INTRODUCTION TO ECONOMICS - Top Engineering Colleg · Department of Civil Engineering Prepared By:...

Department of Civil Engineering Prepared By: Jay K. Kanani Darshan Institute of Engineering & Technology, Rajkot .1

1 INTRODUCTION TO ECONOMICS

1.1 Meaning of Economics

The word Economics is derived from the

Greek word ―OKIOS NEMEIN‖ meaning

household management.

Man is a bundle of desires. Goods and

services satisfy these wants. But almost all

the goods are scares.

Economics is the science that deals with

production, exchange and consumption of

various commodities in economic systems. It

shows how scarce resources can be used to

increase wealth and human welfare. The

central focus of economics is on scarcity of

resources and choices among their

alternative uses.

The resources or inputs available to produce

goods are limited or scarce. This scarcity

induces people to make choices among

alternatives, and the knowledge of

economics is used to compare the

alternatives for choosing the best among

Course Contents

1.1 Meaning and Definition of

Economics

1.2 Micro and Macro economics

1.3 Supply and Demand

- Law of supply

- Law of demand

1.4 Equilibrium

1.5 Elasticity

- Price elasticity

- Income elasticity

1. Introduction of Economics ENGINEERING ECONOMICS AND MANAGEMENT (2140003)

Prepared By: Jay K. Kanani Department of Civil Engineering Page 1.2 Darshan Institute of Engineering & Technology, Rajkot

them. For example, a farmer can grow sugarcane, banana, cotton etc. in his

garden land. But he has to choose a crop depending upon the availability of

irrigation water.

Two major factors are responsible for the emergence of economic problems.

They are: i) the existence of unlimited human wants and ii) the scarcity of

available resources. The numerous human wants are to be satisfied through the

scarce resources available in nature. Economics deals with how the numerous

human wants are to be satisfied with limited resources. Thus, the science of

economics centres on want - effort - satisfaction.

Definition

i) Wealth Definition:

This definition was produced by Adam Smith. He defined “Economics as a science

which inquired into the nature and cause of wealth of Nations”. According to this

definition, Economics is a science of study of wealth only which deals with

production, distribution and consumption. Economics studies only material

commodities and causes of changes in wealth and changes in Economics dept.

Criticisms of this definition:(a) Wealth is of no use unless it satisfies human

wants.(b) This definition is not of much importance/important to man and

welfare.

ii) Welfare definition:

It was given by Alfred Marshall. According to Marshall “Economics is the study of

mankind in the ordinary business of life”. If examines how a person oats his

income and how he invests it. Thus on one side it is a study of wealth and the

other most important side, it is a study of man.


Department of Civil Engineering Prepared By: Jay K. Kanani Darshan Institute of Engineering & Technology, Rajkot Page 1.3

Basic concept of Economics

The basic concept or elements of economics are: wants, scale of preference, choice, and opportunity cost.

1. Wants

Want may be defined as an insatiable desire or need by human beings to own

goods or services that give satisfaction. The basic needs of man include; food,

housing and clothing. Human needs are many. They include tangible goods like

houses, cars, chairs, television set, radio, e.t.c. while the others are in form of

services, e.g. tailoring, carpentry, medical, e.t.c. Human wants and needs are

many and are usually described as insatiable because the means of satisfying

them are limited or scarce.

2. Scarcity

Scarcity is defined as the limited supply of resources which are used for the

satisfaction of unlimited wants. In other words, scarcity is the inability of human

beings to provide themselves with all the things they desire or want. These

resources are scarce relative to their demand. As a student you will need to buy

school materials, e.g books worth $100 but you have only $50. It can be seen that

the money you have, which is your resources, will not be sufficient to buy all you

need. The available resources within the environment can never at any time be in

abundance to satisfy all human wants. Since wants are numerous and insatiable

relative to the available resources, human beings have to choose the most

important ones and leave the less important ones. There would be no economic

problem if resources were not scarce hence economics is sometime defined as

the study of scarcity.

3. Scale of preference

It is defined as a list of unsatisfied wants arranged in the order of their relative

importance. In other words, it is list showing the order in which we want to

satisfy our wants arranged in order of priority. In the scale of preference, the

most pressing wants come first and the least pressing ones come last. It is after

the first in the list has been satisfied that there will be room for the satisfaction of

the next. Choice therefore arises because human wants are unlimited or

numerous, while the resources for satisfying them are limited or scarce.

4. Choice



Choice can be defined as a system of selecting or choosing one out of a number

of alternatives.

Human wants are many and we cannot satisfy all of them because of our limited

resources. We therefore decide which of the wants we can satisfy first. Choice

arises as a result of the resources used in satisfying these wants. Choice therefore

arises as a result of scarcity of resources. Since it is extremely difficult to produce

everything one wants, choice has to be made by accepting or taking up the most

pressing wants for satisfaction based on the available resources.

5. Opportunity Cost

Opportunity cost is defined as an expression of cost in terms of forgone

alternatives. It is the satisfaction of one’s want at the expense of another want. It

refers to the wants that are left unsatisfied in order to satisfy another more

pressing need. Human wants are many, while the means of satisfying them are

scarce or limited. We are therefore faced with the problem where we have to

choose one from a whole set of human wants, to choose one means to forgo the

other. A farmer who has only $20 and wants to buy a cutlass and a hoe may

discover that he cannot get both materials for $20. He would therefore choose

which one he has to buy with the money he has. If he decides to buy a cutlass, it

means he has decided to forgo the hoe. The hoe is thus what he has sacrificed in

order to own a cutlass. The hoe he has sacrificed is the forgone alternative and

this is what is referred to as opportunity cost. Opportunity cost should not be

confused with money cost. Money cost refers to the total amount of money that

is spent in order to acquire a set of goods and services. For example, a customer

who spent $20 to buy a pair of trousers has dispensed with cash. The $20 spent is

the money cost.

1.2 Micro and Macro economics

The difference between micro and macroeconomics is simple. Microeconomics is the

study of economics at an individual, group or company level. Macroeconomics, on

the other hand, is the study of a national economy as a whole.

1. Microeconomics:

Microeconomics is the study of particular firm, particular household,

individual prices, wages, incomes, individual industries, and individual

commodities.



Micro means very small or millionth part.

The subject or example of microeconomics is about person, an investor, a

producer.

As it analyzes individually it provides a partial concept or partial figure of a

country.

Micro economics is concerned with the individual entities.

While both fields of economics often use the same principles and formulas to

solve problems, microeconomics is the study of economics at a far smaller scale,

while macroeconomics is the study of large-scale economic issues.

Both fields of economics are interdependent

At first glance, micro and macro economics might seem completely different from

one another. In reality, these two economic fields are remarkably similar, and the

issues they study often overlap significantly.

For example, a common focus of macroeconomics is inflation and the cost of living

for a specific economy. Inflation is caused by a variety of factors, ranging from low

interest rates to expansion of the money supply.

While this might seem like a purely macroeconomic field of study, it’s actually one

that’s very important in microeconomics. Since inflation raises the price of goods,

services and commodities, it has serious effects for individuals and businesses.

On a microeconomic level, this has several effects. Businesses are forced to raise

their prices in response to the increased cost of materials. They also need to pay

their employees more over the long term to account for the higher cost of living.

This is just one example of a macroeconomic phenomenon – in this case, inflation

and a rising cost of living – affecting a microeconomic one. Other macroeconomic

decisions, such as the creation of a minimum wage or tariffs for certain goods and

materials, have significant microeconomic effects.

Do you want to gain a detailed understanding of macroeconomics? Enroll in our

Economics Without Borders course to learn how currencies, central banks and a wide

variety of other factors affect national and global economies.

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Examples of microeconomic issues

Microeconomics seeks to solve problems on a small level. Some economics like to

describe microeconomics as the study of economics and behavior from the bottom

up, since it’s focused on the effects of low-level decisions on the economy.

An example of a microeconomic issue could be the effects of raising wages within a

business. If a large business raises its wages by 10 percent across the board, what is

the effect of this policy on the pricing of its products going to be?

Since the cost of producing products has increased, the price of these products for

consumers is likely to follow suit. Likewise, what will happen if a company raises

wages for its most productive employees but fires its least productive workers?

2. Macroeconomics

Macroeconomics deals not with individual quantities as such but with

aggregates of these quantities not with individual income but with national

income, not with individual prices but with the price level not with individual

output but with national output.

Macro means large or whole.

The subject of macroeconomics is about national production, national income,

income level.

As it analyzes overall it provides full figure or complete reflection of a country.

Macroeconomics is concerned with the overall performance of the economy.

Examples of macroeconomic issues

While microeconomics focuses on the effects a certain decision has on individuals

and businesses, macroeconomics looks at the bigger picture. In macroeconomics, a

common issue is the effects of certain policies on the national or regional economy.

For example, while a micro economist might study the effects of low interest rates

on individual borrowers, a macroeconomist would observe the effects that low

interest rates have on the national housing market or the unemployment rate.

The importance of a balanced economics education

Microeconomics and macroeconomics have a lot in common, and the skills used to

solve small-scale economic issues are often identical to those used to find solutions

to large-scale economic problems.



Learn the impact of economic variables on small firms, individuals, households and

the economy as a whole in our Micro & Macro Economics course. Designed for new

economics students, this in-depth course is an excellent introduction to macro and

micro economics.

1.3 Supply and demand

Demand : Demand is the rate at which consumers want to buy a product. Economic theory

holds that demand consists of two factors: taste and ability to buy. Taste, which is

the desire for a good, determines the willingness to buy the good at a specific price.

Ability to buy means that to buy a good at specific price, an individual must possess

sufficient wealth or income.

Both factors of demand depend on the market price. When the market price for a

product is high, the demand will be low. When price is low, demand is high. At very

low prices, many consumers will be able to purchase a product. However, people

usually want only so much of a good. Acquiring additional increments of a good or

service in some time period will yield less and less satisfaction.3 As a result, the

demand for a product at low prices is limited by taste and is not infinite even when

the price equals zero. As the price increases, the same amount of money will

purchase fewer products. When the price for a product is very high, the demand will

decrease because, while consumers may wish to purchase a product very much, they

are limited by their ability to buy.

A. The Law of Demand

The law of demand states that, if all other factors remain equal, the higher the price

of a good, the less people will demand that good. In other words, the higher the

price, the lower the quantity demanded. The amount of a good that buyers purchase

at a higher price is less because as the price of a good goes up, so does the

opportunity cost of buying that good. As a result, people will naturally avoid buying a

product that will force them to forgo the consumption of something else they value

more. The chart below shows that the curve is a downward slope.

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For example, we are likely to buy more oranges if the price per dozen is $3 and less if

the price per dozen is $6.

Demand schedule: The demand schedule of sugar which is purchased in the market at different prices per unit of time is given below: Price per Kg Quantity demanded in rupees

in rupees in Kg.

10 1000

8 2000

6 3000

4 4000

2 5000

Explanation:

The above schedule shows that a consumer buys 1000 Kg. sugar 10 rupees per Kg.

when price falls to two rupees his demand increases up to 5000 Kg. We can say that

if other things remaining the same, a consumer buys more goods at lower price and

fewer goods at higher prices.

Demand curve:

Demand curve is a graphic representation of the demand schedule.

In the demand curve, the price is shown on the vertical and quantity demand is

plotted on the horizontal axies. The curve DD' demand curve slopes down which

shows that price and quantity demanded work in opposite direction.

http://www.studypoints.blogspot.com/



Determinants of Demand

When price changes, quantity demanded will change. That is a movement along the same demand curve. When factors other than price changes, demand curve will shift. These are the determinants of the demand curve.

1. Income: A rise in a person’s income will lead to an increase in demand (shift demand curve to the right), a fall will lead to a decrease in demand for normal goods. Goods whose demand varies inversely with income are called inferior goods (e.g. Hamburger Helper).

2. Consumer Preferences: Favorable change leads to an increase in demand, unfavorable change lead to a decrease.

3. Number of Buyers: the more buyers lead to an increase in demand; fewer buyers lead to decrease.

4. Price of related goods:

a. Substitute goods (those that can be used to replace each other): price of substitute and demand for the other good are directly related.

Example: If the price of coffee rises, the demand for tea should increase.

b. Complement goods (those that can be used together): price of complement and demand for the other good are inversely related.



Example: if the price of ice cream rises, the demand for ice-cream toppings will decrease.

5. Expectation of future:

a. Future price: consumers’ current demand will increase if they expect higher future prices; their demand will decrease if they expect lower future prices.

b. Future income: consumers’ current demand will increase if they expect higher future income; their demand will decrease if they expect lower future income

Supply

Supply is defined as the total quantity of a product or service that the marketplace

can offer. The quantity supplied is the amount of a product/service that suppliers

are willing to supply at a given price. This relationship between price and the amount

of a good/service supplied is known as the supply relationship.

B. The Law of Supply

The law of supply describes the practical interaction between the price of a

commodity and the quantity offered by producers for sale. The law of supply is a

hypothesis, which claims that at higher prices the willingness of sellers to make a

product available for sale is more while other things being equal. When the price of a

product is high, more producers are interested in producing the products. On the

contrary, if the price of a product is low, producers are less interested in producing

the product and hence the offer for sale is low. The concept of law of supply can be

explained with the help of a supply schedule and a supply curve.

Supply Schedule

Supply schedule represents the relationship between prices and the quantities that

the firms are willing to produce and supply. In other words, at what price, how much

quantity a firm wants to produce and supply.

Suppose the following is an individual’s supply schedule of oranges.



Price Per Dozen ($)

Quantity Supplied (in dozens)

4 3

6 6

8 9

10 12

12 13

The supply curve is a graphical representation of the law of supply. The supply curve

has a positive slope, and it moves upwards to the right. This curve shows that at the

price of $6, six dozens will be supplied and at the higher price $12, a larger quantity

of 13 dozens will be supplied.



Determinants of Supply

Determinants of supply (also known as factors affecting supply) are the factors which

influence the quantity of a product or service supplied. We have already learned that

price is a major factor affecting the willingness and ability to supply. Here we will

discuss the determinants of supply other than price. These are the factors which are

assumed to be constant in law of supply.

The price change of a product causes the price-quantity combination to move along

the supply curve. However when the other determinants change, the supply curve is

shifted.

Following are the major determinants of supply other than price:

1. Number of Sellers

Greater the number of sellers, greater will be the quantity of a product or service

supplied in a market and vice versa. Thus increase in number of sellers will increase

supply and shift the supply curve rightwards whereas decrease in number of sellers

will decrease the supply and shift the supply curve leftwards. For example, when

more firms enter an industry, the number of sellers increases thus increasing the

supply.

2. Prices of Resources

Increase in resource prices increases the production costs thus shrinking profits and

vice versa. Since profit is a major incentive for producers to supply goods and

services, increase in profits increases the supply and decrease in profits reduces the

supply. In other words supply is indirectly proportional to resource prices. Increase in

resource prices reduces the supply and the supply curve is shifted leftwards whereas

decrease in resource prices increases the supply and the supply curve is shifted

rightwards.

3. Taxes and Subsidies

Taxes reduces profits, therefore increase in taxes reduce supply whereas decrease in

taxes increase supply. Subsidies reduce the burden of production costs on suppliers,

thus increasing the profits. Therefore increase in subsidies increase supply and

decrease in subsidies decrease supply.



4. Technology

Improvement in technology enables more efficient production of goods and services.

Thus reducing the production costs and increasing the profits. As a result supply is

increased and supply curve is shifted rightwards. Since technology in general rarely

deteriorates, therefore it is needless to say that deterioration of technology reduces

supply.

5. Prices of Related Products

Firms which are able to manufacture related products (such as air conditioners and

refrigerators) will the shift their production to a product the price of which increases

substantially related to other related product(s) thus causing a reduction of supply of

the products which were produced before. For example a firm which produces

cricket bats is usually able to manufacture hockey sticks as well. When the price of

hockey sticks increases, the firm will produce more hockey sticks and less cricket

bats. As a result, the supply of cricket bats will be reduced.

6. Prices of Joint Products

When two or more goods are produced in a joint process and the price of any of the

product increases, the supply of all the joint products will be increased and vice

versa. For example, increase in price of meat will increase the supply of leather.

1.4 Equilibrium

When supply and demand are equal (i.e. when the supply function and demand

function intersect) the economy is said to be at equilibrium. At this point, the

allocation of goods is at its most efficient because the amount of goods being

supplied is exactly the same as the amount of goods being demanded. Thus,

everyone (individuals, firms, or countries) is satisfied with the current economic

condition. At the given price, suppliers are selling all the goods that they have

produced and consumers are getting all the goods that they are demanding.

http://www.investopedia.com/terms/e/equilibrium.asp



As you can see on the chart, equilibrium occurs at the intersection of the demand

and supply curve, which indicates no allocative inefficiency. At this point, the price of

the goods will be P* and the quantity will be Q*. These figures are referred to as

equilibrium price and quantity.

In the real market place equilibrium can only ever be reached in theory, so the prices

of goods and services are constantly changing in relation to fluctuations in demand

and supply.

1.5 Elasticity

The quantity demanded of a good is affected mainly by

changes in the price of a good,

changes in price of other goods,

changes in income and c

Changes in other relevant factors.

Elasticity is a measure of just how much the quantity demanded will be affected by a change in price or income or change in price of related goods. Different elasticity of demand measures the responsiveness of quantity demanded to changes in variables which affect demand so:

Price elasticity of demand - measures the responsiveness of quantity

demanded by changes in the price of the good

Income elasticity of demand – measures the responsiveness of quantity

demanded by changes in consumer incomes.



3. Cross elasticity of demand – measures the responsiveness of quantity demanded

by changes in price of another good

Price elasticity

Assume that the price of coke increases by 1 %. If the quantity demanded

consequently falls by 20%, then there is very large drop in quantity demanded in

comparison to the change in price. The price elasticity of coke would

be said to be very high.

Assume that when gas prices increase by 50%, gas purchases fall by 25%. Using the

formula above, we can calculate that the price elasticity of gasoline is:

= (-25%) = - 0.50 (50%)

a) Elastic demand: b) Inelastic demand c) Unit elastic demand d) Perfectly elastic demand e) Perfectly inelastic demand

Price elasticity of demand is always with negative sign. This negative sign shows that

the price and quantity are negatively related, so we can ignore this negative sign.

According to the value of price elasticity of demand there are following types of

elasticity.

If PED > 1 Elastic Demand

If PED < 1 Inelastic Demand

If PED = 1 Unitary Elastic Demand

If PED = 0 Perfectly Inelastic Demand

If PED =∞ Perfectly elastic demand

a) Elastic Demand:



Elastic goods are generally non-necessities or luxuries. An elastic good is a good

where if the price goes up, people will stop buying or greatly reduce demand of a

particular product; and if the price goes down, people will greatly increase of

increase demand of a particular good.

When percentage change in demand is more then percentage change in price, its

called elastic demand. For example if there is 25% increase or decrease in price, it

leads to 50% increase or decrease in demand. This is called elastic demand or

elasticity of demand greater than one.

Eg. Movie tickets, museum tickets etc.

b) Inelastic Demand :

Inelastic goods are generally necessary goods. An inelastic good is a good where if

the price goes up, people will only slightly reduce demand of a particular product;

and if the price goes down, people will only slightly increase demand of a particular

good.

when percentage change in demand is less than percentage change in price, its called

inelastic demand. For example, if there is 50% increase or decrease in price but the

percentage change in demand is 25%, it is called inelastic demand.

Eg. Water, gas etc.



c) Unitary elasticity of demand :

When percentage change in demand and percentage change in price are equal, its

called unit elastic demand. An example would be that a price increase of 5% will

result in a reduction in demand of 5%.



d) Perfectly elastic Demand :

If there is very little change in demand but there is infinite percentage change in

demand, it is called perfectly elastic demand. The demand curve is zero.

e) Perfectly inelastic demand

When there is any change in percentages of a commodity of things but no change in

demand, its called perfectly inelastic demand. The demand curve is vertical.

Eg. Electricity or fuel.



Income elasticity

In economics, income elasticity of demand measures the responsiveness of the

demand for a good to a change in the income of the people; it is calculated as the

ratio of the percentage change in demand to the percentage change in income.

E = change in quantity demanded

change in income

For example, if, in response to a 10% increase in income, the demand for a good

increased by 20%, the income elasticity of demand would be

=20%/10%

= 2

Characterizing Income Elasticity

Normal Goods (E>0).

In economics, normal goods are any goods for which demand increases when income

increases, and falls when income decreases but price remains constant, i.e. with a

positive income elasticity of demand. In general, Nike or Adidas shoes would be a

normal good. As you make more money you are likely to move from off-brand shoes

to nicer quality tennis shoes. To summarize, a good is normal when you consume or

demand more of the good because your income increased.

Luxury Good (E>1).

These are goods whose consumption increases an amount larger than an increase in

income. People become wealthier, they will buy more and more of the luxury good.

This also means, however, that should there be a decline in income its demand will

drop.

Example is Luxury car, Private education, Designer clothes etc.

http://en.wikipedia.org/wiki/Elasticity_%28economics%29

http://en.wikipedia.org/wiki/Supply_and_demand

http://en.wikipedia.org/wiki/Economics

http://en.wikipedia.org/wiki/Good_(economics)

http://en.wikipedia.org/wiki/Demand_(economics)

http://en.wikipedia.org/wiki/Income_elasticity_of_demand



Inferior Good (E<0). These are goods whose consumption decreases with an increase in income.

Transportation provides a good example. When income is low, it makes sense to ride

the bus. But as income increases, people stop riding the bus and start buying cars. It's

acceptable to most people to ride the bus when they can't afford a car. But as soon

as they can afford one, they buy a car and stop riding the bus. Bus riding declines as

income increases.

Other example are, Frozen vegetables, Used goods etc.

There are five possible income demand curves:

1. High income elasticity of demand:

In this case increase in income is accompanied by relatively larger increase in

quantity demanded. Here the value of coefficient Ey is greater than unity (Ey>1). E.g.:

20% increase in quantity demanded due to 10% increase in income.

2. Unitary income elasticity of demand:

In this case increase in income is accompanied by same proportionate increase in

quantity demanded. Here the value of coefficient Ey is equal to unity (Ey=1). E.g.:

10% increase in quantity demanded due to 10% increase in income.

3. Low income elasticity of demand:

In this case proportionate increase in income is accompanied by less than increase in

quantity demanded. Here the value of coefficient Ey is less than unity (Ey<1). E.g.: 5%

increase in quantity demanded due to 10% increase in income.



4. Zero income elasticity of demand:

This shows that quantity bought is constant regardless of changes in income. Here

the value of coefficient Ey is equal to zero (Ey=0). E.g.: No change in quantity

demanded even 10% increase in income.

5. Negative income elasticity of demand:

In this case increase in income is accompanied by decrease in quantity demanded.

Here the value of coefficient Ey is less than zero/negative (Ey<0). E.g.: 5% decrease in

quantity demanded due to 10% increase in income.


2 THEORY OF PRODUCTION

“Production is the process of transforming raw

materials or purchased components into

finished products for sale.”

Production means the development and

creation of goods and services using resources

to stimulate exchange. It is the physical output

of a manufacturing or service

company. Production involves three processes –

raw materials, work in process and finished

goods.

2.1 Meaning of Production

Production function is that part of an

organization, which is concerned with the

transformation of a range of inputs into the

required outputs (products) having the requisite

quality level.

Production is defined as “the step-by-step

conversion of one form of material into another

form through chemical or mechanical process to

create or enhance the utility of the product to

the user.” Thus production is a value addition

process. At each stage of processing, there will

be value addition.

Course Contents

2.1 Meaning of production

2.2 Functions of production

2.3 Factors of production

2.4 Law of variable proportion

2.5 Cost

2.6 Break even analysis (BEP)

http://www.britannica.com/EBchecked/topic/477991/theory-of-production

2. Theory of Production ENGINEERING ECONOMICS AND MANAGEMENT (2140003)


2.2 Functions of Production

(i) Materials: The selection of materials for the product. Production manager

must have sound Knowledge of materials and their properties, so that he

can select appropriate materials for his product. Research on materials is

necessary to find alternatives to satisfy the changing needs of the design in

the product and availability of material resumes.

(ii) Methods: Finding the best method for the process, to search for the

methods to suit the available resources, identifying the sequence of

process are some of the activities of Production Management.

(iii) Machines and Equipment: Selection of suitable machinery for the process

desired, designing the maintenance policy and design of layout of

machines are taken care of by the Production Management department.

(iv) Estimating: To fix up the Production targets and delivery dates and to

keep the production costs at minimum, production management

department does a thorough estimation of Production times and

production costs. In competitive situation this will help the management

to decide what should be done in arresting the costs at desired level.

(v) Loading and Scheduling: The Production Management department has to

draw the time table for various production activities, specifying when to

start and when to finish the process required. It also has to draw the

timings of materials movement and plan the activities of manpower. The

scheduling is to be done keeping in mind the loads on hand and capacities

of facilities available.

(vi) Routing: This is the most important function of Production Management

department. The Routing consists of fixing the flow lines for various raw

materials, components etc., from the stores to the packing of finished

product, so that all concerned knows what exactly is happening on the

shop floor.



(vii) Dispatching: The Production Management department has to prepare

various documents Such as Job Cards, Route sheets, Move Cards,

Inspection Cards for each and every component of the product. These are

prepared in a set of five copies. These documents are to be released from

Production Management department to give green signal for starting the

production. The activities of the shop floor will follow the instructions

given in these documents. Activity of releasing the document is known as

dispatching.

2.3 Factors of Production

Economic resources are the goods or services available to individuals and businesses

used to produce valuable consumer products. The classic economic resources include

land, labor and capital. Entrepreneurship is also considered an economic resource

because individuals are responsible for creating businesses and moving economic

resources in the business environment. These economic resources are also called the

factors of production. The factors of production describe the function that each

resource performs in the business environment.



Land

Land is the economic resource encompassing natural resources found within a

nation’s economy. This resource includes timber, land, fisheries, farms and

other similar natural resources. Land is usually a limited resource for many

economies. Although some natural resources, such as timber, food and animals, are

renewable, the physical land is usually a fixed resource. Nations must carefully use

their land resource by creating a mix of natural and industrial uses. Using land for

industrial purposes allows nations to improve the production processes for turning

natural resources into consumer goods.

Labor

Labor represents the human capital available to transform raw or national resources

into consumer goods. Human capital includes all able-bodied individuals capable of

working in the nation’s economy and providing various services to other

individuals or businesses. This factor of production is a flexible resource as workers

can be allocated to different areas of the economy for producing consumer goods or

services. Human capital can also be improved through training or educating workers

to complete technical functions or business tasks when working with other economic

resources.

Capital

Capital has two economic definitions as a factor of production. Capital can represent

the monetary resources companies use to purchase natural resources, land and

other capital goods. Monetary resources flow through a nation’s economy as

individuals buy and sell resources to individuals and businesses.

Capital also represents the major physical assets individuals and companies use when

producing goods or services. These assets include buildings, production facilities,

equipment, vehicles and other similar items. Individuals may create their own capital

production resources, purchase them from another individual or business or lease

them for a specific amount of time from individuals or other businesses.

Entrepreneurship

Entrepreneurship is considered a factor of production because economic resources

can exist in an economy and not be transformed into consumer goods.

Entrepreneurs usually have an idea for creating a valuable good or service and

assume the risk involved with transforming economic resources into consumer

products. Entrepreneurship is also considered a factor of production since someone

must complete the managerial functions of gathering, allocating and distributing



economic resources or consumer products to individuals and other businesses in the

economy.

2.4 Law of variable proportion

The law of variable proportions states that as the quantity of one factor is increased,

keeping the other factors fixed, the marginal product of that factor will eventually

decline. This means that upto the use of a certain amount of variable factor, marginal

product of the factor may increase and after a certain stage it starts diminishing.

When the variable factor becomes relatively abundant, the marginal product may

become negative.

Assumptions:

The law of variable proportions holds good under the following conditions:

1. Constant State of Technology: First, the state of technology is assumed to be

given and unchanged. If there is improvement in the technology, then the

marginal product may rise instead of diminishing.

2. Fixed Amount of Other Factors: Secondly, there must be some inputs whose

quantity is kept fixed. It is only in this way that we can alter the factor

proportions and know its effects on output. The law does not apply if all

factors are proportionately varied.

3. Possibility of Varying the Factor proportions: Thirdly, the law is based upon

the possibility of varying the proportions in which the various factors can be

combined to produce a product. The law does not apply if the factors must be

used in fixed proportions to yield a product.

Illustration of the Law: The law of variable proportion is illustrated in the

following table and figure. Suppose there is a given amount of land in which more

and more labour (variable factor) is used to produce wheat.

Units of Labour Total Product Marginal Product Average Product

1 2 2 2

2 6 4 3

3 12 6 4

4 16 4 4

5 18 2 3.6

6 18 0 3

7 14 -4 2

8 8 -6 1



It can be seen from the table that upto the use of 3 units of labour, total product

increases at an increasing rate and beyond the third unit total product increases at a

diminishing rate. This fact is shown by the marginal product which is the addition

made to Total Product as a result of increasing the variable factor i.e. labour.

It can be seen from the table that the marginal product of labour initially rises and

beyond the use of three units of labour, it starts diminishing. The use of six units of

labour does not add anything to the total production of wheat. Hence, the marginal

product of labour has fallen to zero. Beyond the use of six units of labour, total

product diminishes and therefore marginal product of labour becomes negative.

