Monday, 28 December 2015

The law of supply definition | supply schedule | supply curve

As we have seen earlier, a supplier always tries to sell more and more commodities when the prices are high and reversely, restricts his supplies when prices start falling. This is the underlying fact of supply.

The law of supply employs this basic reality in its definition. It assumes that while other factors determining supply are constant, changes in price will result in changes of quantities supplied.

Law of Supply
The law of supply states that "all other factors remaining constant, an increase in price will result in an increase in quantity supplied and vice versa". In other words, the law of supply states that there is a direct relationship between price and quantity.

What is supply schedule
Supply schedule is a table or chart depicting the changes in quantities supplied at different prices of a commodity based on the above law of supply.

Suppose a supplier deals in the rice business. At a price of say Rs.50 per kg., the supplier will be putting into market all of his stock say 10,000 kg. of rice. If the price comes down to Rs.45 per kg., he will be supplying only say 8,000 kg. If the price further goes down to Rs.40, he will restrict more supplies and will be supplying only 5,000 kg. On the other hand, suppose price increases from Rs.50 to Rs.60 per kg., then he will try to procure more stocks from other sources and increase his supplies to 15,000 kg or like that. 

The same thing can be presented in the shape of a chart as shown below.

Supply Schedule chart

Price of Rice (Rs. Per kg)
Quantity of rice supplied (in Kg)

So, it is clear from the above supply schedule that the supplier decreases his supply quantity when prices fall. If you view the chart from bottom to top, you will realise that the supplier has increased his supplies whenever the price increased from previous price. The same thing can be illustrated through a supply curve also.

Supply Curve
A supply curve is the line or graph joining all the points of the supply levels at various prices of commodities.

Supply curve can be defined as the graphic representation of the relationship between price of a commodity and the quantities supplied by the supplier.

The quantities supplied are measured by the horizontal axis and prices of the commodity on the vertical axis.

From the above supply schedule of rice, we can draw the supply curve. We can start with the price as 'zero' and quantity supplied also as zero. So, the supply curve will be like this as represented below.

The supply curve will be raising upwards as and when prices increase, because the supplier will go on increasing  the supply quantity with every increase in price unless he is unable to do so because of other factors affecting supply.

Regarding factors affecting supply, you may view the information at this link.

Monday, 7 December 2015

What is Revenue or Income in its broader sense and types of revenue in economics

What is Revenue?
Revenue is the income of a business enterprise or any other organisations or governments. Revenue may be either in shape of sales proceeds from goods and services sold or in shape of receipts from other activities and sources of any enterprise or government. So, revenue includes sales income, fees received for services, interests received from investments and receipts from other sources like collection of taxes, duties, etc. It can include even donations received from others, funds received from other social activities, etc. All these receipts are collectively known as revenue.

Revenue is also refereed to as Gross Income or Gross Receipts.

Generally, revenue is measured as being receipts during a certain period of time - say, during a particular week, a particular month or in a year.

Different types of revenue in economics
Sometimes, revenue can be referred to as business revenue, government revenue or association revenue based on the nature of organisation or enterprise.

Business Revenue
Business revenue refers to income or receipts from normal business activities of any organisation. Any type of business that indulges in manufacturing and / or selling of products, or in providing services to its clients receives income either in form of sales or as fees for services. This income is known as 'business revenue'. The main point is that the income should be from their prime business activity. If one is indulged in rental business, then his business income is the rent received. If it is a financial institution, then their income will be from interest and other charges received in lending the loans.

This business revenue can be classified into two parts as Sales income and other income.

Sales Revenue or sales income
Sales revenue denotes the income received by way of sales of goods or services. For a manufacturer, it is income from sales of produced goods. For a grocery or merchant, it is income from sale of provisions or merchandise. For a banker, it can be the sale of loans. To a service provider like consultant or barber or cobbler, it is their service charges received. So, the sales revenue is the main business income.

