to stay in business by maintaining intact the wealth producing capacity of its resources. Profit is also necessary for the expansion and growth of business. Profits ensure continuous flow of capital for the modernisation and extension of business operations in future. Profit also serves as the barometer of stability, efficiency and progress of a business enterprise.
  2. Creating customers –
    Profits are not created by God or by the force of nature. They arise from the businessman’s efforts to satisfy the needs and wants of customers. A businessman can earn profits only when there are enough customers to buy and pay for his goods and services. In the words of Drucker, “There is only one valid definition of business purpose; to create a customer. The customer is the foundation of business and keeps it in existence. It is to supply the customer that society entrusts wealth-producing resources to a business enterprise”. No business can succeed without providing customers value for their money. Business exists to satisfy the wants, tastes and preferences of customers. In order to earn profit, business must supply better, quality goods and services at reasonable prices. Therefore, creation and satisfaction of customers is an important economic objective of business. Business creates customers through advertising and salesmanship. It satisfies the needs of customers by producing the required goods and services and by creating utilities.
  3. Innovations –
    Business is an organ of dynamism and change. In these days of competition a business can be successful only when it creates new designs, better machines, improved techniques, new varieties, etc. Modern science and technology have created a great scope for innovation in the business world. Innovation is not confined to the invention of a new machine. It comprises all efforts made in perfecting the product, minimising the costs and maximising benefits to customers. It involves improvements in management, production, selling servicing, methods of personnel and accounting, etc. Business firms invest money, time and efforts in Research and Development (R&D) to introduce innovations. They develop new technology, introduce new designs and new tools and processes to minimise costs and to satisfy ever increasing wants of customers. In order to create customers business has to explore new markets and attract more customers. It has also to retain old customers by providing better services to them.

Social Objectives

Business does not exist in a vacuum. It is a part of society. It cannot survive and grow without the support of society. Business must therefore discharge social responsibilities in addition to earning profits. According to Henry Ford, “the primary aim of business should be service and subsidiary aim should be earning of profit”.

The social objectives of business are as follows:

  1. Supplying desired goods at reasonable prices –
    Business is expected to supply the goods and
    services required by the society. Goods and services should be of good quality and these should be supplied at reasonable prices. It is also the social obligation of business to avoid malpractices like hoarding, black marketing and misleading advertising.
  2. Fair Remuneration to employees –
    Employees must be given fair compensation for their work. In addition to wages and salary a reasonable part of profits should be distributed among employees in recognition of their contributions. Such sharing of profits will help to increase the motivation and efficiency of employees. It is the obligation of business to provide healthy and safe work environment for employees. Good working conditions are beneficial to the organisation because these help to improve the productivity of employees and thereby the profits of business. Employees work day and night to ensure smooth functioning of business. It is, therefore, the duty of employers to provide hygienic working and living conditions for workers.
  3. Employment Generation –
    Business should provide opportunities for gainful employment to members of the society. In a country like India unemployment has become a serious problem and the Government is unable to offer jobs to all. Therefore, provision of adequate and full employment opportunities is a significant service to society. If unemployment problem increases, the socio-economic environment cannot be congenial for the growth of business activities.
  4. Fair return to investor –
    Business is expected to pay fair return to shareholders and creditors in the form of dividend and interest. Investors also expect safety and appreciation of their investment. They should be kept informed about the financial health and future prospects of business.
  5. Social welfare –
    Business should provide support to social, cultural and religious organisations. Business enterprises can build schools, colleges, libraries, dharamshalas, hospitals, sports bodies and research institutions. They can help non-government organisations (NGOs) like CRY, Help Age, and others which render services to weaker sections of society.
  6. Payment of Government Dues –
    Every business enterprise should pay tax dues (income tax, GST, excise duty, customs duty, etc.) to the Government honestly and at the right time. These direct and indirect taxes provide revenue to the Government for spending on public welfare. Business should also abide faithfully by the laws of the country.
    Thus, businessmen should pursue those policies and take those actions which are desirable in terms of the objectives and values of our society.

Human Objectives

Business is run by people and for people. Labour is a valuable human element in business. Human objectives of business are concerned with the well-being of labour. These objectives help in achieving economic and social objectives of business. Human objectives of business are given below:

  1. Labour welfare –
    Business must recognise the dignity of labour and human factor should be given due recognition. Proper opportunities should be provided for utilising individual talents and satisfying aspirations of workers. Adequate provisions should be made for their health, safely and social security. Business should ensure job satisfaction and sense of belonging to workers.
  2. Developing human resources –
    Employees must be provided the opportunities for developing new skills and attitudes. Human resources are the most valuable asset of business and their development will help in the growth of business. Business can facilitate self-development of workers by encouraging creativity and innovation among them. Development of skilled manpower is necessary for the economic development of the country.
  3. Participative management –
    Employees should be allowed to take part in decision making process of business. This will help in the development of employees. Such participation will also provide valuable information to management for improving the quality of decisions. Workers’ participation in management will usher in industrial democracy.
  4. Labour management cooperation –
    Business should strive for creating and maintaining cor¬dial employer-employee relations so as to ensure peace and progress in industry. Employees should be treated as honourable individuals and should be kept informed.