Regarding the average product of labour, it rises up to the use of third unit of labour

and beyond that it is falling throughout.

Three Stages of the Law of Variable Proportions:

These stages are illustrated in the following figure where labour is measured on the

X-axis and output on the Y-axis.

Stage 1. Stage of Increasing Returns: In this stage, total product increases at an

increasing rate up to a point. This is because the efficiency of the fixed factors

increases as additional units of the variable factors are added to it. In the figure, from

the origin to the point F, slope of the total product curve TP is increasing i.e. the

curve TP is concave upwards upto the point F, which means that the marginal

product MP of labour rises. The point F where the total product stops increasing at

an increasing rate and starts increasing at a diminishing rate is called the point of

inflection. Corresponding vertically to this point of inflection marginal product of

labour is maximum, after which it diminishes. This stage is called the stage of

increasing returns because the average product of the variable factor increases

throughout this stage. This stage ends at the point where the average product curve

reaches its highest point.



Stage 2. Stage of Diminishing Returns: In this stage, total product continues to

increase but at a diminishing rate until it reaches its maximum point H where the

second stage ends. In this stage both the marginal product and average product of

labour are diminishing but are positive. This is because the fixed factor becomes

inadequate relative to the quantity of the variable factor. At the end of the second

stage, i.e., at point M marginal product of labour is zero which corresponds to the

maximum point H of the total product curve TP. This stage is important because the

firm will seek to produce in this range.

Stage 3. Stage of Negative Returns: In stage 3, total product declines and therefore

the TP curve slopes downward. As a result, marginal product of labour is negative

and the MP curve falls below the X-axis. In this stage the variable factor (labour) is

too much relative to the fixed factor.

Importance and Applicability of the Law of Variable Proportion:

The Law of Variable Proportion has universal applicability in any branch of

production. It forms the basis of a number of doctrines in economics. The Malthusian

theory of population stems from the fact that food supply does not increase faster

than the growth in population because of the operation of the law of diminishing

returns in agriculture.



Ricardo also based his theory of rent on this principle. According to him rent arises

because the operation of the law of diminishing return forces the application of

additional doses of labour and capital on a piece of land. Similarly the law of

diminishing marginal utility and that of diminishing marginal physical productivity in

the theory of distribution are also based on this theory.

The law is of fundamental importance for understanding the problems of

underdeveloped countries. In such agricultural economies the pressure of population

on land increases with the increase in population. This leads to declining or even zero

or negative marginal productivity of workers. This explains the operation of the law

of diminishing returns in LDCs in its intensive form. Ragnar Nurkse have suggested

ways to make use of these disguisedly unemployed labour by withdrawing them and

putting them in those occupations where the marginal productivity is positive.

2.5 Cost

When commodities and services are produced, various expenses have to be incurred,

e.g., purchase of raw materials, payment to labour, landlord, capitalist, etc. The sum

total of the expenses incurred plus the normal profit expected by the producer is

called the cost of production. The various concepts of cost are discussed below:

Explicit cost:

Explicit costs in business include all the transactions pertaining to factors of

production utilized by a given company. Paying explicit costs always requires a

business to expend cash. If the company doesn't expend cash on given factors of

production, those factors are not explicit costs for business transaction purposes.

Explicit costs can also be variable or fixed, depending on how these costs change as

the company increases output. Fixed costs don't change as the company increases

production, whereas variable costs can fluctuate as company output increases.

For example,

A company's explicit costs can include employee wages, payments made to purchase

raw materials, business rent/mortgage payments and fees related to purchasing

manufacturing equipment.

Opportunity Cost:

In economic terms, the opportunities forgone in the choice of one expenditure over

others.



For example

I have a number of alternatives of how to spend my Friday night: I can go to the

movies, I can stay home and watch the baseball game on TV, or go out for coffee

with friends. If I choose to go to the movies, my opportunity cost of that action is

what I would have chose if I had not gone to the movies - either watching the

baseball game or going out for coffee with friends. Note that an opportunity cost

only considers the next best alternative to an action, not the entire set of

alternatives.

Total, Average and Marginal Costs:

Total cost refers to the total outlays of money expenditure, both explicit and implicit

on the resources used to produced a given output.

Average cost is the cost per unit of output which is obtained by dividing the total cost

(TC) by the total output (Q), i.e., TC/Q = average cost.

Marginal cost is the addition made to the total cost as a result of producing one

additional unit of the product. Marginal cost is defined as ?TC/?Q.

Fixed Costs and Variable Costs:

Fixed costs are the expenditure incurred on the factors such as capital, equipment,

plant, factory building which remain fixed in the short run and cannot be changed.

Therefore, fixed costs are independent of output in the short run i.e., they do not

vary with output in the short run. Even if no output is produced in the short run,

these costs will have to be incurred.

Variable costs are costs incurred by the firms on the employment of variable factors

such as labour, raw materials, etc., whose amount can be easily increased or

decreased in the short run. Variable costs vary with the level of output in the short

run. If the firm decided not to produce any output, variable costs will not be

incurred.

Short-run and Long-run Cost:

Short-run costs are the costs which vary with the change in output, the size of the

firm remaining the same. Short-run costs are the same as variable costs.

On the other hand, long-run costs are incurred on the fixed assets, like plant,

building, machinery, land etc. Long-run cost are the same as fixed-costs. However, in

the long-run even the fixed costs become variable costs as the size of the firm or

scale or production is increased.



Non-Recurring cost

Those costs that are generally incurred on a once time basis and include, those

elements of development and investment costs that generally occur only once in the

life cycle of a system. Example of non recurring cost include system test, basic design,

basic tools etc.

- Plant arrangement

- Special tooling and special equipment

- Preproduction engineering

- Specialized work force training

Recurring cost

Recurring fees are those charges that you will pay again and again. Costs that vary

with the quantity being produced, such as labor and materials. Repetitive elements

of development and investment costs that may vary with the quantitiy being

produced during any program phase, For example

- Engineering efforts required for redesign,

- Modification,

- Rework and replacement.

Sunk cost

Sunk costs are unrecoverable past expenditures. These should not normally be taken

into account when determining whether to continue a project or abandon it, because

they cannot be recovered either way.

Examples of Sunk Costs

Here are several examples of sunk costs:

Marketing study. A company spends 50,000Rs. on a marketing study to see if its

new product will succeed in the marketplace. The study concludes that the product

will not be profitable. At this point, the 50,000Rs. is a sunk cost. The company should

not continue with further investments in the widget project, despite the size of the

earlier investment.

Training. A company spends 20,000Rs. to train its sales staff in the use of new

tablet computers, which they will use to take customer orders. The computers prove

to be unreliable, and the sales manager wants to discontinue their use. The training



is a sunk cost, and so should not be considered in any decision regarding the

computers.

2.6 Break even analysis

A calculation of the sales volume (in units) required to just cover costs. A lower sales

volume would be unprofitable and a higher volume would be profitable. Break-even

analysis focuses on the relationship between fixed cost, variable cost (and cost per

unit), and selling price (or selling price per unit).

The Break-even Analysis lets you determine what you need to sell, monthly or

annually, to cover your costs of doing business--your break-even point.

Break Even Point = Fixed Costs / (selling price-variable costs).

WHAT IS FIXED COST?

Fixed costs are the costs that remain the same regardless of volume of output, it

doesn’t change with the production volume.

- Rent,

- Cost of land, building and machinery

- Property tax,

- Insurance or interest expense.

WHAT IS VARIABLE COST?

Variable costs are costs directly related to production units. Typical variable costs

include direct labor and direct materials. The variable cost times the number of units

sold will equal the Total Variable Cost.

Total Variable costs plus fixed costs make up the total cost of production.

In short, a cost that changes in proportion to a change in a company's activity or

business.

Variable costs may include,

- Cost of materials

- Wages



- Packaging cost

- Transportation of finished products

WHAT IS THE TOTAL COST?

The total cost is the sum of fixed costs and variable cost.

Total cost = fixed costs + variable costs

WHAT IS TOTAL REVENUE?

Total revenue is the cost that comes from selling the entire production

Total revenue = selling price per unit x number of unit sold

WHAT IS PROFIT?

Profit is realized after selling the product. Profit can be computed as the difference

between total revenue and total cost for the production.

Profit = total revenue – total cost

ASSUMPTION IN BREAK-EVEN ANALYSIS

a) The total cost of production can be divided into two parts- i) Fixed cost ii)

Variable cost.

b) Fixed cost remains constant regardless of volume of output, it doesn’t change

with the production volume.

c) Variable costs are those which are dependent on volume of production, it

changes with production volume. If VC= Variable cost per unit and Q is the

quantity produced, variable cost = V x Q.

d) Selling price does not change with change in the volume of sales. If SP is the

selling price per unit. The total sales income = SP x Q.

e) The firm deals with only one product, or the sales mix remains unchanged.

f) Productivity per worker and efficiency of plant, etc remains mostly

unchanged.


3 MARKETS

3.1 Market

A market is one of the many varieties

of systems, institutions, procedures, social

relations and infrastructures whereby parties

engage in exchange. While parties may

exchange goods and services by barter, most

markets rely on sellers offering their goods or

services (including labor) in exchange

for money from buyers. It can be said that a

market is the process by which the prices of

goods and services are established. The market

facilitates trade and enables the distribution

and allocation of resources in a society. Markets

allow any trade-able item to be evaluated

and priced.

The concept of a market is any structure that

allows buyers and sellers to exchange any type

of goods, services and information. The

exchange of goods or services, with or

without money, is a transaction.[1]Market

participants consist of all the buyers and sellers

of a good who influence its price, which is a

major topic of study of economics and has given

rise to several theories and models concerning the basic market forces of supply and

demand.

Course Contents

3.1 Meaning of Market

3.2 Types of Market

- Monopolistic competition

- Perfect competition

- Monopoly

- Oligopoly

3.3 National income

- GDP

- GNP

- NDP

- NNP

http://en.wikipedia.org/wiki/System

http://en.wikipedia.org/wiki/Institution

http://en.wikipedia.org/wiki/Procedure_(term)

http://en.wikipedia.org/wiki/Social_relation

http://en.wikipedia.org/wiki/Social_relation

http://en.wikipedia.org/wiki/Infrastructure

http://en.wikipedia.org/wiki/Barter

http://en.wikipedia.org/wiki/Money

http://en.wikipedia.org/wiki/Trade

http://en.wikipedia.org/wiki/Allocation_of_resources

http://en.wikipedia.org/wiki/Price

http://en.wikipedia.org/wiki/Information_economy

http://en.wikipedia.org/wiki/Money

http://en.wikipedia.org/wiki/Financial_transaction

http://en.wikipedia.org/wiki/Market_(economics)#cite_note-1

http://en.wikipedia.org/wiki/Good_(economics)

http://en.wikipedia.org/wiki/Price

http://en.wikipedia.org/wiki/Economic

http://en.wikipedia.org/wiki/Economic_models



3. Markets ENGINEERING ECONOMICS AND MANAGEMENT (2140003)


A market is a group of buyers and sellers, where buyers determine the demand and

sellers determine the supply, together with the means whereby they exchange their

goods or services is called the market. There are some example markets given below.

Although many markets exist in the traditional sense – such as a marketplace – there

are various other types of markets and various organizational structures to assist

their functions, the nature of business transactions could be used to define different

markets.

Markets vary in form, scale (volume and geographic reach), location, and types of

participants, as well as the types of goods and services traded. The following is a non

exhaustive list:

Physical consumer markets

• food retail markets: farmers' markets, agricultural markets, fish

markets and wet markets

• retail marketplaces: public markets, market squares, bazaars, souqs, night

markets, shopping centers and shopping malls

• big-box stores: supermarkets, hypermarkets and discount stores

• ad hoc auction markets: process of buying and selling goods or services by

offering them up for bid, taking bids, and then selling the item to the highest

bidder

• used goods markets such as flea markets

• temporary markets such as fairs

Physical business markets

• physical wholesale markets: sale of goods or merchandise to retailers; to

industrial, commercial, institutional, or other professional business users or to

other wholesalers and related subordinated services

• markets for intermediate goods used in production of other goods and

services

• labor markets: where people sell their labour to businesses in exchange for

a wage

• ad hoc auction markets: process of buying and selling goods or services by

offering them up for bid, taking bids, and then selling the item to the highest

bidder

• temporary markets such as trade fairs

Financial markets

http://en.wikipedia.org/wiki/Marketplace

http://en.wikipedia.org/wiki/Farmers%27_market

http://en.wikipedia.org/wiki/Agricultural_marketing

http://en.wikipedia.org/wiki/Fish_market

http://en.wikipedia.org/wiki/Fish_market

http://en.wikipedia.org/wiki/Wet_market

http://en.wikipedia.org/wiki/Public_market

http://en.wikipedia.org/wiki/Market_square

http://en.wikipedia.org/wiki/Bazaar

http://en.wikipedia.org/wiki/Souq

http://en.wikipedia.org/wiki/Night_market

http://en.wikipedia.org/wiki/Night_market

http://en.wikipedia.org/wiki/Shopping_center

http://en.wikipedia.org/wiki/Shopping_mall

http://en.wikipedia.org/wiki/Big-box_stores

http://en.wikipedia.org/wiki/Supermarkets

http://en.wikipedia.org/wiki/Hypermarkets

http://en.wikipedia.org/wiki/Discount_stores

http://en.wikipedia.org/wiki/Auction

http://en.wikipedia.org/wiki/Flea_market

http://en.wikipedia.org/wiki/Fair

http://en.wikipedia.org/wiki/Wholesale_market

http://en.wikipedia.org/wiki/Intermediate_good

http://en.wikipedia.org/wiki/Labor_market

http://en.wikipedia.org/wiki/Wage

http://en.wikipedia.org/wiki/Auction

http://en.wikipedia.org/wiki/Trade_fair



Financial markets facilitate the exchange of liquid assets. Most investors prefer

investing in two markets:

• the stock markets, for the exchange of shares in corporations(NYSE, AMEX,

and the NASDAQ are the most common stock markets in the US)

• and the bond markets

There are also:

• currency markets are used to trade one currency for another, and are often

used for speculation on currency exchange rates

• the money market is the name for the global market for lending and

borrowing

• futures markets, where contracts are exchanged regarding the future delivery

of goods are often an outgrowth of general commodity markets prediction

markets are a type of speculative market in which the goods exchanged are

futures on the occurrence of certain events. They apply the market dynamics

to facilitate information aggregation.

Non-physical markets

• media markets (broadcast market): is a region where the population can

receive the same (or similar) television and radio station offerings, and may

also include other types of media including newspapers and Internet content

• Internet markets (electronic commerce): trading in products or services using

computer networks, such as the Internet

• artificial markets created by regulation to exchange rights for derivatives that

have been designed to ameliorate externalities, such as pollution permits

(see carbon trading)

Non authorized and illegal markets

• grey markets (parallel markets): is the trade of a commodity through

distribution channels which, while legal, are unofficial, unauthorized, or

unintended by the original manufacturer

• illegal black markets such as the market for illicit drugs, arms or pirated

products

http://en.wikipedia.org/wiki/Financial_markets

http://en.wikipedia.org/wiki/Liquid_asset

http://en.wikipedia.org/wiki/Stock_market

http://en.wikipedia.org/wiki/Corporation

http://en.wikipedia.org/wiki/NYSE

http://en.wikipedia.org/wiki/American_Stock_Exchange

http://en.wikipedia.org/wiki/NASDAQ

http://en.wikipedia.org/wiki/Bond_market

http://en.wikipedia.org/wiki/Currency_market

http://en.wikipedia.org/wiki/Money_market

http://en.wikipedia.org/wiki/Futures_market

http://en.wikipedia.org/wiki/Commodity_market

http://en.wikipedia.org/wiki/Prediction_market

http://en.wikipedia.org/wiki/Prediction_market

http://en.wikipedia.org/wiki/Media_market

http://en.wikipedia.org/wiki/Electronic_commerce

http://en.wikipedia.org/wiki/Externalities

http://en.wikipedia.org/wiki/Carbon_trading

http://en.wikipedia.org/wiki/Grey_market

http://en.wikipedia.org/wiki/Black_market

http://en.wikipedia.org/wiki/Illegal_drug_trade

http://en.wikipedia.org/wiki/Arms_trafficking

http://en.wikipedia.org/wiki/Copyright_infringement

http://en.wikipedia.org/wiki/Copyright_infringement



3.2 Types of Market

1. Perfect competition

Perfect competition is an industry with many firms, each selling an identical good;

many buyers; no restrictions on entry into the industry; no advantage for existing

firms over new firms; and sellers and buyers are well informed about prices.

Generally, a perfectly competitive market exists when every participant is a "price

taker", and no participant influences the price of the product it buys or sells.

Specific characteristics may include:

A large number buyers and sellers – A large number of consumers with the

willingness and ability to buy the product at a certain price, and a large

number of producers with the willingness and ability to supply the product at

a certain price.

No barriers of entry and exit – No entry and exit barriers makes it extremely

easy to enter or exit a perfectly competitive market.

Perfect factor mobility – In the long run factors of production are perfectly

mobile, allowing free long term adjustments to changing market conditions.

http://en.wikipedia.org/wiki/Price_taker

http://en.wikipedia.org/wiki/Price_taker

http://en.wikipedia.org/wiki/Barriers_to_entry

http://en.wikipedia.org/wiki/Barriers_to_exit

http://en.wikipedia.org/wiki/Factors_of_production



Perfect information - All consumers and producers are assumed to have

perfect knowledge of price, utility, and quality and production methods of

products.

Zero transaction costs - Buyers and sellers do not incur costs in making an

exchange of goods in a perfectly competitive market.

Profit maximization - Firms are assumed to sell where marginal costs meet

marginal revenue, where the most profit is generated.

Homogeneous products - The products are perfect substitutes for each

other;i.e-the qualities and characteristics of a market good or service do not

vary between different suppliers.

Non-increasing returns to scale - The lack of increasing returns to scale (or

economies of scale) ensures that there will always be a sufficient number of

firms in the industry.

Property rights - Well defined property rights determine what may be sold, as

well as what rights are conferred on the buyer.

Rational buyers - buyers capable of making rational purchases based on

information given

No externalities - costs or benefits of an activity do not affect third parties

2. Monopoly

In economics, a monopoly is a single seller. In law, a monopoly is a business entity

that has significant market power, that is, the power to charge high

prices.[4] Although monopolies may be big businesses, size is not a characteristic of a

monopoly. A small business may still have the power to raise prices in a small

industry (or market).

A monopoly exists when a specific person or enterprise is the only supplier of a

particular commodity.


Profit Maximizer: Maximizes profits.

High Barriers: Other sellers are unable to enter the market of the monopoly.

Price Maker: Decides the price of the good or product to be sold, but does so

by determining the quantity in order to demand the price desired by the firm.

http://en.wikipedia.org/wiki/Monopoly#cite_note-Orbach.26Campbell-4

http://en.wikipedia.org/wiki/Company



Single seller: In a monopoly, there is one seller of the good that produces all

the output.[5] Therefore, the whole market is being served by a single

company, and for practical purposes, the company is the same as the industry.

Price Discrimination: A monopolist can change the price and quality of the

product. He or she sells higher quantities, charging a lower price for the

product, in a very elastic market and sells lower quantities, charging a higher

price, in a less elastic market.

Monopolies derive their market power from barriers to entry – circumstances that

prevent or greatly impede a potential competitor's ability to compete in a market.

There are three major types of barriers to entry: economic, legal and deliberate.

Economic barriers -

Economic barriers include economies of scale, capital requirements, cost

advantages and technological superiority.

Capital requirements: Production processes that require large investments of

capital, or large research and development costs or substantial sunk costs limit

the number of companies in an industry. Large fixed costs also make it difficult

for a small company to enter an industry and expand.

Technological superiority: A monopoly may be better able to acquire, integrate

and use the best possible technology in producing its goods while entrants do not

have the size or finances to use the best available technology. One large company

can sometimes produce goods cheaper than several small companies.

No substitute goods: A monopoly sells a good for which there is no close

substitute. The absence of substitutes makes the demand for the good relatively

inelastic enabling monopolies to extract positive profits.

Control of natural resources: A prime source of monopoly power is the control of

resources that are critical to the production of a final good.

Network externalities: The use of a product by a person can affect the value of

that product to other people. This is the network effect. There is a direct

relationship between the proportion of people using a product and the demand

for that product. In other words the more people who are using a product the

greater the probability of any individual starting to use the product. This effect

accounts for fads, fashion trends, social networks etc. It also can play a crucial

role in the development or acquisition of market power. The most famous

current example is the market dominance of the Microsoft office suite and

operating system in personal computers.

http://en.wikipedia.org/wiki/Monopoly#cite_note-5

http://en.wikipedia.org/wiki/Network_effect



Legal barriers -

Legal rights can provide opportunity to monopolies the market of a good.

Intellectual property rights, including patents and copyrights, give a monopolist

exclusive control of the production and selling of certain goods. Property rights

may give a company exclusive control of the materials necessary to produce a

good.

3. Monopolistic competition

Monopolistic competition is a type of imperfect competition such that many

producers sell products that are differentiated from one another (e.g. by

branding or quality) and hence are not perfect substitutes. In monopolistic

competition, a firm takes the prices charged by its rivals as given and ignores the

impact of its own prices on the prices of other firms.

There are six characteristics of monopolistic competition (MC):

Product differentiation

MC firms sell products that have real or perceived non-price differences.

However, the differences are not so great as to eliminate other goods as

substitutes. Technically, the cross price elasticity of demand between goods in

such a market is positive. In fact, the XED would be high.[7] MC goods are best

described as close but imperfect substitutes.[7]The goods perform the same basic

functions but have differences in qualities such as type, style, quality, reputation,

appearance, and location that tend to distinguish them from each other. For

example, the basic function of motor vehicles is the same—to move people and

objects from point to point in reasonable comfort and safety. Yet there are many

different types of motor vehicles such as motor scooters, motor cycles, trucks and

cars, and many variations even within these categories.

Many firms

There are many firms in each MC product group and many firms on the side lines

prepared to enter the market. A product group is a "collection of similar

products".[8] The fact that there are "many firms" gives each MC firm the freedom

to set prices without engaging in strategic decision making regarding the prices of

other firms and each firm's actions have a negligible impact on the market. For

example, a firm could cut prices and increase sales without fear that its actions

will prompt retaliatory responses from competitors.

http://en.wikipedia.org/wiki/Imperfect_competition

http://en.wikipedia.org/wiki/Differentiation_(economics)

http://en.wikipedia.org/wiki/Substitute_good

http://en.wikipedia.org/wiki/Cross_elasticity_of_demand

http://en.wikipedia.org/wiki/Monopolistic_competition#cite_note-Krugman_2009-7

http://en.wikipedia.org/wiki/Monopolistic_competition#cite_note-Krugman_2009-7

http://en.wikipedia.org/wiki/Monopolistic_competition#cite_note-8



How many firms will an MC market structure support at market equilibrium? The

answer depends on factors such as fixed costs, economies of scale and the degree

of product differentiation. For example, the higher the fixed costs, the fewer

firms the market will support.[9] Also the greater the degree of product

differentiation—the more the firm can separate itself from the pack—the fewer

firms there will be at market equilibrium.

No entry and exit costs

In the long run there are no entry and exit costs. There are numerous firms

waiting to enter the market, each with their own "unique" product or in pursuit

of positive profits. Any firm unable to cover its costs can leave the market without

incurring liquidation costs. This assumption implies that there are low start up

costs, no sunk costs and no exit costs.

Independent decision making

Each MC firm independently sets the terms of exchange for its product.[10] The

firm gives no consideration to what effect its decision may have on

competitors.[10]The theory is that any action will have such a negligible effect on

the overall market demand that an MC firm can act without fear of prompting

heightened competition. In other words each firm feels free to set prices as if it

were a monopoly rather than an oligopoly.

Market power

MC firms have some degree of market power. Market power means that the firm

has control over the terms and conditions of exchange. An MC firm can raise its

prices without losing all its customers. The firm can also lower prices without

triggering a potentially ruinous price war with competitors. The source of an MC

firm's market power is not barriers to entry since they are low. Rather, an MC

firm has market power because it has relatively few competitors, those

competitors do not engage in strategic decision making and the firms sells

differentiated product.[11] Market power also means that an MC firm faces a

downward sloping demand curve. The demand curve is highly elastic although

not "flat".

Imperfect information

No sellers or buyers have complete market information, like market demand or

market supply.


http://en.wikipedia.org/wiki/Monopolistic_competition#cite_note-ColanderDavid-10

http://en.wikipedia.org/wiki/Monopolistic_competition#cite_note-ColanderDavid-10




4. Oligopoly

An oligopoly is a market form in which a market or industry is dominated by a

small number of sellers (oligopolists). Oligopolies can result from various forms of

collusion which reduce competition and lead to higher prices for consumers.

Oligopoly has its own market structure.

In other situations, competition between sellers in an oligopoly can be fierce,

with relatively low prices and high production. This could lead to an efficient

outcome approaching perfect competition. The competition in an oligopoly can

be greater when there are more firms in an industry than if, for example, the

firms were only regionally based and did not compete directly with each other.


Profit maximization conditions

An oligopoly maximizes profits .

Ability to set price

Oligopolies are price setters rather than price takers.

Entry and exit

Barriers to entry are high. The most important barriers are government

licenses, economies of scale, patents, access to expensive and complex

technology, and strategic actions by incumbent firms designed to discourage

or destroy nascent firms. Additional sources of barriers to entry often result

from government regulation favoring existing firms making it difficult for new

firms to enter the market.

Number of firms

"Few" – a "handful" of sellers. There are so few firms that the actions of one

firm can influence the actions of the other firms.

Product differentiation

Product may be homogeneous (steel) or differentiated (automobiles).

Long run profits

Oligopolies can retain long run abnormal profits. High barriers of entry

prevent sideline firms from entering market to capture excess profits.

Perfect knowledge

http://en.wikipedia.org/wiki/Market_form

http://en.wikipedia.org/wiki/Market_(economics)

http://en.wikipedia.org/wiki/Industry

http://en.wikipedia.org/wiki/Perfect_competition

http://en.wikipedia.org/wiki/Profit_maximization

http://en.wikipedia.org/w/index.php?title=Price_setter&action=edit&redlink=1



Assumptions about perfect knowledge vary but the knowledge of various

economic factors can be generally described as selective. Oligopolies have

perfect knowledge of their own cost and demand functions but their inter-

firm information may be incomplete. Buyers have only imperfect knowledge

as to price, cost and product quality.

Interdependence

The distinctive feature of an oligopoly is interdependence. Oligopolies are

typically composed of a few large firms. Each firm is so large that its actions

affect market conditions. Therefore the competing firms will be aware of a

firm's market actions and will respond appropriately. This means that in

contemplating a market action, a firm must take into consideration the

possible reactions of all competing firms and the firm's countermoves. It is

very much like a game of chess or pool in which a player must anticipate a

whole sequence of moves and countermoves in determining how to achieve

his or her objectives. For example, an oligopoly considering a price reduction

may wish to estimate the likelihood that competing firms would also lower

their prices and possibly trigger a ruinous price war. Or if the firm is

considering a price increase, it may want to know whether other firms will

also increase prices or hold existing prices constant.

Non-Price Competition

Oligopolies tend to compete on terms other than price. Loyalty schemes,

advertisement, and product differentiation are all examples of non-price

competition.

http://en.wikipedia.org/wiki/Perfect_knowledge

http://en.wikipedia.org/wiki/Interdependence



3.3 National Income

Introduction:

The economy of India is the tenth-largest in the world by nominal GDP and the third-

largest by purchasing power parity (PPP). The country is one of the G-20 major

economies, a member of BRICS and a developing economy that is among the top 20

global traders according to the WTO. India was the 19th-largest merchandise and the

6th largest services exporter in the world in 2013;

Agriculture sector is the largest employer in India's economy but contributes a

declining share of its GDP (13.7% in 2012-13). Its manufacturing industry has held a

constant share of its economic contribution, while the fastest-growing part of the

economy has been its services sector - which includes construction, telecom,

software and information technologies, infrastructure, tourism, education, health

care, travel, trade, banking and other components of its economy.

Meaning:

National income is the measurement of flow of services and good in economic

system. National wealth is the measurement of present assets available on a given

time while the national income is the measurement of the production power of

economic system in a given time period.

The figures of National income are based on the financial year (i.e. from 1st April to

31st March). The data of estimation of India’s National income are issued by Central

statistical organization (CSO).

The simplest way to think about national income is to consider what happens when

one product is manufactured and sold.

Example

For example, consider the production of a motor car which has a retail price of

£25,000. This price includes £21,000 for all the costs of production (£6,000 for

components, £10,000 for assembly and £5,000 for marketing) plus £4,000 for profit.

To avoid double-counting, the national income accounts only record the value of

the final stage, which in this case is the selling price of £25,000.

When goods are bought second-hand, the transaction does not add new value and

will not be included in national output. If second-hand goods are included, double-

counting will occur, and this would falsely inflate the value of national income.

http://en.wikipedia.org/wiki/India

http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)

http://en.wikipedia.org/wiki/Gross_domestic_product

http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)

http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)

http://en.wikipedia.org/wiki/Purchasing_power_parity

http://en.wikipedia.org/wiki/G-20_major_economies

http://en.wikipedia.org/wiki/G-20_major_economies

http://en.wikipedia.org/wiki/BRICS

http://en.wikipedia.org/wiki/World_Trade_Organization



For example, if the car in question is sold in two year’s time for £15,000 it would

provide the owner with money, but the sale will not add to national income. If it

were included in national income, it would make the value of the car £35,000 - the

initial £25,000 plus the second hand value of £15,000. This is clearly not the case, so

any future second-hand sales are not included when valuing national income. Such

second-hand transactions are called transfers.

