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Q1. What is a Joint Stock Company? Explain the Merits and Demerits of Joint Stock Company?

Introduction
Joint Stock Company is the predominant form of business organization, which undertake any
business or industry on a large scale. Its called corporation in USA and it overcomes the drawbacks of
proprietorship and partnership.

Subject:
Joint Stock Company is a voluntary incorporated association of shareholders or stockholders who
contribute to the common stock, (i.e. capital to the association) of which they are the owners but all of them
do not manage it. Board of directors elected by the shareholders manages it. Their liability is limited to the
value of shares held by them and they share profit or losses.

Definition:
In the words of Mr.Kuchhal, a joint stock company is ‘ an incorporated associations which is an
artificial legal person, having independent legal entity, with a perpetual succession, a carrying a limited
liability’.

As per the Indian Companies Act of 1956, a joint stock company is a company which is permanent paid up
or nominal share capital or a fixed amount of capital divided into shares held and transferable as stock by
shareholders who are its members.

Merit of Joint Stock Companies

Limited Liability: The principle of limited liability is applicable to joint – stock company and that the
reason we write ‘ LTD’ at the end of the company name. Since the liability of the shareholders is limited
risk faced by them are reduced. Hence even if the company suffers losses they need not pay more than the
face value of the shares.

Large Amount of Capital: Large-scale production is facilitated under the company form of business
organization. This is because its easy for a company to raise a large amount of capital, by acceptive fixed
deposits from the public. Thus the savings of the people can be productively used.

Transfer of Shares: The shares of a company are transferable whenever one likes. So the small savers can
sell their shares in the stock exchange with a fee and somebody else does also not affect the company as the
sale by one shareholder leads to the purchase of the share. So the funds of the public are not blocked and
there is not loss for the company as the share is transferred.

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Shares of Different Varieties: Shares of a company are of different types, namely equity shares, simple
preference shares, cumulative preference shares etc. The people who want to take greater risk can purchase
the equity shares and the others can go for cumulative preference shares. Thus providing a wide variety of
choices to shareholders, its possible for a company to raise a large amount of capital.

Risky Enterprises: A joint stock company can start a risky enterprise. This is because the risks associated
with a business are greatly reduced due to the limited liability of shareholders and a small value of the
shareholder. Further an individual may purchase shares of different companies so as to minimize the loss
still further. So even if there is a loss in the case of one company, the individual shareholders may not be
affected.

Less Danger of Misappropriation of funds: There is a less danger of misappropriation of funds. This is
because the audited accounts of the companies must be published

Combination of Capital and Business Abilities: Many individuals possessing a large amount of capital and
not having capacities to start and run a business can invest in companies. Other persons, having no capital
but possessing capacities to manage a business, can secure jobs as managers and executives in companies.

Efficient Management: In Join Stock Company the ownership and management are separated. The
shareholders are owners but they do not manage it. It is managed by experts in different fields, who work
under the direction of the Board of Directors, manage it.

Economies of Scale: A Joint Stock Company can enjoy the economics of scale such as advantages of
specialization and division of labour etc by making full use of managerial skills and abilities and other
factors of production.

Continuity and Stability: Since it has a perpetual succession a company continues to carry on its business
even if some of the original shareholders leave the company or die or become insolvent. So it is permanent
and stable in nature. So the business activities can be undertaken with long term objective.

Legal Control: Since Companies are subject to rules and regulations of the companies act, they are
supposed to work in the interest of their shareholders.

Democratic Management: There is democratic management in a joint stock company. This is because the
directors are elected by shareholders from time to time. The elected board of directors manages the
company successfully because of their wide experience, abilities and efficiencies.

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Research: Because of its continuous existence and a large amount of resources at its disposal, a company
can conduct research and experiments and apply the fruits of research to industrial uses. This will enable it
to improve the quality of its product, reduce its cost of production and thereby enjoy good profits in due
course.