Other Revenue or other income
While performing a business, it is possible that you may receive some income which is not related to your primary business activity. For example, you are running a manufacturing business. You sell your produce and receive the revenue. Now, you may not be spending all that income for your business. You may deposit some money in fixed deposits or invest in other investments. So, you will be receiving interest from these investments. It is not your sale income. It is to be termed as 'other income'. Similarly, you may sell some old machinery or assets and buy new ones. This sale of old assets is not your primary sale. It is your 'other income'.If you can rent a part of your building or any machinery to others for a short period, the rent received is also treated as 'other income'.

Government Revenue
Government revenue is entirely different from business revenue. Government revenue is the money received from various taxes and duties imposed by the government to meet out its expenditure in running the government and on spending in various development programmes of the country.
The receipts include collections from Income Tax, Goods and Service Tax, Sales Tax, etc. and from duties like Customs Duty, Excise Duty, Export / Import Duty, etc. The government revenue may also include income generated through financial and banking operations and through railways and tourism departments. All these are part of government revenue intended for spending on public works and for welfare of the country.

Association revenue (Social & non-profit organisations)
Association revenue is that type of revenue generated by non-profit organisations and public associations like cooperatives and NGOs. It is a fund created through non-business oriented activities for a common cause of the members of the organisation or for public welfare. The revenue generated includes membership fees of members, donations or charity fund received from outsiders and any financial help received from governments, etc. They may also generate revenue through sponsoring of cultural or any kind of programmes.

Concepts of Total Revenue, Average Revenue and Marginal Revenue
Now, let us study about another nomenclature of revenue terminology as total revenue, average revenue and marginal revenue.

Total revenue
Total revenue refers to the total receipts or income made in business during a period. It can be the whole income by way of sales of goods and services and may include other receipts also. But normally, it is treated as a product of total quantity sold multiplied by the cost of one unit of the product that is sold.
So, Total Revenue = Total quantity* cost per unit.
It can be represented as TR = Q*P where TR is total revenue, Q is quantity sold and P is cost or price per unit.

Average revenue
Average revenue is the value or cost of one unit of production or sales. Generally, businessmen arrive at average revenue by calculating the total expenses incurred by them in producing certain output which includes the value of their own minimum profit and other remunerations to staff and management. So this total expenditure is to be returned back to the business from the revenue that is received through sales. So, price is fixed by them accordingly. So, in most cases, the average revenue will be equal to the average cost of that product. Then only can they realise full production cost.

Average revenue is calculated by dividing the total revenue with the number of units sold.
Average revenue = Total revenue / total quantity sold
AR = TR/ Q where TR is total revenue and Q is quantity sold.

But, we have noticed already that TR is Q*P
So, if we substitute TR with Q*P, then AR = Q*P / Q = P. So, AR is same as P. This is applicable in most of the cases.

Marginal revenue
Marginal revenue is that amount of revenue which is received by sale of one more unit of the product.
Under normal circumstances, if cost or price remains constant, then Marginal revenue should be equal to Average revenue. But, mostly it is not so.
It is due to the fact that if there is plenty of supply, the prices will fall naturally. On the other hand, if there is short supply of goods, people tend to pay more for it than forego it. This is why the need for the concept of Marginal revenue arose.

Marginal revenue = P*(Q+1) - P*Q where P is the price or cost of one unit and Q is quantity.
So, MR = the revenue received by selling (Q+1) units minus revenue received by selling Q units.

For example, if a vendor sells each pair of slippers at Rs.100 per unit and suppose he sold 20 units on one day and 21 units the next day. So, the second day, he sold one extra unit. First day TR was 100*20 =2000 and second day's TR was 100*21 = 2100. His MR on second day is Rs.100.

Suppose he sold 20 units at a price of 100 on first day. But next day he was able to sell 21 units and earned only Rs.2080 as he had to sell extra pair at lower price. Then MR will be only Rs.80, because he earned an extra amount of only 80 (2080- 2000 = 80).