Measuring national income is crucial for various purposes:

1. The measurement of the size of the economy and level of country’s economic

performance;

2. To trace the trend or the speed of the economic growth in relation to previous

year(s) also in other countries;

3. To know the composition and structure of the national income in terms of

various sectors and the periodical variations in them.

4. To make projections about the future development trend of the economy.

5. To help government formulate suitable development plans and policies to

increase growth rates.

6. To fix various development targets for different sectors of the economy on the

basis of the earlier performance.

7. To help businesses to forecast future demand for their products.

8. To make international comparison of people’s living standards.

Important concepts of National income are:

1. Gross domestic product 2. Gross national product 3. Net national product 4. Personal income 5. Disposable income

1. Gross domestic product (GDP)

The monetary value of all the finished goods and services produced within a

country's borders in a specific time period, though GDP is usually calculated

on an annual basis. It includes all of private and public consumption,

government outlays, investments and exports less imports that occur within a

defined territory.

GDP = C + G + I + NX



Where:

"C is normally the largest GDP component in the economy, consisting of

private (household final consumption expenditure) in the economy. These

personal expenditures fall under one of the following categories: durable

goods, non-durable goods, and services. An example includes food, rent,

jewelry, gasoline, and medical expenses but does not include the purchase of

new housing.

"G” is the sum of government expenditures on final goods and services. It

includes salaries of public servants, purchases of weapons for the military and

any investment expenditure by a government. It does not include any transfer

payments, such as social security or unemployment benefits.

"I" is includes, for instance, business investment in equipment, but does not

include exchanges of existing assets. Examples include construction of a

new mine, purchase of software, or purchase of machinery and equipment for

a factory.

"NX" is the nation's total net exports, calculated as total exports minus total

imports. (NX = Exports - Imports)

2. Gross National Product

GNP is the total value of all final goods and services produced within a nation

in a particular year, plus income earned by its citizens (including income of

those located abroad), minus income of non-residents located in that

country. Basically, GNP measures the value of goods and services that the

country's citizens produced regardless of their location. GNP is one measure

of the economic condition of a country, under the assumption that a higher

GNP leads to a higher quality of living,

For example, In India GNP includes all income earned by Indian residents and

businesses, regardless of where it's made. Specifically, GNP counts the

investments made by Indian residents and businesses, both inside and

outside the country. In addition, it includes the value of all products

manufactured by domestic businesses, regardless of where they are made.

On the other hand, GNP wouldn't count any income earned in the India by

foreign residents or businesses. Therefore, it doesn't include investments

made by overseas residents. It also excludes products manufactured in the

http://en.wikipedia.org/wiki/Household_final_consumption_expenditure

http://en.wikipedia.org/wiki/Durable_goods

http://en.wikipedia.org/wiki/Durable_goods

http://en.wikipedia.org/wiki/Government_spending

http://en.wikipedia.org/wiki/Final_goods

http://en.wikipedia.org/wiki/Public_servants

http://en.wikipedia.org/wiki/Transfer_payment

http://en.wikipedia.org/wiki/Transfer_payment

http://en.wikipedia.org/wiki/Social_security

http://en.wikipedia.org/wiki/Unemployment_benefits

http://en.wikipedia.org/wiki/Mining

http://www.investorwords.com/11320/total.html

http://www.investorwords.com/5209/value.html

http://www.investorwords.com/9693/final.html

http://www.investorwords.com/2209/goods.html

http://www.investorwords.com/6664/service.html

http://www.investorwords.com/2400/income.html

http://www.investorwords.com/10429/non_resident.html

http://www.investorwords.com/1639/economic.html

http://www.investorwords.com/6456/condition.html

http://www.investorwords.com/305/assumption.html

http://www.investorwords.com/13490/leads.html

http://www.investorwords.com/3994/quality.html



India by overseas businesses. For these reasons, the GNP of the India tells you

more about the financial well-being of Indians, and Indian-based multi-

national corporations, than it does about the health of the Indian economy.

• GDP ( Gross Domestic Product) and GNP (Gross National Product)

measure the size and strength of an economy but are calculated and used in

different ways.

GDP GNP

Stands for Gross Domestic Product Gross National Product

Definition An estimated value of the

total worth of a country’s

production and services,

within its boundary, by its

nationals and foreigners,

calculated over the course on

one year.

An estimated value of the total

worth of production and

services, by citizens of a

country, on its land or on

foreign land, calculated over

the course on one year.

Formula for

Calculation

GDP = consumption +

investment + (government

spending) + (exports −

imports).

GNP = GDP + NR (Net income

inflow from assets abroad or

Net Income Receipts) - NP (Net

payment outflow to foreign

assets).

Uses Business, Economic

Forecasting.

Business, Economic

Forecasting.

Application

(Context in which

these terms are

used)

To see the strength of a

country’s local economy.

To see how the nationals of a

country are doing

economically.



3. Net National Product

Net national product (NNP) refers to gross national product (GNP), i.e. the

total market value of all final goods and services produced by the factors of

production of a country or other polity during a given time period,

minus depreciation.

NNP = GNP – Depreciation

4. Net Domestic Product

The net domestic product (NDP) equals the gross domestic product (GDP)

minus depreciation on a country's capital goods.

NDP = GDP – Depreciation

Net domestic product accounts for capital that has been consumed over the year

in the form of housing, vehicle, or machinery deterioration. The depreciation

accounted for is often referred to as "capital consumption allowance" and

represents the amount of capital that would be needed to replace those

depreciated assets.

5. Personal income

Personal income, "before-tax income", is the total annual gross earnings of an

individual from all income sources, such as: salaries and

wages, investment interest and dividends, employer contributions to pension

plans, and rental properties.

How it works/Example:

Personal income is used in calculating adjusted gross income (AGI) -- which is

important to individuals for income-tax purposes.

It is also an essential measure to investors because it serves as an indicator of

future demand for both goods and services in the market. If personal income is

high, there could be more money spent in the economy, indicating a future

business boom.

http://en.wikipedia.org/wiki/Gross_national_product

http://en.wikipedia.org/wiki/Market_value

http://en.wikipedia.org/wiki/Good_(economics_and_accounting)

http://en.wikipedia.org/wiki/Service_(economics)

http://en.wikipedia.org/wiki/Production_factors

http://en.wikipedia.org/wiki/Production_factors

http://en.wikipedia.org/wiki/Depreciation

http://en.wikipedia.org/wiki/Gross_domestic_product

http://en.wikipedia.org/wiki/Depreciation

http://en.wikipedia.org/wiki/Capital_(economics)

http://en.wikipedia.org/wiki/Capital_consumption_allowance

http://www.investinganswers.com/financial-dictionary/personal-finance/income-5798

http://www.investinganswers.com/financial-dictionary/personal-finance/gross-earnings-5779

http://www.investinganswers.com/financial-dictionary/investing/investment-4904

http://www.investinganswers.com/financial-dictionary/tax-center/adjusted-gross-income-agi-2132

http://www.investinganswers.com/financial-dictionary/economics/market-3609

http://www.investinganswers.com/financial-dictionary/economics/money-5074

http://www.investinganswers.com/financial-dictionary/economics/economy-1517



6. Disposable income

Disposable income is total personal income minus personal current taxes. In

national accounts definitions, personal income, minus taxes equals disposable

personal income. Subtracting personal outlays (which includes the major category

of personal or private consumption expenditure) yields personal (or,

private) savings, hence the income left after paying away all the taxes is referred

to as disposable income.

For example, let's assume your household personal income includes $100,000

from salaries and you are paying at the 35% tax rate. Your household's disposable

income would then be $65,000 ($100,000 - $35,000). Economists use DPI to

gauge households' rate of savings and spending.

http://en.wikipedia.org/wiki/Personal_income

http://en.wikipedia.org/wiki/Personal_consumption_expenditures_price_index

http://en.wikipedia.org/wiki/Savings


4 BASIC ECONOMICS PROBLRMS

4.1 Economic problems

The economic problem—sometimes called

the basic, central, or fundamental economic

problem—is one of the fundamental economic

theoretical principles in the operation of

any economy. It asserts that there is scarcity;

that is, that the finite resources available are

insufficient to satisfy all human wants and

needs. The question then becomes how to

determine what is to be produced, and how

the factors of production (such

as capital and labor) are to be allocated.

Economics revolves around methods and

possibilities of solving this fundamental

economic problem.

The economic problem arises mainly due to two

facts: human wants are unlimited, but the

means to satisfy human wants are scarce.

4.2 Poverty

Poverty is general scarcity or dearth, or the

state of one who lacks a certain amount of material possessions or money. Absolute

poverty or destitution refers to the deprivation of basic human needs, which

Course Contents

4.1 Meaning of Economic problems

4.2 Poverty

- Causes of Poverty

- Measures to reduce Poverty

4.3 Unemployment

- Causes of Unemployment

- Remedies of Unemployment

4.4 Inflation

- Types of inflation

- Measures to control Inflation

http://en.wikipedia.org/wiki/Scarcity

http://en.wikipedia.org/wiki/Resource

http://en.wikipedia.org/wiki/Want

http://en.wikipedia.org/wiki/Need

http://en.wikipedia.org/wiki/Factors_of_production

http://en.wikipedia.org/wiki/Capital_(economics)

http://en.wikipedia.org/wiki/Labor_(economics)


http://en.wiktionary.org/wiki/dearth

http://en.wikipedia.org/wiki/Extreme_poverty

http://en.wikipedia.org/wiki/Extreme_poverty

http://en.wikipedia.org/wiki/Basic_needs

4. Basic economic problems ENGINEERING ECONOMICS AND MANAGEMENT (2140003)


commonly includes food, water, sanitation, clothing, shelter, health care and

education.

Poverty reduction is a major goal and issue for many international organizations such

as the United Nations and the World Bank. The World Bank estimated 1.29 billion

people were living in absolute poverty in 2008. Of these, about 400 million people in

absolute poverty lived in India and 173 million people in China.

At present, 29.8% of the Indian population lives below the poverty line. In the

category of poor falls the people whose daily income is less than 28.65 rupees (56

cents/35p) a day in cities and 22.42 rupees (44 cents/33p) a day in villages. But do

you think this amount is enough to survive even for a day in the country where every

food item is available at sky-high prices? This means, the actual number of people

living below the poverty line is much higher, as according to the statistical data,

anyone earning 30 rupees won’t be considered as poor but must be facing the same

difficulties in life.

Where do the majority of poor live in India? – 60% of the poor still reside in the

states of Bihar, Jharkhand, Odisha, Madhya Pradesh, Chattisgarh, Uttar Pradesh and

Uttarakhand. The reason for these states to be in the category of the poorest state is

because 85% of tribal people live there. Also, most of these regions are either flood-

prone or suffer from drought-like conditions. These conditions hamper agriculture to

a great extent, on which the household income of these people depends.

According to a 2011 poverty Development Goals Report, poverty in India is expected

to drop by 22% in 2015.

Causes of Poverty

Poverty is the state for the majority of the world’s people and nations. Why is this? Is

it enough to blame poor people for their own predicament? Have they been lazy,

made poor decisions, and been solely responsible for their plight? What about their

governments? Have they pursued policies that actually harm successful

development? Such causes of poverty and inequality are no doubt real. But deeper

and more global causes of poverty are often less discussed.

1. Rapidly Rising Population:

The population during the last 45 years has increased at the rate of 2.2% per annum.

On average 17 million people are added every year to its population which raises the

demand for consumption goods considerably.

http://en.wikipedia.org/wiki/Drinking_water

http://en.wikipedia.org/wiki/Health_care

http://en.wikipedia.org/wiki/Poverty#Poverty_reduction

http://en.wikipedia.org/wiki/World_Bank



2. Low Productivity in Agriculture:

The level of productivity in agriculture is low due to subdivided and fragmented

holdings, lack of capital, use of traditional methods of cultivation, illiteracy etc. This is

the main cause of poverty in the country.

3. Under Utilized Resources:

The existence of under employment and disguised unemployment of human

resources and underutilization of resources has resulted in low production in

agricultural sector. This brought a down fall in their standard of living.

4. Low Rate of Economic Development:

The rate of economic development in India has been below the required level.

Therefore, there persists a gap between level of availability and requirements of

goods and services. The net result is poverty.

6. Price Rise:

The continuous and steep price rise has added to the miseries of poor. It has

benefited a few people in the society and the persons in lower income group find it

difficult to get their minimum needs.

7. Unemployment:

The continuously expanding army of unemployed is another cause of poverty. The

job seeker is increasing in number at a higher rate than the expansion in employment

opportunities.

8. Shortage of Capital and Able Entrepreneurship:

Capital and able entrepreneurship have important role in accelerating the growth.

But these are in short supply making it difficult to increase production significantly.

9. Social Factors:

The social set up is still backward and is not conducive to faster development. Laws

of inheritance, caste system, traditions and customs are putting hindrances in the

way of faster development and have aggravate" the problem of poverty.



10. Political Factors:

The Britishers started lopsided development in India and reduced Indian economy to

a colonial state. They exploited the natural resources to suit their interests and

weaken the industrial base of Indian economy.

In independent India, the development plans have been guided by political interests.

Hence, the planning a failure to tackle the problems of poverty and unemployment.

Measures to reduce Poverty

1. Employment opportunities

Poverty can be eliminated if the poor people are given the jobs according to

their needs and talents. Self-employment can also be provided to them.

Government can set up institutions which trains them in some practices and

skills.

2. Establishment of Small Scale Industries

Government should develop cottage, handicrafts and other small scale

industries to in the backward regions of our country. Moreover this will

transfer resources from the areas of surplus to the deficit solving the problem

of urbanization.

3. Education

Government should take steps to spread awareness for education so that the

people do not have to depend on others for their income. They can also

protect themselves from exploitation by the greedy traders.

4. Reduce Inflation

Inflation tends to make poor poorer and rich richer. There should be a stability

in the price level of the country. Government should also reduce the burden

of tax on the poor and charge more on the richer class. Rationing should be

promoted so that the poor people get the basic necessities if life at lower

price level.



5. Check Population growth

Much of the problem of poverty can be solved if the population of the country

can be reduced to a average level. This will make developmental plans

successful and the poor people will have a greater share in the funds of the

government.

6. Proper Utilization of Resources

Resources of the country should be utilized properly so that we can have the

benefits of those free gifts of nature.

4.3 Unemployment

Unemployment, also referred to as joblessness, occurs when people are without

work and is actively seeking employment. During periods of recession, an economy

usually experiences high unemployment rates. There are many proposed causes,

consequences, and solutions for unemployment.

Type of Unemployment

1. Structural unemployment

Structural unemployment occurs when certain industries decline because of long

term changes in market conditions. For example, over the last 20 years UK motor

vehicle production has declined while car production in the Far East has increased,

creating structurally unemployed car workers. Globalization is an increasingly

significant cause of structural unemployment in many countries.

Cyclical: occurs when there is not enough aggregate demand in the economy to

provide jobs for everyone who wants to work. Demand for goods and services

decreases, less production is needed, and fewer workers are needed.

2. Regional unemployment

When structural unemployment affects local areas of an economy, it is called

‘regional’ unemployment. For example, unemployed coal miners in South Wales and

ship workers in the North East add to regional unemployment in these areas.

https://www.boundless.com/definition/recession/

http://www.economicsonline.co.uk/Global_economics/Globalisation_introduction.html

https://www.boundless.com/definition/aggregate/



3. Classical unemployment

Classical unemployment is caused when wages are ‘too’ high. This explanation of

unemployment dominated economic theory before the 1930s, when workers

themselves were blamed for not accepting lower wages, or for asking for too high

wages. Classical unemployment is also called real wage unemployment.

4. Seasonal unemployment

Seasonal unemployment exists because certain industries only produce or distribute

their products at certain times of the year. Industries where seasonal unemployment

is common include farming, tourism, and construction.

5. Frictional unemployment

Frictional unemployment, also called search unemployment, occurs when workers

lose their current job and are in the process of finding another one. There may be

little that can be done to reduce this type of unemployment, other than provide

better information to reduce the search time. This suggests that full employment is

impossible at any one time because some workers will always be in the process of

changing jobs.

6. Voluntary unemployment

Voluntary unemployment is defined as a situation when workers choose not to work

at the current equilibrium wage rate. For one reason or another, workers may elect

not to participate in the labour market. There are several reasons for the existence of

voluntary unemployment including excessively generous welfare benefits and high

rates of income tax. Voluntary unemployment is likely to occur when the equilibrium

wage rate is below the wage necessary to encourage individuals to supply their

labour.

Causes of Unemployment

It is obvious that the unemployment situation is grim indeed. It has, therefore, to be

tackled with appropriate measures and on an urgent basis. However, before we

discussed the ways and means of removing unemployment, it is necessary that we

understand the causes that given rise to it. The major causes which have been

responsible for the wide spread unemployment can be spelt out as under.

1. Rapid Population Growth:

It is the leading cause of unemployment in Rural India. In India, particularly in rural

areas, the population is increasing rapidly. It has adversely affected the



unemployment situation largely in two ways. In the first place, the growth of

population directly encouraged the unemployment by making large addition to

labour force. It is because the rate of job expansion could never have been as high as

population growth would have required.

It is true that the increasing labour force requires the creation of new job

opportunities at an increasing rate. But in actual practice employment expansion has

not been sufficient to match the growth of the labor force, and to reduce the back

leg of unemployment. This leads to unemployment situation secondly; the rapid

population growth indirectly affected the unemployment situation by reducing the

resources for capital formation. Any rise in population, over a large absolute base as

in India, implies a large absolute number.

It means large additional expenditure on their rearing up, maintenance, and

education. As a consequence, more resources get used up in private consumption

such as food, clothing, shelter and son on in public consumption like drinking water,

electricity medical and educational facilities. This has reduced the opportunities of

diverting a larger proportion of incomes to saving and investment. Thus, population

growth has created obstacles in the way of first growth of the economy and retarded

the growth of job opportunities.

2. Limited land:

Land is the gift of nature. It is always constant and cannot expand like population

growth. Since, India population increasing rapidly, therefore, the land is not sufficient

for the growing population. As a result, there is heavy pressure on the land. In rural

areas, most of the people depend directly on land for their livelihood. Land is very

limited in comparison to population. It creates the unemployment situation for a

large number of persons who depend on agriculture in rural areas.

3. Seasonal Agriculture:

In Rural Society agriculture is the only means of employment. However, most of the

rural people are engaged directly as well as indirectly in agricultural operation. But,

agriculture in India is basically a seasonal affair. It provides employment facilities to

the rural people only in a particular season of the year. For example, during the

sowing and harvesting period, people are fully employed and the period between the

post harvest and before the next sowing they remain unemployed. It has adversely

affected their standard of living.



4. Fragmentation of land:

In India, due to the heavy pressure on land of large population results the

fragmentation of land. It creates a great obstacle in the part of agriculture. As land is

fragmented and agricultural work is being hindered the people who depend on

agriculture remain unemployed. This has an adverse effect on the employment

situation. It also leads to the poverty of villagers.

5. Backward Method of Agriculture:

The method of agriculture in India is very backward. Till now, the rural farmers

followed the old farming methods. As a result, the farmer cannot feed properly many

people by the produce of his farm and he is unable to provide his children with

proper education or to engage them in any profession. It leads to unemployment

problem.

6. Decline of Cottage Industries:

In Rural India, village or cottage industries are the only mans of employment

particularly of the landless people. They depend directly on various cottage

industries for their livelihood. But, now-a-days, these are adversely affected by the

industrialization process. Actually, it is found that they cannot compete with modern

factories in matter or production. As a result of which the village industries suffer a

serious loss and gradually closing down. Owing to this, the people who work in there

remain unemployed and unable to maintain their livelihood.

7. Defective education:

The day-to-day education is very defective and is confirmed within the class room

only. Its main aim is to acquire certificated only. The present educational system is

not job oriented, it is degree oriented. It is defective on the ground that is more

general then the vocational. Thus, the people who have getting general education

are unable to do any work. They are to be called as good for nothing in the ground

that they cannot have any job here; they can find the ways of self employment. It

leads to unemployment as well as underemployment.

8. Lack of transport and communication:

In India particularly in rural areas, there are no adequate facilities of transport and

communication. Owing to this, the village people who are not engaged in agricultural

work are remained unemployed. It is because they are unable to start any business



for their livelihood and they are confined only within the limited boundary of the

village. It is noted that the modern means of transport and communication are the

only way to trade and commerce. Since there is lack of transport and communication

in rural areas, therefore, it leads to unemployment problem among the villagers.

8. Inadequate Employment Planning:

The employment planning of the government is not adequate in comparison to

population growth. In India near about two lakh people are added yearly to our

existing population. But the employment opportunities did not increase according to

the proportionate rate of population growth. As a consequence, a great difference is

visible between the job opportunities and population growth.

Remedies of Unemployment

1. Adoption of Labour Intensive Techniques:

Despite the fact that the Strategy of Prof. Mahalanobis for basic and key industries is

based on capital intensive techniques, our government should try to adopt labour

intensive techniques for new fields of production.

2. Rapid Industrialization:

To solve the problem of industrial unemployment, remedy lies in stepping up

industrial efficiency. It means that the expansion of existing and the development of

new industries are urgently required. Some basic industries like iron and steel

industries, defense, chemical, power generation and atomic etc., should be set up.

3. Population Control:

There is no second opinion to say that population in India is rising at a very high

speed. Unless this problem is not checked, the problem of unemployment cannot be

solved properly.

Efforts should be made to raise the agricultural and industrial production. Therefore,

special drive should be made to make the programme of family planning a good

success especially in rural and backward regions of the country.



4. Re-orientation of Education System:

As regards the problem of educated unemployment in urban areas, India should

reconstruct and overhaul the education system according to the changing

environment of the country.

There must be vocationalisation of education. Proper education should be imparted

to the younger men who will be in position to start certain cottage and small scale

industries of their own choice especially at village level.

5. Extension of Social Services:

India is still lagging behind in the sphere of education, medical science and other

services as compared to the advanced countries of the West. Therefore, efforts

should be made to extend these services to rural folks in the backward regions of the

country.

6. Decentralization:

Experience shows that lack of gainful opportunities of employment in villages and

small towns has led to the migration of people to metropolitan cities in search of

alternative jobs.

This has created the problem of over crowdedness and urbanization. Under these

circumstances, it is advisable to encourage industries around small towns preferably

according to the local environments.

7. Encouragement to Small Enterprises:

To provide the opportunities for self-employment, small scale industries should be

given top priority. They should be provided liberal loans, raw material training

facilities and infrastructure and market facilities etc.

It is a good luck that Sixth Five Year Plan (1980-85) has given due consideration to

provide these facilities under the scheme of self-employment. Similar steps have

been proposed in Eighth Five Year Plan.

8. Guiding Centers and More Employment Exchanges:

The economists are of unanimous view that more employment exchanges should be

opened in rural as well as in urban areas to give guidance to the people to search

employment. They should also be motivated for self-employment proposals.



9. Rural Development Schemes:

As rural sector is dominant and agriculture is the basic occupation of the people,

therefore, urgent need of the hour is to introduce rural development schemes.

It is correctly believed that there is no other remedy than a massive programme of

investment in rural development and massive injection of science and technology

into the methods of production followed in rural areas in their agricultural and non-

agricultural activities.

4.4 Inflation

In economics, inflation is a sustained increase in the general price level of goods and

services in an economy over a period of time. When the general price level rises,

each unit of currency buys fewer goods and services. Consequently, inflation reflects

a reduction in the purchasing power per unit of money – a loss of real value in the

medium of exchange and unit of account within the economy. A chief measure of

price inflation is the inflation rate, the annualized percentage change in a

general price index (normally the consumer price index) over time.

Inflation occurs due to an imbalance between demand and supply of money, changes

in production and distribution cost or increase in taxes on products. When economy

experiences inflation, i.e. when the price level of goods and services rises, the value

of currency reduces. This means now each unit of currency buys fewer goods and

services.

It has its worst impact on consumers. High prices of day-to-day goods make it

difficult for consumers to afford even the basic commodities in life. This leaves them

with no choice but to ask for higher incomes. Hence the government tries to keep

inflation under control.

Contrary to its negative effects, a moderate level of inflation characterizes a good

economy. An inflation rate of 2 or 3% is beneficial for an economy as it encourages

people to buy more and borrow more, because during times of lower inflation, the

level of interest rate also remains low. Hence the government as well as the central

bank always strives to achieve a limited level of inflation.


http://en.wikipedia.org/wiki/Price_level

http://en.wikipedia.org/wiki/Economy

http://en.wikipedia.org/wiki/Currency

http://en.wikipedia.org/wiki/Purchasing_power

http://en.wikipedia.org/wiki/Price_index

http://en.wikipedia.org/wiki/Consumer_price_index



Types of Inflation

1. Wholesale inflation

Wholesale or headline inflation is measured on the basis of the changes in wholesale

price index (WPI). Since it is based on the wholesale prices, it helps the government

to spot the price rise in advance.

However, wholesale inflation lost its relevance after the government decided to

change the frequency of reviewing the index from a weekly to monthly basis, and the

Reserve Bank of India shifted its monetary focus from wholesale to retail inflation.

2. Retail inflation

Retail inflation is calculated on the basis of changes in the Consumer Price

Index (CPI). Since it measures the impact of price rise, it is more relevant for financial

planning for the average investor.

While people from big cities should use the urban variant, those from villages and

smaller cities can use the rural one.

http://economictimes.indiatimes.com/topic/wholesale%20price%20index

http://economictimes.indiatimes.com/topic/wholesale%20price%20index

http://economictimes.indiatimes.com/topic/Bank%20of%20India

http://economictimes.indiatimes.com/topic/Retail%20inflation

http://economictimes.indiatimes.com/topic/Consumer%20Price%20Index

http://economictimes.indiatimes.com/topic/Consumer%20Price%20Index

http://economictimes.indiatimes.com/topic/financial%20planning

http://economictimes.indiatimes.com/topic/financial%20planning



3. Food inflation

Food inflation is a subset of headline inflation and is expected to rise further in the

coming months due to a deficit in the monsoon rains.

Given the large number of people below the poverty line, it is a major cause for

concern for developing countries like India. It is essential for investors to take this

inflation into account while planning their finances.

4. Housing inflation

Housing inflation is another subset of headline inflation. It is rising at a faster clip

compared with the headline inflation and was above 15% two years ago.

The cost of housing is a major expenditure for city dwellers and is more important for

them. This is why one must consider it while planning for the real estate goals.

http://economictimes.indiatimes.com/topic/Food%20inflation

http://economictimes.indiatimes.com/topic/real%20estate



1. Lifestyle inflation

As an individual's income increases, there is a gradual improvement in lifestyle—

bigger house, branded clothes, better car. These additional expenses result in what is

termed as lifestyle inflation.

So the expenses increase not just on account of the rise in prices, but also due to a

better lifestyle. Since the rise depends on the individual, it is not possible to put a

number that is applicable to all.

However, one must consider it while computing long-term goals, such as retirement

planning or children's wedding.

2. Education inflation

Though education inflation is also a subset of headline inflation, it only measures the

increase in cost of education and stationery.

It is essential to provide for this inflation while planning for your child's studies

because most of the higher education is now subsidized and the subsidy might not be

available by the time your ward reaches adulthood.

http://economictimes.indiatimes.com/topic/higher%20education



7. Medical inflation

Medical inflation is relatively under control in India due to the government

restrictions on drug price rise and technological innovation to keep a tab on medical

equipment costs.

However, medical expenses are bound to rise as you grow older and you need to

consider a higher rate of inflation so that you face any problem during your sunset

years.



Measures to control Inflation

1. Fiscal Policies:

Fiscal policies are effective in increasing the leakage rates from the circular income

flow, thereby rejecting all further additions into this particular flow of income. This

brings about a reduction in the Demand-Pull Inflation, in terms of increasing

unemployment and slackening the economic growths. Following are a few types of

fiscal policies commonly employed:

Lowering the expenses on governmental level

A fall in the borrowing amounts in the government sectors, on an annual basis

High direct taxes, for reducing the disposable income

2. Monetary Policies:

Monetary Policies have a great role to play in controlling Inflation. These are policies

which can actually control the rise in demand, by increasing the rates of interest and

reducing the supply of real money. An escalation in the interest rates brings about a

reduction in collective demands, in the following three ways:

• A rise in the interest rate discourages borrowing from both companies and

households. When interest rates increase, it simultaneously encourages the

savings rate, owing to an escalation in the opportunity cost of expenditure.

• Rise in the interest rates is a very useful tool for restricting monetary inflation.

Increase in the real rates of interest decreases the demand for loans, thereby

limiting the growth of broad money.

• There may also be a fall in the commercial investments, due to a rise in the costs

of borrowing money. This exerts a direct influence on a handful of planned

investment-related projects, which turn out to be unprofitable. This leads to a

fall in the collective demand.

• An increase in the payment of mortgage interests automatically decreases the

real 'effective' disposable income of the house owners, as well as their spending

capacities. Escalation in the mortgage costs also decreases the demand

generated in the housing markets.

