BB0033 BBA103- Business Environment

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Summer/May 2012

Bachelor of Business Administration-BBA Semester 1

BB0033/BBA103- Business Environment - 4 Credits

(Book ID: B1499)

Assignment Set- 2

Q.1 Describe the major features of a capitalist economy?

ANSWER:Capitalist Economy

We shall now discuss the Capitalist economic system. In this economic system the means of production and distribution are privately owned and production is guided largely through the operation of markets

The following are the features of capitalism.

a) Free Private Enterprise

A capitalist economy is a free enterprise economy. Such an economy is characterized by economic liberty. The chief constituent of economic liberty is the right of individuals to own property. The word „property‟, in this context, does not refer to things of personal use. Property here refers to only material means of production, like land, machinery and factories. In a capitalist economy, all material means of production are owned privately.

b) Freedom of consumption and freedom of production

„Free enterprise‟ definitely follows that everyone is free to pursue any economic activity. Freedom to own property is accompanied by freedom to use it. Producers and firms have the right to own and use wealth to earn income and to sell and purchase labour for wages with little or no government control. They are free to choose the industry where they would employ the resources available to them. This feature distinguishes capitalist economies from the fascist economies. In the latter, individuals have the right to own the property, but its use is generally decided by the State. In the former, the right to own and the right to use property go together.

Workers are also free to choose their occupation. Every worker enters that occupation in which he expects the highest reward in the form of money, wages and other benefits. In a capitalist economy, employers are free to choose their workers and the workers are free to choose their employers. Freedom of occupational choice, however, does not mean guarantee of job for, the choice is practically limited by the extent of availability of the jobs.

Freedom of production and occupation necessarily implies freedom of consumption. Individuals have freedom to dispose their incomes. Every earner is at liberty to save or not to save, to save more or to save less. He has the liberty to keep his saving in the form of cash, bank deposits, loans advanced or direct investment. Similarly, he is free to decide how he will dispose of the rest of his income. This is called „Consumers‟ Sovereignty‟. The production decisions in the free market economy are based on the consumer desires which are reflected in the demand pattern. Frederic Benham remarks, “Under capitalism, the consumer is the king”.

Free private enterprise and freedom of consumption and production implies that capitalism propagates legal inheritance of properties from parents to children.

c) Market Mechanism

The market mechanism is the key factor that regulates the capitalist economy. Capitalism believes that markets are efficient and should thus function without interference. Buyers and sellers express their opinions about how much they are willing to pay or how much they will demand of goods and services. Prices are determined by the unhindered operation of the forces of demand and supply. This is called price mechanism.

We may illustrate this by considering demand for and supply of labour in a particular industry. Suppose the demand for labour in one industry increases, producers will try to attract workers from other industries. Competition among producers will be keener than competition among workers who wish to enter that industry. Consequently, the wage rate will rise. At this new wage rate, demand will adjust itself to supply. Through successive adjustments, the supply of labour will be equal to its demand at the final wage rate. What is true of labour market is also true for funds, materials, machines etc. Thus it is the price mechanism which determines how the available productive resources are to be used for the production of different types of goods and services. Thus, price mechanism organizes production. In the same way, price mechanism plays a major role in the distribution of goods among different individuals.

Price mechanism is a basic coordinating mechanism in a capitalist economy. That is why Adam Smith regarded price mechanism as an „invisible hand‟.

d) Profit Motive

Profit motive is at the heart of a capitalist economy. Maximization of profit is the sole motive of producers. Allocation of resources is determined by the profit motive. Producers would produce more of those goods where they are able to earn maximum profits. Consumers dispose of their income in such a manner that they derive maximum utility from it. Every employer bargains for as low a wage rate as possible, and every employee tries to get as high a wage as possible. Similarly, every lender charges a high interest rate; every landlord tries to get a high rent and every tenant wants to pay a low rent. Every individual, whatever may be his capacity, seeks his own benefit and tries to maximize it.

Profit motive serves as an incentive to people to put in their best. Producers adopt all means to earn highest profit. Highest wage induces the workers to improve efficiency. Thus profit motive ensures incentive and efficiency.

e) Minimum Government Interference

There is least interference by the government in the economic activities and in the working of market forces. Indeed, government intervention is necessary to ensure some of the smooth functioning of the capitalist system. For example, government interference is necessary to define and protect property rights, ensure freedom of entry and exit, enforce contractual agreements among private entrepreneurs, ensure the satisfaction of certain community wants, etc. However, government interference in the system is comparatively very limited.

f) Competition

Competition is one of the vital pillars of the capitalist economy. Competition tends to promote economic efficiency. It ensures that goods and services are produced at the lowest possible cost of production. Under competitive conditions, only efficient firms will survive and inefficient firms will be eliminated. Similarly competition in the labour market ensures that laborers give their best performance. Otherwise, they would be competed out of the market.

