2140003-EEM-material 04022017 045520AM PDF

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INTRODUCTION TO ECONOMICS
1.1 Meaning of Economics
The word Economics is derived from the

Greek word ―OKIOS NEMEIN‖ meaning
Course Contents
household management.
1.1 Meaning and Definition of
Economics
Man is a bundle of desires. Goods and 1.2 Micro and Macro economics
services satisfy these wants. But almost all 1.3 Supply and Demand
- Law of supply
the goods are scares.
- Law of demand
1.4 Equilibrium
Economics is the science that deals with 1.5 Elasticity
production, exchange and consumption of - Price elasticity
- Income elasticity
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
Department of Civil Engineering Prepared By: Jay K. Kanani

Darshan Institute of Engineering & Technology, Rajkot Page 1.1
1. Introduction of Economics ENGINEERING ECONOMICS AND MANAGEMENT (2140003)
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.
Prepared By: Jay K. Kanani Department of Civil Engineering

Page 1.2 Darshan Institute of Engineering & Technology, Rajkot
 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.

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.

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.

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 Quantity Supplied

Dozen ($) (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.

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.

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.”
Course Contents
Production means the development and
creation of goods and services using resources 2.1 Meaning of production
2.2 Functions of production
to stimulate exchange. It is the physical output 2.3 Factors of production
of a manufacturing or service 2.4 Law of variable proportion
company. Production involves three processes – 2.5 Cost
2.6 Break even analysis (BEP)
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.

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 Course Contents
relations and infrastructures whereby parties
engage in exchange. While parties may 3.1 Meaning of Market
3.2 Types of Market
exchange goods and services by barter, most - Monopolistic competition
markets rely on sellers offering their goods or - Perfect competition
services (including labor) in exchange - Monopoly
- Oligopoly
for money from buyers. It can be said that a
3.3 National income
market is the process by which the prices of - GDP
goods and services are established. The market - GNP
- NDP
facilitates trade and enables the distribution
- NNP
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.

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

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

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.

 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.

 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.

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.

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.

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

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.

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.

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
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 An estimated value of the total

total worth of a country’s worth of production and
production and services, services, by citizens of a
within its boundary, by its country, on its land or on
nationals and foreigners, foreign land, calculated over
calculated over the course on the course on one year.
one year.
Formula for GDP = consumption + GNP = GDP + NR (Net income

Calculation investment + (government inflow from assets abroad or
spending) + (exports − Net Income Receipts) - NP (Net
imports). payment outflow to foreign
assets).
Uses Business, Economic Business, Economic

Forecasting. Forecasting.
Application To see the strength of a To see how the nationals of a

(Context in which country’s local economy. country are doing
these terms are economically.
used)

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.

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.

4
BASIC ECONOMICS PROBLRMS
4.1 Economic problems

The economic problem—sometimes called
the basic, central, or fundamental economic Course Contents
problem—is one of the fundamental economic
theoretical principles in the operation of 4.1 Meaning of Economic problems
4.2 Poverty
any economy. It asserts that there is scarcity; - Causes of Poverty
that is, that the finite resources available are - Measures to reduce Poverty
insufficient to satisfy all human wants and 4.3 Unemployment
- Causes of Unemployment
needs. The question then becomes how to
- Remedies of Unemployment
determine what is to be produced, and how 4.4 Inflation
the factors of production (such - Types of inflation
- Measures to control Inflation
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
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.

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.

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.

 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.

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.

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.

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 Course Contents
trade what he has for what he wants. Ideal
5.1 Meaning of Money
money has three critical characteristics: it acts 5.2 Functions of Money
as a medium of exchange; it is an economic 5.3 Types of Money
good; and it is a means of economic calculation. 5.4 Banking
- Types of Banking
5.2 Functions of Money 5.5 Reserve bank of India (RBI)
- Functions of RBI
5.6 Cash reserve ratio (CRR)
1. Medium of Exchange: 5.7 Bank rate
5.8 Repo rate
The most important function of money is to 5.9 Reverse repo rate
serve as a medium of exchange or as a means of 5.10 Statutory liquidity ratio
payment. To be a successful medium of (SLR)
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.