Demerits of Joint Stock Companies

Lack of Personal Interest and Inefficient Management: The actual management of a Joint stock company is
the hands of salaried executives. They have no personal interest in the functioning of their company. Hence
they may not always manage the affairs of their company efficiently. Some of them might even leak out
secrets of their company to rival companies.

Indifference of Shareholders and Oligarchy: On account of their limited liability many of the shareholders
are indifferent. They may not take an active part in the affairs of their company. They are also scattered.
They are interested only in dividend. So a few big shareholders manage to get directorship and take all the
decisions.

Promotion of Self indirect and misuse of power by directors: A few big directors who control the affairs of
the company, try to promote their own interest in various ways at the cost of other shareholders.

To Risky Ventures: The directors may be inclined to start very risky enterprise, which may fail. Hence they
will involve the shareholders in losses.

Extravagance: The directors may not behave in a responsible manner. They may spend in an extravagant
way.

Favoritism: The selection of the staff to work in various departments may not be made by directors or
managers on the basis of merit, but on the basis of favoritism, influence, personal relations etc. They may
employ their friends and relatives in high posts paying high salaries. Hence the general working of a
company is likely to suffer.
Unethical Practices: Directors possess inside information of the working of their company. Hence they may
dispose of their shares at high prices by creating an impression that their company is going to make good
profits when in fact the things are otherwise .So those who buy such shares will suffer losses.

Conflict: There if no close personal contact between employees and management. Hence there is likely to
be a conflict between employees and the management. At times this may result in strikes and lockouts.

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Political Corruption: A number of Joint stock companies may pay a large amount of money as donations to
political parties. They are given for the personal benefit of directors and or for the benefit of the company at
the cost of the public.

Concentration of Economic Power and Wealth and inefficient Management: Most of the important
companies in a country are dominated by a few wealthy individuals as they are elected as directors there
would be a concernation of wealth and economic power in their hands.

Delay in taking decision: The board of directors of a joint stock company cannot take quick decisions and
prompt actions to meet the changes in demand for product. This is because of lot of discussion and
consultation before the decision.

Conclusion

The joint stock system has much contributed to economic progress. This is because it is responsible for
tremendous industrial progress, production and trade.

Q2. Briefly review various theories of Profits.

Introduction

Different theories have been developed over a period of time to explain the emergence of Profit.
Some of the theories are explained below. They are,

1.Risk Taking Theory


2.Uncertanity Bearing Theory of Profits
3.Innovation Theory
4.Dynamic Theory of Profits
5.Profits in a static society

Subject

1. Risk Taking Theory: Hawley – American Economist, developed this theory. According to Hawley
Profit is reward for risk taking. Profit arises because considerable amount of risk is involved in business
But this theory has been criticized on several grounds. Hawley has not classified the types of risk. Cawer
has pointed out, profit is not the reward for risk taking. It is the reward for risk avoiding. An entrepreneur is

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required to minimize his risk, if he cannot eliminate it totally. A successful entrepreneur is he who earns
good profits by eliminating the risk. On the other hand a mediocre businessman is not able to reduce the
risk in business and therefore is subject to losses.

2. Uncertainty Bearing Theory of Profits: Prof. F.H. Knight an American Economist developed this
theory. He classified the risk under two heads.
a. Certain risks like risk of fire, theft and accident can be covered through insurance and the
losses can be passed to an insurance company and they are less important. The entrepreneur
can take an insurance policy by paying the premium. These risks are called insurable risks.
b. There are other risks in the markets, when the price of the raw material goes up then it might
affect the profit, as the cost of production will be up. The other one is the substitute for the
product so when a substitute enters in the market the sales will go down and the stock will be
higher in the stores. So it is very important that avoid these risk, which can be done only by a
continuos market research and bring up new products. All these factors are uncertain and
losses arising out of these can be insured with any insurance company.