National Objectives

National objectives of business are as follows:

  1. Optimum utilisation of resources –
    Business should use the nation’s resources in the best possible manner. Judicious allocation and optimum utilisation of scarce resources is essential for rapid and balanced economic growth of the country. Business should produce goods in accordance with national priorities and interests. It should minimise the wastage of scarce natural resources.
  2. National self-reliance –
    It is the duty of business to help the Government in increasing exports and in reducing dependence on imports. This will help a country to achieve economic independence. This requires development of new technology and its application in industry.
  3. Development of small scale industries –
    Big business firms are expected to encourage growth of small scale industries which are necessary for generating employment. Small scale firms can be developed as ancillaries which provide inputs to large scale industries.
  4. Development of backward areas –
    Business is expected to give preference to the industriali-sation of backward regions of the country. Balanced regional development is necessary for peace and progress in the country. It will also help to raise standard of living in backward areas. Government offers specific incentives to the businessmen who set up factories in notified backward areas.
  5. Control over pollution –
    Rapid industrialisation has resulted in air, water and noise pollution. Business is responsible for reducing the adverse effect of business on the quality of life. It must make proper arrangements for the disposal of smoke, effluents, wastes, etc. to protect the health and life of people, animals and birds.

BUSINESS OBJECTIVES AT A GLANCE

Economic Objectives

  1. Earning Profit
  2. Creating customers
  3. Innovations

Social objectives

  1. Quality goods at fair prices
  2. Fair remuneration to employees
  3. Generating employment
  4. Fair return to investors
  5. Social welfare
  6. Payments of taxes

Human Objectives

  1. Labour welfare
  2. Developing Human Resources
  3. Participative management
  4. Labour management Cooperation

National Objectives

  1. Optimum utilisation of resources
  2. National self-reliance
  3. Development of small scale units
  4. Development of backward areas
  5. Pollution control

Role of Profit in Business

Profit earning is essential in business due to the following reasons:

  1. Incentive – Profit is the driving force behind every business. It inspires people to start an enterprise and to work hard for making it successful. Profit is the reward for, undertaking the risk of business.
  2. Survival – Profit is essential for the survival of business and it ensures the continuity of an enterprise. In the absence of profits, an enterprise will eat up its own capital and ultimately close down. With the help of profits business can replace obsolete machinery and equipment and thereby maintain its capacity to create wealth. According to Drucker, “profit is the risk premium that covers the costs of staying in business”. Profits help business to face trade cycles and other shocks. Profits are also required to reward various factors of production.
  3. Growth – Profits is the biggest source of capital for expansion and growth of business. It serves as a means of self-financing. In addition, profits enable business to attract capital from outside. Nobody likes to invest money in a loss making enterprise.
  4. Measure of efficiency – Profit is considered to be the index of success in business. People judge the performance of an enterprise on the basis of profits earned by it.
  5. Prestige and recognition – A loss making business enjoys no goodwill. Profits provide economic power and status to businessmen. Higher profits increase the bargaining strength and credit worthiness of business. Moreover, only a profit making business can provide service to society.

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Thus, profit earning is an essential and desirable objective of every business. But mere money chasing is not business. According to Drucker, “the problem of any business is not the maximisation of profit but the achievement of sufficient profits to cover the risks of economic activity, and thus, to avoid loss. The businessmen who keep their customers, employees, investors and the society satisfied, will definitely earn good profits”. Urwick has very aptly summed up the relevance of profit motive in business as “earning of profits cannot be the objective of a business any more than eating is the objective of living”. A business cannot survive without profit just as a person cannot live without food. But profits cannot be the sole purpose of business just as eating is not the aim of life. However, profits must be earned by satisfying the wants of customers and after paying workers their dues. In the words of Arvind Mafatlal, “no business or industry is run philanthropically. It has to make a profit for further growth. But this profit cannot be at the expense of labour and the community at large”.

Economic and social objectives of business are not contradictory. They go hand in hand in the long run. No business can earn profits without satisfying customers and other sections of society.

Similarly, business cannot render service without earning profits. Thus, the real objective of business is to earn profit by serving the interests of consumers, employees, investors, Government and the society as a whole.

Objections against Profit Maximisation

Despite their indispensable role in business, profits cannot be the be-all and end-all of business.

The profit maximisation objective is undesirable on account of the following reasons:

  • Profit maximisation overstresses the end result and overlooks the means employed to achieve the profits. It considers profit as the ultimate goals of business rather than a means to the real end. The ultimate aim of business should be social welfare. If profit maximisation is considered as the ultimate aim of business, businessmen might try to maximise profits by socially undesirable means such as profiteering, black-marketing, hoarding, exploitation of workers and consumers, etc.
  • Profit maximisation overstresses the reward for owners and ignores the interests of other stakeholders. Profit is the reward for capital and profit maximisation gives the impression that a business concern is the domain only of owners. In reality, no business can succeed without the fullest co-operation of labour, consumers, Government and the community at large. Profit maximisation objective overlooks the stake of these groups in business.
  • Profit maximisation misguides managers to the point where they may endanger the survival of the business. In order to maximise current profits, managers may undermine the firm’s future. They may ignore research and development, executive development, pushing of the most easily saleable products, and other long-term investments. Such activities threaten the long-term success of the enterprise.
  • Profit maximisation has capitalistic overtones. The advocates of socialism decry the goal of profit maximisation on the ground that profit maximisation results in the exploitation of poor by the rich. It also accentuates inequalities in the distribution of income and wealth.
  • Profit maximisation is inconsistent with the modern trends in business. Diffusion of share
    ownership, professionalisation of management, growth of institutional shareholding and the emergency of a distinctive technostructure are some of these trends. The main goal of the technostructure (control by managers and technologists), is survival and growth of business. Profit maximisation may endanger long term growth and, therefore, the technostructure prefers long-term growth. These professionals regard profit maximisation as unrealistic, inappropriate and even immoral.