3. Exchange Rates:

An escalation in the exchange rate is possible by increasing the rates of interest or

buying money through the central bank interferences in the foreign exchange



markets. Mentioned below, is a short-term mean by which inflation can be

controlled through exchange rates:

• Income policies or direct wage controls: Setting restrictions on the growth rate

of wages may decrease cost push inflation. On governmental level, an attempt to

influence the growth of wage leads to limit the rise in the pay in public sectors,

as well as initiates cash restrictions for making payments to the employees of

public sectors. As far as the private sector is concerned, the government

attempts to convince the commercial firms and its employees to implement self-

controls at the time of negotiating wages. Generally, there is a fall in the wage

inflation when there is an economic depression, leading to a rise in the

unemployment rates.

The long-term means of controlling Inflation are as follows:

• Supply-side Reform Policy: According to this policy, if more output is produced at

a low per unit cost, there are chances for the economy to attain persistent

economic growth and development, without being affected by inflation.

• Policy regarding labor market reforms: If an increase in the flexibility of the labor

market permits the commercial firms to put a check on labor costs, it can lead to

a reduction in the pressures created by Cost-Push Inflation.


5 MONEY

5.1 Money

Money is primarily a medium of exchange

or means of exchange. It is a way for a person to

trade what he has for what he wants. Ideal

money has three critical characteristics: it acts

as a medium of exchange; it is an economic

good; and it is a means of economic calculation.

5.2 Functions of Money

1. Medium of Exchange:

The most important function of money is to

serve as a medium of exchange or as a means of

payment. To be a successful medium of

exchange, money must be commonly accepted

by people in exchange for goods and services.

While functioning as a medium of exchange,

money benefits the society in a number of

ways:

(a) It overcomes the inconvenience of baiter

system (i.e., the need for double coincidence of

wants) by splitting the act of barter into two

acts of exchange, i.e., sales and purchases

through money.

Course Contents

5.1 Meaning of Money

5.2 Functions of Money

5.3 Types of Money

5.4 Banking

- Types of Banking

5.5 Reserve bank of India (RBI)

- Functions of RBI

5.6 Cash reserve ratio (CRR)

5.7 Bank rate

5.8 Repo rate

5.9 Reverse repo rate

5.10 Statutory liquidity ratio

(SLR)

5. Money ENGINEERING ECONOMICS AND MANAGEMENT (2140003)


(b) It promotes transactional efficiency in exchange by facilitating the multiple

exchange of goods and services with minimum effort and time,

(c) It promotes allocation efficiency by facilitating specialization in production and

trade,

(d) It allows freedom of choice in the sense that a person can use his money to buy

the things he wants most, from the people who offer the best bargain and at a time

he considers the most advantageous.

2. Store of value

To act as a store of value, a money must be able to be reliably saved, stored, and

retrieved – and be predictably usable as a medium of exchange when it is retrieved.

Money, being a unit of value and a generally acceptable means of payment, provides

a liquid store of value because it is so easy to spend and so easy to store. By acting as

a store of value, money provides security to the individuals to meet unpredictable

emergencies and to pay debts that are fixed in terms of money. It also provides

assurance that attractive future buying opportunities can be exploited.

2. Measure of Value:

Money serves as a common measure of value in terms of which the value of all goods

and services is measured and expressed. By acting as a common denominator or

numeraire, money has provided a language of economic communication.

Money also acts as a unit of account. As a unit of account, it helps in developing an

efficient accounting system because the values of a variety of goods and services

which are physically measured in different units (e.g, quintals, metres, litres, etc.) can

be added up. It provides a basis for keeping accounts, estimating national income,

cost of a project, sale proceeds, profit and loss of a firm, etc.

5.3 Types of Money

There are several kinds of money varying in liability and strength. The society has

modified the money at different times and in this way several types of money are

introduced. When there was ample availability of metals, metal money came into

existence later it was substituted by the paper money. At different times, several

commodities were used as the medium of exchange. So, it can be said that according

to the needs and availability of means, the kinds of money has changed.



There are 4 major types of money:

1. Commodity Money

2. Fiat Money

3. Fiduciary Money

4. Commercial Bank Money

1. Commodity Money

It is the simplest kind of money which is used in barter system where the valuable

resources fulfill the functions of money. The value of this kind of money comes from

the value of resource used for the purpose. It is only limited by the scarcity of the

resources. Value of this kind of money involves the parties associated with the

exchange process. This money has intrinsic value.

Whenever any commodity is used for the exchange purpose, the commodity

becomes equivalent to the money and is called commodity money. There are certain

types of commodity, which are used as the commodity money. Among these, there

are several precious metals like gold, silver, copper and many more. Again, in many

parts of the world, seashells (also known as cowrie shells), tobacco and many other

items were in use as a type of money & medium of exchange.

Ex : gold coins , beads , shells, pearls, stones, tea, sugar, metal

2. Fiat money

Fiat money or fiat currency is money whose value is not derived from any intrinsic

value or guarantee that it can be converted into a valuable commodity (such as gold).

Instead, it has value only by government order (fiat). Usually, the government

declares the fiat currency (typically notes and coins from a central bank, such as the

Reserve Bank of India in the India) to be legal tender, making it unlawful to not accept

the fiat currency as a means of repayment for all debts, public and private.

3. Commercial Bank Money

Commercial Bank money or demand deposits are claims against financial institutions

that can be used for the purchase of goods and services. A demand deposit account

is an account from which funds can be withdrawn at any time by cheque or cash

withdrawal without giving the bank or financial institution any prior notice. Banks

have the legal obligation to return funds held in demand deposits immediately upon

demand (or 'at call'). Demand deposit withdrawals can be performed in person, via

cheques or bank drafts, using automatic teller machines (ATMs), or through online

banking.

http://en.wikipedia.org/wiki/Legal_tender



4. Fiduciary Money

Today's monetary system is highly fiduciary. Whenever, any bank assures the

customers to pay in different types of money and when the customer can sell the

promise or transfer it to somebody else, it is called the fiduciary money. Fiduciary

money is generally paid in gold, silver or paper money. There are cheques and bank

notes, which are the examples of fiduciary money because both are some kind of

token which are used as money and carry the same value.

In simple words, Banking can be defined as the business activity of accepting and

safeguarding money owned by other individuals and entities, and then lending out

this money in order to earn a profit. However, with the passage of time, the

activities covered by banking business have widened and now various other services

are also offered by banks. The banking services these days include issuance of debit

and credit cards, providing safe custody of valuable items, lockers, ATM services and

online transfer of funds across the country / world.

5.4 Banking

It is well said that banking plays a silent, yet crucial part in our day-to-day lives. The

banks perform financial intermediation by pooling savings and channelizing them

into investments through maturity and risk transformations, thereby keeping the

economy’s growth engine revving.

Banking business has done wonders for the world economy. The simple looking

method of accepting money deposits from savers and then lending the same money

to borrowers, banking activity encourages the flow of money to productive use and

investments. This in turn allows the economy to grow. In the absence of banking

business, savings would sit idle in our homes, the entrepreneurs would not be in a

position to raise the money, ordinary people dreaming for a new car or house would

not be able to purchase cars or houses.

Activities undertaken by large banks include investment banking, corporate

banking, private banking, insurance, consumer finance, foreign exchange trading,

commodity trading, trading in equities, futures and options trading and money

market trading.

http://en.wikipedia.org/wiki/Investment_banking

http://en.wikipedia.org/wiki/Commercial_bank


http://en.wikipedia.org/wiki/Private_banking

http://en.wikipedia.org/wiki/Insurance

http://en.wikipedia.org/wiki/Loan

http://en.wikipedia.org/wiki/Foreign_exchange_market

http://en.wikipedia.org/wiki/Commodity_market

http://en.wikipedia.org/wiki/Stock_market

http://en.wikipedia.org/wiki/Futures_exchange





What is a bank?

In simple words, we can say that Bank is a financial institution that undertakes the

banking activity i.e. it accepts deposits and then lends the same to earn certain

profit.

Banks offer many different channels to access their banking and other services:

- Automated Teller Machines

- A branch is a retail location

- Call center

- Mail: most banks accept cheque deposits via mail and use mail to

communicate to their customers, e.g. by sending out statements

- Mobile banking is a method of using one's mobile phone to conduct

banking transactions

- Online banking is a term used for performing multiple transactions,

payments etc. over the Internet

- Relationship Managers, mostly for private banking or business banking,

often visiting customers at their homes or businesses

- Telephone banking is a service which allows its customers to conduct

transactions over the telephone with automated attendant or when

requested with telephone

- Video banking is a term used for performing banking transactions or

professional banking consultations via a remote video and audio

connection. Video banking can be performed via purpose built banking

transaction machines (similar to an Automated teller machine), or via

a video conference enabled bank branch clarification

- DSA is a Direct Selling Agent, who works for the bank based on a

contract. Its main job is to increase the customer base for the bank.

What is a Banking Company?

Any company, which transacts the business of banking defined above is termed as

Banking company

What is Banking System?

Banking systems can be defined as a mechanism through which the money supply of

the country is created and controlled.

http://en.wikipedia.org/wiki/Automated_Teller_Machine

http://en.wikipedia.org/wiki/Branch_(banking)

http://en.wikipedia.org/wiki/Call_center

http://en.wikipedia.org/wiki/Mobile_banking

http://en.wikipedia.org/wiki/Online_banking

http://en.wikipedia.org/wiki/Customer_relationship_management

http://en.wikipedia.org/wiki/Telephone_banking

http://en.wikipedia.org/wiki/Automated_attendant

http://en.wikipedia.org/wiki/Video_banking

http://en.wikipedia.org/wiki/Video_conference

http://en.wikipedia.org/wiki/Direct_Selling_Association



Types of Banking

1. Central bank of India-

In India the central banking authority is the Reserve Bank of India. It is also

referred to as the Apex Bank. It functions under an act called The Reserve Bank

of India Act, 1934. All the banks and other financial institutions operating in India

come under the monitoring and control of RBI. RBI controls the banking sector in

India through an Act called The Banking Regulations Act 1949. In the past, when

there were very few banks, RBI used to include all the scheduled banks in its

schedule. Now a day, when the number of banks has gone up substantially, RBI

has to change the schedule every now and then, hence irrespective of whether a

bank finds its name in the schedule to the RBI Act or not, its schedule status can

be found out from its banking license. A Bank that is not a scheduled bank is

referred to as nonscheduled bank even in it is having banking license.

2. Commercial banks-

These banks function to help the entrepreneurs and businesses. They give

financial services to these businessmen like debit cards, banks accounts, short

term deposits, etc. with the money people deposit in such banks. They also lend

money to businessmen in the form of overdrafts, credit cards, secured loans,

unsecured loans and mortgage loans to businessmen. The commercial banks in

the country were nationalized in 1969. So the various policies regarding the loans,

rates of interest and loans etc are controlled by the Reserve Bank. These days, the

commercialized banks provide some services given by investment banks to their

clients.

The commercial banks can be further classifies as: public sector bank, private

sector banks, foreign banks and regional banks.

- The public sector banks are owned and operated by the government,

who has a major share in them. The major focus of these banks is to

serve the people rather earn profits. Some examples of these banks

include State Bank of India, Punjab National Bank, Bank of

Maharashtra, etc.

- The private sector banks are owned and operated by private institutes.

They are free to operate and are controlled by market forces. A greater

share is held by private players and not the government. For example,

Axis Bank, Kotak Mahindra Bank etc.



- The foreign banks are those that are based in a foreign country but

have several branches in India. Some examples of these banks include;

HSBC, Standard Chartered Bank etc.

- The regional rural banks were brought into operation with the

objective of providing credit to the rural and agricultural regions and

were brought into effect in 1975 by RRB Act. These banks are restricted

to operate only in the areas specified by government of India. These

banks are owned by State Government and a sponsor bank. This

sponsorship was to be done by a nationalized bank and a State

Cooperative bank. Prathama Bank is one such example, which is

located in Moradabad in U.P.

3. Cooperative banks:

These banks are controlled, owned, managed and operated by cooperative

societies and came into existence under the Cooperative Societies Act in 1912.

These banks are located in the urban as well in the rural areas. Although these

banks have the same functions as the commercial banks, they provide finance to

farmers, salaried people, small scale industries, etc. and their rates of interest of

interest are lower as compared to other banks.

There are three types of cooperative banks in India, namely:

- Primary credit societies: These are formed in small locality like a small

town or a village. The members using this bank usually know each

other and the chance of committing fraud is minimal.

- Central cooperative banks: These banks have their members who

belong to the same district. They function as other commercial banks

and provide loans to their members. They act as a link between the

state cooperative banks and the primary credit societies.

- State cooperative banks: these banks have a presence in all the states

of the country and have their presence throughout the state.

4. Specialized banks:

i) The Export-Import Bank Of India

The Export-Import Bank Of India ranks high among the specialized financial

institutions in India.



It was set up in the year 1981 to enhance International Trade in India with

the aid of a two-way approach. It offers financial assistance to the

exporters and importers and also by acting as a link between the various

financial institutions to ensure overall development of the Indian financial

market. The bank offers financial assistance to the various sectors like

agriculture, export, import, and film industry. For the agricultural sector

the bank has arranged for unique financial programs like posting shipment

credit, terming loans etc. The category of term loans are issued for

modernization, purchase of equipments, acquisitions etc. For the

exporters the bank provides warehousing finance, export lines of credit

facilities. The funded capital scheme of the bank includes long-term

working capital, cash flow financing, and the non funded capital scheme

include letter of credit limits, guarantee limits. For the film industry the

bank has arranged for cash flow financing for film production, funds for

exhibition in overseas market.

ii) Small Industries Development Bank of India

The Small Industries Development Bank of India also ranks high among the

specialized financial institutions in India. It was founded in the year 1990 to

develop the small-scale industry in India with the aid of advisory services.

The bank offers financial assistance to the small and medium scale

industries and coordinated the functioning of the other financial

institutions that caters to the need of the agro-industries in India. The

Small Industries Development Bank of India offers financial assistance for

significant issues like infrastructure development, rehabilitation for sick

industrial units. The investors can take the advantage of the unique fixed

deposit scheme offered the bank. For the recently launched companies the

bank provides composite loan, technology up gradation fund, direct credit

scheme etc. The existing members are allowed direct credit scheme, credit

linked capital subsidy etc. For the up gradation of the standard of Indian

women and to help them achieve financial independence the bank offers

two specialized financial program named as marketing fund for women

and Mahila Udhyam Nidhi.

iii) National Housing Bank

The National Housing Bank was established in the year 1988 as per the

guidelines of the National Housing Bank Act, 1987 with a view to

accelerate the growth of the Housing Financing Institutions by providing



them with financial and other required assistance. The company extends

financial assistance for entire infrastructural development offers refinance

to the existing housing finance companies etc. The bank has set up

specialized divisions like Development and Risk Management, Project

Finance, Refinancing Operations, Resource Mobilization and Management

etc. The head office is located at New Delhi and Shri S. Sridhar acts as the

Chairman & Managing Director of the bank.

iv) Board for Industrial & Financial Reconstruction

The Board for Industrial & Financial Reconstruction was set up in the year

1987 in order to advise on all the aspects that need to be up graded for a

sick industrial unit. The Sick Industrial Companies (Special Provisions) Act,

1985 guides the activities of the board. The board assesses the type of

sickness and the industrial units that eligibility criteria. The main eligibility

criteria for the companies are that they should be registered under the

Companies Act for at least 5 years.

5.5 Reserve bank of India

The Reserve Bank of India was established on April 1, 1935 in accordance with the

provisions of the Reserve Bank of India Act, 1934.

The Central Office of the Reserve Bank was initially established in Calcutta but

was permanently moved to Mumbai in 1937. The Central Office is where the

Governor sits and where policies are formulated. Though originally privately

owned, since nationalization in 1949, the Reserve Bank is fully owned by the

Government of India.

The Reserve bank of India plays an important part in the Development Strategy of

the Government of India. It is a member bank of the Asian Clearing Union.

The Reserve Bank of India has four regional representations: North in New Delhi,

South in Chennai, East in Kolkata and West in Mumbai. It has 19 regional offices

at most state capitals and at a few major cities in India.

Functions of Reserve bank of India.

Major functions of the RBI are as follows:

http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/RBIA1934170510.pdf

http://en.wikipedia.org/wiki/Government_of_India

http://en.wikipedia.org/wiki/Asian_Clearing_Union



1. Issue of Bank Notes:

The Reserve Bank of India has the sole right to issue currency notes except one rupee

notes which are issued by the Ministry of Finance. Currency notes issued by the

Reserve Bank are declared unlimited legal tender throughout the country.

This concentration of notes issue function with the Reserve Bank has a number of

advantages: (i) it brings uniformity in notes issue; (ii) it makes possible effective state

supervision; (iii) it is easier to control and regulate credit in accordance with the

requirements in the economy; and (iv) it keeps faith of the public in the paper

currency.

2. Banker to Government:

As banker to the government the Reserve Bank manages the banking needs of the

government. It has to-maintain and operate the government’s deposit accounts. It

collects receipts of funds and makes payments on behalf of the government. It

represents the Government of India as the member of the IMF and the World Bank.

3. Custodian of Cash Reserves of Commercial Banks:

The commercial banks hold deposits in the Reserve Bank and the latter has the

custody of the cash reserves of the commercial banks.

4. Custodian of Country’s Foreign Currency Reserves:

The Reserve Bank has the custody of the country’s reserves of international currency,

and this enables the Reserve Bank to deal with crisis connected with adverse balance

of payments position.

5. Lender of Last Resort:

The commercial banks approach the Reserve Bank in times of emergency to tide over

financial difficulties, and the Reserve bank comes to their rescue though it might

charge a higher rate of interest.

6. Central Clearance and Accounts Settlement:

Since commercial banks have their surplus cash reserves deposited in the Reserve

Bank, it is easier to deal with each other and settle the claim of each on the other

through book keeping entries in the books of the Reserve Bank. The clearing of

accounts has now become an essential function of the Reserve Bank.

7. Controller of Credit:

Since credit money forms the most important part of supply of money, and since the

supply of money has important implications for economic stability, the importance of



control of credit becomes obvious. Credit is controlled by the Reserve Bank in

accordance with the economic priorities of the government.

5.6 Cash reserve ratio (CRR)

CRR means Cash Reserve Ratio. Banks in India are required to hold a certain

proportion of their deposits in the form of cash. However, actually Banks don’t hold

these as cash with themselves, but deposit such case with Reserve Bank of India (RBI)

/ currency chests, which is considered as equivalent to holding cash with RBI. This

minimum ratio (that is the part of the total deposits to be held as cash) is stipulated

by the RBI and is known as the CRR or Cash Reserve Ratio. Thus, when a bank’s

deposits increase by Rs100, and if the cash reserve ratio is 6%, the banks will have to

hold additional Rs 6 with RBI and Bank will be able to use only Rs 94 for investments

and lending / credit purpose. Therefore, higher the ratio (i.e. CRR), the lower is the

amount that banks will be able to use for lending and investment. This power of RBI

to reduce the lendable amount by increasing the CRR makes it an instrument in the

hands of a central bank through which it can control the amount that banks

lend. Thus, it is a tool used by RBI to control liquidity in the banking system.

5.7 Bank rate

Bank rate is the interest rate at which a central bank provides loans to banks and

other borrowers. Corresponding to it is the discount rate, that is, the rate at which

the central bank discounts trade bills, and other instruments, which are redeemable

at par. In practice, the two rates result in the same cost of borrowing from the

central bank so that the two terms can be used interchangeably.

The central bank is the lender of the last resort. Therefore, the rate at which it is

ready to extend credit has a direct impact upon the level of interest rate in the

country. When the market has to pay more for its funds from the central bank, it

increases the interest rate charged from the business sector. It is expected that,

faced with a demand for increased interest rates, the borrowers curtail their demand

for credit and investment activity slows down. Moreover, higher cost of borrowing

funds adds to the cost of production and supply, which means that the suppliers

must increase prices or bear the extra cost themselves.



5.8 Repo rate

Repo (Repurchase) rate is the rate at which the RBI lends shot-term money to the

banks against securities. When the repo rate increases borrowing from RBI becomes

more expensive. Therefore, we can say that in case, RBI wants to make it more

expensive for the banks to borrow money, it increases the repo rate; similarly, if it

wants to make it cheaper for banks to borrow money, it reduces the repo rate.

Repo rate also called short term lending rate.

5.9 Reverse repo rate

Reverse Repo rate is the rate at which banks park their short-term excess liquidity

with the RBI. The banks use this tool when they feel that they are stuck with excess

funds and are not able to invest anywhere for reasonable returns. An increase in

the reverse repo rate means that the RBI is ready to borrow money from the banks

at a higher rate of interest. As a result, banks would prefer to keep more and more

surplus funds with RBI.

5.10 Statutory liquidity ratio (SLR)

Statutory liquidity ratio stands for Statutory Liquidity Ratio. This term is used by

bankers and indicates the minimum percentage of deposits that the bank has to

maintain in form of gold, cash or other approved securities. Thus, we can say that it

is ratio of cash and some other approved securities to liabilities (deposits) It regulates

the credit growth in India.

Statutory liquidity ratio is the Indian government term for reserve requirement that

the commercial banks in India require to maintain in the form of gold or government

approved securities before providing credit to the customers. Statutory Liquidity

Ratio is determined and maintained by Reserve Bank of India in order to control the

expansion of bank credit.

The SLR is commonly used to contain inflation and fuel growth, by increasing or

decreasing it respectively. This counter acts by decreasing or increasing the money

supply in the system respectively.

The main objectives for maintaining the statutory liquidity ratio are the following:

To ensure the solvency of commercial banks.

http://en.wikipedia.org/wiki/Reserve_requirement


http://en.wikipedia.org/wiki/Securities

http://en.wikipedia.org/wiki/Reserve_Bank_of_India

http://en.wikipedia.org/wiki/Inflation



To control the expansion of bank credit. By changing the level of SLR, the

Reserve Bank of India can increase or decrease bank credit expansion.

To compel the commercial banks to invest in government securities like

government bonds.


6 INTRODUCTION TO MANAGEMENT

6.1 Introduction:

One of the most important activities in

business is the management of the 4M’s

men, machines, material and money.

Simply speaking, management is what

managers do. But that simple statement

doesn’t tell us much does it?

In one context, it may comprise the

activities of executives and

administrative personnel in an

organization.

In a broad perspective, management can

be considered as the proper utilization of

people and other resources in an

organization to accomplish desired

objectives.

Definition:

ccording to F.W. Taylor “Management in

business and human organization activity

is simply the act of getting people

together to accomplish desired goals”.

Course Contents

6.1 Introduction and Definition of

Management

6.2 Nature of Management

6.3 Management is a science and an

art

6.4 Difference between

Administration and Management

6.5 Functions of Management

6.6 Levels of Management

6.7 Managerial skill

6.8 Role of Manager

6.9 Scientific theory

6.10 Henry fayol’s 14 principles

of Management

6.11 Abraham Maslow’s need

theory

6. Introduction of Management ENGINEERING ECONOMICS AND MANAGEMENT (2140003)


According to Peter Druker, “Give direction to their organization, provide

leadership, and decide how to use organizational resources to

accomplish goals”.

According to Henri Fayol, “Management is to forecast, to plan, to organize, to

command, to co-ordinate and control activities of others”.

According to Fredmund Malik defines as Management is the transformation

of resources into utility.

Organization Function of Resources Management

6.2 Nature of Management

Nature of management can be described as follows.

1. Continuous Process:

Management is a never ending process. It will remain the part of organization

till the organization itself exists. Management is an unending process as past

decisions always carry their impact for the future course of action.

2. Universal in Nature:

Management is universal in nature i.e. it exists everywhere in universe

wherever there is a human activity. The basic principles of management can

be applied anywhere whether they are business or non-business organization.

3. Multidisciplinary:

- Man - Material - Machine - Money - Information - Technology

- Planning - Organizing - Staffing - Leading - controlling

Organizational

goals

http://en.wikipedia.org/wiki/Fredmund_Malik



Management is basically multidisciplinary. Though management has

developed as a separate discipline it draws knowledge and concepts of various

other streams like sociology, psychology, economics, statistics etc.

Management links ideas and concepts of all these disciplines and uses them

for good-self of the organization.

4. Management is goal oriented:

Management is a goal oriented activity. It works to achieve some

predetermined objectives or goals which may be economic or social.

5. Management is a group activity:

Management is a vital part of group activity. As no individual can satisfy all his

needs himself, he unites with his co-workers and work together as an

organized group to achieve what he cannot achieve individually.

6. Dynamic:

Management is dynamic in nature i.e. techniques to manage business changes

itself over a period of time.

7. System of authority:

Authority is power to get the work done by others and compel them to work

systematically. Management cannot perform in absence of authority.

Authority and responsibility depends upon position of manager in

organization.

8. Management is Science:

Management is considered as science. Science tells about the causes and

effects of applications and is based on some specific principles

and procedures. Management also uses some principles and specific methods.

These are formed by continuous observations.

9. Management is an art:



Management is considered as art as both requires skills, knowledge,

experience and creativity for achievement of desired results.

6.3 Management is a Science and an Art

According to the nature of management, there is a controversy that whether

management is a science or an art. This controversy is very old & is yet to be

settled. It should be noted that, learning process of science is different from that

of art. Learning of science includes principles while learning of art involves its

continuous practice.

Management as a Science

Science is a systematic body of knowledge relating to a specific field of study that

contains general facts which explains a phenomenon. It establishes cause and

effect relationship between two or more variables and underlines the principles

governing their relationship. These principles are developed through scientific

method of observation and verification through testing.

Science is characterized by following main features:

1. Universally accepted principles – Scientific principles represents basic truth

about a particular field of enquiry. These principles may be applied in all

situations, at all time & at all places. E.g. – law of gravitation which can be applied

in all countries irrespective of the time.

Management also contains some fundamental principles which can be applied

universally like the Principle of Unity of Command i.e. one man, one boss. This

principle is applicable to all type of organization – business or non business.

2. Experimentation & Observation – Scientific principles are derived through

scientific investigation & researching i.e. they are based on logic.

E.g. the principle that earth goes round the sun has been scientifically proved.

Management principles are also based on scientific enquiry & observation and

not only on the opinion of Henry Fayol. They have been developed through

experiments & practical experiences of large no. of managers.

E.g. it is observed that fair remuneration to personal helps in creating a satisfied

work force.



3. Cause & Effect Relationship – Principles of science lay down cause and effect

relationship between various variables.

E.g. when metals are heated, they are expanded. The cause is heating & result is

expansion.

The same is true for management; therefore it also establishes cause and effect

relationship.

E.g. lack of parity (balance) between authority & responsibility will lead to

ineffectiveness. If you know the cause i.e. lack of balance, the effect can be

ascertained easily i.e. ineffectiveness. Similarly if workers are given bonuses, fair

wages they will work hard but when not treated in fair and just manner, reduces

productivity of organization.

4. Test of Validity & Predictability – Validity of scientific principles can be tested

at any time or any number of times i.e. they stand the time of test. Each time

these tests will give same result. Moreover future events can be predicted with

reasonable accuracy by using scientific principles.

E.g. H2 & O2 will always give H2O.

Principles of management can also be tested for validity.

E.g. principle of unity of command can be tested by comparing two persons – one

having single boss and one having 2 bosses. The performance of 1st person will

be better than 2nd.

It cannot be denied that management has a systematic body of knowledge but it

is not as exact as that of other physical sciences like biology, physics, and

chemistry etc. The main reason for the inexactness of science of management is

that it deals with human beings and it is very difficult to predict their behaviour

accurately. Since it is a social process, therefore it falls in the area of social

sciences. It is a flexible science & that is why its theories and principles may

produce different results at different times and therefore it is a behaviour

science.

Management as an Art



Art refers to the way of doing specific things; it indicates how an object can be

achieved. In the words of George R. Terry, "Art is bringing about of a desired

result through the application of skill." Art is, thus, skillful application of

knowledge which entirely depends on the inherent capacity of a person which

comes from within a person and is learned from practice and experience. In this

sense, management is certainly an art as a manager uses his skill, knowledge and

experience in solving various problems; both complicated and non-complicated

that arises in the working of his enterprise successful.

1. Practical Knowledge: Every art requires practical knowledge therefore

learning of theory is not sufficient. It is very important to know practical

application of theoretical principles.

E.g. to become a good painter, the person not only should know about the

different colour and brushes but different designs, dimensions, situations etc

to use them appropriately. A manager can never be successful just by

obtaining degree or diploma in management; he must have also known how

to apply various principles in real situations, by functioning as a manager.

2. Personal Skill: Although theoretical base may be same for every artist, but

each one has his own style and approach towards his job. That is why the level

of success and quality of performance differs from one person to another.

E.g. there are several qualified painters but M.F. Hussain is recognized for his

style. Similarly management as an art is also personalized. Every manager has

his own way of managing things based on his knowledge, experience and

personality, that is why some managers are known as good managers (like

Aditya Birla, Rahul Bajaj) whereas others as bad.

3. Creativity: Every artist has an element of creativity in line. That is why he aims

at producing something that has never existed before which requires

combination of intelligence & imagination. Management is also creative in

nature like any other art. It combines human and non-human resources in a

useful way so as to achieve desired results. It tries to produce sweet music by

combining chords in an efficient manner.

4. Perfection through practice: Practice makes a man perfect. Every artist

becomes more and more proficient through constant practice. Similarly

managers learn through an art of trial and error initially but application of

management principles over the years makes them perfect in the job of

managing.