Uncertainty theory has been criticized on the ground that profit is the reward paid to an
entrepreneur for discharging several duties. Prof. Knight has overlooked other duties and has glorified the
uncertainty, the theory has no sound foundations either in logic or in practice. A number of illiterate
producers who have not studied the theory, are able to anticipate precisely the profits or losses that would
arise in future.

3. Innovation Theory: Joseph Schumpeter developed this theory. According to him, profit is the
reward paid to an entrepreneur for his innovative endeavors.

Schumpeter has made distinction between invention and innovation. A scientist may make an
invention, but an entrepreneur exploits this invention on a commercial basis. The basis on which the
invention is exploited depends upon the innovative nature of the entrepreneur. If he is successful in
exploiting the invention it is innovation.

Schumpeter theory has been criticized on several grounds. Profit is the reward for discharging so
many duties but Schumpeter has overlooked the other duties. Another point of criticism is that Schumpeter
has neglected the fact that profit is also the reward for risk and uncertainty bearing. The most serious
criticism of this theory is that a particular producer who exhibits an innovative character may earn super
normal profits in the short run. Super normal profit will attract new firms, which will reduce the profit in
the long run.

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4. Dynamic Theory of Profit: Renowned economist, J.B. Clark, developed the dynamic theory of
profit. Prof. Clark points out that the whole world is dynamic. Changes after the changes are
taking place every day and the economic consequences of these changes are of a far reaching
character. Prof. Clark has pointed out the following types of changes.

i. Changes in the quantity and quality of human needs


ii. Changes in the techniques of production
iii. Changes in the supply capital
iv. Changes in the Organization of business
v. Changes in population

These changes can occur at any time. Techniques of production may change and improved machinery may
be introduced. This may reduce the cost and increase the profit and output. But to purchase the improved
machinery, a larger amount of fixed capital is required. This may necessitate the admission of a new partner
or conversion of the partnership firm into a joint stock company to raise capital on a large scale.

All these changes can occur suddenly, and an entrepreneur has to face them properly. A producer who
overcomes these hurdles is successful in earning higher profits. He must adjust himself to the changing
times. A producer who cannot address himself to the dynamic world lags behind. In order to survive and
grow every producer must change the methods to suit the changing needs. According to Prof. Clark, Profit
is the reward paid for dynamism.

Conclusion
Every theory has its pros and cons but when we combine the pros and cons together then we get
a right idea on the theory of profit on different instance and conditions.

Q3. Explain the steps involved in Cost-Benefit analysis as a method of investment.

Introduction

The Cost-benefits analysis is a technique used for analyzing investment and for rating the
alternative investment opportunities as well as for ranking such opportunities on the basis of the rate of
return to investment. Investment analysis is very important but very difficult due to the elements of

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uncertainty, changing value of money etc., as discussed above. Besides there are capital constraints and
social costs and benefits involved.

Subject:
The cost benefit analysis as a method for investment analysis can proceed along the following
steps:

i. Identification of a Project: The first thing an investor has to do is to search various investment
opportunities for the purposes of finally selecting one of them. In doing so, he has to keep in mind the size
of the investments he has contemplated and his own expertise and interest. For this purpose, the investor
can get the necessary information from the development organizations who are engaged in developing
project profiles. He can also borrow ideas from the established and reputed investors within and outside the
country. It is possible that he has some new project ideas. Whatever the case, one has to choose a few
project alternatives for further scrutiny by carefully including the good or sound projects a high rate of
return.

ii. Formulation of the project: Once a list of projects chosen for scrutiny is ready, with a blue print
and all details of requirements in terms of land, building, plant and machinery, raw materials fuel, and
power, labour and technocrats etc. with prices of each, one can proceed further. The next thing he has to
take into account is the capacity likely to be created and possible utilization of the capacity over time and
the prices at which the products could be sold over the time span considered ads the life to the project. After
the alternatives are formulated, each of them has to be examined in terms of its feasibility, plant and
machinery, raw materials and technical know how. It should be obvious that some of the projects identified
and selected for scrutiny could be dropped at this stage because they are not feasible on anyone or more of
the feasibility’s listed here.

