Indian economic environment 1. economics & the business environment

1Economics and the

Business Environment

The Firm as a Legal Entity

• The sole proprietor– limited scope for expansion– unlimited liability

• The partnership• Companies– limited liability– public limited companies (plc)• public issues of shares• shares traded on the Stock Exchange

– private limited companies– consortia– public corporations

The Internal Organisation of the Firm

• U-form

U-form business organisation

P r o d u c t i o n F i n a n c e S a l e s P u r c h a s i n g

C h i e f e x e c u t i v e


• U-form

– advantages

• direct control by central executive of the firm

• clear goals

– problems of large U-form firms

• co-ordination and communication costs

• distorted information

• decline in organisational efficiency

• M-form


M-form business organisation

P r o d u c t i o n F i n a n c e S a l e s P u r c h a s i n g

D i v i s i o n 1 D i v i s i o n 2 D i v i s i o n 3

H e a d O f f i c e


• M-form– advantages

• reduced length of information flows

• enhanced level of control

– problems• bureaucracy and communication problems

• conflicts between divisions

• The flat organisation

• The holding company– role of parent company and subsidiaries

The Aims of the Firm

• Goals of the firm

• The traditional theory of the firm

• Alternative theories

– the divorce of ownership from control

– the development of the joint-stock company

–managerial objectives

The Aims of the Firm

• The principal / agent relationship

– the principal – agent problem

– asymmetric information

– dealing with imperfect information

• monitoring

• incentives

• The goal of staying in business

– the willingness of firms to take risks

– problems of being over cautious

The External Business Environment

• PEST analysis– Political / legal factors

– Economic factors• the microeconomic environment

• the macroeconomic environment

– Social / cultural factors

– Technological factors

• Using PEST analysis– relations between the four sets of factors

– importance of the economic factors


• Classifying industries

– Classifying production

• primary production

• secondary production

• tertiary production

Output of industrial sectors(as % of GDP)

1974

54.9%

2.8%

42.3%

Secondary

Primary

Tertiary


1974

54.9%

2.8%

42.3%

70.9%

5.8%

23.3%

2002

Secondary Secondary

Primary Primary

Tertiary Tertiary


1974

54.7%

3.4%

41.9%

Secondary

Primary

Tertiary

Employment by industrial sector(% of total employees)

1974

54.7%

3.4%

41.9%

79.8%

1.8%

18.4%

2002

Secondary Secondary

Primary Primary

Tertiary Tertiary

Employment by industrial sector(% of total employees)

• Classifying firms into industries– nature of an industry

– industrial sectors

– why classify firms into industrial sectors?• helps in analysing trends

• identifying specific needs

• helps to understand relationships between firms

• Standard industrial classification– nature of the system of classification

– sections, subsections• divisions, groups and classes


Standard industrial classification: 1992

• Changes in the structure of UK economy

– expanding and contracting sections

• by output

• by employment


The Determinants of Business Performance

• Structure → conduct → performance

– relationship between business structure and business conduct (behaviour)

• competitive markets and competitive behaviour

• limited competition and collusion

– relationship between business conduct and business performance

• indicators for measuring performance

• profitability, market share, growth, etc.

The Economist's Approach to Business

• Tackling the problem of scarcity

–meaning of scarcity

– production and consumption• role of the business economist

– study of consumer behaviour

– study of firms

– factors of production• labour

• land and raw materials

• capital


• Demand and supply– actual and potential demand and supply

– the role of firms in satisfying demand

– business economists’ study of the supply process

• Macroeconomics and microeconomics–macroeconomics

• the balancing of aggregate demand and supply

–microeconomics• the balancing of the demand and supply for

particular products


• Microeconomics and choice–What?

– How?

– For whom?

• Choice and opportunity cost– the meaning of opportunity cost

– rational choices

–marginal costs and benefits

• Microeconomic choices and the firm

Indian economic environment 1. economics & the business environment

Education

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