5. Goal-Oriented: Every art is result oriented as it seeks to achieve concrete

results. In the same manner, management is also directed towards



accomplishment of pre-determined goals. Managers use various resources like

men, money, material, machinery & methods to help in the growth of an

organization.

Thus, we can say that management is an art therefore it requires application of

certain principles rather it is an art of highest order because it deals with shaping

the attitude and behavior of people at work towards the desired goals

6.4 The difference between Management and Administration

Top level:

- General manager

- Managing director

- Chief executive

- Board of directors

Middle level:

- The departmental heads

- The branch heads

Lower level:

- The foremen

- Supervisors

- Superintendents

Basis Administrative Management Meaning It is concerned with Management is an art of



formulation of broad objectives, plans & policies.

getting things done through others by directing their efforts towards achievement of pre-determined goals.

Nature Administration is a decision-making function

Management is an executing function.

Process Administration decides what is to be done & when it is to be done.

Management decides who should as it & how should he do it.

Function

Administration is a thinking function because plans & policies are determined under it.

Management is a doing function because managers get work done under their supervision.

Skill Conceptual and Human skills

Technical and Human skills

Level Top level function Middle & lower level function

6.5 Functions of Management

Planning

Organizing

Staffing

Directing

Controlling

1. Planning



It is the basic function of management. It deals with chalking out a future

course of action & deciding in advance the most appropriate course of

actions for achievement of pre-determined goals or mission.

According to KOONTZ, “Planning is deciding in advance

- what to do,

- when to do &

- how to do.

It bridges the gap from where we are & where we want to be”.

A plan is a future course of actions. It is an exercise in problem solving &

decision making.

Planning is determination of courses of action to achieve desired goals.

Thus, planning is a systematic thinking about ways & means for

accomplishment of pre-determined goals.

Planning is necessary to ensure proper utilization of human & non-

human resources. It is all pervasive, it is an intellectual activity and it also

helps in avoiding confusion, uncertainties, risks, wastages etc.

2. Organizing

After a plan is in place, a manager needs to organize her team and

materials according to her plan. Assigning work and granting authority

are two important elements of organizing.

A manager has the organizational responsibilities that include the ability

to identify different roles, choose the right roles for the employees,

delegate the tasks to the employees and ensure that the employees have

the resources to perform their tasks better.

It is the process of bringing together physical, financial and human

resources and developing productive relationship amongst them for

achievement of organizational goals.

According to Henry Fayol, “To organize a business is to provide it with

everything useful or its functioning i.e. raw material, tools, capital and

personnel’s”.



3. Staffing

It includes manpower or human resource planning.

Staffing involves recruitment, selection, induction and positioning the

people in the organization.

Decisions on remuneration packages are part of staffing.

Training, retraining, development, mentoring and counseling are

important aspects of staffing.

It also includes performance appraisals and designing and administering

the motivational packages.

4. Directing

It is one of the most important functions of management to translate

company's plans into execution.

It includes providing leadership to people so that they work willingly and

enthusiastically.

Directing people involves motivating them all the time to enthuse them

to give their best.

Communicating companies plans throughout the organization is an

important directing activity.

It also means coordinating various people and their activities.

Directing aims at achieving the best not just out of an individual but

achieving the best through the groups or teams of people through team

building efforts.

5. Controlling

It implies measurement of accomplishment against the standards and

correction of deviation if any to ensure achievement of organizational

goals.

The purpose of controlling is to ensure that everything occurs in

conformities with the standards. According to Theo Haimann,

“Controlling is the process of checking whether or not proper progress is

being made towards the objectives and goals and acting if necessary, to

correct any deviation”.



According to Koontz & O’Donell “Controlling is the measurement &

correction of performance activities of subordinates in order to make

sure that the enterprise objectives and plans desired to obtain them as

being accomplished”. Therefore controlling has following steps:

Establishment of standard performance.

Measurement of actual performance.

Comparison of actual performance with the standards and

finding out deviation if any.

Corrective action.

6.6 Levels of Management / Types of Manager

This distinction is drawn keeping in mind the authority, responsibility and the nature

of functions performed by different managers.

1. Top level / General manager

These managers work at the highest level of the organizational

hierarchy.

The number of managers in this group is the smallest. Their basic

function is to lay down the plans, policies and procedures.

They co-ordinate the various departments of the organization with

each other and also interact with the external environment, to keep

themselves aware of the changes taking place outside the

organization.

The co-ordinate the overall activities of the firm and direct the major

organizational activities by continuously performed.

The top level managers are normally called as ‘Chief executive

officer’, ‘President’, Vice-president, General manager etc.

2. Middle level / Functional manager



They act as a link between the top level and the lower level

managers.

They direct the activities of their subordinates for the achievement of

the overall organizational goals.

The organization is divided into different departments and these

managers act as the head of their respective departments.

These managers are normally called as ‘Departmental managers’,

Plant managers’, ‘Assistant manager’ etc. the exact title may once

again differ from organization to organization.

These managers spend most of their time in managing the company’s

day to day operations and have very little interaction with the outside

parties such as customers, suppliers etc.

3. Lower level / Front-line manager

They are also called as the first line managers. They directly supervise

the employees or the work force by giving them orders and helping

them.

They also co-ordinate the work of employees with the organizational

resources.

They are normally called as ‘foreman’, ‘supervisors’, ‘office

managers’, they may be technical supervisors, production

supervisors, financial supervisors.

6.7 Managerial skills

Successful managers are those who possess the technical, human and conceptual

skills, though their degree may vary from top level to lower levels down the

organizational hierarchy.

As we move down the organizational hierarchy, there is more of technical skills

required by the managers and less of conceptual skills.



1) Conceptual skills

It is the mental ability of managers to co-ordinate and integrates the

organizations interests and activities.

It is the ability to foresee the opportunities that must be exploited so

that the organization can make the best use of them and co-ordinate

them with its internal system.

It involves broad knowledge and imagination on the part of managers

to use these skills so that the overall objectives can be implemented

effectively.

2) Human skills

A manager is the one who performs the functions of management.

These functions have to be performed by managers at all the

organizational levels.

Managers at the top level pass orders to the workers through the

middle and the lower level managers for achieving the organizational

goals. In this, knowledge and application of human and behavioral

skills is very important for the managers to get the work done

through their subordinates.



Human skill is the ability to work with, understand and motivate

other people, either as individuals or groups.

3) Technical skills

It is the ability to use the tools and techniques in an area that a

person is specialized in.

It requires specialized knowledge to perform the work in that

specialized area. These areas may be manufacturing, public

administration, industrial management or business management.

6.8 Role of Manager

1. Interpersonal Roles :

1) Figurehead –

The manager occupies an official position whereby he performs the duties

of signing certain documents, making speeches, receiving official visitors

and other duties of legal and social nature.

2) Leader –

The manager looks after the interests of his subordinates and also tries to

solve their psychological and work-related problems. He lays down the

goals for his followers, co-ordinates the individual goals with the

organizational goals, motivates his followers to accomplish those goals and



also creates a feeling of enthusiasm, loyalty and confidence amongst them

for the purpose of achieving the said goals.

3) Liaison –

The manager serves a connecting link between his organization and

outsiders or between his unit and other organizational units. The major

objectives of his role are to maintain a link between the organization and

its external environment (society, consumers, government etc).

2. Informal Roles :

1) Monitor –

The manager constantly collects information about these factors which

affect his activities. Such factors may be within the organization as well as

outside it. They have to monitor all the activities of the organizations by

reading various journals and periodicals.

2) Disseminator –

The manager passes some of his privileged information to other members

of the organizations. This is done through formal and informal interaction

of managers with their subordinates by holding meetings or circulating

notice and circulars to them.

3) Spokesman –

The manager act as a link between their superiors and subordinates as also

between the external and the internal organizational environment. The

instruction and ordinances issued by superiors are passed on to their

subordinates while the reactions and problems of subordinates are

communicated to their superiors.

3. Decisional Roles :

1) Entrepreneurs –

The managers keep thinking of new ideas for the development of the

organization. They try to implement these ideas within the given

framework of resources. It may be required, at times, to bring certain

changes in products, processes, technology etc.

2) Disturbance handlers –



The managers try to solve the unexpected disturbance arising in and

outside the organization. There might be problems such as firing the

employees by the superiors or demanding of a higher wage by the

employees or facing of a tough situation with the customers or suppliers of

materials which need the active role of manager as a disturbance handler

to solve them.

3) Negotiators –

They mediate between the organization and the employees. In case of any

conflict, they work in the interests of the organization and its work force so

that the organizational goals are not at stake.

6.9 Scientific Management

Scientific management was a theory of management that analyzed and synthesized

workflows. Its main objective was improving economic efficiency, especially labor

productivity. It was one of the earliest attempts to apply science to the engineering

of processes and to management.

During the beginning of the 20th century, skilled labour was not available in United

States as a result of which productivity suffered. The management thinkers were

looking for ways and means to increase the efficiency of workers so that productivity

could be increased. Different alternatives of deleting or combining the operations of

work were being looked into.

It was then that scientific management theory came into existence which was

propounded by Fredrick W. Taylor (1856-1915), who is also known as the father of

scientific management.

Taylor found that in most of the organizations, time and work studies were not the

basis of doing the work as a result of which ‘how much work should be done in a day

and how much should be paid for each day’s work’ was not paid attention to.

Taylor observed that some workers were more talented than others, and that even

smart ones were often unmotivated. He observed that most workers who are forced

to perform repetitive tasks tend to work at the slowest rate that goes unpunished.

Taylor thought on these lines and developed his theory of scientific management

which emphasized on determining the best way of doing each task/job by eliminating

all types of wastages of men and materials.

http://en.wikipedia.org/wiki/Management

http://en.wikipedia.org/wiki/Analysis

http://en.wiktionary.org/wiki/synthesis#Noun

http://en.wikipedia.org/wiki/Workflow

http://en.wikipedia.org/wiki/Economic_efficiency

http://en.wikipedia.org/wiki/Workforce_productivity

http://en.wikipedia.org/wiki/Workforce_productivity

http://en.wikipedia.org/wiki/Applied_science

http://en.wikipedia.org/wiki/Engineering

http://en.wikipedia.org/wiki/Process

http://en.wikipedia.org/wiki/Worker

http://en.wikipedia.org/wiki/Punishment



He also emphasized on time and motion studies to find out the optimum time and

nature of operation to be performed for the successful completion of each task.

Taylor’s theory is based on his working experience in three different companies:

Midvale Steel, Simonds Rolling Machine Company and Bethlehem Steel.

1. Midvale Steel :

Taylor joined Midvale Steel as a labourer. During his tenure at Midvale Steel,

Taylor observed that workers were working at less than their full capacity. He

attributed this to the following reasons;

Workers feared to work fast because they thought that if they finished

their work fast, they would be turned out by the management or that their

pay would be lowered.

The wage system was based on paying daily wages as a result of which

workers used to be present the factory but their output was low.

He suggested the following principles to overcome this problem. These

principles formed the basis of scientific management theory.

a) The development of true science of management :

Scientific means should be developed to determine how tasks are done.

Each task should be based on time and motion study and not on the past

experience of workers.

b) The scientific selection of workers :

It aimed at selecting the right worker for the right job and training him to

perform the task through the scientific method.

c) The scientific education and development of the worker :

This would enable the workers to put their best to the organizational

output by understanding the work and the method of work. The

supervisors should also cooperate with the workers by inviting their

suggestions and discussing the new and improved methods of work.

d) Division of work responsibilities :



Taylor advocated that managers should be entrusted with the task of

planning the work using scientific methods and workers should execute

the work according to these standards.

Taylor also introduced a system of ‘differential rate system’ whereby he asked

the managers to pay a higher wage to the workers who finished their work in

less than the standard time and lower rate to those who produced lesser than

the standard level.

2. At Simonds Rolling Machine Company :

Taylor worked as a management consultant. In one of their projects, workers

had to inspect the bicycle ball bearings. It was felt by the management that

since this work involved long working hours and was also not innovative; the

worker efficiency would not increase. Taylor studied and timed the

movements of the best workers and motivated and trained the rest of the

workers to come up to that level. For this the again adopted the system of

‘differential rate’ and also introduced certain improvements in their working

hours including rest hours. This brought about a change in the quality of

production and worker’s earning and management’s profit, both rose up.

3. Bethlehem Steel :

In the Pig iron experiment, he studied the time and movement of workers

who unloaded raw materials from the incoming railcars and loaded the

finished goods on the outgoing ones. He observed that each worker could

load about 12.5 tons per day and earn $1.15 for the same each day. Taylor

selected the most efficient worker, studied his time and motion study. He

introduced rest periods during the day long working hours of the workers and

offered the incentive plans to workers for reaching the targeted performance.

He set the target of 47.5 tons per day and a wage rate of $1.85 per day those

who met these standards.

Principles of Scientific Management :

1) The development of true science of management:

• Use Time and Motion Studies

- Motion studies are performed to eliminate waste

- Motion study evolved into a technique for improving work methods.

- Motion study comes first before the setting of time standards.



• Motion studies are used to

- Develop the best work method.

- Develop motion consciousness on the part of all employees.

- Develop economical and efficient tools, fixtures, & production aids.

- Assist in the selection of new machines and equipment.

- Train new employees in the preferred method.

- Reduce effort and cost.

- Time study developed in the direction of establishing standard times

- Time study is a direct and continuous observation of a task, using a

timekeeping device (stopwatch for example) to record the time taken for accomplish

a task

2) The scientific selection of workers :

It aimed at selecting the right worker for the right jon and training him to

perform the task through the scientific method.

3) The scientific education and development of the worker:

This would enable the workers to put their best to the organizational output

by understanding the work and the method of work. The supervisors should also

cooperate with the workers by inviting their suggestions and discussing the new and

improved methods of work.

4) Equal division of work and responsibility between worker and manager:

Taylor advocated that managers should be entrusted with the task of planning

the work using scientific methods and workers should execute the work according to

these standards.

Techniques of Scientific Management

1. Time Study -



a. It is a technique which enables the manager to ascertain standard time

taken for performing a specified job.

b. Every job or every part of it is studied in detail.

c. This technique is based on the study of an average worker having

reasonable skill and ability.

d. Average worker is selected and assigned the job and then with the help

of a stop watch, time is ascertained for performing that particular job.

e. Taylor maintained that Fair day’s work should be determined through

observations, experiment and analysis by keeping in view an average

worker.

Standard Time × Working Hours = Fair Day’s Work

2. Motion Study –

a. In this study, movement of body and limbs required to perform a job

are closely observed.

b. In other words, it refers to the study of movement of an operator on

machine involved in a particular task.

c. The purpose of motion study is to eliminate useless motions and

determine the best way of doing the job.

d. By undertaking motion study an attempt is made to know whether

some elements of a job can be eliminated combined or their sequence

can be changed to achieve necessary rhythm.

e. Motion study increases the efficiency and productivity of workers by

cutting down all wasteful motions.

3. Functional Foremanship -



a. Taylor advocated functional foremanship for achieving ultimate

specification.

b. This technique was developed to improve the quality of work as single

supervisor may not be an expert in all the aspects of the work.

c. Therefore workers are to be supervised by specialist foreman.

d. The scheme of functional foremanship is an extension of principle pf

specialization at the supervisory level.

e. Taylor advocated appointment of 8 foramen, 4 at the planning level &

other 4 at implementation level.

f. The names & function of these specialist foremen are: -

Instruction card clerk concerned with tagging down of

instructions according to which workers are required to perform

their job

Time & cost clerk is concerned with setting a time table for doing

a job & specifying the material and labor cost involved in it.

Route clerk determines the route through which raw materials

has to be passed.

Shop Disciplinarians are concerned with making rules and

regulations to ensure discipline in the organization.

Gang boss makes the arrangement of workers, machines, tools,

workers etc.

Speed boss concerned with maintaining the speed and to remove

delays in the production process.

Repair boss concerned with maintenance of machine, tools and

equipments.

Inspector is concerned with maintaining the quality of product.

4. Standardization -

a. It implies the physical attitude of products should be such that it meets

the requirements & needs of customers.

b. Taylor advocated that tools & equipments as well as working conditions

should be standardized to achieve standard output from workers.

c. Standardization is a means of achieving economics of production.



d. It seems to ensure -

The line of product is restricted to predetermined type, form,

design, size, weight, quality. Etc

There is manufacture of identical parts and components.

Quality & standards have been maintained.

Standard of performance are established for workers at all levels.

5. Differential Piece Wage Plan -

a. This tech of wage payment is based on efficiency of worker.

b. The efficient workers are paid more wages than inefficient one.

c. On the other hand, those workers who produce less than standard no.

of pieces are paid wages at lower rate than prevailing rate i.e. worker is

penalized for his inefficiency.

d. This system is a source of incentive to workers who improving their

efficiency in order to get more wages.

e. It also encourages inefficient workers to improve their performance

and achieve their standards.

f. It leads to mass production which minimizes cost and maximizes

profits.

6. Other Techniques -

a. Various other techniques have been developed to create ordeal

relationship between management and workers and also to create

better understanding on part of works.

b. Those includes use of instruction cards, strict rules & regulations,

graphs, slides, charts etc, so as to increase efficiency of workers.



6.10 Henry fayol’s 14 principles of Management

Fayol wrote during the same time period as Taylor.

He wrote from personal experience as he was the managing director of a

large French coal-mining firm.

Henri Fayol's management theory is a simple model of how management

interacts with personnel. Fayol's management theory covers concepts in a

broad way, so almost any business can apply his theory of management.

Today the business community considers Fayol's classical management

theory as a relevant guide to productively managing staff.

His belief that management was an activity common to all business

endeavors, government and even the home led him to develop 14 principles

of management- that could be applied to all organizational situations, these

principles are following-

Management Principles developed by Henri Fayol:

1. DIVISION OF WORK: Work should be divided among individuals and groups to

ensure that effort and attention are focused on special portions of the task.

Fayol presented work specialization as the best way to use the human

resources of the

organization.

2. AUTHORITY: The concepts of Authority and responsibility are closely related.

Authority was defined by Fayol as the right to give orders and the power to

exact obedience. Responsibility involves being accountable, and is therefore

naturally associated with authority. Whoever assumes authority also assumes

responsibility.

3. DISCIPLINE: A successful organization requires the common effort of workers.

Penalties should be applied judiciously to encourage this common

effort.

4. UNITY OF COMMAND: Workers should receive orders from only one

manager.

5. UNITY OF DIRECTION: The entire organization should be moving towards a

common objective in a common

direction.



6. SUBORDINATION OF INDIVIDUAL INTERESTS TO THE GENERAL INTERESTS:

The interests of one person should not take priority over the interests of the

organization as a

whole.

7. REMUNERATION: Many variables, such as cost of living, supply of qualified

personnel, general business conditions, and success of the business, should be

considered in determining a worker’s rate of

pay.

8. CENTRALIZATION: Fayol defined centralization as lowering the importance of

the subordinate role. Decentralization is increasing the importance. The

degree to which centralization or decentralization should be adopted depends

on the specific organization in which the manager is

working.

9. SCALAR CHAIN: Managers in hierarchies are part of a chain like authority

scale. Each manager, from the first line supervisor to the president, possess

certain amounts of authority. The President possesses the most authority; the

first line supervisor the least. Lower level managers should always keep upper

level managers informed of their work activities. The existence of a scalar

chain and adherence to it are necessary if the organization is to be

successful.

10. ORDER: For the sake of efficiency and coordination, all materials and people

related to a specific kind of work should be treated as equally as

possible.

11. EQUITY: All employees should be treated as equally as

possible.

12. STABILITY OF TENURE OF PERSONNEL: Retaining productive employees

should always be a high priority of management. Recruitment and Selection

Costs, as well as increased product-reject rates are usually associated with

hiring new workers.

13. INITIATIVE: Management should take steps to encourage worker initiative,

which is defined as new or additional work activity undertaken through self-

direction.

14. ESPIRIT DE CORPS: Management should encourage harmony and general

good feelings among employees.



He was also suggested which type of ability should be required for the manager.

Fayol summed up the qualities of managers under the following heads:

1. Physical – Health and vigor

2. Mental – Ability to analyze, interpret and arrive at conclusions

3. Moral – Willingness to accept responsibility, loyalty and dignity

4. General education – Knowledge of overall affairs of the organization

5. Special knowledge – Knowledge of a specific activity; technical, commercial

or financial

6. Experience – Knowledge gained over a period of time while working in a

particular functional area.

6.11 Abraham Maslow’s Hierarchy need

Abraham Maslow, a practicing psychologist, developed one of the most widely

recognized need theories, a theory of motivation based upon a consideration of

human needs. His theory of human needs had three assumptions:

Human needs are never completely satisfied.

Human behavior is purposeful and is motivated by the need for satisfaction.

Needs can be classified according to a hierarchical structure of importance,

from the lowest to highest.

Maslow broke down the needs hierarchy into five specific areas:



Physiological needs. Maslow grouped all physical needs necessary for

maintaining basic human well-being, such as food and drink, into this

category. After the need is satisfied, however, it is no longer is a motivator.

Safety needs. These needs include the need for basic security, stability,

protection, and freedom from fear. A normal state exists for an individual to

have all these needs generally satisfied. Otherwise, they become primary

motivators.

Belonging and love needs. After the physical and safety needs are satisfied

and are no longer motivators, the need for belonging and love emerges as a

primary motivator. The individual strives to establish meaningful relationships

with significant others.

Esteem needs. An individual must develop self-confidence and wants to

achieve status, reputation, fame, and glory.

Self-actualization needs. Assuming that all the previous needs in the hierarchy

are satisfied, an individual feels a need to find himself.


7 FUNCTIONS OF MANAGEMENT AND

ORGANIZATIONAL STRUCTURE

7.1 Planning

In simple words, planning is deciding in

advance what is to be done, when where,

how and by whom it is to be done. Planning

bridges the gap from where we are to where

we want to go. It includes the selection of

objectives, policies, procedures and

programmes from among alternatives. A

plan is a predetermined course of action to

achieve a specified goal. It is an intellectual

process characterized by thinking before

doing. It is an attempt on the part of

manager to anticipate the future in order to

achieve better performance. Planning is the

primary function of management.

Nature of Planning:

1. Contribution to objectives -

In the ever changing environment of

today, the objectives have to be very

carefully chosen and plans systematically made for the purpose of attainment

of these objectives.

Course Contents

7.1 Planning

- Nature

- Process

- Importance

- Limitation

7.2 Organizing

- Centralization

- Decentralization

7.3 staffing

7.4 Directing

7.5 Controlling

7.6 Organizational structure

- Introduction and definition

7.7 Types of organizational structure

7.8 Types of organization

7.9 Departmentalization

7.10 Span of control

- Types

- Factor affecting

7. Functions of Management and Organizational structure ENGINEERING ECONOMICS AND MANAGEMENT (2140003)


2. Primary function of management -

Of all the four function of management; planning, organizing, directing and

controlling. Planning is the primary function and precedes all other managerial

functions. Without proper planning other managerial functions shall not

follow.

3. All pervasive function -

Whatever be the organization, business or non-business, profit making or non-

profit making, planning pervades everywhere, right from top level

management to low-level management.

4. Efficiency of plans -

Efficiency is defined as ‘the achievement of the ends with the least amount of

resources.’ Plans to be efficient must be achieved with minimum cost in terms

of time and money.

Planning process

Revision of goals And plans

1. Identification of goals/objectives –

Planning cannot be successful unless we know what it is headed towards.

The enterprise must clearly set the objectives for the entire organizations,

for different departments at the same level and for different levels in the

organization.



Clear identification of goals helps in optimum allocation of scarce

resources.

2. Development of alternative plans –

After the managers are clear of what goals are to be attained, they must

think of ways and means to achieve them.

This is reflected in the alternative plans of action since there can be no

best way of doing things. All possible alternatives of achieving the

objectives are sought for by the managers.

3. Evaluation of different plans –

Once the managers are able to perceive the different ways of achieving the

goals, they have to select the most appropriate plan which will be adaptive

within the given framework of resources.

Due care must be taken to adopt a plan which is flexible (which can be

modified according to situation), acceptable by the organizational

members and is cost effective.

Each course of action has its own benefits, costs and risk. The managers

choose a plan which gives the highest returns at a minimum cost.

4. Selection of a plan –

Through a rational decision making process, the manager will now choose

one best course of action which shall be implemented for the achievement

of the organizational goals.

This plan being a complex one, may be supported by sub-plans.

Importacne of Planning

1. Efficient Use of Resources

All organizations, large and small, have limited resources. The planning

process provides the information top management needs to make

effective decisions about how to allocate the resources in a way that will

enable the organization to reach its objectives. Productivity is maximized

and resources are not wasted on projects with little chance of success.



2. Establishing Goals

Setting goals that challenge everyone in the organization to strive for

better performance is one of the key aspects of the planning process. Goals

must be aggressive, but realistic. Organizations cannot allow themselves to

become too satisfied with how they are currently doing--or they are likely

to lose ground to competitors. The goal setting process can be a wake-up

call for managers that have become complacent. The other benefit of goal

setting comes when forecast results are compared to actual results.

Organizations analyze significant variances from forecast and take action to

remedy situations where revenues were lower than plan or expenses

higher.

3. Managing Risk And Uncertainty

Managing risk is essential to an organization’s success. Even the largest

corporations cannot control the economic and competitive environment

around them. Unforeseen events occur that must be dealt with quickly,

before negative financial consequences from these events become severe.

Planning encourages the development of “what-if” scenarios, where

managers attempt to envision possible risk factors and develop

contingency plans to deal with them. The pace of change in business is

rapid, and organizations must be able to rapidly adjust their strategies to

these changing conditions.

4. Team Building

Planning promotes team building and a spirit of cooperation. When the

plan is completed and communicated to members of the organization,

everyone knows what their responsibilities are, and how other areas of the

organization need their assistance and expertise in order to complete

assigned tasks. They see how their work contributes to the success of the

organization as a whole and can take pride in their contributions. Potential

conflict can be reduced when top management solicits department or

division managers’ input during the goal setting process. Individuals are

less likely to resent budgetary targets when they had a say in their

creation.



Limitation of Planning

1. Uncertainty of future events:

It is one of the biggest difficulties of planning process. It is matter of fact

that planning is related with forecasting of future events in an advance

manner. And we know that future is uncertain & risk-oriented what will

happen tomorrow we can’t say with certainty, but we can predict about

future events through planning. But it is not important the predictions

which are made by us will be in accurate form. Hence, it is clear that there

is a fear of uncertainty of future conditions in planning.

2. Costly Process:

It also creates a huge problem in course of making plans of an

organization. Planning refers to an expensive process because it requires a

lot of investment of money as well as effort. Infect, planning involves

collection of information & data from different source & environment so

that experts are needed to put into work in this field which makes planning

process more expensive. Thus, it is clear that planning is a costly process.

3. Time Consuming Process:

Planning is the time consuming process. Because planning requires a lot of

time for thinking, evaluating the business conditions and drawing the final

plan and so in case emergency or important decision is required it will take

optimum time and business will lose its golden opportunity. As a result

business organization cannot be run smoothly for a long period.

4. Lack of Accuracy:

There is lack of proper accuracy in planning. Because we know that

panning is based on future & future is always uncertain & unpredictable

what will occur tomorrow we can’t say with certainty. Thus to make

reliable data and accurate prediction is too necessary. In the absence of

reliable data & accurate prediction, there is chance of business loss and

failure. On the whole it is clear that there is lack of proper accuracy in

planning.



5. Difficulty in the Selection of the best Alternative:

It is one of the greatest demerits of planning. Infect, planning provides a

large number of alternatives to organization to perform its events or

activities in the best form. But it is not possible for organization to select

the best alternative among st the various alternatives because organization

has no clear idea about the best alternatives, due to large appearance of

alternative courses. So that it is clear, there is difficulty in the selection of

the best alternative course in planning.

7.2 Organizing

The organizing function creates the pattern of relationships among workers and

makes optimum use of resources to enable the accomplishment of plans

and objectives. The organizing function typically follows the planning stage and

specific organizing duties involve the assignment of tasks, the grouping of tasks into

departments and the assignment of authority and allocation of resources across the

organization.

Defition

"Organizing is the process of defining and grouping the activities of the enterprise

and establishing the authority relationships among them."

Nature of Organizing

The following are the important characteristics of organization.

1. Specialization and division of work

The entire philosophy of organization is centered on the concepts of

specialization and division of work. The division of work is assigning

responsibility for each organizational component to a specific individual or

group thereof. It becomes specialization when the responsibility for a

specific task lies with a designated expert in that field. The efforts of the

operatives are coordinated to allow the process at hand to function

correctly. Certain operatives occupy positions of management at various

points in the process to ensure coordination.

https://www.boundless.com/definition/objectives/



2. Orientation towards goals

Every organization has its own purposes and objectives. Organizing is the

function employed to achieve the overall goals of the organization.

Organization harmonizes the individual goals of the employees with overall

objectives of the firm.

3. Composition of individuals and groups

Individuals form a group and the groups form an organization. Thus,

organization is the composition of individual and groups. Individuals are

grouped into departments and their work is coordinated and directed

towards organizational goals.

4. Continuity

An organization is a group of people with a defined relationship in which

they work together to achieve the goals of that organization. This

relationship does not come to end after completing each task. Organization

is a never ending process.