A truly successful business can be built only if the objective of service to the society is constantly followed. If this is done profits will come automatically, but if the whole emphasis is on making money business may not survive and succeed for a long period. The guiding principle of business should be profit through service. Every business should provide a proper balance between profit motive and social service.

CA Foundation Business & Commercial Knowledge Study Material – Nature of Business, Profession and Employment

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CA Foundation Business & Commercial Knowledge Study Material Chapter 1 Introduction to Business – Nature of Business, Profession and Employment

NATURE OF BUSINESS, PROFESSION AND EMPLOYMENT

Meaning and Nature of Business

Business is an activity, in which different persons exchange something of value, whether goods or services, for mutual gain or profit. It is an organised or systematic activity involving the satisfaction of human wants. Business involves regular or recurring purchase and sale of goods and services with the purpose of earning profits through the satisfaction of human needs. Repeated dealings rather than a single isolated transaction constitute business. Business may be distinguished from other activities by the fact that goods and services created or purchased are meant for sale and not for personal consumption.
Various experts have defined business in different ways. Some of the popular definitions of business are given below:

  • L.H. Haney : “Business may be defined as human activity directed towards producing or acquiring wealth through buying and selling of goods”.
  • B.O. Wheeler – “Business is an institution organised and operated to provide goods and services to society under the incentive of private gain.”
  • L.R. Dicksee – “Business is a form of activity pursued primarily with the objective of earning profits for the benefit of those on whose behalf the activity is conducted.”
  • James Stephenson – “Economic activities performed for earning profits are termed as Business”.
  • Keith and Carlo – “Business is a sum of all activities involved in the production and distribution of goods and services for private profits”.
  • Urwick and Hunt – “Business is any enterprise which makes, distributes or provides any article or service which the other members of the community need and are able and willing to pay for.”
  • R.N. Owens – “Business is any enterprise engaged in the production and distribution of goods for sale in market or rendering services for a price.”

The salient features of business are given below:

  1. Creation of utilities – Business makes goods more useful to satisfy human wants. It adds time, place, form and possession utilities to various types of goods. In the words of Roger, “a business exists to create and deliver value satisfaction to customers at a profit”. Business enables people to satisfy their wants more effectively and economically. It carries goods from place of surplus to the place of scarcity (place utility). It makes goods available for use in future through storage (time utility).
  2. Dealings in goods and services – Every business enterprise produces and/or buys goods and services for selling them to others. Goods may be consumer goods or producer goods. Consumer goods are meant for direct use by the ultimate consumers, e.g., bread, tea, shoes, etc. Producer goods are used for the production of consumer or capital goods like raw materials, machinery, etc. Services like transport, warehousing, banking, insurance, etc. may be considered as intangible and invisible goods. Services facilitate buying and selling of goods by overcoming various hindrances in trade.
  3. Continuity in dealings – Dealings in goods and services become business only if undertaken on a regular basis. According to Peterson and Plowman, “a single isolated transaction of purchase and sale will not constitute business. Recurring or repeated transaction of purchase and sale alone mean business.” For instance, if a person sells his old scooter or car it is not business though the seller gets money in exchange. But if he opens a shop and sells scooters or cars regularly, it will become business. Therefore, regularity of dealings is an essential feature of business.
  4. Sale, transfer or exchange – All business activities involve transfer or exchange of goods and services for some consideration. The consideration called price is usually expressed in terms of money. Business delivers goods and services to those who need them and are able and willing to pay for them. For example, if a person cooks and serves food to his family, it is not business. But when he cooks food and sells it to others for a price, it becomes business. According to Peter Drucker “any organisation that fulfills itself through marketing a product or service is a business”.
  5. Profit motive – The primary aim of business is to earn profits. Profits are essential for the survival as well as growth of business. Profits must, however, be earned through legal and fair means. Business should never exploit society to make money.
  6. Element of risk – Profit is the reward for assuming risk. Risk implies the uncertainty of profit or the possibility of loss. Risk is a part and parcel of business. Business enterprises function in uncertain and uncontrollable environment. Changes in customers’ tastes and fashions, demand, competition, Government policies, etc. create risk. Food, fire, earthquake, strike by employees, theft, etc. also cause loss. A businessman can reduce risks through correct forecasting and insurance. But all risks cannot be eliminated.
  7. Economic activity – Business is primarily an economic activity as it involves production and distribution of goods and services for earning money. However, business is also a social institution because it helps to improve the living standards of people through effective utilisation of scarce resources of the society. Only economic activities are included in business. Non-economic activities do not form a part of business.
  8. Art as well as science – Business is an art because it requires personal skills and experience. It is also a science because it is based on certain principles and laws.

Meaning and Nature of Profession

The term profession means an occupation which involves application of specialised knowledge and skills to earn a living. The persons who are engaged in profession are called professionals. They render personal services of a specialised nature to their clients. The service is based on professional education, training and experience. Professionals receive fee for their services. Chartered Accountancy, medicine, law, tax consultancy are examples of professions. .