Merits of a capitalist economy

a) Incentive to work

Producers are motivated to bring improvements in production activities in order to earn more profits. They are motivated to develop new techniques of production so as to survive in the face of competition.

b) Efficient use of resources

In a capitalist economy, producers are under constant pressure to maximise efficiency of resources and to keep the cost at minimum in order to earn high profits. Similarly, the workers work most efficiently in order to earn high incomes.

c) Flexibility and Adaptability

It adapts itself to changed conditions and adaptability. It shows its flexibility by adapting itself to large scale production, new techniques of production and increased regulations by the government.

d) Automatic working

The impersonal forces of price mechanism enable the capitalist economy to take all important decisions. Automatic functioning of price mechanism in a capitalist economy helps the producers in solving the basic problems of „what to produce‟, „how to produce‟, and „for whom to produce‟.

e) Economic freedom:

There is freedom to consumers and producers, and freedom to save and invest. Thus, economic freedom is the virtue of capitalism.

f) Increase in production and standard of living

The greatest achievement of the capitalist system is that it has led to large increase in production and national income. Countries like the USA, UK, Japan, etc., have experienced a high rate of economic growth by adopting the capitalist system. This has enabled these countries to raise their standard of living.

Demerits of a Capitalist Economy

a) Inequality of income

Capitalism has led to large disparities in the distribution of income and wealth. The inequality is inherent because of the institution of private property, the right of inheritance and concentration of productive forces in the hands of a small minority. Consequently, the rich has become richer and the poor has become poorer.

b) Class conflict

A capitalist economy has led to class struggle between the capitalists and the workers, the „haves‟ and „have-nots‟, the rich and the poor. This is the direct consequence of the capitalists exploiting the labour class for more profit. There is constant hostility, struggle, and animosity between these two groups in the form of strikes, lock-outs, etc. This affects the functioning of the economy adversely.

c) Economic instability

Since there is no co-coordinating agency, there is always a possibility of over-production or under-production, booms and depressions, inflation and unemployment. This causes a lot of sufferings.

d) Economic waste

When better techniques are innovated, old techniques are discarded. This results in economic waste. Consumers discard many old models of cars, electronics items, machineries etc. Sometimes producers go for excessive advertisements in order to push up their sales. The extra cost ultimately falls on the consumers

Q.2 Write a short note on co-operative sector?

ANSWER: The philosophy of co-operation endeavors to empower isolated individuals who are individually weak , to come together in a democratic manner on the basis of equality to achieve the desired common economic interests. The Co-operative Planning committee defined co-operation "as a form of organization in which persons voluntarily associate together on a basis of equality for the promotion of their economic interests". The concept of co-operation emphasizes on the collective action of individuals to achieve common goals which may not have been possible for one isolated individual. The principles of co-operation define the basic characteristics of any co-operative organization. These principles form the common thread that runs through all the co-operative societies which marginal variations.

       India has a rich history of co-operative movement. The movement had drawn inspiration from similar endeavors throughout the world. 'Nidhis' were a pre-cursor to the Indian cooperatives. In this scheme, the members used to contribute monthly for a period. They were given loan facility which could be repaid in installments. The co-operative movement has gone up from strength and today India has a strong movement catering to various sectors

Cooperation dates back as far as human beings have been organizing for mutual benefit. Tribes were organized as cooperative structures, allocating jobs and resources among each other, only trading with the external communities. The roots of the cooperative movement can be traced to multiple influences and extend worldwide. The cooperative movement has been fueled globally by ideas of economic democracy. Economic democracy is a socioeconomic philosophy that suggests an expansion of decision-making power from a small minority of corporate shareholders to a larger majority of public stakeholders. There are many different approaches to thinking about and building economic democracy. A cooperative is a legal entity owned and democratically controlled by its members. Members often have a close association with the enterprise as producers or consumers of its products or services, or as its employees.

Cooperatives are typically based on the cooperative values of "self-help, self-responsibility, democracy and equality, equity and solidarity" and the seven cooperative principles:^[14]

1.                   Voluntary and open membership

2.                   Democratic member control

3.                   Economic participation by members

4.                   Autonomy and independence

5.                   Education, training and information

6.                   Cooperation among cooperatives

7.                   Concern for community

Cooperatives are dedicated to the values of openness, social responsibility and caring for others. Such legal entities have a range of social characteristics. Membership is open, meaning that anyone who satisfies certain non-discriminatory conditions may join. Economic benefits are distributed proportionally to each member's level of participation in the cooperative, for instance, by a dividend on sales or purchases, rather than according to capital invested.