Centralization

Centralization is said to be a process where the concentration of decision making is

in a few hands. All the important decision and actions at the lower level, all subjects

and actions at the lower level are subject to the approval of top management.

According to Allen, “Centralization” is the systematic and consistent reservation of

authority at central points in the organization. The implication of centralization can

be :-

Reservation of decision making power at top level.

Reservation of operating authority with the middle level managers.

Reservation of operation at lower level at the directions of the top level.

For example, in a business concern, the father & son being the owners decide about

the important matters and all the rest of functions like product, finance, marketing,

personnel, are carried out by the department heads and they have to act as per

instruction and orders of the two people. Therefore in this case, decision making



power remain in the hands of father & son.

In the year when founder Henry ford was running the Ford Motor Company, the auto

manufacturer was a very centralized organization. Every key decision –and many less

important ones was made directly by Mr. Ford. For example, he insisted on

approving all purchase order within the firm, a task that most CEOs of his stature

delegated to subordinates.

Advantages/Benefits of centralization

Facility for personnel leadership. There is absolutely no doubt that the

centralized Office organization helps in establishing a personnel leadership

which may even be able to convert a losing business house into a profitable

one because of strong, efficient, purposeful and non-controversial central

leadership.

Equitable distribution of work. In order to group together and economies the

working as well as cost the grouping of two and more departments into one

also placing the same under one control goes a long way in equitably

distributing in workload not only between different departments but between

individual worker as well. This brings economy and speed.

Uniformity of activities. Obviously when centralized, the activities will be either

in the hand of one individual or a few one but under his (one) direct, control.

This will result into uniformity of activities and thereby ensuring uniform

decision and uniform process.

Specialization. Specialization of work as well as process and handling of the

work by the staff who has specialized in the work he is handling are a few of

the meaningful advantages of specialization.

Economy. The uniformity of activities and specialization of work lead to

economic operation and best utilization of the staff services. This brings

efficiency and smoothness as well. All these bring economy.

No duplication of work. Centralized personal leadership, uniformity of activities

and specialization leave no scope for duplication of work in the office. Thus

extra labor and extra cost involved in duplication is avoided and economy is

ensured.

Quick decision. For taking advantage of rare opportunities coming in the way,

it is necessary that decision should be quickly taken lest the opportunity so

available may be slipped away. Centralized office organization helps in such a

http://www.blurtit.com/q223478.html



quick decision.

Effective control. Uniformity in activities, specialization and standardization

facilitates greater degree or supervision, effective co-ordination, self and

departmental integration and thus ensure effective control.

Disadvantages of centralization

However, a centralized set-up suffers from the following disadvantages:

Delay in work. Quick decision is possible but only at the top level, since

decision is take only by the top, it is not possible to take quick decision

whenever the top is neither available nor is in a mood to take one. This results

in delaying the work since it is the top that is to take decision and none else.

Bureaucracy. Bureaucracy leads to red tapism. A centralized set-up breads red-

tapism which does not only delay the work but also sometimes helps in the

raining of eye brows because bureaucracy always leads to discrimination.

Distinctive to subordinates. Subordinate in such a set up only is required to

implement whatever it is asked to carry out. No independent decision

making authority. A mechanical working always creates mental reservation.

The subordinate does not take imitative nor is he allowed to do so. Thus there

remains no charm in either the work or the organization as he knows full well

that no upper ladder is there for him as he is not allowed to take any

initiative.

No loyalty. Since the initiative is not there, charm is not there. Zeal is absent.

No involvement is there. Only the implementation of job is there. This means

“work like a machine as ordered.” Such a psychology always never works.

Thus neither the work for the organization is treated as own one, obviously

from a servant loyalty can be expected only when he is allowed to think that

he is very much the part of the department and the organization. This is

always missing. This brings lack of loyalty among the working force.

Lack of secrecy. Secrecy in a centralized set up cannot be maintained as the

orders and decisions flow from one place and conveyed to all. Moreover, all

work at a place, under one roof, one control and one office department. Thus

secrecy even if tried cannot be maintained as effectively as might be required.



Decentalization

In such a decentralized system, there is no single centralized authority that makes

decisions on behalf of all the parties.

Decentralized system is the democratic way of running an organization in which

the power is en-route from top to bottom and employees at each level are

delegated to take independent decisions whereas centralized system is a

undemocratic way (Army rule) of running an organization in which orders and

decisions are passed from top to bottom and everyone has just to obey

According to Allen, “Decentralization refers to the systematic effort to delegate to

the lowest level of authority except that which can be controlled and exercised at

central points.

Decentralization also called departmentalization is the policy of delegating

decision-making authority down to the lower levels in an organization. In a more

decentralized organization, the top executives delegate much of their decision-

making authority to lower tiers of the organizational structure.

Advantages/Benefits of Decentralization:

Decentralization has many advantages/benefits, including:

1. Top management is relieved of much day-to-day problem solving and is left

free to concentrate on strategy, on higher level decision making, and

coordinating activities.

2. Decentralization provides lower level managers with vital experience in

making decisions. Without such experience, they would be ill-prepared to

make decisions when they are promoted into higher level positions.

3. Added responsibility and decision making authority often result in increased

job satisfaction. Responsibility and the authority, that goes with it makes the

job more interesting and provides greater incentives for people to put out

their best efforts.

4. Lower level managers generally have more detailed and up to date

information about local conditions than top managers. Therefore the

decisions of lower level management are often based on better information.

http://en.wikipedia.org/wiki/Decentralized_decision_making

http://en.wikipedia.org/wiki/Decentralized_decision_making



5. It is difficult to evaluate a manager's performance if the manager is not given

much latitude in what he or she can do.

Disadvantage of Decentralization

Can be extremely expensive

Training lower-level managers

Potential cost of poor decisions

Duplication of activities

Developing and operating sophisticated planning and reporting system

The difference of centralization and de centralization of power is, centralization of

power is when the government makes all the rules and runs everything on his own

but decentralization of power means the government gives some power to smaller

communities which allow the citizens in decision making.

Implications of Decentralization

1. There are fewer burdens on the Chief Executive as in the case of centralization.

2. In decentralization, the subordinates get a chance to decide and act independently which develops skills and capabilities. This way the organization is able to process reserve of talents in it.

3. In decentralization, diversification and horizontal can be easily implanted. 4. In decentralization, concern diversification of activities can place effectively

since there is more scope for creating new departments. Therefore, diversification growth is of a degree.

5. In decentralization structure, operations can be coordinated at divisional level which is not possible in the centralization set up.

6. In the case of decentralization structure, there is greater motivation and morale of the employees since they get more independence to act and decide.

7.3 Staffing

After an organization's structural design is in place, it needs people with the right

skills, knowledge, and abilities to fill in that structure. People are an organization's

most important resource, because people either create or undermine an

organization's reputation for quality in both products and service.

The term staffing in management consists of:

Selecting the right person for the right post.

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Training and development.

Giving proper remuneration and motivation.

Performance appraisal of employees.

Proper promotions, transfers, etc.

Defition

“Staffing means filling and keeping filled, positions in the organization structure.”

Nature of Staffing

1. People Centered:

Staffing is people centered and is relevant in all types of organizations. It is

concerned with all categories of personnel from top to bottom of the organization.

2. Responsibility of Every Manager:

Staffing is a basic function of management. Every manager is continuously engaged

in performing the staffing function. He is actively associated with recruitment,

selection, training and appraisal of his subordinates. These activities are performed

by the chief executive, departmental managers and foremen in relation to their

subordinates. Thus, staffing is a pervasive function of management and is performed

by the managers at all levels.

3. Human Skills:

Staffing function is concerned with training and development of human resources.

Every manager should use human relations skill in providing guidance and training to

the subordinates. Human relations skills are also required in performance appraisal,

transfer and promotion of subordinates. If the staffing function is performed

properly, the human relations in the organisation will be cordial.

4. Continuous Function:

Staffing function is to be performed continuously. It is equally important in the

established organizations and the new organizations. In a new organization, there

has to be recruitment, selection and training of personnel. In a running organization,

every manager is engaged in various staffing activities. He is to guide and train the

workers and also evaluate their performance on a continuous basis.

http://kalyan-city.blogspot.com/2011/05/performance-appraisal-of-employees.html



Importance Of Staffing

1. Maximum and Efficient Utilization of Resources:

Staffing plays an important role in maximum and efficient utilization of

resources. Because in every organization all the resources like, money, material

and machine etc are utilized efficiently through specialized man power and

specialized man power can only appoint in an organization through a good

staffing system. Thus, we can say that it helps in maximum and efficient

utilization of resources.

2. Reduces Cost of Production:

Staffing also plays an important role in reducing cost of production. Because it

helps in appointing right person at the right job, at the right, time so that no

wastage and mistakes can be made by efficient personnel during the production

of products. Hence, it is clear that it assists in reducing cost of production.

3. For Job Satisfaction-

Staffing is an important source for employee’s job satisfaction. Because by

means of this system jobs are allocated among the personnel according to their

ability, talent, aptitude and specializations which give employees more

satisfaction regarding their jobs. As a result of that they give their hundred

percent efforts behind their jobs.

4. For meeting Present and Future Needs of Employees-

Staffing is very important for fulfilling present as well as future needs of

employees. Because it gives a clear picture to organization that in coming year

how much positions will be vacant and new positions will be established. So that

organization can fulfill those vacant and new positions by appointing the

deserved candidates. Thus, it is clear that staffing fulfills present and future

needs of employees in organization.

5. For maintaining Co-ordination among the Employees-

Staffing plays a prominent role in establishing unity and co-ordination among the

employees. Because it assigns their jobs according to their ability, talent,

aptitude and specializations which makes them involved in their tasks and

ensure healthy and co-operative relationship among the employees.



Process Of Staffing

1. Manpower requirements-

The very first step in staffing is to plan the manpower inventory required by a

concern in order to match them with the job requirements and demands.

Therefore, it involves forecasting and determining the future manpower needs

of the concern.

2. Recruitment-

Once the requirements are notified, the concern invites and solicits applications

according to the invitations made to the desirable candidates.

3. Selection-

This is the screening step of staffing in which the solicited applications are

screened out and suitable candidates are appointed as per the requirements.

4. Training and Development-

Training is a part of incentives given to the workers in order to develop and grow

them within the concern. Training is generally given according to the nature of

activities and scope of expansion in it. Along with it, the workers are developed

by providing them extra benefits of in depth knowledge of their functional areas.

Development also includes giving them key and important jobs as a test or

examination in order to analyze their performances.

5. Remuneration-

It is a kind of compensation provided monetarily to the employees for their work

performances. This is given according to the nature of job- skilled or unskilled,

physical or mental, etc. Remuneration forms an important monetary incentive

for the employees.

6. Performance Evaluation-

In order to keep a track or record of the behaviour, attitudes as well as opinions

of the workers towards their jobs. For this regular assessment is done to

evaluate and supervise different work units in a concern. It is basically

concerning to know the development cycle and growth patterns of the

employees in a concern.



7. Promotion and transfer-

Promotion is said to be a non- monetary incentive in which the worker is shifted

from a higher job demanding bigger responsibilities as well as shifting the

workers and transferring them to different work units and branches of the same

organization.

7.4 Directing

DIRECTING is said to be a process in which the managers instruct, guide and

oversee the performance of the workers to achieve predetermined goals. Directing

is said to be the heart of management process. Planning, organizing, staffing has

got no importance if direction function does not take place.

Directing initiates action and it is from here actual work starts. Direction is said to

be consisting of human factors. In simple words, it can be described as providing

guidance to workers is doing work. In field of management, direction is said to be

all those activities which are designed to encourage the subordinates to work

effectively and efficiently. According to Human, “Directing consists of process or

technique by which instruction can be issued and operations can be carried out as

originally planned” Therefore, Directing is the function of guiding, inspiring,

overseeing and instructing people towards accomplishment of organizational goals.

Nature Of Directing

1. Directing Initiates Action:

Other functions prepare a base or setting of action, i. e., how action has to be

carried on the directing initiate or start action.

By giving directions or instructions the managers get the work started in the

organization.

2. Continuing Function:

Directing is a continuous process. A manager cannot just rest after issuing orders

and instructions. He has to continuously guide, supervise and motivate his

subordinates. He must continuously take steps to make sure that orders and

instructions are carried out properly.

http://www.managementstudyguide.com/planning_function.htm

http://www.managementstudyguide.com/organizing_function.htm



3. Directing takes place at every level:

Directing is a pervasive function as it is performed by managers at all levels and

in all locations. Every manager has to supervise, guide, motivate and

communicate with his subordinate to get things done. However, the time spent

in directing is comparatively more at operational level of management. Directing

takes place wherever superior subordinate relation exists.

4. Directing flows From Top to Bottom:

Directions are given by managers to their subordinates. Every manager can

direct his immediate subordinate and take directions from immediate boss.

Directing starts from top level and flows to lower level.

5. Performance Oriented:

Directing is a performance oriented function. The main motive of directing is

bringing efficiency in performance. Directing converts plans into performance.

Performance is the essence of directing. Directing functions direct the

performance of individuals towards achievement of organizational goal.

6. Human Element:

Directing function involves study and molding of human behaviour. It improves

interpersonal and intergroup relationship. It motivates employees to work with

their best ability.

7.5 Controlling

Controlling is one of the managerial functions

like planning, organizing, staffing and directing. It is an important function because it

helps to check the errors and to take the corrective action so that deviation from

standards are minimized and stated goals of the organization are achieved in a

desired manner. Control in management means setting standards, measuring actual

performance and taking corrective action.

Difinition

"Controlling is the process of ensuring that actual activities conform to the planned

activities."



Importance Of Controlling

1. Helps in achieving organizational goals:

When the plans are made in the organization these are directed towards

achievement of organizational goal and the controlling function ensures that all

the activities in the organization take place according to plan and if there is any

deviation, timely action is taken to bring back the activities on the path of

planning.

When all the activities are going according to plan then automatically these will

direct towards achievement of organizational goal.

2. Judging accuracy of standards:

Through strategic controlling we can easily judge whether the standard or target

set are accurate or not. An accurate control system revises standards from time

to time to match them with environmental changes.

3. Making efficient use of Resources:

Like traffic signal control guides the organization and keeps it on the right track.

Each activity is performed according to predetermined standards. As a result

there is most and effective use of resources.

4. Improving employee motivation:

An effective control system communicates the goals and standards of appraisal

for employees to subordinates well in advance.

A good control system also guides employees to come out from their problems.

This free communication and care motivate the employees to give better

performance.

5. Ensures order and discipline:

Control creates an atmosphere of order and discipline in the organization.

Effective controlling system keeps the subordinates under check and makes sure

they perform their functions efficiently.



Sharp control can have a check over dishonesty and fraud of employees. Strict

control monitor, employees work on computer monitor which brings more order

and discipline in work environment.

6. Facilitate coordination in action:

Control helps to maintain equilibrium between means and ends. Controlling

makes sure that proper direction is taken and that various factors are

maintained properly. All the departments are controlled according to

predetermined standards which are well coordinated with one another. Control

provides unity of direction.

Process Of Controlling

The control process involves carefully collecting information about a system,

process, person, or group of people in order to make necessary decisions about

each. Managers set up control systems that consist of four key steps:

Establish standards to measure performance.

Measure actual performance

Compare performance with the standards

Take corrective actions

1. Establish standards to measure performance.

Within an organization's overall strategic plan, managers define goals for

organizational departments in specific, operational terms that include standards

of performance to compare with organizational activities.



2. Measure actual performance

Most organizations prepare formal reports of performance measurements that

manager’s review regularly. These measurements should be related to the

standards set in the first step of the control process. For example, if sales growth

is a target, the organization should have a means of gathering and reporting

sales data.

3. Compare performance with the standards

This step compares actual activities to performance standards. When managers

read computer reports or walk through their plants, they identify whether actual

performance meets, exceeds, or falls short of standards. Typically, performance

reports simplify such comparison by placing the performance standards for the

reporting period alongside the actual performance for the same period and by

computing the variance—that is, the difference between each actual amount

and the associated standard.

4. Take corrective actions

When performance deviates from standards, managers must determine what

changes, if any, are necessary and how to apply them. In the productivity and

quality‐centered environment, workers and managers are often empowered to

evaluate their own work. After the evaluator determines the cause or causes of

deviation, he or she can take the fourth step—corrective action. The most

effective course may be prescribed by policies or may be best left up to

employees' judgment and initiative.

Controlling Techniques

1. Direct Supervision and Observation

'Direct Supervision and Observation' is the oldest technique of controlling. The

supervisor himself observes the employees and their work. This brings him in

direct contact with the workers. So, many problems are solved during

supervision. The supervisor gets firsthand information, and he has better

understanding with the workers. This technique is most suitable for a small-

sized business.

http://kalyan-city.blogspot.com/2011/03/what-is-business-meaning-definitions.html



2. Financial Statements

All business organizations prepare Profit and Loss Account. It gives a summary of

the income and expenses for a specified period. They also prepare Balance

Sheet, which shows the financial position of the organization at the end of the

specified period. Financial statements are used to control the organization. The

figures of the current year can be compared with the previous year's figures.

They can also be compared with the figures of other similar organizations.

Ratio analysis can be used to find out and analyze the financial statements. Ratio

analysis helps to understand the profitability, liquidity and solvency position of

the business.

3. Budgetary Control

A budget is a planning and controlling device. Budgetary control is a technique of

managerial control through budgets. It is the essence of financial control.

Budgetary control is done for all aspects of a business such as income,

expenditure, production, capital and revenue. Budgetary control is done by the

budget committee.

4. Break Even Analysis

Break Even Analysis or Break Even Point is the point of no profit, no loss. For e.g.

when an organization sells 50K cars it will break even. It means that, any sale

below this point will cause losses and any sale above this point will earn profits.

The Break-even analysis acts as a control device. It helps to find out the

company's performance. So the company can take collective action to improve

its performance in the future. Break-even analysis is a simple control tool.

5. Return on Investment (ROI)

Investment consists of fixed assets and working capital used in business. Profit

on the investment is a reward for risk taking. If the ROI is high then the financial

performance of a business is good and vice-versa.

ROI is a tool to improve financial performance. It helps the business to compare

its present performance with that of previous years' performance. It helps to

conduct inter-firm comparisons. It also shows the areas where corrective actions

are needed.

http://kalyan-city.blogspot.com/2011/02/what-is-budget-components-of-government.html



7.6 Organization Structure

Introduction organization :

Organization is one important element of the management process. It is

next to planning.

The term 'Organization' is derived from the word 'organism' which means

a structure of body divided into parts that are held together by a fabric of

relationship as one organic whole. In an enterprise, many managers and

employees work together for achieving common objectives.

An organization is a group of people who together work to achieve a

common goal. In order to work together efficiently, the group must find

the best way to organize the work that needs to be done in order to meet

the goals of the organization.

There are different structures which can be given to an organization. They

include line, functional and so on.

Definition :

James Mooney defines organization as "the form of every human

association for attainment of a common purpose".

Organization is a means to an end to achieve its goals, which are to create

value for its stakeholders (stockholders, employees, customers, suppliers,

community.



VERTICAL DIVISION OF LABOUR is concerned with apportioning authority and for

planning and decision making

HORIZONTAL DIVISION OF LABOUR groups the basic tasks to be performed into

jobs and then into departments so organizational goals can be achieved.

Introduction organizational structure :

Organizational structure defines how tasks are divided, grouped, and

coordinated in organizations. Every organization has a structure that

clarifies the roles that organizational members perform, so that everyone

understands their responsibilities to the group.

An effective organizational structure will facilitate working relationships

between various sections of the organization.

There are different types of organization structures that companies follow

depending on a variety of things; it can be based on geographical regions,

products or hierarchy. To put it simply an organizational structure is a plan

that shows the organization of work and the systematic arrangement of

work.

Organization structure comprises of six key elements they are:

– Work specialization

– Departmentalization

– Chain of command

– Span of control

– Centralization and decentralization

– Formalization



7.7 Types of Organizational structure

There are different types of organizational structures and a company should choose the one that best suits their needs.

1. Traditional Structures - Line structure - Line and staff structure - Functional structure

These are the structures that are based on functional division and departments.

These are the kind of structures that follow the organization’s rules and procedures

to the T. they are characterized by having precise authority lines for all levels in the

management. Under types of structures under traditional structures are:

Line Structure

This is the kind of structure that has a very specific line of command. The

approvals and orders in this kind of structure come from top to bottom in a

line.

Hence the name line structure. This kind of structure is suitable for smaller

organizations like small accounting firms and law offices. This is the sort of

structure that allows for easy decision making, and also very informal in

nature. They have fewer departments, which makes the entire organization a

much decentralized one.



Advantages of Line Organization Structure.

1. Simplicity: Line Organization structure is easy to understand and follow by

superiors and subordinates. It is simple and clear as regards authority and

accountability.

2. Prompt decisions: Line Organization facilitates prompt decision-making at all

levels as the authority given is clear and complete.

3. Discipline: It brings discipline in the Organization due to unity of command,

delegation of authority and direct accountability.

4. Economical: Line Organization is economical as experts are not appointed.

5. Attraction to talented persons: Line Organization brings out talented workers

and develops in them quality of leadership. It offers opportunities of self-

development to employees.

6. Quick communication, high efficiency, flexibility and high employee morale

are some more advantages of line Organization structure.



Line and Staff Structure

Though line structure is suitable for most organizations, especially small ones,

it is not effective for larger companies. This is where the line and staff

organizational structure comes into play. Line and structure combines the line

structure where information and approvals come from top to bottom, with

staff departments for support and specialization.

Line and staff organizational structures are more centralized. Managers of line

and staff have authority over their subordinates, but staff managers have no

authority over line managers and their subordinates. The decision making

process becomes slower in this type of organizational structure because of the

layers and guidelines that are typical to it, and let’s not forget the formality

involved.



Advantages of Line and Staff Organization.

1. Less burden on executives: Line executives get the assistance of staff

specialists. This reduces the burden of tine executives. This raises overall

efficiency and facilitates the growth and expansion of an enterprise.

2. Services of experts available: The benefits of services of experts are provided

to line managers. Highly qualified experts are appointed and they offer

guidance to line executives.

3. Sound decision-making: Line and staff Organization facilitates sound

management decisions because of the services of experts and specialists. The

decisions are also taken in a democratic method i.e. in consultation with the

experts.

4. Limited tension on line managers: The pressure of work of line bosses is

brought down as they are concerned only with production management.

5. Benefits of specialization: There is division of work and specialization in this

Organization. Naturally, the benefits of division of work and specialization are

easily available.

6. Training opportunities to employees: Better opportunities of advancement are

provided to workers. The scope for learning and training for promotions are

available.

Functional structure

This kind of organizational structure classifies people according to the function

they perform in their professional life or according to the functions performed

by them in the organization.

The organization chart for a functional based organization consists of Vice

President, Sales department, Customer Service Department, Engineering or

production department, accounting department and Administrative

department.



For example, Car and Scooter industries are following to the functional

structure.

Advantages of Functional Organization.

1. Use of specialist makes the organization a more professionally managed

system

2. Expert person like a Finance manager can give work related advice to the

clerk so that they again perform better and their productivity is also better.

3. Better consistence in all activities due to specialized activity of functional

groups.

4. Decision-making is faster, as functional role is vested in the functional head

of department and not in the immediate superior.

5. More R & D, less wastages, less accident, less breakdown, better TQM

efforts, more effective quality circles, etc., due to functional staff.

6. Limited span of management and tall structure.

2. Divisional Structures - Product structure - Market structure - Geographic structure

This is the kind of structure that is based on the different divisions in the organization. These structures can be further divided into:

Product Structure

a product structure is based on organizing employees and work on the basis of

the different types of products. If the company produces three different types

of products, they will have three different divisions for these products.



Advantages:

1. Coordination within product lines made easier

2. More adaptable to changes in environment (e.g., can shut down a

division when a product is no longer selling)

3. Responsibility for failures, successes identifiable

4. Competition across divisions can serve as a motivator

Market Structure

Market structure is used to group employees on the basis of specific market. A

company could have 3 different markets they use and according to this

structure, each would be a separate division in the structure.

Washing Machine

Division

Lighting

Division

Television

Division

Corporate

Managers

CEO

Corporation

Large Business

Customers

Small Business

Customers

Educational

Institutions

Individual

Customers

Corporate

Managers

CEO

Corporation



Geographic Structure

Large organizations have offices at different place, for example there could be

a north zone, south zone, west and east zone. The organizational structure

would then follow a zonal region structure.

3. Matrix Structures

Northern

Region

Western

Region

Southern

Region

Eastern

Region

Corporate

Managers

CEO

Corporation



This is a structure, which is a combination of function, and product structures.

This combines both the best of both worlds to make an efficient organizational

structure.

This structure is the most complex organizational structure.

A subordinate in matrix structure may receive instructions from two bosses.

Managers group people by function and product teams simultaneously.

• Results in a complex network of reporting relationships.

• Very flexible and can respond rapidly to change.

• Each employee has two bosses which can cause problems.

– Functional manager gives different directions than product

manager and employee cannot satisfy both.

Advantages:

• It attempts to retain the benefits of both structures (functional

organization and project organization).

• Coordinates resources in a way that applies them effectively to

different projects.

• Staff can retain membership on teams and their functional department

colleagues

Disadvantages:

• Potential for conflict between functional vs. project groups.

• Greater administrative overhead.

• Increase in managerial overhead

7.8 Types of Organization (Formal and Informal organization)

In an organization, there may be two types of groups on the basis of structuring. These are: (i) formal groups and (ii) informal groups.

1. Formal organization

According to Chester Bernard , “Formal organization is a system of consciously

coordinated activities of two or more persons towards a common objectives. The

essence of formal organization is conscious common purpose and formal



organization comes into existence when persons (A) are able to communicate with

each other (B) are willing to act and (C) share a purpose.”

Formal groups are created and maintained to fulfill needs or tasks which are related

to the total organization mission. Thus these are consciously and deliberately

created. Such groups may be either permanent in the form of top management team

such as board of directors or management committees, work units in the various

departments of the organization, staff groups providing specialized services to the

organization, and so on; or the formal groups may be constituted on temporary basis

for fulfilling certain specified objectives. Formal groups may be quite large in size.

It refers to the organization structure deliberately created by management for

achieving the objectives of enterprise. It is a network of official authority

responsibility relationships and communication follows. It is an official and rational

structure.

There are two main components of Formal group as,

a) Command group—specified by the organization chart and comprised of employees who report directly to a supervisor.

b) Task group—comprised of employees who work together to compete a particular task/project; e.g., self managed team

Advantages of Formal Organization:

1) Systematic Working:

Formal organization structure results in systematic and smooth functioning of an

organization.

2) Achievement of Organizational Objectives:

Formal organizational structure is established to achieve organizational objectives.

3) No Overlapping of Work:

In formal organization structure work is systematically divided among various

departments and employees. So there is no chance of duplication or overlapping of

work.

4) Co-ordination:



Formal organizational structure results in coordinating the activities of various

departments.

5) Creation of Chain of Command:

Formal organizational structure clearly defines superior subordinate relationship, i.e.,

who reports to whom.

6) More Emphasis on Work:

Formal organizational structure lays more emphasis on work than interpersonal

relations.

Disadvantages of Formal Organization:

1) Delay in Action:

While following scalar chain and chain of command actions get delayed in formal

structure.

2) Ignores Social Needs of Employees:

Formal organizational structure does not give importance to psychological and social

need of employees which may lead to demonization of employees.

3) Emphasis on Work Only:

Formal organizational structure gives importance to work only; it ignores human

relations, creativity, talents, etc.

2. Informal organization

According to Chester Bernard , “ Informal organization is joint personal activity with out conscious common purpose though contributing to joint result.” Natural groupings of employees that form to fulfill social needs, evolving naturally.

There are two main components of informal group as,

a) Interest group

Established to meet a mutual objective (a group formed to lobby management

for more fringe benefits).



b) Friendship group—

Formed because members have something in common. The difference between formal and informal groups.

A formal organization has its own set of distinct characteristics, including well-defined rules and regulations, an organizational structure, and determined objectives and policies, among other characteristics.

Formal rules are often adapted to subjective interests, giving the practical everyday life of an organization more informality.

The deviation from rulemaking on a higher level was documented for the first time in the Hawthorne studies in 1924. This deviation was referred to as informal organization.

Advantages of Informal Organization:

1) Fast Communication:

Informal structure does not follow scalar chain so there can be faster spread of

communication.

2) Fulfills Social Needs:

Informal communication gives due importance to psychological and social need of

employees which motivate the employees.

3) Correct Feedback:

Through informal structure the top level managers can know the real feedback of

employees on various policies and plans.

Disadvantages of informal organization:

1) It Creates Rumors:

All the persons in an informal organization talk carelessly and sometimes a

wrong thing is conveyed to the other person which may bring in horrible

results.

2) It Resists Change:

https://www.boundless.com/sociology/definition/formal-organization/

https://www.boundless.com/sociology/definition/more/

https://www.boundless.com/sociology/definition/informal-organizations/



This organization resists change and lays stress on adopting the old

techniques.

3) Pressure of Group Norms:

In this organization, people are under pressure to observe group norms.

Sometimes the people assembled in informal group lose sight of their

objective and all decide to oppose their superiors unanimously. Such a

situation adversely affects productivity.