The main features of a profession are as follows :

  1. Specialised body of knowledge – Every profession has a specialised and systematised body of knowledge. Members of the profession are required to learn this knowledge.
    Restricted entry – Entry to a profession is allowed only to those who have completed the prescribed education and have passed the specified examination.
  2. Formal training – A profession provides facilities for formal education and training to those who want to acquire professional qualification.
  3. Professional association – Every profession has its own association. A professional associa¬tion is a statutory body and its membership is essential. The association regulates entry in the profession, grants certificate of practice, formulates and enforces code of conduct. For example, The Institute of Chartered Accountants of India (ICAI) regulates the accountancy profession in India.
  4. Service motive – Professionals are expected to emphasise services to their clients rather than economic gain.
  5. Code of conduct – The activities of a professional are regulated by a formal code of conduct. The code is prescribed by the professional association of which he is a member.

Names of various Professions and their Respective Associations are given below:

S.No.ProfessionsProfessionalProfessional associations
1.Medical ProfessionDoctorsMedical Council of India
2.Law ProfessionLawyersBar Council of India
3.Accounting ProfessionChartered AccountantsThe Institute of Chartered Accountants of India (ICAI)
4.Company Secretary ProfessionCompany SecretariesThe Institute of Company Secretaries of India (ICSI)
5.Cost Accounting ProfessionCost AccountantsThe Institute of Cost and Works Accountants of India (ICWAI)
6.Engineering ProfessionEngineersThe Institution of Engineers (India)

Meaning and Nature of Employment

Employment means an economic activity, where people work for others in exchange for some remuneration. The persons who work for others are called ’employees’. The persons or organisations which engage others to work for them are called ‘employers’. The remuneration by an employer to his employee is known as wages or salary. The employee performs the work assigned to him by his employer as per the terms and conditions of employment. There is an oral or written agreement between the employer and the employee. The employee acts under the guidance and control of his employer. The employer may be a Government (department) undertaking or a private firm. Employment thus includes all types of jobs in Government offices and private enterprises. When a professionally qualified person works as an employee he is also said to be in employment. For example, a doctor may be employed in a hospital, a chartered accountant may be working as an accountant in a company and a lawyer may serve as a law officer in a bank.

The main features of employment are as follows:

  • In employment, a person works for others called employer.
  • An employee provides personal service.
  • There is a service agreement or contract between the employee and the employer. It contains the terms and conditions of employment.
  • The employee has to obey the order of the employer.
  • No capital investment is made by the employee.
  • The employee gets wage or salary for his/her service.

Various examples of employment are as follows:

  • A teacher teaching in a school or college.
  • An engineer employed in Municipal Corporation of Delhi.
  • An accountant working in the accounts department of a company.
  • A person working as the plant manager of a factory.
  • A nurse or doctor working in a hospital.

Distinction between Business, Profession and Employment

  1. Mode of establishment – A business enterprise is established when an entrepreneur takes a decision to carry on some business activity. In a profession, on the other hand, the membership or enrollment of a recognised professional association or institution is essential. In order to take up employment, a person has to enter into a contract of service.
  2. Nature of work – A business exists to provide goods and services to satisfy human wants. On the other hand, a professional renders personalised service of a specialised nature to his clients. An employee performs the work assigned by the employer under the contract of service.
  3. Qualifications – No formal education is compulsory in order to carry on a business. But for a profession, specialised knowledge and training are essential. Minimum educational qualifications are prescribed for every profession. In case of employment, the qualifications required depend upon the nature of the job. .
  4. Main objective – In business, the basic motive is to earn profits. A professional, on the other hand, is expected to emphasise the service motive and sense of mission. That is why, a rigorous code of ethical behaviour is laid down in every profession. In case of service, the motive of an employee is to earn salary and receive other benefits.
  5. Investment – Every business requires capital depending upon the nature and scale of operations. A professional also has to invest some capital to establish an office for rendering services. There is no need for capital in case of employment.
  6. Risk – There is an inherent element of risk in business and profession but practically no risk is involved in case of employment. There can be loss in business but in profession and employment return is never negative.
  7. Reward – Profit is the reward of a businessman while professional fee is the reward of a professional. The reward in case of employment is wage or salary. Wage/salary and fee are more regular and fixed than profits.
  8. Transfer of interest – It is possible to transfer ownership interest in business. But no such transfer is possible in case of profession and employment.
  9. Public advertisement – The success of a business depends upon public advertisements. But professionals are prohibited from giving public advertisements. There is no need for public advertisements in case of service.
    In spite of the above differences, there is a closed inter-relationship between business, profession and service. A large business enterprise employs a large number of persons in order to achieve its objectives. It also requires the services of professional experts such as chartered accountants, lawyers, architects, cost accountants, etc. Modern business has become very complex. Trained and experienced managers and other experts are required for efficient business operations. Professionals and other employees provide the necessary manpower for efficient running of business concerns. Thus, business, profession and employment are complementary to one another.

CA Foundation Business & Commercial Knowledge Study Material – Economic and Non-Economic Activities

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CA Foundation Business & Commercial Knowledge Study Material Chapter 1 Introduction to Business – Economic and Non-Economic Activities

Every human being is busy in some activity or the other throughout the day. Every person gets up from bed in the morning, brushes his/her teeth, takes bath and eats breakfast. Then a child goes to School or College to study. An adult goes to work on the job and a housewife works at home. In the evening a person comes back home, watches television, eats dinner and goes to bed at night. All these activities in which a person engages from morning to evening are known as ‘human activities’.