Some facts about Average Revenue and Marginal Revenue

  • Average revenue (AR) or Marginal revenue (MR) can increase or decrease depending upon circumstances.
  • If lesser quantities are produced, AR will increase as many costs are of fixed nature irrespective of quantity produced and so, price per unit will be fixed at higher rates. Contrarily, if more quantities are produced, AR will be lesser per unit.
  • Similarly, MR changes with changes in quantities at certain levels. If more units are sold after a certain point, the marginal revenue per unit will go on decreasing. If lesser quantities are sold than needed by market, then MR may increase per each unit sold.
  • Average Revenue is calculated as at a particular level of sales to know the average cost realised from sales and for comparing the cost price with sale price.
  • Marginal Revenue is calculated to study the impact of sale of each additional unit. It is used for controlling the quantities of sales to maintain price.
  • AR and MR will be the same as far as the seller is able to maintain the same sale price for any volume of sales.
  • If the seller is unable to maintain the same price for each levels of sales quantity, then AR and MR will vary.

Saturday, 28 November 2015

What is Cost and different types of cost in economics

What is Cost?
Cost is the value of inputs employed in producing an output. It includes the cost of materials involved in producing an output along with the labour charges, rent or depreciation of tools involved in producing the output, interest paid or foregone by employing capital and the value of efforts and sacrifices made by the producer in producing the output.

So, cost can be defined as the monetary value of all materials, resources and efforts involved in producing an output along with the value of time, opportunity foregone and risks involved in producing the output.

For example, you may take the example of a housewife preparing food or any particular recipe.

  • The housewife purchases provisions and vegetables, etc. 
  • She invests money in utensils and gas stove and gas. 
  • She labours in the kitchen for some hours to cut the vegetables, cook food and do other activities. 
  • She employs a maid for washing dishes and pays to her periodically. 
  • She sweats in kitchen instead of enjoying in the hall or her bedroom watching the TV or reading books. 
  • Further, she risks the probabilities of cutting or burning her fingers while working. 
  • So all these factors when taken in their monetary value, constitute the cost factor of the food that she prepared.
This is how the cost of any product is assessed. All these elements taken together, constitute the total cost of the product.

Types of costs in economics
The following are the different types of costs in economics signifying different aspects of the cost.

  • Total cost
  • Fixed cost
  • Variable cost
  • Average cost
  • Marginal cost
  • Explicit cost
  • Implicit cost
Now, let us have a look at the features of each and every aspect of these costs.

Total Cost
Total cost refers to the total amount of expenses incurred in producing the output which includes the monetary value of each and every aspect mentioned in the above example of housewife preparing food. It is the cost as a whole of the produce. So, total cost constitutes all the expenses incurred.

Fixed Cost
Fixed cost is a more or less lumpsum cost that is to be incurred irrespective of the quantity or quality of the product that is produced. It does not have any relation with the volume of output. For example, in the above illustration of housewife preparing the food, you can see that the stove is needed irrespective of the quantity of food to be cooked. Again, you need the utensils also for cooking. So, these are fixed expenses which are needed as a base for cooking the food. Again the risk factor and the the labour factor are also there which also constitute fixed cost for most part of it. So, fixed cost includes all salaries and administrative expenses including value of depreciation of assets during that period. These are compulsory expenses incurred irrespective of production.

Here, you should note one point. The fixed cost for smaller quantities of production may be high whereas if the production quantity gets increased, the fixed cost per unit may become less. With same fixed expenses, you can produce more quantities upto some limits.

Variable cost
Variable cost is variable in nature. It depends upon the quantities and qualities of the produce. If food is to be cooked for more people, the expenses increase and for lesser people, it decreases. If, you have to produce high quality food, you need high quality ingredients which are more costlier. So, the cost depends upon these factors.

In the above example of housewife cooking food, the cost of provisions and vegetables and gas consumption can change depending upon the quantity of food to be prepared. If you are cooking for four people, it will be less. But if you cook for 10 people, the total expenses will be much more. This is one variable cost example.

But, on the whole, you should note that the variable cost per unit of food may remain the same. Because, the same quantity of provisions and vegetables are required per head.