Distinction from Informal Organization

Formal rules are often adapted to subjective interests giving the practical everyday life of an organization more informality. Practical experience shows no organization is ever completely rule-bound: all real organizations represent some mix of formal and informal characteristics. When attempting to create a formal structure for an organization, it is necessary to recognize informal organization in order to create workable structures. Tended effectively, the informal organization complements the more explicit structures, plans, and processes of the formal organization. Informal organization can accelerate and enhance responses to unanticipated events, foster innovation, enable people to solve problems that require collaboration across boundaries, and create paths where the formal organization may someday need to pave a way.

7.9 Departmentalization

Department is a unique group of resources established by management to

perform some organizational task. The process of establishing departments

within the management system is called Departmentalization.

Departmentalization refers to the process of grouping activities into

departments.

Division of labor creates specialists who need coordination. This coordination is

facilitated by grouping specialists together in departments.

Division of labor or specialization is the specialization of cooperative labor in

specific, circumscribed tasks and roles, intended to increase the productivity of

labor. Historically the growth of a more and more complex division of labor is

closely associated with the growth of total output and trade, the rise of

https://www.boundless.com/sociology/definition/innovation/



capitalism, and of the complexity of industrialization processes. Later, the

division of labor reached the level of a scientifically-based management practice

with the time and motion studies associated with Taylorism.

Coordination is the act of coordinating, making different people or things work

together for a goal or effect.

After reviewing the plans, usually the first step in the organizing process is

departmentalization. Once jobs have been classified through work

specialization, they are grouped so those common tasks can be coordinated.

Departmentalization is the basis on which work or individuals are grouped into

manageable units. There are five traditional methods for grouping work

activities:

1. Departmentalization by function

2. Departmentalization by product

3. Departmentalization by geographical regions

4. Departmentalization by matrix process

5. Departmentalization by customer

1. Functional Departmentalization



2. Product Departmentalization

3. Geographic Departmentalization



4. Matrix Departmentalization

5. Customer Departmentalization



Advantages of departmentalization :

The greatest advantage to this sort of departmentalization is that it allows for

specialization. The people in the department are focused on one task and the

managers can be expert in that task.

Disadvantages of departmentalization :

The greatest disadvantage of this type of departmentalization is that it isolates

the department from the other parts of the process. The department may

become excessively concerned with its own function instead of acting in ways

that will benefit the overall production process and firm.

7.10 Span of control

The concept of span of control was developed in the United Kingdom in 1992 by Sir Ian Hamilton.

Span of control, also known as span of management, is a Human resources management term that refers to the number of subordinates a supervisor can effectively manage.

A span of control is the number of people who report to one manager in a hierarchy. The more people under the control of one manager - the wider the span of control. Less means a narrower span of control.

Span of control is widely employed in large organization like the Military, Government agencies.

Span of Control refers to the area in which a particular person or manager has direct influence over, and whose responsibility the area comes under.

Types of Span of Control

Structure in an organization refers to the reporting relationships between employees. These relationships can be shown in graphic form via an organizational chart, such as this one:



The organizational chart displays the reporting relationships between different staff members.

In this chart, the span of control of the CEO is 3 - this is the number of people reporting directly to him.

Also, this chart has 3 layers - this is the number of different positions in the reporting structure from the bottom row to the top position.

1. Flat/Wide Structure

Flat organization structure refers to having a relatively small number of layers in your

company's organizational chart. The specific number will vary with the complexity of

the business. A very small company with a flat organizational structure may have all

staffers reporting directly to the president, whereas a multinational corporation

might have a large number of levels of management - but still be flatter than its

peers.

Advantages:

In a flat organization structure, each manager has a relatively higher number of

direct reports, as compared to similar companies. This can have advantages:

Fewer layers of management means fewer approvals in decision-making, so

decisions can be made faster and the organization can respond more quickly

to new opportunities or threats.



Fewer layers of management also mean that decisions reach the ultimate

decision maker sooner in the process, which gives the ability for faster

decision-making and therefore a faster response to new business issues.

Fewer layers of management can lead to better and more frequent

communication between higher-level managers and staffers, resulting in

better understanding of company goals for the staffers and a better

understanding of daily operational issues by the managers.

Disadvantages:

A flat organization structure also has some disadvantages:

Fewer opportunities for promotions, since there are fewer management

positions in the company. This will not matter for some employees, but those

who have aspirations of managing a team will have fewer opportunities in a

flat organization and may leave for one with more chances to lead.

A wider span of control for managers means that manager input will be

relatively harder for staffers to obtain. This means employees need to be

more self-motivated and independent in their work style and that less

independent employee will not function as well in the environment.

A wider span of control for managers also means that they will have less time

to focus on individual decisions. This can be a disadvantage for important

strategic decisions that will have a long term impact on the company, since

they will tend to get relatively less time spent on determining the best

strategic path.

2. Tall/Narrow structure

Tall organizational structure is one which has many levels of hierarchy. In these

organizations, there are usually many managers, and each manager has a small

span of control – they are in charge of only a small group of people. Tall

structures tend to be more complicated and complex, and may be slower to

respond to market changes than organizations where managers have a larger

span of control.



Advantages:

There is a narrow span of control ie each manager has a small number of

employees under their control. This means that employees can be closely

supervised.

There is a clear management structure.

Clear progression and promotion ladder

The function of each layer will be clear and distinct. There will be clear lines of

responsibility and control.

Disadvantages:

The freedom and responsibility of employees (subordinates) is restricted.

Decision making could be slowed down as approval may be needed by each of

the layers of authority.

High management costs because managers are generally paid more than

subordinates. Each layer will tend to pay it’s managers more money than the

layer below it.

Communication has to take place through many layers of management.



Factor affecting Span of Control

1. Qualification and Qualities

If the superiors and subordinates are well-qualified, trained, experienced, and if they are

experts in their jobs then the span of control will be wide and vice-versa.

2. Level of Management

If the superiors are working at the top-level of management, then they have more

responsibilities. Therefore, their span of control will be narrow and vice-versa.

3. Nature of Work

If the work is difficult then the span of control is narrow and vice-versa.

4. Superior - Subordinates Relationship

If there are good relations between the superior and subordinates, then the span of control

will be wide and vice-versa.

5. Degree of Centralization

Under decentralization, the superior has to take fewer decisions. Therefore, he can have a

wide span of control. However, under centralization, the superior has to take many

decisions. Therefore, he should have a narrow span of control.

7. Financial position of the Organization

If the organization has a good financial position, then it can have a narrow span of control.

This is because a narrow span requires more managers. More managers will increase the

compensation or wage bill of the organization. However, if the organization has a bad

financial position, then it will be forced to have a wide span of control.

8. Clarity of Plans and Responsibilities

If the plans are clear and if the responsibilities are well-defined, then the span of control will

be wide. This is because the subordinates will not have to go and consult their superior

repeatedly for getting orders and guidance.

http://kalyan-city.blogspot.com/2011/08/what-is-span-of-control-meaning.html

http://kalyan-city.blogspot.com/2011/05/levels-of-management-top-middle-and.html

http://kalyan-city.blogspot.com/2010/07/decentralisation-advantages-and.html


8 INTRODUCTION OF MARKETING AND

FINANCIAL MANAGEMENT

8.1 Introduction

Marketing management is a broad scope of the

study of marketing focusing on the practical

application of the techniques and marketing

activities of a certain company or business.

Marketing is everywhere.

Rapidly emerging forces of globalization have

led firms to market beyond the borders of their

home countries, making international marketing

highly significant and an integral part of a firm's

marketing strategy. Marketing managers are

often responsible for influencing the level,

timing, and composition of customer demand

accepted definition of the term.

Marketing helps in creating demand, getting

loyal customers and helps in retention of these

customers which eventually leads to profits and

growth of the company.

Course Contents

8.1 Introduction and Definition of

Marketing

8.2 4 P’s of Marketing

8.3 different concept of Marketing

8.4 Marketing demand

- Methods of demand forecasting

8.5 Market segmentation

- Bases of market segmentation

-Importance of market

segmentation

8.6 Meaning of Finance and

Financial management

8.7 Scope of Financial management

8.8 Functions of Financial

management

8.9 Objectives of Financial

management

http://en.wikipedia.org/wiki/Globalization

http://en.wikipedia.org/wiki/International_marketing

8. Introduction of Marketing and Financial management ENGINEERING ECONOMICS AND MANAGEMENT (2140003)


Definition

» According to Philip Kotler, Marketing means the human activity to satisfy the

needs of consumer through exchange process.

» The way a product is designed, tested, produced, branded, packaged, priced,

distributed, and promoted.

» In simple meaning marketing means the art of selling.

» Marketing means the skills to satisfy the human wants.

» There are four mixes of marketing Product, Price, Place and Promotion.

8.2 4 P’s of Marketing OR Marketing mix

Marketing decisions generally fall into the following four controllable categories:

I. Product II. Price

III. Place (distribution) IV. Promotion

1. Product - Product variety - Quality - Design The Marketing Mix - Packaging - Warranties

2. Price - List price - Discounts - Allowances - Payment period - Credit terms

3. Place - Channels - Coverage

4. Promotion

- Sales promotion - Advertising - Sales force - Public relations



1. Product: Product is the article which a manufacturer desires to sell in the open market. It is

the first element in the marketing mix. The product mix includes the following

variables.

- Product line and range,

- Style, shape, design, colour, quality and other physical features of a

product,

- Packaging and labeling of a product,

- Branding and trade mark given to the product,

- Guarantees and warranties of the product, and

- Product servicing.

Managing product component involves product planning and development. Here,

the decisions are required to be taken regarding product range, branding,

packaging, labeling and other features of the product. The product manufactured

for market should be as per the needs and expectations of consumers.

Product is the most powerful competing instrument in the hands of the marketing

manager. It is the heart of whole marketing mix. If the product is not sound

/attractive to the customers, no amount of sales promotion, appropriate channel

selection or price reduction will help to achieve the marketing target. Hence,

durability, quality, uses, etc. of the product are important from the marketing point

of view.

Decisions on these aspects of a product are important as marketing is directly

related to these aspects. Sales promotion measures will be useful but their role will

be supplementary/ supportive. Such measures may not be effective if the product

to be marketed is not of standard quality or if the brand or package is not

attractive or if the product is not as per the requirements/expectations of

consumers. This suggests that decisions relating to product are important /crucial

in the marketing of a product.

2. Price:

Price is one more critical component of marketing mix. It is the valuation of the

product mentioned by the seller on the product.

Price mix includes the following variables:



- Pricing policies,

- Discounts and other concessions offered for capturing market,

- Terms of credit sale,

- Terms of delivery, and

- Pricing strategy selected and used.

Pricing has an important bearing on the competitive position of a product. The

marketing manager may use pricing as a tool for achieving the targeted market share

or sales volume. Pricing can also be used for capturing market and also for facing

market competition effectively.

Pricing decisions and policies have direct influence on the sales volume and profits of

the firm. Market price of a product also needs periodical review and adjustments.

The price charged should be high enough to give adequate profit to the company but

low enough to motivate consumers to purchase product. It should also be suitable to

face market competition effectively.

3. Place (Distribution channel):

Physical distribution is the delivery of goods at the right time and at the right place

to consumers. Physical distribution of product is possible through channels of

distribution which are many and varied in character.

Physical distribution (place mix) includes the following variables:

- Distribution marketing channels available for distribution, and

- Transportation, warehousing and inventory control for making the

product available to consumers easily and economically.

For large-scale distribution, the services of wholesalers, retailers and other

marketing intermediaries are required.

A marketing manager has to select a channel which is convenient, economical and

suitable for the distribution of a specific product. For instance, large numbers of

outlets are required for the distribution of products of mass consumption such as

soaps and oils. On the other hand, for the marketing of specialty products like

refrigerators and TV sets, selective distribution through authorized dealers is quite

convenient.



4. Promotion:

Promotion is the persuasive communication about the product offered by the

manufacturer to the prospect.

Promotion mix includes the following variables:

- Advertising and publicity of the product,

- Personal selling techniques used,

- Sales promotion measures introduced at different levels,

- Public relations techniques used for keeping cordial relations with

dealers and consumers,

- Display of goods for sales promotion.

Promotional activities are necessary for large scale marketing and also for facing

market competition effectively. Such activities are varied in nature and are useful

for establishing reasonably good rapport with the consumers.

Advertising gives information and guidance to consumers. Brand names are made

popular through advertising. Along with advertising, personal selling is also useful

for motivating the customers to buy a specific product.

In addition to advertising and personal selling, a manufacturer has to use other

sales promotion techniques at the consumer level and at the dealer level. The

techniques at consumer level include displays, exhibitions, discount coupons, small

gifts and free samples, attractive container and consumer contests. Consumer

psychology is favorable for extensive use of such sales promotion techniques.

After-sales services are also useful for promoting sales of durable good.

8.3 Different concepts of Marketing The Production concept

The production concept is one of the oldest concepts in business. It holds that

consumers will prefer products that are widely available and inexpensive.

Manager of production concentrate on achieving high production efficiency,

low costs and mass distributions.

This distribution makes sense in developing countries such as China, where

the largest PC manufacturer, Lenovo take advantages of the country’s huge

and inexpensive labor pool to dominate the market.



Marketers also use the production concept when a company wants to expand

the market.

Marketing objectives:

» Cheap, efficient production » Intensive distribution » Market expansion

The Product concept

The product concept proposes that consumers will buy the product that offers

them the highest quality, the best performance, and the most features.

Managers in these organizations focus on making superior products and

improving them over time.

A General motors’ executives said years ago: “How can the public know what

kind of car they want until they see what is available? GM’s designers and

engineers would develop plans for a new car. Then manufacturing would

make it. Then the finance department would price it. Finally, marketing and

sales would try to sell it. No wonder the car required such hard selling by the

dealers! GM failed to ask customers what they wanted and never brought in

the marketing people at the beginning to help figure out what kind of car

would sell.

Marketing objectives:

» Quality improvement » Addition of features

The selling concept

The selling concept holds that consumers, if left alone, will ordinarily not buy

enough of the organization’s products. The organization must therefore

undertake an aggressive selling and promotion efforts.

Most organizations practice the selling concept when they have overcapacity:

Their aim is to sell what they make rather than make what the market wants.



The Marketing concept

The marketing concept emerged in the mid-1950s. Instead of a product-

centered, “make and sell” philosophy, business shifted to a customer-

centered, “sense and respond” philosophy. The job is not to find the right

customers for your products, but to find the right products for your customer.

The marketing concept has been expressed in many colorful ways:

- “Meeting needs profitably”

- “Love the customer, not the product.”

- “Find wants and fills them.”

Selling concept focuses on the needs of the seller; marketing on the needs of

the buyer.

8.4 Marketing demand

We are now ready to consider how the company can choose attractive markets and

develop winning strategies in these markets. Companies face many market

opportunities and must carefully evaluate them before choosing their target

Starting point Focus Means Ends

(a)The selling concept

(b)The Marketing concept

Selling and Profits through

Factory Products promoting sales volume

Target Customer Coordinated Profit through

Market needs marketing customer

satisfaction



markets. They need skill in measuring and forecasting the size, growth and profit

potential of competing market opportunities.

Objectives of demand estimation

» How much to sell?

» Where to sell?

» When to sell?

Method of Demand forecasting

1. Survey of Buyers Intentions method:

Forecasting is the art of anticipating what buyers are likely to do under a given

set of conditions. This suggests that the buyers should be surveyed. Because

buyer behavior is so important, buyers should be surveyed.

For major consumer durables, several research organizations conduct periodic

surveys of consumer buying intentions. These organizations ask questions like

the following:

“Do you intend to buy an automobile within the next six months?”

0.00 0.20 0.40 0.60 0.80 1.00

No

Chance

Slight

Possibility

Fair

Possibility

Good

Possibility

High

Possibility

Certain

2. Sales force opinion method:

When buyer interviewing is impractical, the company may ask its sales

representatives to estimate their future sales. Each sales representative

estimates how much each current and prospective customer will buy of each

of the company’s products.

Sales representative might be optimistic, they are often unaware of larger

economic developments and do not know how their company’s marketing

plans will influence future sales in their territory.

They might wrong so that the company will set a low sales quota, or they

might lack the time to prepare careful estimates. To encourage better

estimating, the company could offer certain aids or incentives.



Involving the sales force in forecasting brings a number of benefits.

3. Expert opinion method:

Companies can also obtain forecasts from experts. Experts include dealers,

distributors, suppliers, marketing consultants, and trade associations. Thus

auto companies survey their dealers periodically for their forecasts of short-

term demand.

Occasionally companies will invite a group of experts to prepare a forecast.

The experts exchange views and produce a group estimate (group discussion

method). Or they supply individual estimates and assumptions that are

reviewed by the company, revised and followed by further rounds of

estimating.

4. Time series analysis:

Many firms prepare their forecasts on the basis of past sales. Past sales (Q)

are analyzed into three major components.

The first components, trend (T), is the result of basic development in

population, capital formation and technology.

The second components, cycle (C), captures the wavelike movement of sales.

The third components, season (S), refers to a consistent pattern of sales

movements within the year. The term season broadly describes any recurrent

hourly, weekly, monthly sales pattern.

5. Market test method:

The purpose of marketing testing is so learning how consumers and dealers

react to handling, using and repurchasing the actual product.

When buyers do not plan their purchases carefully or experts are not available

or reliable, a direct market test is desirable.

Manager will face several decisions.

How many test cities?

Which cities? Length of test?



8.5 Market segmentation

Meaning:

The market consists of many types of consumers, products and needs. The

marketer has to determine which segments offer the best opportunities.

Market segmentation is a process of identifying groups of buyers with different

desire or requirements.

Companies cannot connect with all customers in large, broad or diverse markets.

But they can divide such markets into group of consumers or segments with

distinct needs and wants. A company then needs to identify which market

segments it can serve effectively.

Different bases of Market segmentation:

The major three segmentation variables as under;

1. Geographic segmentation

Geographic segmentation calls for dividing the market into different

geographical units as nations, states, regions, countries, cities. The company

can decide to operate in one or a few geographic areas.

Rural and Urban markets differ on a number of important parameters such as

literacy levels, income, spending power and availability of infrastructure such

as electricity, telephone network and roads.

For example, Nachiketa stationery market is local market because it’s product

sales in Rajkot city only so that its market called city market.

While in the case of Vadilal ice-cream market, its market is regional market

because it’s product generally sales in metro cities in western India.

The product such as Videocon, Amul, kelvinator, Bata etc having national

market because it’s product generally sales in all over India.

2. Demographic Segmentation

Demographic Segmentation, we divide the market into groups on the basis of

variables such as age, family size, family life cycle, gender, income,

occupation, education, religion and social class.



1) Age :

Consumer wants and abilities change with age. Therefore, age stage is

important variables to define segments.

Johnson & Johnson’s baby soap and baby talcum powder, which are

popular in almost all the south Asian countries; it is a classic example of

products for children.

Hindustan Uniliver Limited (HUL) pears soap in pink color, specially

targeted toward children.

Television channels in India indicate segmentation based on age and life

cycle. There are channels like Astha or Sanskar essentially focused on the

older generation; cartoon Network, Disney, Pogo and Hungama TV are

channels addressing children and MTV and VTV are channels for

youngsters.

2) Gender:

Men and Women customer have different attitudes and behave

differently. A research study examining how men and women shop found,

Men often like to read product information; Women may relate to a

product on a more personal level.

Gender differentiation has long been applied to product categories such as

clothing, hairstyling, cosmetics and magazines.

Some traditionally more male-oriented markets, such as the automobile

industry, are beginning to recognize gender segmentation and are

changing the way design and sell cars. Women shop differently for cars

than Men; car more about interior styling.

3) Income:

Consumer purchasing power is depends on their income. However, income

does not always predict the best consumers for a given product. Even if

two consumers have similar income levels, each may own different types

and brands of products based on a host similar income level, life style,

attitudes etc.

The low income consumer spend a large portion of their income on

primary necessity such as food and cloth, the goods like television, washing

machine, air-condition etc are beyond their reach.



3. Psychographic segmentation

1) Social class:

Social class has a strong influence strong preferences in cars, clothing,

home furnishing, reading habits, many companies design products and

services for specific social classes. There are three social class such as

upper, middle and lower class.

Upper or rich class consumer believe in maintaining highest standard of

living and prefer to purchase most expensive product like, Branded cloths,

imported furniture at home etc.

Middle or lower class consumer believe to live a systematic way.

2) Lifestyle:

People’s product interests are influenced by their lifestyles. In facts, the

goods they consume express their lifestyles. Marketers are increasingly

segmenting their markets by consumer lifestyles.

Volkswagen has designed lifestyle automobiles: a car for “the good citizen”

emphasizing economy, safety and ecology.

Companies making cosmetics, alcoholic beverages, and furniture are

seeking opportunities in lifestyle segmentation. At the same time, lifestyle

segmentation does not always work; Nestle introduced a special brand of

decaffeinated coffee for “late nighters,” and it failed.

4. Behavioral Segmentation

In behavioral segmentation, marketers divide buyers into groups on the basis

of their knowledge of attitude toward, use of, or response to a product.

1) Occasions:

Occasions give rise to need for products on certain occasions.

Greeting card brands such as Archies and Hallmark make cards for

different occasions such as birthdays, wedding, Diwali and Raksha

Bandhan.

The Amul brand of chocolate is promoted as “a gift for someone you love”

Occasion segmentation can help firms expand product usage. For example,

Biscuits are used as an accompaniment with tea or coffee in the evening.

2) Product loyal:



A market can be segmented by consumer loyalty patterns. Consumers can

be loyal to brands (Coca-Cola) and other entities.

Consumers who buy one brand all the time. Thus a buying pattern might

represent a consumer with strong loyalty for the company.

Consumers can be divided into three groups according to their brand

loyalty status: Hard core loyal, shifting loyal, switcher

Importance / Significance of Market Segmentation

1. Facilitates consumer-oriented marketing: Market segmentation facilitates

formation of marketing-mix which is more specific and useful for achieving

marketing objectives. Segment-wise approach is better and effective as

compared to integrated approach for the whole market.

2. Facilitates introduction of effective product strategy: Due to market

segmentation, product development is compatible with consumer needs as

there is effective crystallization of the specific needs of the buyers in the

target market. Market segmentation facilitates the matching of products with

consumer needs. This gives satisfaction to consumers and higher sales and

profit to the marketing firm.

3. Facilitates the selection of promising markets: Market segmentation

facilitates the identification of those sub-markets which can be served best

with limited resources by the firm. A firm can concentrate efforts on most

productive/ profitable segments of the total market due to segmentation

technique. Thus market segmentation facilitates the selection of the most

suitable market.

4. Facilitates selection of proper marketing programme- Market segmentation

helps the marketing man to develop his marketing mix programme on a

reliable base as adequate information about the needs of consumers in the

target market is available. The buyers are introduced to marketing programme

which is as per their needs and expectations.

5. Facilitates effective advertising: Advertising media can be more effectively

used because only the media that reach the segments can be employed. It

makes advertising result oriented.



8.6 Meaning of Finance

Business finance refers to money and credit employed in business. It involves

procurement and utilization of funds so that business firms may be able to carry

out their operations effectively and efficiently.

In simple words, Arrangement of funds is called finance. All organizations need

finance for operating its different activities. So, we can say finance is just like

blood for survival the business in changing economic environment. Fund, money,

saving, cash, reserves and assets are the basics of finance. Finance word is very

deep and in modern age, this word is also known Business Finance.

Meaning of Financial Management

Financial Management means planning, organizing, directing and controlling the

financial activities such as procurement and utilization of funds of the enterprise.

It means applying general management principles to financial resources of the

enterprise.

8.7 Scope/element of Financial management

Investment decision - Investment in current assets are also a part of

investment decisions called as working capital decisions.

Financial decisions - They relate to the raising of finance from various

resources which will depend upon decision on type of source, period of

financing, cost of financing and the returns thereby.

Dividend decision - The finance manager has to take decision with regards to

the net profit distribution. Net profits are generally divided into two:

a. Dividend for shareholders- Dividend and the rate of it has to be

decided.

b. Retained profits- Amount of retained profits has to be finalized which

will depend upon expansion and diversification plans of the enterprise.

http://www.svtuition.org/2010/01/fund.html

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http://www.svtuition.org/2009/02/definition-of-reserves.html

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8.8 Functions of Financial management

Estimation of capital requirements:

A finance manager has to make estimation with regards to capital

requirements of the company. This will depend upon expected costs and

profits and future programmes and policies of a concern. Estimations have to

be made in an adequate manner which increases earning capacity of

enterprise.

Determination of capital composition:

Once the estimation has been made, the capital structure have to be decided.

This involves short- term and long- term debt equity analysis. This will depend

upon the proportion of equity capital a company is possessing and additional

funds which have to be raised from outside parties.

Choice of sources of funds:

For additional funds to be procured, a company has many choices like-

a. Issue of shares and debentures

b. Loans to be taken from banks and financial institutions

c. Public deposits to be drawn like in form of bonds.

Choice of factor will depend on relative merits and demerits of each source

and period of financing.

Investment of funds:

The finance manager has to decide to allocate funds into profitable ventures

so that there is safety on investment and regular returns is possible.

Disposal of surplus:

The net profits decision has to be made by the finance manager. This can be

done in two ways:

a. Dividend declaration - It includes identifying the rate of dividends and

other benefits like bonus.

b. Retained profits - The volume has to be decided which will depend

upon expansion, innovational, diversification plans of the company.

Management of cash:

Finance manager has to make decisions with regards to cash management.

Cash is required for many purposes like payment of wages and salaries,



payment of electricity and water bills, payment to creditors, meeting current

liabilities, maintenance of enough stock, purchase of raw materials, etc.

Financial controls:

The finance manager has not only to plan, procure and utilize the funds but he

also has to exercise control over finances. This can be done through many

techniques like ratio analysis, financial forecasting, cost and profit control, etc.

8.9 Objectives of Financial management

The objectives or goals or financial management are- (a) Profit maximization, (b)

Return maximization, and (c) Wealth maximization. We shall explain these three

goals of financial management as under:

Goal of Profit maximization.

The main objective of financial management is profit maximization. The finance

manager tries to earn maximum profits for the company in the short-term and

the long-term. He cannot guarantee profits in the long term because of business

uncertainties. However, a company can earn maximum profits even in the long-

term, if:-

- The Finance manager takes proper financial decisions.

- He uses the finance of the company properly.

A few replace the goal of 'maximization of profits' to 'fair profits'. 'Fair Profits'

means general rate of profit earned by similar organization in a particular area.

Goal of Return Maximization.

The second goal of financial management is to safeguard the economic interest

of the persons who are directly or indirectly connected with the company, i.e.,

shareholders, creditors and employees.

The all such interested parties must get the maximum return for their

contributions. But this is possible only when the company earns higher profits or

sufficient profits to discharge its obligations to them. Therefore, the goal of

maximization of returns is inter-related.

Goal of Wealth Maximization.

Frequently, Maximization of profits is regarded as the proper objective of the

firm but it is not as inclusive a goal as that of maximizing it value to its



shareholders. Value is represented by the market price of the ordinary share of

the company over the long run which is certainly a reflection of company's

investment and financing decisions. The log run means a considerably long

period in order to work out a normalized market price.


9 INTRODUCTION OF PRODUCTION AND

HUMAN RESOURCE MANAGEMENT

9.1 Meaning of Production

Production function is that part of an

organization, which is concerned with the

transformation of a range of inputs into the

required outputs (products) having the requisite

quality level.

Production is defined as “the step-by-step

conversion of one form of material into another

form through chemical or mechanical process to

create or enhance the utility of the product to

the user.” Thus production is a value addition

process. At each stage of processing, there will

be value addition.

Meaning of Production Management

Production management is a branch of

management which is related to the production

function.

Production may be referred to as the process

concerned with the conversion of inputs (raw

materials, machinery, information, manpower,

and other factors of production) into output (Semi finished and finished goods and

Course Contents

9.1 Meaning of Production and

Production management

9.2 Classification of Production

system

9.3 Objectives of Production

management

9.4 Plant location

- Meaning and definition

- Factor affecting

9.5 Plant layout

- Objective

- Types

9.6 Meaning and definition of

HRM

9.7 Scope of HRM

9.8 Manpower planning

- Objectives

- Process

9.9 Recruitment

- Meaning and definition

- Sources

9.10Selection

- Process

- Types

9. Introduction of Production and HR Management ENGINEERING ECONOMICS AND MANAGEMENT (2140003)


services) with the help of certain processes (Planning, scheduling and controlling

etc.) while management is the process of exploitation of these factors of production

in order to achieve the desired results.

INPUTS OUTPUT

Raw materials

Machinery

Information

Manpower

9.2 Classification of Production system

Production systems can be classified as Job Shop, Batch, Mass and Continuous

Production systems.

1. Job shop production

Job shop production are characterized by manufacturing of one or few quantity of

products designed and produced as per the specification of customers within

prefixed time and cost. The distinguishing feature of this is low volume and high

variety of products.

A job shop comprises of general purpose machines arranged into different

departments.

Each job demands unique technological requirements, demands processing on

machines in a certain sequence.

Characteristics

The Job-shop production system is followed when there is:

1. High variety of products and low volume.

2. Use of general purpose machines and facilities.

3. Highly skilled operators who can take up each job as a challenge because of

uniqueness.

4. Large inventory of materials, tools, parts.

Goods & Services

PROCESS



5. Detailed planning is essential for sequencing the requirements of each product,

capacities for each work centre and order priorities.