ECONOMIC AND NON-ECONOMIC ACTIVITIES

All human activities may broadly be classified into two categories:

  1. Economic activities and
  2. Non-economic activities

Economic activities are undertaken with the object of earning money and acquiring wealth. These activities result in the production of economic goods and services. Business is an economic activity but it differs from other economic activities such as those of an employee, and self employed persons like doctors, lawyers, chartered accountants, etc.

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Non-economic activities are inspired by sentiments and emotions such as love for the family, desire to help the poor and love for the country. These activities are not undertaken for monetary gain but for one’s satisfaction and happiness.

Economic Activities

Economic activities refer to all those human activities which are undertaken to earn a living and thereby satisfy human wants. The main object of these activities is to earn income and create wealth. The money earned through work is used to satisfy wants. For example, a teacher teaches in a school or college, a doctor attends to patients in his clinic and a shopkeeper sells goods to his customers. Economic activities are concerned with the production, distribution and exchange of goods and services. These activities create utilities and result in the production of wealth. Economic activities are also called occupations.

The main characteristics of economic activities are as follows:

  1. Economic motive – Economic activities are undertaken to earn money and acquire wealth The main motive behind these activities is to make an economic gain. These activities are performed by human beings for earning livelihood.
  2. Productive – Economic activities involve production, distribution and exchange of goods and services for satisfying human wants. These activities are directly related to creation of wealth.
  3. Economic resources – Economic activities make use of economic resources such as land, labour, capital, etc.
  4. Rational use – Economic activities require proper allocation of scarce resources so as to obtain maximum output from them. These activities involve optimum utilisation of land, labour, capital and other factors of production. Welfare of society can be maximised when best possible use of resources is made.
  5. Economic growth – Economic activities determine the level of economic development of a country and the standard of living of its citizens.
  6. Legally valid – Human activities performed for economic gain are called economic activities only when they are lawful. Unlawful activities such as gambling, black marketing, theft, dacoity, smuggling etc., are opposed to public interest. Therefore, these activities cannot be called economic activities.
  7. Socially desirable – Economic activities are desirable for society. They must be in accordance with the expectations and norms of society.

Examples of economic activities

  • Production of goods by a manufacturer in a factory.
  • Distribution of goods by a wholesaler to retailers.
  • Selling of goods by a retailer to customers.
  • Transportation of goods and passengers by railways/roadways/airlines/ships.
  • Storage of goods by a warehouse keeper.
  • Acceptance of deposits and lending of money by a banker.
  • Insurance of risks by an insurance company.
  • Advertising and publicity of goods by an advertising agency.
  • A clinic run by a doctor.
  • Legal services provided by a lawyer in a court.
  • Audit services provided by a chartered accountant in his office.
  • Working of a Government officer.
  • Services of a teacher in a school/college.
  • Working of a farmer in his fields to self his produce.
  • Working of a nurse in a hospital.

Economic Activities at a Glance Characteristics

  1. Economic motive
  2. Productive
  3. Rational use
  4. Economic resources
  5. Economic growth
  6. Legally valid
  7. Socially desirable

Examples

  1. Manufacturing goods in a factory.
  2. Selling goods in a shop.
  3. A doctor treating patients in his clinic.
  4. A lawyer providing legal advice in his own office.
  5. A professor teaching in a university.
  6. A clerk working in a Government office.

Non-Economic Activities

Activities which are undertaken to satisfy social, religious, cultural and sentimental requirements are called non-economic activities. The object of these activities is not to earn monetary gain or reward. People engage in non-economic activities for reasons of love, sympathy, religion, patriotism, etc. For example, a mother looks after her children, a student donates blood, an old man goes to temple daily, a rich man donates money to Prime Minister Relief Fund, a young man helps a blind girl to cross the road, etc.

It is the object of any activity that distinguishes between economic and non-economic activities. The primary objective of economic activities is to earn livelihood and create wealth. On the other hand, the main objective of non-economic activities is to get some sort of social, cultural, religious or recreational satisfaction. The output of economic activities can be measured in terms of money e.g., the salary of a teacher, the fee of a doctor and the profits of a businessman. But the result of non-economic activities cannot be measured in terms of money.

The same activity may be economic as well as non-economic. For example, a nurse attending a patient in a hospital is an economic activity as the nurse works for a salary. But when the same nurse attends to her sick mother at home it is a non-economic activity because the object is not to earn money. Thus, the activity of the same person may be economic at one-time or place and non-economic at another time or place. The dividing line is not the activity or the person who is doing it but the objective for which it is undertaken.

Thus, non-economic activities are undertaken due to the following considerations :

  1. Love and affection – for example taking dinner with the family, cooking food for family.
  2. Personal satisfaction – for example meditating in a park.
  3. Physical needs – for example morning walk by a person.
  4. Religious obligation – for example praying in a temple.
  5. Social obligations – for example helping victims of an accident, flood or earthquake.
  6. Patriotism – donating blood for injured army men.