iii. Appraisal and selection of the Project : Appraisal of feasible projects refers to their assessment in
Terms of economic viability. This can be done with the help of projected cash outflows and inflows from
each project and then comparing them out on merit. For this purpose various measures used for evaluating
the investment worth, including cost-benefit analysis, can be adopted. Through this step of screening, those
of the selected projects that are viable as well as within the investment limit contemplated by the investor
are selected.

iv. Comparison of Cash flow: Projects which pass the third test of feasibility are then put to best
comparing the cash-flows by using the cost-benefit ratio (or any of the other measures discussed above). If
and where critical values are involved, each measure would produce several outcomes. This would enable

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the investor to compare the rates of return along with the risks involved. This sort of comparison is of
crucial importance because one determine mathematical solution is not available and one has to be guided
by ones subjective evaluation of the risk involved as well as ones attitude towards acceptance of risk. One
may select a project promising high returns with high uncertainty or low profitability with low risk level.

v. Selection and Implementation: Keeping in view the funds available for investment one or more of
the projects can be selected for implementation. The selected projects will then be implemented in
accordance with the blue prints already prepared. While implementing the project after it being
commissioned, it is necessary to monitor the project on a regular basis. This includes ensuring the projected
time period involved is observed in practice, after ascertaining the quality and quantity are as per norms
assumed and the marketing of the product industrial relations, repayment of loans and payments of
dividend follow the norms anticipated while formulating the project.

vi. Mid-term Project Evaluation: A post compilation audit of the project is the last step but in respect
of long term projects, mid-term appraisal is always desirable. This can be done by re-calculating the
measure of investment worth with a view to find out the actual worth and compare it with the anticipated
worth at the stage of anticipated worth estimated at the formulation stage. This would enable the investor to
find out whether the expected results have been realized or not and then find out whether the expected
results have been realized or not and then find out the causes responsible for divergence between the
expected and the realized results. Such an appraisal provides opportunity for rectifying any mistakes and
improving upon the performance.

Conclusion
Even though we do this analysis there are things like uncertainty and value of money, which may
put the results of the analysis in a Jeopardy. So its important that a continues monitoring is required.

Q4. Define Business Cycle. Explain various Phases of Business Cycle.

Introduction

Business fluctuations, booms and slumps, in the economic activities form essentially the economic
environment of a country. They influence business decisions tremendously and set the trend of future
business. The period of prosperity opens up and new larger opportunities for investment, employment and
production and thereby promotes business. On the contrary, the period of depression reduces the business
opportunities. A profit-maximizing entrepreneur must therefore analyze the economic environment of the
period relevant for his important business decisions, particularly those pertaining to forward planning.

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Subject

Definition of Business or Trade Cycle.


The term ‘trade cycle’ in economics refers to the wave like fluctuation in the aggregate economic
activity, particularly in employment, output and income. In other words, trades cycles are ups and down in
economic activity. Different economists define a trade cycle in various ways. For instance, Mitchell defined
trade cycle as a fluctuation in aggregate economic activity. According to Haberler, ‘The business cycle in
the general sense may be defined as an alternation of periods of prosperity and depression, of good and bad
trade.’

Phases of Business cycle:


The ups and downs in the economy are reflected by the fluctuations in aggregate economic magnitiudes,
such as, production, investment, employment, prices, wages, bank credits, etc. The upward and downward
movements in these magnitudes show different phases of a business cycle. The various phases of trade
cycle may be enumerated as follows,
1. Expansion
2. Peak
3. Recession
4. Trough
5. Recovery and expansion.

Prosperity: Expansion and Peak


Rise in the national output, rise in consumer and capital expenditure rise in the level of
employment characterize the Prosperity phase. Inventories of both input and output increase. Debtors find
it more and more convenient to pay off their debts. Bank advances grow rapidly even thought bank rate
increases. There is general expansion of credit. Idle funds find their way to productive investment since
stock prices increase due to increase in profitability and dividend. Purchasing power continues to flow in
and out of all kinds of economic activities. So long as the condition permit, the expansion continues,
following the multiplier process.