Average cost
Average cost refers to the cost per unit of production. It is derived by dividing the total cost with the number of units produced. Suppose in the above example of cooking food, if total expenses incurred are Rs.1,000 and the food is served to 10 people, the average cost per meal is 1000 / 10 = Rs.100 per meal. Or, if total monthly expense for cooking comes to Rs.6,000, then average cost per day is Rs.200 (6,000 / 30 days = 200). And, if 4 people eat per day, then average cost per head is 200 / 4 = 50.

Marginal cost
Marginal cost is the amount of  extra expenditure incurred per addition of one unit of extra product.

Say, for example, a guest visited your home and you cooked one more plate of meals for him. You had to spend some extra rice, dal and vegetables for him. Now, the value of this extra items is the extra money spent by you. All other expenses remained the same. Only you had to put some more effort in cutting vegetables, etc. So, in this case, the marginal cost incurred by is the value of those extra rice, pulses, vegetables and any other extra ingredient used by you. So, this is the notion or concept of marginal cost.

Explicit Cost
Explicit means clearly and physically visible. You are seeing those expenses clearly without any doubt or misunderstanding. You will be paying the amount, can get bills for them and enter the amounts in your records as proof of payments. In the above example, the cost of provisions, vegetables, utensils and payment to your maid are all explicit costs.

Implicit Cost
Implicit means implied or understood. They can not be directly experienced. You are not making direct payments to outsiders to prove those expenses. But, you can evaluate such expenses with the aid of the prevailing market value of such expenses.

In the above example of preparing food by the housewife, you can see that the gas stove and utensils are used for cooking. So, it is an element of cost. If you hire the same things from market to cook food, you might have had to pay some rent. So that much of rent is an implicit cost of the food. Or, you may calculate the depreciation and include that amount as an implicit cost.

So, whatever items you are using in production which are not directly and completely identifiable with production, and you need to calculate the value of those items through other means of calculation; those costs are known as implicit costs.

Saturday, 7 November 2015

Production Process and different types of production process

We have learnt that Production is one major economic activity employing land, labour, capital and entrepreneurship as its factors for achieving the production targets.

Now, what is production process? Let us understand how production takes place and what are the processes involved in production activity.

What is Production Process?
Production process can be defined as any kind of activity involved in the transforming of the inputs into outputs. It is the act of manufacturing or producing some output of economical value to meet the demands and needs of customers and consumers employing the various processes or techniques available.

  • Production process involves employing different kinds of tools that are known as transforming resources for achieving the production. Land, building, labour or manpower, machinery and managerial skills- all these are examples of transforming resources. They transform the inputs into end products.
  • Similarly, production process involves employing another kind of resource known as ingredients or inputs for achieving the production. These ingredients are known as transformed resources. For example, if it is a cement production process, the ingredients used are limestone, gypsum and ash which get transformed into cement.

Now, coming to different types or kinds of production processes, each process can be identified and classified based on many different sets of features.

A. Classification of production process based on the volume of production | type of market
This classification identifies the following types of production processes that can be chosen by you according to your feasibility to target specific customers and volume.

  1. Mass production process: In this process, the production is done in large scales employing extensive machinery and automated processes and it is not limited to any particular demands or orders placed by customers. You are able to produce different varieties and qualities of output on large scales, as most of the work is automated and there is continuous supply of inputs to achieve the output with the help of supervisors and technical teams streamlining all activities of production. This is also known as Flow Production Process. There will be different sections or departments of production staff overlooking and streamlining the activities from one stage of production to another stage of production, till the output is complete in all respects and put into the market for sale.
  2. Job production process: Job production involves taking orders from customers and producing the goods according to those job orders. It may include taking orders from different customers for different items or taking orders for a specific item of production. But, you will be producing only so much quantity as is ordered by the buyer or customer. For example, one hundred cupcakes for a wedding ceremony or four kinds of sweet dishes, 50 pieces each, for a birthday party.
  3. Batch production process: In this process of production, goods are produced in batches in a sequence according to your own set goals. If your target is to produce 4 kinds of items, each numbering 100 units, then, you will produce them one by one. First you will produce 100 units of item no.1, then 100 units of item no.2 and so on. Your attention will be concentrated on each item till it is produced completely. So, your machines and workforce are fully employed on each item of good till it is completed.
  4. Just-in-time production process: Just-in-time process involves producing goods or services as and when they are actually required. It may be similar to job production process. But, not exactly same. Job production is directly linked with your customers, whereas, just-in-time is related with demands or orders placed by your agents and retailers.