DISTINCTION BETWEEN ECONOMIC AND NON-ECONOMIC ACTIVITIES

S.No.Point of DistinctionEconomic ActivitiesMon-Economic Activities
1.ObjectiveEconomic objective – To earn a living and acquire wealthSentimental and emotional objectives – To obtain some sort of personal satisfaction.
2.ExpectationMoney income is expected from these activitiesMoney income is not expected from these activities
3.RelationshipDirectly related to income and wealthNot related to income and wealth.
4.Measurement of outcomeResult can be measured in terms of moneyResult cannot be measured in terms of Money
5.LogicGuided by rational considerations of cost and benefitGuided by sentiments and emotions without regard to gain or sacrifice
6.ResourcesInvolve proper allocation and optimum use of resourcesOptimum allocation and use of resources not essential
7.Types or examplesBusiness, Profession and employmentFamily-oriented, religious, social, cultural and national.

Economic activities are also known as ‘occupations’. Economic activities or occupations may be classified into three broad categories as follows:

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CA Foundation Business Economics Study Material – Perfect Competition

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CA Foundation Business Economics Study Material Chapter 4 Price Determination in Different Markets – Perfect Competition

PERFECT COMPETITION

Introduction:

Perfect competition is a market structure where there are large number of firms (seller) which produce and sell homogeneous product. Individual firm produces only a small portion of the total market supply.

Therefore, a single firm cannot affect the price.
– Price is fixed by industry.
– Firm is only a price taker.
– So the price of the commodity is uniform.

Features of perfect competition

Following are the main features of perfect competition:

  1. Large number of buyers and sellers:
    • The number of buyers and sellers is so large that none of them can influence the price in the market individually.
    • Price of the commodity is determined by the forces of market demand and market supply.
  2. Homogeneous Product:
    • The product produced by all the firms in the industry are homogeneous.
      – They are identical in every respect like colour, size, etc.
      – Products are perfect substitutes of each other.
  3. Free entry and exit of the firms from the markets:
    • New firms are free to enter the industry any time.
    • Old firms or loss incurring firms can leave industry any time.
    • The condition of free entry and exit applies only to the long run equilibrium of the industry.
  4. Perfect knowledge of the market:
    • Under perfect competition, all firms (sellers) and buyers have perfect knowledge about the market.
    • Both have perfect information about prices at which commodities can be sold and bought.
  5. Perfect mobility:
    • The factors of production can move freely from one occupation to another and from one place to another.
  6. No transport cost:
    • Transport cost is ignored as all the firms have equal access to the market.
  7. No selling cost:
    • Under perfect competition commodities traded are homogeneous and have uniform price.
    • Therefore, firm need not make any expenditure on publicity and advertisement.

Equilibrium of the Industry:

  • Industry is a group of firms producing identical commodities.
  • Under perfect competition, price of a commodity is determined by the interaction between market demand and market supply of the whole industry.
  • The equilibrium price is determined at a point where demand for and supply of the whole industry are equal to each other.
  • No individual firm can influence the price.
  • Firm has to accept the price determined by the industry.
  • Therefore, the firm is said to be price taker and industry, the price maker.

Equilibrium of the industry is illustrated as follows:

CA Foundation Business Economics Study Material - Perfect Competition

The above table and fig. shows that at a price of ₹ 6 per unit, the quantity demanded equals quantity supplied.
The industry is at equilibrium at point ‘E’, where the equilibrium price is ₹ 6 and equilibrium | quantity is 60 units.

Equilibrium of a firm:

  • We have already seen that under the perfect competition, the price of the commodity is determined by the forces of market demand and market supply le. price is determined by industry.
  • Individual firm has to accept the price determined by the industry. Hence, firm is a PRICE TAKER.

CA Foundation Business Economics Study Material - Perfect Competition 1

  • In the table – the equilibrium price for the industry has been fixed at ₹ 6 per unit through the inter-action of market demand and supply.
  • Table – shows that the firm has no choice but to accept and sell their commodity at a price that has been determined by the industry ie. ₹ 6 per unit.
  • The firm cannot charge higher price than the market price of ₹ 6 per unit because of fear of loosing customers to rival firms.
  • There is no incentive for the firm to lower the price also.
  • Firm will try to sell as much as it can at the price of ₹ 6 per unit.
  • Table – shows that firm’s AR = MR = Price.

CA Foundation Business Economics Study Material - Perfect Competition 2

  • Fig. shows that being a price taker firm, it has to sell at a given price i.e. ₹ 6 per unit.
  • Therefore, firm’s demand curve is a horizontal straight line parallel to X-axis i.e. a perfectly elastic demand curve.
  • We know that price of a commodity is also the AR for the firm.
  • Therefore, demand curve also shows the AR for different quantities sold by the firm.
  • As every additional unit is sold at a given price i.e. ₹ 6 per unit, the MR = AR and the two curves coincides.
  • Thus, in a perfectly competitive market a firm’s AR = MR = Price = Demand Curve

Conditions for equilibrium of a firm:

  • In perfect competition, the firms are price takers and output adjusters.
  • This is because the price of the commodity is determined by the forces of market demand and market supply ie. by whole industry and individual firm has to accept it.
  • Therefore firm has to simply choose that level of output which yields maximum profit at the prevailing prices.
  • The firm is at equilibrium when it maximises its profit.
  • The output which helps the firm to maximise its profit is called equilibrium output.
  • There are two conditions for the equilibrium of a firm. They are —
    1. Marginal Revenue should be equal to the marginal cost i.e. MR = MC. (First order condition)
    2. Firm’s marginal cost curve should cut its marginal revenue curve from below i.e. marginal cost curve should have positive slope at the point of equilibrium. (Second order condition)
  • If MR > MC, there is incentive to produce more and add to profits.
  • If MR < MC, the firm will have to decrease the output as cost of production of additional units is high.
  • When MR = MC, it is equilibrium output which maximises the profits.