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.
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.

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.

 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:

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.

 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 Course Contents
men, machines, material and money.
6.1 Introduction and Definition of
Simply speaking, management is what Management
6.2 Nature of Management
managers do. But that simple statement 6.3 Management is a science and an
doesn’t tell us much does it? art
6.4 Difference between
In one context, it may comprise the Administration and Management
activities of executives and 6.5 Functions of Management
6.6 Levels of Management
administrative personnel in an 6.7 Managerial skill
organization. 6.8 Role of Manager
6.9 Scientific theory
In a broad perspective, management can 6.10 Henry fayol’s 14 principles
be considered as the proper utilization of of Management
6.11 Abraham Maslow’s need
people and other resources in an theory
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”.

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
- Man - Planning
- Material - Organizing
- Machine - Staffing Organizational
- Money - Leading goals
- Information - controlling
- Technology
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:

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 getting things done through

objectives, plans & others by directing their efforts
policies. towards achievement of pre-
determined goals.
Nature Administration is a Management is an executing
decision-making function.
function
Process Administration decides Management decides who
what is to be done & should as it & how should he
when it is to be done. do it.
Function Administration is a Management is a doing

thinking function function because managers get
because plans & work done under their
policies are determined supervision.
under it.
Skill Conceptual and Human Technical and Human skills

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.

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
Course Contents
In simple words, planning is deciding in
advance what is to be done, when where, 7.1 Planning
how and by whom it is to be done. Planning - Nature

- Process
bridges the gap from where we are to where - Importance
we want to go. It includes the selection of - Limitation
objectives, policies, procedures and 7.2 Organizing
- Centralization
programmes from among alternatives. A - Decentralization
plan is a predetermined course of action to 7.3 staffing
achieve a specified goal. It is an intellectual 7.4 Directing
7.5 Controlling
process characterized by thinking before 7.6 Organizational structure
doing. It is an attempt on the part of - Introduction and definition
manager to anticipate the future in order to 7.7 Types of organizational structure
7.8 Types of organization
achieve better performance. Planning is the 7.9 Departmentalization
primary function of management. 7.10 Span of control
- Types
- Factor affecting
 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.

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.

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

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.

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.

 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.

 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.

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.

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.

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.

CEO
Corporation
Corporate
Managers
Washing Machine Lighting Television

Division Division Division
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.
CEO
Corporation
Corporate
Managers
Large Business Small Business Educational Individual

Customers Customers Institutions Customers

 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.
CEO
Corporation
Corporate
Managers
Northern Western Southern Eastern

Region Region Region Region
3. Matrix Structures

 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 di
rectly to a supervisor.
b) Task group—
comprised of employees who work together to compete a particular task/proj
ect; 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 betwe
en 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:

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

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.

8
INTRODUCTION OF MARKETING AND
FINANCIAL MANAGEMENT
8.1 Introduction
Course Contents
Marketing management is a broad scope of the
study of marketing focusing on the practical 8.1 Introduction and Definition of
Marketing
application of the techniques and marketing
8.2 4 P’s of Marketing
activities of a certain company or business.
8.3 different concept of Marketing
Marketing is everywhere.
8.4 Marketing demand
Rapidly emerging forces of globalization have - Methods of demand forecasting
led firms to market beyond the borders of their 8.5 Market segmentation
home countries, making international marketing - Bases of market segmentation
highly significant and an integral part of a firm's -Importance of market
marketing strategy. Marketing managers are segmentation
often responsible for influencing the level, 8.6 Meaning of Finance and
timing, and composition of customer demand Financial management
accepted definition of the term. 8.7 Scope of Financial management
8.8 Functions of Financial
Marketing helps in creating demand, getting management
loyal customers and helps in retention of these
8.9 Objectives of Financial
customers which eventually leads to profits and management
growth of the company.