In the later stages of prosperity, however, inputs start falling short of their demand. Additional workers are
hard to find. Hence additional workers can be obtained by bidding a wage rate higher than the prevailing
rates. Labour market becomes sellers market. A similar situation appears also in other input markets. This
marks reaching the peak.

Turning – Point and Recession

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Once the economy reaches the peak, increase in demand is halted. It even starts decreasing in
some sectors, for the reason stated above. Producers, on the other hand, unaware of this fact continue to
maintain their existing levels of production and investment. As a result, a discrepancy between output
supply and demand arises. The growth of discrepancy, between supply and demand is so slow that it goes
unnoticed for some time but producers suddenly realize that their inventories are piling up. This situation
might appear in a few industries at the first instance, but later it spreads to other industries also. Intially, it
might be taken as a problem arisen out of minor mal-adjustment but persistence of the problem makes the
producers believe that they indulged in ‘over-investment’ and the cancellation of orders for the inputs by
the producers of capital goods and raw materials cancel their orders for their input. This is the turning point
and the beginning of recession.
When investments are curtailed, production and employment decline resulting in further decline in demand
for both consumer and capital goods. Borrowings for investment decreases bank credit shrinks, share prices
decrease, unemployment gets generated along with a fall in wage rates. At this stage, the process of
recession is complete and the economy enters the phase of depression.

Depression and Trough


During the phase of depression, economic activities slide down their normal level. The growth rate
becomes negative. The level of national income and expenditure declines rapidly. Prices of consumer and
capital goods decline steadily. Workers lose their jobs. Debtors find it difficult to pay off their debts.
Demand for bank credit reaches its low ebb and banks experience mounting of their cash balances.
Investment in stock becomes less profitable and least attractive. At the depth of depression, all economic
activities touch the bottom and the phase of trough is reached.
How is the process reversed? The factors reverse the downswing vary from cycle to cycle like factors
responsible for business cycle vary from cycle to cycle. The producers anticipate better future try to
maintain their capital stock and offer jobs to some workers here and there. They do so also because they
feel encouraged by the halt in decrease in price in the trough phase. Consumers on their part expecting no
further decline in price begin to spend on their postponed consumption and hence demand picks up, though
gradually. On the other hand, stock prices begin to rise for the simple reason that fall in stock prices comes
to an end and optimism is underway in the stock market.

The Recovery
As the recovery gathers momentum, some firms plan additional investment, some undertake
renovation programs, some undertake both. These activities generate construction activities in both
consumers and capital good sectors. Individuals who had postponed their plans to construct houses
undertake it now, lest cost of construction mounts up. As a result, more and more employment is generated
in the construction sector. As employment increases despite wage rates moving upward the total wage
income increase at a rate higher than employment rate. Wage income rises, so does the consumption

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expenditure. Businessmen realize quick turnover and an increase in profitability. Hence, they speed up the
production machinery.

Over the period, as the factors of production become more fully employed wages and other input prices
move upward rapidly. Investors therefore, become discriminatory between alternative investments. As
prices, wages and other factor – prices increase, a number of related development begin to take place.
Businessmen start increasing their inventories, consumers start buying more and more of durable goods and
variety items. With this process catching up, the economy enters the phase of expansion and prosperity. The
cycle is thus complete.

Conclusion
Trade cycle has become one of the important factor in determining a countries status, most of the
developing countries are in Expansion and Peak as many developed countries are shifting their operations
in these countries to cut the cost and increase the profit margin.