CA Foundation Business Economics Study Material - Perfect Competition 3

  • Fig. shows that OP is the price determined the industry and firm has to accept it.
  • At prevailing price OP the firm faces horizontal demand curve or average revenue curve.
  • Since the firm sells every additional unit at the same price, marginal revenue curve coincides with average revenue curve.
  • In the fig. at point ‘A’, MR = MC but second condition is not fulfilled.
  • Therefore, OQ1 is not equilibrium output. Firm should expand output beyond OQ1 because
    – it will result in the fall of marginal cost, and
    – add to firm’s profits.
  • In the fig. at point ‘B’ not only
    MR = MC
    but MC curve cuts the MR curve from below Le. it has positive slope.
  • Therefore, OQ2 is the equilibrium level of output and point ‘B’ represents equilibrium of firm.

Supply curve of the firm in a competitive market

In a perfectly competitive industry, the MC curve of the firm is also its supply curve. This can be explained with the help of following figure.

CA Foundation Business Economics Study Material - Perfect Competition 4

  • The fig. shows that at the market price OP1 the firm faces demand curve D,.
  • At OP1 price the firm supplies OQ1 quantity because here MC=MR.
  • If the price rises to OP2 the firm faces demand curve D2.
  • At OP2 price the firm supplies OQ2 quantity.
  • Similarly at OP3 and OP4 price corresponding supplies are OQ3 and OQ4 respectively.
  • Thus, the firm’s marginal cost curve indicates the quantities of output which it will supply at different prices.
  • It can be observed that the competitive firm’s short run supply curve is identical only with that portion of MC curve, which lies above the AVC.
  • Hence, price ≥ AVC.

Short Run Equilibrium of a Competitive Firm. (Price – Output Equilibrium)

A competitive firm in the short run attains equilibrium at a level of output which satisfies the following two conditions:

  1. MC = MR, and
  2. MC curve cuts the MR curve from below.

When a competitive firm, is in short run equilibrium, it may find itself in any of the following situations —

  1. it break evens i.e. earn NORMAL PROFITS where Average Revenue = Average Cost i.e. AR = AC.
  2. it earns profit i.e. earn SUPER NORMAL PROFITS where Average Revenue > Average Cost i.e. AR > AC.
  3. it suffer LOSSES where Average Revenue < Average Cost i.e. AR < AC.

Normal Profits (AR = AC):
A firm would earn normal profits if at the equilibrium output AR=AC.
CA Foundation Business Economics Study Material - Perfect Competition 5

Super Normal Profits (AR > AC):
A firm would earn super normal profits if at the equilibrium output AR > AC.
CA Foundation Business Economics Study Material - Perfect Competition 6

Losses (AR < AC):
A firm suffer losses, if at the equilibrium level of output, its AR < AC.
CA Foundation Business Economics Study Material - Perfect Competition 7
CA Foundation Business Economics Study Material - Perfect Competition 8

  • When the firm incur losses, a question arises whether it should continue to produce or should it shut down ?
  • The answer to this lies in the cost structure of the firm.
  • Total cost of a firm = Total Fixed Costs + Total Variable Costs
  • Fixed costs once incurred cannot be recovered even if the firm shuts down.
  • Therefore, whether to shut down or not depends on variable costs alone.
  • If AR (Price) > AVC or AR = AVC, the firm can continue to produce even though it suffer losses at the equilibrium level of output.
  • If AR (Price) < AVC, the firm should shut down.

Long run Equilibrium of a Competitive Firm

  • In a perfectly competitive market there is no restriction on the entry or exit of firms.
  • Therefore, if existing firms are earning super normal profits in the short run, they will attract new firms to enter the industry.
  • As a result of this, the supply of the commodity increases. This brings down the price per unit.
  • On the other hand, the demand for factors of productions rises which pushes up their prices and so the cost of production rises.
  • Thus, the price line or AR curve will go down and cost curves will go up.
  • As a result of this, price line or AR curve becomes tangent to long run average cost curve. This wipes out super normal profit.
  • Hence, in long run firms earn only normal profits.

CA Foundation Business Economics Study Material - Perfect Competition 9

  • Fig. Shows that long run LMR = LMC = LAC = LAR = Price
  • The firm is at equilibrium at point E1
  • E1 is the minimum point of LAC curve. Thus firm produces equilibrium output OQ1 at the minimum or optimum cost.
  • In the long run under competitive market —
    – Firms earn just normal profits, and
    – competitive firms are of optimum size because they produce at optimum cost Le. at the lowest point of long run average cost curve.

 

CA Foundation Business Economics Study Material – Determination of Prices

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CA Foundation Business Economics Study Material Chapter 4 Price Determination in Different Markets – Determination of Prices

Determination of Equilibrium Price

  • We know that law of demand reveals, if other conditions remain unchanged, more quantity of a commodity is demanded in the market at a lower price and less quantity is demanded at a higher price. Therefore, demand curve slopes downward.
  • Similarly, the law of supply reveals, if other conditions remain unchanged, more quantity of a commodity is supplied in the market at a higher price and less quantity is supplied at a lower price. Therefore, supply curve slopes upward.
  • Demand and supply are the two main factors that determine the price of a commodity in the market. In other words, the price of a commodity is determined by the inter-action of the forces of demand and supply.
  • The price that will come to prevail in the market is one at which quantity demanded equals 1 quantity supplied.
  • This price at which quantity demand equals quantity supplied is called equilibrium price.
  • The quantity demanded and supplied at equilibrium price is called equilibrium quantity.