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.
Starting point Focus Means Ends
Selling and Profits through

Factory Products promoting sales volume
(a)The selling concept
Target Customer Coordinated Profit through

Market needs marketing customer
satisfaction
(b)The Marketing concept
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

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 Slight Fair Good High Certain

Chance Possibility Possibility Possibility Possibility
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.

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

Course Contents
Production function is that part of an
9.1 Meaning of Production and
organization, which is concerned with the Production management
transformation of a range of inputs into the 9.2 Classification of Production
required outputs (products) having the requisite system
9.3 Objectives of Production
quality level. management
9.4 Plant location
Production is defined as “the step-by-step - Meaning and definition
conversion of one form of material into another - Factor affecting
form through chemical or mechanical process to 9.5 Plant layout
- Objective
create or enhance the utility of the product to - Types
the user.” Thus production is a value addition 9.6 Meaning and definition of
process. At each stage of processing, there will HRM
be value addition. 9.7 Scope of HRM
9.8 Manpower planning
 Meaning of Production Management - Objectives
- Process
Production management is a branch of 9.9 Recruitment
management which is related to the production - Meaning and definition
- Sources
function. 9.10 Selection
- Process
Production may be referred to as the process - Types
concerned with the conversion of inputs (raw
materials, machinery, information, manpower,
and other factors of production) into output (Semi finished and finished goods and

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
PROCESS Goods &
Services
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.

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.

 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 Course Contents
and encourage a positive impact through
its activities on the environment,
10.1Meaning of social
consumers, employees, communities,
responsibility
stakeholders and all other members of
the public sphere 10.2 Corporate social responsibility
OR Stakeholder
 Corporate social responsibility offers
manifold benefits both internally and 10.3 Business ethics
externally to the companies involved in - Importance
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.

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.
Shareholder
s
Local
Community Employees
Social
Responsibility
Of Business
Government
Consumers
Society

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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1

1.1 Meaning of Economics

The word Economics is derived from the

The resources or inputs available to produce

Department of Civil Engineering Prepared By: Jay K. Kanani

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

ii) Welfare definition:

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

Prepared By: Jay K. Kanani Department of Civil Engineering

 Basic concept of Economics

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

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

Department of Civil Engineering Prepared By: Jay K. Kanani

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

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

1.2 Micro and Macro economics

 Microeconomics is the study of particular firm, particular household,

Prepared By: Jay K. Kanani Department of Civil Engineering

 Micro means very small or millionth part.

Both fields of economics are interdependent

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

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

Department of Civil Engineering Prepared By: Jay K. Kanani

Examples of microeconomic issues

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

Examples of macroeconomic issues

The importance of a balanced economics education

Prepared By: Jay K. Kanani Department of Civil Engineering

1.3 Supply and demand

A. The Law of Demand

Department of Civil Engineering Prepared By: Jay K. Kanani

Price per Kg Quantity demanded in rupees

Prepared By: Jay K. Kanani Department of Civil Engineering

1. Income: A rise in a person’s income will lead to an increase in demand (shift

2. Consumer Preferences: Favorable change leads to an increase in demand,

4. Price of related goods:

Department of Civil Engineering Prepared By: Jay K. Kanani

B. The Law of Supply

Prepared By: Jay K. Kanani Department of Civil Engineering

Price Per Quantity Supplied

Department of Civil Engineering Prepared By: Jay K. Kanani

3. Taxes and Subsidies

Prepared By: Jay K. Kanani Department of Civil Engineering

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

5. Prices of Related Products

6. Prices of Joint Products

Department of Civil Engineering Prepared By: Jay K. Kanani

Different elasticity of demand measures the responsiveness of quantity demanded to

Prepared By: Jay K. Kanani Department of Civil Engineering

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

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

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

Prepared By: Jay K. Kanani Department of Civil Engineering

c) Unitary elasticity of demand :

Department of Civil Engineering Prepared By: Jay K. Kanani

d) Perfectly elastic Demand :

e) Perfectly inelastic demand

Eg. Electricity or fuel.

Prepared By: Jay K. Kanani Department of Civil Engineering

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

E = change in quantity demanded

Characterizing Income Elasticity

Normal Goods (E>0).