Q5. Short notes on

J) Opportunity Costs: The Production of one commodity can only be at the cost of another. The Commodity
that is scarified is the opportunity cost of the commodity produced. Thus, economists define
the cost of production of a particular product as the value of the foregone alternative products, that resource
used in its production could have produced. The opportunity cost of a product, is therefore, the opportunity
lost of not being able to produce some other product. Resources can be used for a number of purposes. The
opportunity cost of these resources to a firm is the value in their next best alternative use.

T) Distinction between Perfect Competition and Monopoly:


 Under perfect competition there are many buyers and sellers and they will not be able to fix the price.
The prices are fixed by the interaction between demand and supply where as in Monopoly condition
there is only one seller and he can fix the price, as there is no competition.
 Under perfect competition there are many firm in the industry producing same products but under
monopoly the firm and industry is the same as there is only one seller.
 Under perfect competition there is no restriction for firms to enter and exit from the business but in
monopoly there is restriction for example we can take the insurance, which was full under the control
of LIC, but now the market has opened.
 Under the perfect competition every seller has a similar price to their product even if one seller
increase the price then they move to the others but in the case of monopoly the consumer has to buy
the product at the price it has been fixed and no alternative for it.

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 Under Monopoly the cost is less than the price so they make super normal profit in the short run but
when many firms enter into the industry then it becomes perfect competition where everybody fix a
similar price and earn a normal profit in long run.
 In Perfect competition because there are many firms the output is very high and price is also
reasonable but in monopoly the output is low and the price is very high.

U) Limitation of Cost – Benefit Analysis:


 Critics have pointed out that this analysis is applicable in a partial equilibrium framework. However
economists like A C Harberger have shown that it can be applied to the general equilibrium analysis as
well.
 The exactness and the usefulness of this analysis is limited by the fact that it is based on the
assumption that maximization of social welfare. We have already seen that this is not so.
 The cost benefit analysis is applied on another assumption that the existing pattern of distribution of
income, distribution is given and has to be kept as it is. In fact, a change in income distribution does
lead to a change in net wealth and further in social welfare.
 Another limitation of the analysis is that it ignores the effect of diminishing marginal utility of
additional wealth or income with every incremental dose of income or wealth being added to the
existing total.
 By assuming the positive correlation between wealth and welfare, the analysis assumes away all
difficulties involved in the calculation of present and future cost as well as private and social cost.
 Whatever applies to costs also applies to benefits i.e., calculation of present and future benefits as well
as private and a social benefit involves similar difficulties.

P) Determinants of Supply: There are a number of factors influencing the supply of a commodity. They
are known as the determinants of supply. The important determinants of supply are:
 Price: Price is the single largest factor influencing the supply of a commodity. More commodities is
supplied at a lower price and less commodity is supplied at the higher price. The change in the supply
may be in the form of the increase or decrease in supply.
 Natural Conditions: Supply of agricultural products depends on the natural environment or climatic
conditions like rainfall temperature, earthquake etc., On the other hand the supply decrease in the
drought condition.
 State of Technology: The improvement in the technique of production leads to increased productivity
and results in an increase in the supply of manufactured goods.
 Transport conditions: The difficulties in transport may cause a temporary decrease in the supply, as
goods cannot be brought in time to the market. So even at the rising prices the quantity supplied cannot
be increased.

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 Factor prices and their availability: When the factors of production are easily available at low prices,
more investment is encouraged due to better returns. Under such circumstances the supply to the
commodity which these factor help to produce may tend to increase and vice versa.
 Government Policy: The government’s economic policies like industrial policy, fiscal policy, etc.,
influence the supply. If the industrial licensing policy of the government is liberal, more firms are
encouraged to enter into registrations and high customs duties may decrease the supply of the imported
goods but it would encourage the domestic industrial activity, So that the supply of domestic products
may increase.
 Cost of Production: If there is a rise in the cost of production of a commodity, its supply will tend to
decrease. Conversely, a fall in the cost of production tends to decrease the supply.
 Prices of other products: The prices of substitutes or related products also influence the supply of a
commodity. If the price of wheat rises, the farmers may grow more of wheat and less of rice.

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