The process of price determination is illustrated with the help of following imaginary schedule and diagram.

CA Foundation Business Economics Study Material - Determination of Prices

The above table shows that at a price of ₹ 3 per unit, the quantity demanded equals quantity supplied of the commodity. At ₹ 3 two forces of demand and supply are balanced. Thus, ₹ 3 is the equilibrium price and equilibrium quantity at ₹ 3 is 300 units.

CA Foundation Business Economics Study Material - Determination of Prices 1

  • The equilibrium between demand and supply can also be explained graphically as in Fig.
  • In Fig. the market is at equilibrium at point ‘E’, where the demand curve and supply curve intersect each other. Here quantity demanded and supplied, are equal to each other.
  • At point ‘E’, the equilibrium price is ₹ 3 per unit and equilibrium quantity is 300 units.
  • If the price rises to ₹ 4 per unit, the supply rises to 400 units but demand falls to 200 units. Thus, there is excess supply of 200 units in the market.
  • In order to sell off excess supply of 200 units the sellers will compete among themselves and in doing so the price will fall.
    As a result the quantity demand will rise and quantity supplied will fall and becoming equal to each other at the equilibrium price ₹ 3.
  • Similarly, if the price falls to ₹ 2 per unit, the demand rises to 400 units but supply falls to 200 units. Thus, there is excess demand of 200 units in the market.
  • As the price is less there is competition among the buyers to buy more and more. This competition among buyers increases with the entry of new buyers.
  • More demand and less supply and competition among buyers will push up the price.
  • As a result, quantity demanded will fall and quantity supplied will rise and become equal to each other at the equilibrium price of ₹ 3.

Effects of Shifts in Demand and Supply on Equilibrium Price

While determining the equilibrium price, it was assumed that demand and supply conditions were constant. In reality however, the condition of demand and supply change continuously.
Thus, changes in income, taste and preferences, changes in the availability and prices of related goods, etc. brings changes in demand conditions and cause demand curve to shift either to right or left.
In the same way, changes in the technology, changes price of labour, raw materials, etc., changes in the number of firms, etc. brings changes in supply conditions and cause supply curve to shift either to right or left.

(a) Change (shift) in Demand and Supply remaining constant.

CA Foundation Business Economics Study Material - Determination of Prices 2

  • In Fig.- DD and SS are the original demand and supply curves respectively intersecting each other at point E.
  • At point E, the equilibrium price is OP and the demand and supply (ie. equilibrium quantity) are equal at OQ.
  • When the demand increases, the demand curve shifts upwards from DD to D1D1 supply remaining the same.
    As a result, the equilibrium price rises from OP to OP1 and the equilibrium quantity increases from OQ to OQ1 as shown at point E1.
  • When the demand decreases, the demand curve shifts downwards from DD to D2D2, Supply remaining the same.
  • As a result, the equilibrium price falls from OP to OP2 and the equilibrium quantity decreases from OQ to OQ2 as shown at point E2.

(b) Change (shift) in Supply and Demand remaining constant.

CA Foundation Business Economics Study Material - Determination of Prices 3

  • In Fig. – DD and SS are the original demand and supply curves respectively inter-sections each other at point E.
  • At point E, the equilibrium price is OP and the demand and supply (i.e. Equilibrium quantity) are equal at OQ.
  • When the supply increases, the supply curve shifts to the right from SS to S1S1 demand remaining the same.
  • As a result, the equilibrium price falls from OP to OP1 and the equilibrium quantity increases from OQ to OQ1 as shown at point E1.
  • When the supply decreases, the supply curve shifts to the left from SS to S2S2, demand remaining the same.
  • As a result, the equilibrium price rises from OP to OP2 and the equilibrium quantity decreases from OQ to OQ2 as shown at point E2.

Effects of Simultaneous Shifts in Demand and Supply on Equilibrium Price

Sometimes demand and supply conditions may change at the same time changing the equilibrium price and quantity. The changes in both demand and supply simultaneously can be discussed with the help of following diagrams:

CA Foundation Business Economics Study Material - Determination of Prices 4

  • In Fig. – DD and SS are the original demand and supply respectively intersecting each other at point E at which the equilibrium price is OP and the equilibrium quantity is OQ.
  • Fig. (a) shows that the increase in demand is equal to increase in supply. The new curves D1D1 and S1S1 intersect at E1. Therefore, the new equilibrium price is equal to old equilibrium price OP. But equilibrium quantity increases.
  • Fig. (b) shows that the increase in demand is more than increase in supply. The new curves D1D1 and S1S1 intersect each other at point E, which shows that new equilibrium price OP1 is higher than old equilibrium price OP. But equilibrium quantity increases.
  • Fig. (c) shows that the increase in supply is more than increase in demand. The new curves D1D1 and S1S1 intersect each other at point E1 which shows that new equilibrium price OP1 is lower than old equilibrium price OP. But equilibrium quantity increases.