Q.3 what are the benefits that an economy can get through privatization?

ANSWER:Countries like the UK have shown how they could solve the fiscal crisis of the State and could bring a new industrial bureaucracy. The benefits of privatization may be listed down as follows:

a) Improvement in managerial efficiency

Privatization through disinvestment will establish a direct relationship between the shareholders and the management. The private shareholders will have direct interest in increasing the efficiency of these enterprises. The management will not face uncalled-for political pressure and interference. Thus inefficiency due to political interferences will be removed. Management will be guided by economic and commercial considerations. It will help in improving the quality of decision-making. Introduction of „profit-oriented‟ decision-making process will improve the efficiency and the performance of the enterprises.

b) Creation of competitive environment

Privatization will abolish monopoly of the public sector. Competitive environment can be created since there would be more of similar enterprises. Such an environment will help in improving the competitive strength and efficiency of these enterprises. This will result in the induction of modern and improved technologies.

c) Ideological grounds

In advanced countries people favor the idea that public sector enterprises should be confined to essential activities (public utilities like defense, post, law, etc., and providing basic infrastructure) in which the private sector will not show any interest. All other activities should be performed by private sector enterprises since they are more efficient. It enables the government to concentrate more on essential State functions. In fact, the government must not enter into those areas where the private sector can perform better. The role of State should be as a regulator and not as a producer.

d) Greater flexibility

Public sector enterprises normally do not enjoy sufficient functional autonomy. Governmental interferences often lead to delay in decision-making. Private management can take quick and timely decisions. This will definitely lead to greater efficiency.

e) Reduction in Burden on Public Exchequer

Public sector enterprises have been facing huge losses and have been putting a large burden on the public exchequer. It has been a waste of the tax-payer ‟s hard-earned money. Privatization would be helpful in reducing this financial burden upon the government.

f) Greater Attention to Consumer Satisfaction

Public sectors do not give a personal touch and do not care much for the needs of the consumers. On the other hand, the private sector survives on consumer satisfaction. A private sector can sustain in the market only when it cares for the consumers. Hence quality of services improves.

g) Increase in financial discipline

Public sector enterprises can get budgetary support irrespective of their performance. But private sector enterprises will be able to raise funds only if they are performing well. Thus, they will be forced to perform well and improve their financial discipline.

h) Fiscal support

The demands on the governments, both at the center and in the states are increasing. There is a compelling need to expand the activities of the State in areas such as education, health, eradication of poverty, creating infrastructure for industrial development, and so on. It is therefore legitimate that a part of the additional resources needed for supporting these activities come from the sale of shares built up earlier by the government out of its resources. It is sometimes argued that the resources raised through disinvestments must be utilized for paying off past debts, and thereby bringing down the interest burden of the government.

Q.4 Explain the four levels of economic integration?

ANSWER:Levels of Economic Integration/Trading Blocs

Economic Integration covers different kinds of arrangements between two or more countries by which they link their economies closer, either in part or in total. They discriminate against the other countries, which are not parties to the agreement through tariffs. There are four levels of economic integration. Each level is described in brief.

a) Free Trade Area

If a group of countries agrees to abolish all trade restrictions and barriers and charge very low rates of tariffs among them in carrying out international trade, such a group is called „free trade area‟. These countries impose trade barriers with regard to trade with the countries other than the member countries of the group, independently. Member countries are free to levy their own external tariffs on goods from outside the free trade area. Each member country retains autonomy over trade with external countries and they maintain an internal tariff-free area.

There are several free trade agreements in practice. The North American Free Trade Agreement (NAFTA) is the best example. Others include the European Free Trade Association (EFTA), and the Asian Free Trade Area(AFTA).

b) Customs Union

It has two basic features. (i) Member countries abolish all trade barriers among them and charge low tariffs. (ii) They adopt a uniform commercial policy of barriers and restrictions jointly with regard to trade with non-member countries. Typically, this takes the form of a common external tariff, whereby imports from non-members are subject to the same tariff when goods are sold to any member country. Thus customs union is advanced in degree to a free trade area. An example of customs union is Mercosur in South America.