2. Batch production

Batch production is defined by American Production and Inventory Control Society

(APICS) “as a form of manufacturing in which the job passes through the functional

departments in lots or batches and each lot may have a different routing.” It is

characterised by the manufacture of limited number of products produced at regular

intervals and stocked awaiting sales.

Characteristics

Batch production system is used under the following circumstances:

1. When there is shorter production runs.

2. When plant and machinery are flexible.

3. When plant and machinery set up is used for the production of item in a batch and

change of set up is required for processing the next batch.

4. When manufacturing lead time and cost are lower as compared to job order

production.

3. Mass production

Manufacture of discrete parts or assemblies using a continuous process are called

mass production.

This production system is justified by very large volume of production. The machines

are arranged in a line or product layout. Product and process standardisation exists

and all outputs follow the same path.

Characteristics

Mass production is used under the following circumstances:

- Standardization of product and process sequence.

- Dedicated special purpose machines having higher production capacities and

output rates.

- Large volume of products.

- Shorter cycle time of production.



- Lower in process inventory.

- Perfectly balanced production lines.

- Flow of materials, components and parts is continuous and without any back

tracking.

- Production planning and control is easy.

- Material handling can be completely automatic.

4. Continuous production

Production facilities are arranged as per the sequence of production operations from

the first operations to the finished product. The items are made to flow through the

sequence of operations through material handling devices such as conveyors,

transfer devices, etc.

Characteristics

Continuous production is used under the following circumstances:

- Dedicated plant and equipment with zero flexibility.

- Material handling is fully automated.

- Process follows a predetermined sequence of operations.

- Component materials cannot be readily identified with final product.

- Planning and scheduling is a routine action.



9.3 Objectives of Production management

The objective of the production management is ‘to produce goods services of right

quality and quantity at the right time and right manufacturing cost’.

Right quality

The quality of product is established based upon the customers’ needs. The right

quality is not necessarily best quality. It is determined by the cost of the product and

the technical characteristics as suited to the specific requirements.

Right quantity

The manufacturing organization should produce the products in right number. If they

are produced in excess of demand the capital will block up in the form of inventory

and if the quantity is produced in short of demand, leads to shortage of products.

Right time

Timeliness of delivery is one of the important parameter to judge the effectiveness of

production department. So, the production department has to make the optimal

utilization of input resources to achieve its objective.

Right manufacturing cost

Manufacturing costs are established before the product is actually manufactured.

Hence, all attempts should be made to produce the products at pre-established cost,

so as to reduce the variation between actual and the standard (pre-established) cost.

9.4 Plant location

Meaning

The selection of a place for locating a plant is one of the problems, perhaps the most

important, which is faced by an entrepreneur while launching a new enterprise.

A selection on pure economic considerations will ensure an easy and regular supply

of raw materials, labor force, efficient plant layout, proper utilization of production

capacity and reduced cost of production.



A bad location, on the other hand, is a severe handicap for any enterprise and it

finally bankrupts it. It is, therefore, very essential that utmost care should be

exercised in the initial stages to selec4t a proper place.

Definition

According to Prof. R.C. Davis, The function of determining where the plant should be

located for maximum operating economy and effectiveness.”

Factor affecting of location

1. Raw materials

The factory needs to be close to these if they are heavy and bulky to transport.

2. Energy supply

This is needed to work the machines in a factory. Early industries were near to coalfields. Today, electricity allows more freedom.

3. Labour

A large cheap labour force is required for labour-intensive manufacturing industries. High-tech industries have to locate where suitable skilled workers are available.

4. Market

An accessible place to sell the products is essential for many industries:

those that produce bulky, heavy goods that are expensive to transport those that produce perishable goods those that provide services to people

The market is not so important for other industries such as high-tech whose products are light in weight and cheap to transport. Such industries are said to be 'footloose'.

5. Transport

A good transport network helps reduce costs and make the movement of materials easier.



6. Cost of land

Greenfield sites in rural areas are usually cheaper than brown field sites in the city.

7. Government policies

Industrial development is encourages in some areas and restricted in others.

Industries that locate in depressed ('Development') areas may receive financial

incentives from the government and assistance from the EU in the form of low

rent and rates

Problem of Location

The problem of site selection of a factory can be solved in the following 3 stages:

- Selection of the Region: Comparative advantages are analyzed from various

options of natural regions & political boundaries in particular country.

- Selection of the Locality: Urban, Rural & Suburban areas are various

alternatives in selection of locality.

- Selection of the Site: The type of development of land, cost of leveling etc,

plant expansions & other infrastructure facilities like transport, banking,

power, communication, postal facilities etc. are considered.

9.5 Plant layout

Definition

Plant layout refers to the arrangement of physical facilities such as machines,

equipment, tools, furniture etc. in such a manner so as to have quickest flow of

material at the lowest cost and with the least amount of handling in processing the

product from the receipt of raw material to the delivery of the final product.

Objectives Of Ideal Plant Layout

A well designed plant layout is one that can be beneficial in achieving the following

objectives:



- Proper and efficient utilization of available floor space

- Transportation of work from one point to another point without any delay

- Proper utilization of production capacity.

- Reduce material handling costs

- Utilize labour efficiently

- Reduce accidents

- Provide for volume and product flexibility

- Provide ease of supervision and control

- Provide for employee safety and health

- Allow easy maintenance of machines and plant.

- Improve productivity

Types Of Layout

There are mainly four types of plant layout:

a) Product or line layout

b) Process or functional layout

a) Product Layout or Line Layout-

In this type of layout the machines and equipments are arranged in one line

depending upon the sequence of operations required for the product. It is also called

as line layout. The material moves to another machine sequentially without any

backtracking or deviation i.e the output of one machine becomes input of the next

machine. It requires a very little material handling.

It is used for mass production of standardized products.

Advantages of Product layout:



- Low cost of material handling, due to straight and short route and absence of

backtracking

- Smooth and continuous operations

- lesser inventory and work in progress

- Continuous flow of work

- Simple and effective inspection of work and simplified production control

- Optimum use of floor space

- Lower manufacturing cost per unit

Disadvantages of Product layout:

- Higher initial capital investment in special purpose machine (SPM)

- Breakdown of one machine will disturb the production process.

- High overhead charges

- Lesser flexibility of physical resources.

b) Process or functional layout-

- In this type of layout the machines of a similar type are arranged together at

one place. This type of layout is used for batch production. It is preferred

when the product is not standardized and the quantity produced is very small.

-

Advantages of Process layout:

- Lower initial capital investment is required.

- There is high degree of machine utilization, as a machine is not blocked for a

single product

- The overhead costs are relatively low

- Breakdown of one machine does not disturb the production process.

- Supervision can be more effective and specialized.

- Greater flexibility of resources.



Disadvantages of Process layout:

- Material handling costs are high due to backtracking

- More skilled labour is required resulting in higher cost.

- Work in progress inventory is high needing greater storage space

- More frequent inspection is needed which results in costly supervision

Benefits derived from efficient production management

The efficient Production Management will give benefits to the various sections of the

society. They are:

(i) Consumer benefits from improved industrial Productivity, increased use value in the

product.

Products are available to him at right place, at right price, at right time, in desired quantity

and of desired quality.

(ii) Investors: They get increased security for their investments, adequate market returns,

and creditability and good image in the society.

(iii) Employee gets adequate Wages, Job security, improved working conditions and

increased Personal and Job satisfaction.

(iv) Suppliers: Will get confidence in management and their bills can be realized without any

delay.

(v) Community: community enjoys Benefits from economic and social stability.

(vi) The Nation will achieve prospects and security because of increased Productivity and

healthy industrial atmosphere.

9.6 Human resource management

Meaning

Human Resource Management (HRM) is the function within an organization that

focuses on recruitment of, management of, and providing direction for the people

who work in the organization

Essentially, the purpose of HRM is to maximize the productivity of an organization by

optimizing the effectiveness of its employees.

http://www.answers.com/topic/hrm-abbreviation



Definition of Human resource management

The first definition of HRM is that it is the process of managing people in

organizations in a structured and thorough manner

Human Resource Management (HRM) is the function within an organization that

focuses on recruitment of, management of, and providing direction for the people

who work in the organization

Objectives of Human Resource Management,

- To help the organization reach its goals.

- To ensure effective utilization and maximum development of human

resources.

- To ensure respect for human beings. To identify and satisfy the needs of

individuals.

- To ensure reconciliation of individual goals with those of the organization.

- To achieve and maintain high morale among employees.

- To provide the organization with well-trained and well-motivated employees.

9.7 Scope of HRM

The scope of HRM refers to all the activities that come under the banner of HRM.

These activities are as follows

1. Human resources planning:-

Human resource planning or HRP refers to a process by which the company to

identify the number of jobs vacant, whether the company has excess staff or

shortage of staff and to deal with this excess or shortage.

2. Job analysis design:-

Another important area of HRM is job analysis. Job analysis gives a detailed

explanation about each and every job in the company. Based on this job analysis the

company prepares advertisements.

3. Recruitment and selection:-

Based on information collected from job analysis the company prepares

advertisements and publishes them in the news papers. This is recruitment. A

number of applications are received after the advertisement is published, interviews



are conducted and the right employee is selected thus recruitment and selection are

yet another important area of HRM.

4. Orientation and induction:-

Once the employees have been selected an induction or orientation program is

conducted. This is another important area of HRM. The employees are informed

about the background of the company, explain about the organizational culture and

values and work ethics and introduce to the other employees.

5. Training and development:-

Every employee goes under training program which helps him to put up a better

performance on the job. Training program is also conducted for existing staff that

have a lot of experience. This is called refresher training. Training and development is

one area where the company spends a huge amount.

6. Performance appraisal:-

Once the employee has put in around 1 year of service, performance appraisal is

conducted that is the HR department checks the performance of the employee.

Based on these appraisal future promotions, incentives, increments in salary are

decided.

7. Compensation planning and remuneration:-

There are various rules regarding compensation and other benefits. It is the job of

the HR department to look into remuneration and compensation planning.

8. Motivation, welfare, health and safety:-

Motivation becomes important to sustain the number of employees in the company.

It is the job of the HR department to look into the different methods of motivation.

Apart from this certain health and safety regulations have to be followed for the

benefits of the employees. This is also handled by the HR department.

9. Industrial relations:-

Another important area of HRM is maintaining co-ordinal relations with the union

members. This will help the organization to prevent strikes lockouts and ensure

smooth working in the company.



9.8 Manpower planning

Manpower Planning which is also called as Human Resource Planning consists

of putting right number of people, right kind of people at the right place, right time,

doing the right things for which they are suited for the achievement of goals of the

organization. Human Resource Planning has got an important place in the arena of

industrialization. Human Resource Planning has to be a systems approach and is

carried out in a set procedure.

Objectives of Manpower planning

- Assessing manpower needs for future & making plans for recruitments &

selection.

- Assessing skill requirement in future.

- Determining training & development needs of the organization.

- Anticipating surplus or shortage of staff & avoiding unnecessary detention or

dismissal.

- Controlling wages & salary casts.

- Ensuring optimum use of human resource in the organization.

- Helping the organization to cope with the technological development &

modernization.

- Ensuring higher labour productivity.

- Ensuring career planning of every employee of the organization & making

succession programmers.

Process/Steps in Manpower Planning

1. Analyzing the current manpower inventory- Before a manager makes

forecast of future manpower, the current manpower status has to be

analyzed. For this the following things have to be noted-

- Type of organization

- Number of departments

- Number and quantity of such departments

- Employees in these work units

Once these factors are registered by a manager, he goes for the future



forecasting.

2. Making future manpower forecasts- Once the factors affecting the future

manpower forecasts are known, planning can be done for the future

manpower requirements in several work units.

The Manpower forecasting techniques commonly employed by the

organizations are as follows:

i. Expert Forecasts: This includes informal decisions, formal expert surveys

and Delphi technique.

ii. Trend Analysis: Manpower needs can be projected through extrapolation

(projecting past trends), indexation (using base year as basis), and

statistical analysis (central tendency measure).

iii. Work Load Analysis: It is dependent upon the nature of work load in a

department, in a branch or in a division.

iv. Work Force Analysis: Whenever production and time period has to be

analyzed, due allowances have to be made for getting net manpower

requirements.

v. Other methods: Several Mathematical models, with the aid of computers

are used to forecast manpower needs, like budget and planning analysis,

regression, and new venture analysis.

3. Developing employment programmes- Once the current inventory is

compared with future forecasts, the employment programmes can be framed

and developed accordingly, which will include recruitment, selection

procedures and placement plans.

4. Design training programmes- These will be based upon extent of

diversification, expansion plans, development programmes, etc. Training

programmes depend upon the extent of improvement in technology and

advancement to take place. It is also done to improve upon the skills,

capabilities, knowledge of the workers.



9.9 Recruitment

Meaning

Recruitment is the process of searching the candidates for employment and

stimulating them to apply for jobs in the organization. Recruitment of candidates is

the function preceding the selection, which helps create a pool of prospective

employees for the organization so that the management can select the right

candidate for the right job from this pool.

The basic purpose of recruitments is to create a talent pool of candidates to enable

the selection of best candidates for the organization, by attracting more and more

employees to apply in the organization.

Recruitment is a positive process i.e. encouraging more and more employees to

apply.

The factors effecting recruitment are: -

- Size if the organization.

- The employment condition.

- The effect of past recruiting efforts.

- Working condition and salary.

- Rate of growth of organization.

- The future expansion plans.

- Cultural, economic and legal factors.

- Company’s image.

- Recruitment policy.

Definition

According to Edwin B. Flippo, “Recruitment is the process of searching the

candidates for employment and stimulating them to apply for jobs in the

organization”.

Recruitment is the process of hiring the right kinds of candidates on the

right job.



Source of Recruitment:

Basically organizations are available by the two main sources of recruitment which are:

1) Internal Recruitment. 2) External Recruitment.

Vacancies in upper level management can be filled either by hiring people from

outside the organization or by promoting lower level mangers. Both strategies have

advantages and disadvantages. We will consider both internal and external

recruitment sources in detail:

1) Internal Recruiting :

When job vacancies exist, the first place that an organization should look for

placement is within itself. An organization’s present employees generally feel that

they deserve opportunities to be promoted to higher-level positions because of their

service and commitment to organization. More over organizations have

opportunities to examine the track records of its present employees and to estimate

which of them would be successful. Also recruiting among present employees is less

expensive than recruiting from outside the organization. The major forms of the

internal recruiting include:

a. Promotion and Transfers b. Employee referrals. c. Former Employees d. Retirements

a. Promotions and Transfers: Promotion is an effective means using job posting and

personnel records. Job posting requires notifying vacant positions by posting notices,

circulating publications or announcing at staff meetings and inviting employees to

apply. Personnel records help discover employees who are doing jobs below their

educational qualifications or skill levels.

Promotions has many advantages like it is good public relations, builds morale,

encourages competent individuals who are ambitious, improves the probability of

good selection since information on the individual’s performance is readily available,

is cheaper than going outside to recruit, those chosen internally are familiar with the

organization thus reducing the orientation time and energy and also acts as a training

device for developing middle-level and top-level managers.



However, promotions restrict the field of selection preventing fresh blood & ideas

from entering the organization. It also leads to inbreeding in the organization.

Transfers are also important in providing employees with a broad-based view of the

organization, necessary for future promotions.

b. Employee referrals: Employees can develop good prospects for their families and

friends by acquainting them with the advantages of a job with the company,

furnishing them with introduction and encouraging them to apply.

This is a very effective means as many qualified people can be reached at a very low

cost to the company.

The other advantages are that the employees would bring only those referrals that

they feel would be able to fit in the organization based on their own experience. The

organization can be assured of the reliability and the character of the referrals. In this

way, the organization can also fulfill social obligations and create goodwill.

c. Former Employees: These include retired employees who are willing to work on a

part-time basis, individuals who left work and are willing to come back for higher

compensations. Even retrenched employees are taken up once again. The advantage

here is that the people are already known to the organization and there is no need to

find out their past performance and character. Also, there is no need of an

orientation programme for them, since they are familiar with the organization.

d. Retirements: At times, management may not find suitable candidates in place of

the one who had retired, after meritorious service. Under the circumstances,

management may decide to call retired managers with new extension.

Advantages of Internal Recruitment:

1. Provides greater motivation for good performance.

2. Provides greater opportunities for present employees

3. Provides better opportunity to assess abilities

4. Improves morale and organizational loyalty

5. Enables employees to perform the new job with little lost time

Disadvantages of Internal Recruitment:

1. Creates a narrowing thinking and stale ideas



2. Creates pressures to compete

3. Creates homogeneous workforce

4. Chances to miss good outside talent Requires strong management

development programs specially to train for technology.

2) External Recruiting:

A broad variety of methods are available for external recruiting. An organization

should carefully assess the kinds of positions it wants to fill and select the recruiting

methods that are likely to produce the best results.

There are some employee needs that a firm must fill through external recruitment.

Among them are: filling entry-level jobs, acquiring skills not possessed by current

employees, and obtaining employees with different backgrounds to provide new

ideas. The major forms of the internal recruiting include:

a. Advertising b. Employment agency c. Schools, Colleges and Professional Institutions d. Labor unions e. Casual applicants f. Unconsolidated applications g. Computer data bank

a. Advertising

A way of communicating the employment needs within the firm to the public

through media such as radio, newspaper, television, industry publications, and the

Internet.

Sometimes organizations can perform the recruitment function through blind

advertisements in blind advertisements no identification about the company is

provided to applicants. Companies can use blind advertisements for many reasons

e.g.

• Company wants to keep the recruitment in low profile so that lesser number of

applicants should apply in order to discourage the irrelevant people.

• Due to bad reputation or image of the organization



• Advertisement is made just for the purpose of test marketing for example just to

have knowledge about the supply of applicants in labor market etc.

b. Employment Agencies

An organization that helps firms recruits employees and, at the same time, aids

individuals in their attempt to locate jobs. There are two types of the employment

agencies i.e.

• Public Employment Agencies.

• Private Employment Agencies

Both of these sources provide coordination between the organizations and

applicants who are searching for jobs, for this service they use to charge a fee

.Employment agencies are able to tailor their services to the specific needs of the

clients For example some agencies Specialize in a particular employment areas, such

as engineering, human resource or Computer programming, etc.

c. Schools, Colleges and Professional Institutions: Offer opportunities for recruiting

their students. They operate placement services where complete bio-data and other

particulars of the students are available.

The companies that need employees maintain contact with Guidance Counselors of

Employment Bureaus and teachers of business and vocational subjects. The

prospective employers can review Credentials and interview candidates for

management trainees or probationers.

Whether the education sought involves a higher secondary certificate, specific

vocational training, or a college background with a bachelor’s, masters’ or doctoral

degree, educational institutions provide an excellent source of potential employees

for entry-level positions in organizations. These general and technical/ professional

institutions provide blue-collar applicants, white-collar and managerial personnel.

d. Labour unions: Firms with closed or union shops must look to the union in their

recruitment efforts. Disadvantages of a monopolistically controlled labour source are

offset, at least particularly, by savings in recruitment costs. With one-fifth of the

labour force organized into unions, organized labour constitutes an important source

of personnel.



e. Casual applicants: Unsolicited applications, both at the gate and through the mail,

constitute a much-used source of personnel. These can be developed through

provision of attractive employment office facilities and prompt and courteous replies

to unsolicited letters.

f. Unconsolidated applications: For positions in which large numbers of candidates

are not available from other sources, the companies may gain keeping files of

applications received from candidates who make direct enquiries about possible

vacancies on their own, or may send unconsolidated applications. The information

may be indexed and filed for future use when there are openings in these jobs.

g. Computer data banks: When a company desires a particular type of employee, job

specifications and requirements are fed into a computer, where they are matched

against the resume data stored therein. The output is a set of resumes for individuals

who meet the requirements. This method is very useful for identifying candidates for

hard-to-fill positions which call for an unusual combination of skills.

Advantages of External Recruitment:

1. provides new ideas and new insights

2. Provides greater diversity and helps achieve EEO goals by making

affirmative action easy

3. Provides opportunities to handle rapid growth if the organization

4. Opportunities to get people with up-to-date knowledge education and

training

Disadvantages of External Recruitment:

1. It is more expensive and time consuming

2. Destroys incentives of present employees to strive for promotion

3. More chances to commit hiring mistakes due to difficult applicant

assessment that will lead to wastage of resources.



9.10 Selection

Meaning

Selection involves the series of steps by which the candidates are screened for

choosing the most suitable persons for vacant posts.

The basic purpose of selection process is to choose the right candidate to fill the

various positions through various interviews and tests in the organization.

Selection process

The Employee selection Process takes place in following order-

1. Preliminary Interviews-

It is used to eliminate those candidates who do not meet the minimum eligibility

criteria laid down by the organization. The skills, academic and family background,

competencies and interests of the candidate are examined during preliminary

interview. Preliminary interviews are less formalized and planned than the final

interviews. The candidates are given a brief up about the company and the job

profile; and it is also examined how much the candidate knows about the company.

Preliminary interviews are also called screening interviews.

2. Application blanks-

The candidates who clear the preliminary interview are required to fill application

blank. It contains data record of the candidates such as details about age,

qualifications, reason for leaving previous job, experience, etc.

3. Written Tests-

Various written tests conducted during selection procedure are aptitude test,

intelligence test, reasoning test, personality test, etc. These tests are used to

objectively assess the potential candidate. They should not be biased.

4. Employment Interviews-

It is a one to one interaction between the interviewer and the potential candidate. It

is used to find whether the candidate is best suited for the required job or not. But

such interviews consume time and money both. Moreover the competencies of the

candidate cannot be judged. Such interviews may be biased at times. Such interviews



should be conducted properly. No distractions should be there in room. There should

be an honest communication between candidate and interviewer.

5. Medical examination-

Medical tests are conducted to ensure physical fitness of the potential employee. It

will decrease chances of employee absenteeism.

6. Appointment Letter-

A reference check is made about the candidate selected and then finally he is

appointed by giving a formal appointment letter

Types Of Selection Tests

Individuals differ in characteristics related to job performance. These differences,

which are measurable, relate to cognitive abilities, psychomotor abilities, job

knowledge, work samples, vocational interests, and personality. Various tests

measure these differences.

a. Cognitive Aptitude Tests

It measures an individual’s ability to learn, as well as to perform a job. Job-related

abilities may be classified as verbal, numerical, perceptual speed, spatial, and

reasoning.

b. Job Knowledge Tests

This sort of test is designed to measure a candidate’s knowledge of the duties of the position for which he or she is applying.

c. Work-Sample Tests (Simulations)

It identifies a task or set of tasks that are representative of the job. The evidence

concerning these tests, to date, is that they produce high predictive validity, reduce

adverse impact, and are more acceptable to applicants.

d. Personality Tests

It is a selection tools, personality tests have not been as useful as other types of

tests. They are often characterized by low reliability and low validity. Because some



personality tests emphasize subjective interpretation, the services of a qualified

psychologist are required.

e. Drug and Alcohol Testing

Basic purpose of the drug-testing programs contends that it is necessary to ensure

workplace safety, security, and productivity.

f. Internet Testing

The Internet is increasingly being used to test various skills required by applicants.


10 CORPORATE SOCIAL RESPONSIBILITY

10.1 Meaning of Social responsibility

The goal of CSR is to embrace

responsibility for the company's actions

and encourage a positive impact through

its activities on the environment,

consumers, employees, communities,

stakeholders and all other members of

the public sphere

Corporate social responsibility offers

manifold benefits both internally and

externally to the companies involved in

various projects. Externally, it creates a

positive image amongst the people for its

company and earns a special respect

amongst its peers. Internally, it cultivates

a sense of loyalty and trust amongst the

employees in the organizational ethics.

The spectrum of CSR includes a number

of areas as human rights, safety at work,

consumer protection, climate protection

and caring for the environment, and

sustainable management of natural

resources.

Course Contents

10.1Meaning of social

responsibility

10.2 Corporate social responsibility

OR Stakeholder

10.3 Business ethics

- Importance

http://en.wikipedia.org/wiki/Stakeholder_%28corporate%29

http://en.wikipedia.org/wiki/Public_sphere

10. Corporate social responsibility ENGINEERING ECONOMICS AND MANAGEMENT (2140003)


From the perspective of employees, CSR activities include providing health

and safety measures, preserving employee rights and discouraging

discrimination at workplace.

Nearly all leading corporate in India are involved in corporate social

responsibility (CSR) programmes in areas like education, health, livelihood

creation, skill development, and empowerment of weaker sections of the

society. Notable efforts have come from the Tata Group, Infosys, Bharti

Enterprises, ITC Welcome group, Indian Oil Corporation among others.

For example, FORD Motor - “we endeavor to become a leading contributor to

a more sustainable world”…”The Ford Motor Company Fund supports many

local and national programs to affect change, provide for those in need, and

improve quality of life.”

10.2 Corporate Social Responsibility to Different sections OR

Stakeholder

A stakeholder is any individual or organization that is affected by the activities of

a business. They may have a direct or indirect interest in the business, and may

be in contact with the business on a daily basis, or may just occasionally. Business

enterprises are primarily accountable to eight major interest groups.

Social Responsibility

Of Business

Consumers

Society

Government

Employees

Shareholders

Local Community



1. To employees

The success of an organization depends to a very large extent on the

morale of the employees. It is possible only when the business is fulfilling

social responsibility towards employees such as:

The payment of fair wages

The provision of the best possible working condition

To provide Social security

The establishment of fair work standards and norms

An opportunity for participating in managerial decisions

2. To consumers

The consumer is the foundation of a business and keeps it in existence. It

has been widely recognized that customer satisfaction shall be the key to

satisfying the organizational goals. Important responsibilities of the

business to the customers are:

Ensure access to essential products and services.

To charge the reasonable price

Ensure the right to information.

To avoid misleading the customers by improper advertisements

3. To shareholders

The responsibility of a company to its shareholders, who are the owners, is

needed a primary one. The fact that the shareholders have taken a great

risk in making investment in the business should be adequately recognized.

To protect the interests of the shareholders

To safeguard the capital of the shareholders

To provide a reasonable dividend

To ensure that its public image is such that the shareholders can

feel proud of their company.

4. To community/Society

The business has a lot of responsibility to the community around its

location and to the society at large. These responsibilities include;



Taking appropriate steps to prevent environmental pollution

Help in overall development of the society.

Development of backward area.

Promotion of small scale industries

5. To government

Government provides protection to business. Hence the business is

required to fulfill its social responsibility towards the government such as:

Regular and full payment of all types of tax in time

To follow trade practice

Stakeholders Examples of interests

Government taxation, VAT, low unemployment, truthful reporting.

Employees rates of pay, job security, compensation, respect, truthful communication.

Customers value, quality, customer care, ethical products.

Suppliers providers of products and services used in the end product for the customer,

Creditors credit score, new contracts, liquidity.

Community jobs, involvement, environmental protection, shares, truthful communication.

Trade Unions quality, Staff protection

Owner have interest of the success of his/her business.



10.3 Business ethics

Business ethics are moral principles that guide the way a business behaves. The

same principles that determine an individual’s actions also apply to business

Acting in an ethical way involves distinguishing between “right” and “wrong” and

then making the “right” choice. It is relatively easy to identify unethical business

practices. For example, companies should not use child labour. They should not

unlawfully use copyrighted materials and processes. They should not engage in

bribery.

However, it is not always easy to create similar hard-and-fast definitions of good

ethical practice. A company must make a competitive return for its shareholders

and treat its employees fairly. A company also has wider responsibilities. It

should minimise any harm to the environment and work in ways that do not

damage the communities in which it operates. This is known as corporate social

responsibility.

Note that many people react that business ethics, with its continuing attention to

"doing the right thing," only asserts the obvious ("be good," "don't lie," etc.), and

so these people don't take business ethics seriously. For many of us, these

principles of the obvious can go right out the door during times of stress.

Consequently, business ethics can be strong preventative medicine.

The Importance of Ethics in Organizations

Ethics are the principles and values an individual uses to govern his activities and

decisions. In an organization, a code of ethics is a set of principles that guide the

organization in its programs, policies and decisions for the business. The ethical

philosophy an organization uses to conduct business can affect the reputation,

productivity and bottom line of the business.

1. Leadership Ethics

The ethics that leaders in an organization use to manage employees may have an

effect on the morale and loyalty of workers. The code of ethics leaders use

determines discipline procedures and the acceptable behavior for all workers in

an organization. When leaders have high ethical standards, it encourages workers

in the organization to meet that same level. Ethical leadership also enhances the



company’s reputation in the financial market and community. A solid reputation

for ethics and integrity in the community may improve the company’s business.

2. Employee Ethics

Ethical behavior among workers in an organization ensures that employees

complete work with honesty and integrity. Employees who use ethics to guide

their behavior adhere to employee policies and rules while striving to meet the

goals of the organization. Ethical employees also meet standards for quality in

their work, which can enhance the company’s reputation for quality products

and service.

3. Ethical Organizational Culture

Leaders and employees adhering to a code of ethics create an ethical

organizational culture. The leaders of a business may create an ethical culture by

exhibiting the type of behavior they'd like to see in employees. The organization

can reinforce ethical behavior by rewarding employees who exhibit the values

and integrity that coincides with the company code of ethics and disciplining

those who make the wrong choices.

4. Benefits to the Organization

A positive and healthy corporate culture improves the morale among workers in

the organization, which may increase productivity and employee retention; this,

in turn, has financial benefits for the organization. Higher levels of productivity

improve the efficiency in the company, while increasing employee retention

reduces the cost of replacing employees.

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