c) Common Market

It has 3 basic features. (i) Abolish all barriers among them.(ii) Adopt uniform commercial policy jointly.(iii) They allow free movement of human resources, technology and capital among the member countries. Thus, restrictions on immigration, emigration, and cross-border investments are abolished. When factors of production are freely mobile, then capital, labour and technology may be employed in their most productive uses. Thus Common Market is superior to Customs Union. The best example is the European Union, which achieved the status of a common market in the 1990s as a result of a 35-year struggle to end barriers to the free movement of labour, capital and technology.

d) Economic Union

This has all three features of the common market. In addition to that, they achieve uniformity in monetary policy and fiscal policy, taxation and social welfare progamme among the member countries. The idea is to blend their economies into a single entity. This requires nations to surrender a large measure of their national sovereignty. Thus economic union is superior to Common Market. Formation of economic union is extremely difficult. The Belgium-Luxembourg Economic Union, founded in 1922, is the best example of this form of economic integration.

Q.5 What are the characteristics of the Indian economy that tend to create

constraints in the development of the nation?

ANSWER: There are certain characteristics which tend to create constraints in the development of the nation namely:

Rapid Population Growth: This monster is eating into the success of India. According to 2011 census of India, population of India was 1.21 billion growing at a rate of 1.41% approx. Such a vast population puts lots of stress on economic infrastructure of the nation. Thus India has to control its burgeoning population. India is the second most populous country in the world and is projected to be the most populated by 2025. The positive aspect of India’s growing population is the large proportion of population in the younger age group.

Low per capita Income and Poverty: As per the World Bank estimate of 2005, 41.6% of the Indian population was living Below the International Poverty Line of US$ 1.25 a day (PPP in nominal terms 21.6 a day in urban areas and 14.3 in rural areas. Major steps are needed to be taken to eliminate poverty from India.

Unemployment: The increasing population is pressing hard on economic resources as well as job opportunities. Indian government has started various schemes such as Jawahar Rozgar Yojna, and Self Employment Scheme for Educated Unemployed Youths (SEEUY). But these are proving to be a drop in an ocean.

Rural Urban Divide: It is said that India lies in villages, even today when there is a lot of talk going on about migration to cities, 70% of the Indian population still lives in villages. There is a very stark difference in the pace of rural and urban growth. Unless there is a balanced development Indian economy cannot grow.

Economic Disparities and Predominance of Agriculture: Lagging states need to generate more jobs for their people by creating an attractive investment destination. Reforming cumbersome regulatory procedures, improving rural connectivity, establishing law and order,

creating a stable platform for natural resource investment that balances business interests with social concerns, and providing rural finance are important.

These challenges can be overcome by sustained and planned economic reforms. These includes:

Maintaining fiscal discipline.

Orientation of public expenditure towards sectors in which India is faring badly, such as health and education.

Introduction of reforms in labour laws to generate more employment opportunities for the growing population of India.

Reorganization of agricultural sector, introduction of new technology, reducing agricultural dependence on monsoon by developing means of irrigation.

Introduction of financial reforms including privatization of some public sector banks.

Q.6 Suppose you are planning to start a business. State the unethical practices that a business should avoid?

ANSWER: Some unethical practices that a business should avoid are:

(i) Deceiving customers by selling sub-standard or defective items, by underestimation or any other means is not to be done.

(ii) Hoarding, black-marketing is not to be done.

(iii) Destroying or distorting competition is not to be done.

(iv) Honesty should be shown while advertising, labeling and packaging.

(v) The image of the competitors cannot be tarnished by unfair practices.

(vi) Accurate business records should be made.

(vii) Taxes and other obligations should be paid promptly.

(viii) No cartel agreements formal or informal should be formed to control price etc

(ix) Kickbacks or payoffs to politicians are to be refrained from.

(x) Payment of fair wages and fair treatment to all employees should be ensured.

Business ethics (also corporate ethics) is a form of applied ethics or professional ethics that examines ethical principles and moral or ethical problems that arise in a business environment. It applies to all aspects of business conduct and is relevant to the conduct of individuals and entire organizations. Business ethics has both normative and descriptive dimensions. As a corporate practice and a career specialization, the field is primarily normative. Academics attempting to understand business behavior employ descriptive methods. The range and quantity of business ethical issues reflects the interaction of profit-maximizing behavior with non-economic concerns. Interest in business ethics accelerated dramatically during the 1980s and 1990s, both within major corporations and within academia. For example, today most major corporations promote their commitment to non-economic values under headings such as ethics codes and social responsibility charters. Adam Smith said, "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. Governments use laws and regulations to point business behavior in what they perceive to be beneficial directions. Ethics implicitly regulates areas and details of behavior that lie beyond governmental control. The emergence of large corporations with limited relationships and sensitivity to the communities in which they operate accelerated the development of formal ethics regimes

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