B. Another classification of Production processes based on the nature of functions performed
Production process can be classified according to the nature of function or activity involved in it. So this classification identifies production process either as manufacturing process, or administrative process, or selling and distribution process or as marketing process.

Manufacturing process
All activities directly related with the production of output are identified into manufacturing process.
For example, if you are producing bread, the activities of making sponge with wheat flour, then fermenting it and mixing the flour to make dough and baking the bread in oven to make the final product- all these functions are known as the manufacturing process of the bread.

Administrative process
Administrative process includes the procurement of raw materials and tools for preparing the bread, the planning of resources including finances for running the business and management functions, etc.

Selling and Distribution process
The actual selling functions including storage in godowns or selling outlets involving distribution of the finished products to the selling points and other related selling functions are all to be cited as features of selling process.

Marketing process
Marketing process involves locating the market for goods by identifying more profitable markets through surveys and analysis reports; promoting sales through advertisement and publicity; promoting the brand image of the product and the company and promoting the shares of the company, etc.

Saturday, 3 October 2015

Capital formation - One of the four basic economic activities

The four basic economic activities of any economy are interlinked and each activity leads to the other next activity.

  • Production of goods and services leads to and results in distribution of the goods so produced to their consumption points..
  • Distribution of goods to all corners of economy results in consumption of those goods and services in an effective way.
  • Consumption can be refrained at some point of satiety and then, the extra consumption capacity can be got diverted into investment for future stocks and capital formation.

So, you are able to see how one activity leads to the other activity.and how they can be interlinked.

Now, coming to capital formation, It can be defined as creation of capital- either working capital or fixed capital- by way of purchasing new stocks or plant and machinery or through increasing the present levels of capital. It can be treated as new investments in business or the yearly increases in present stocks or working capital.

The creation of capital or capital formation refers to the net worth of assets after meeting out liabilities. It is the balance value of additions to capital by way of deducting all liabilities from assets.

Decrease in the expenses and in present consumption leads to excess of income and excess of stocks of produced goods and services. So, whenever there is more production and lesser consumption, it leads to capital formation. So, the restraint from present consumption and generation of savings are the major sources of capital formation. The overall production is either consumed or used for creating capital.

Understanding capital formation process

  • Whenever you refrain from present consumption and save your money, it gets deposited into banks generally.
  • The banks in turn lend that money to producers or invests the money in shares and equity funds. 
  • This investment again is used by the producers and businessmen to purchase machinery and equipments and in starting new ventures or to increase the present production levels. Increased production is possible because of this extra income or savings utilised positively by producers. 
  • This will again boost the economy and can increase both income of workers and also the consumption levels. 
  • Increased consumption is a sign of elevated standard of living and symbolises a developed economy.

Increased consumption should not mean that whatever you are producing is consumed entirely. When the production of goods and services are much more than requirements, and since you are having more money to spend in developed economies, it is possible that you can consume more things at relatively affordable prices and still save sufficient money. So these savings again create capital formation.

Capital formation takes place when these savings are deposited into banks and used for investments in shares or for financing the producers. If the savings are kept idle at home, then no capital formation can occur. So it is important that idle funds are utilised for producing more goods and services to be considered as contributing to capital formation process.

Sunday, 13 September 2015

Consumption of Goods and Services and its effects on economy

Consumption is the 3rd basic economic activity of any economy that follows after Production and Distribution of goods. In some cases, consumption may not necessarily require to go through the intermediary process of distribution, as in the case of a roadside eatery, where food is produced and consumed immediately with no intermediary.

Consumption is the act of using up something. Economically, it is the usage or utilisation of goods and services that are being produced. Whatever goods and services get produced, we use them up for satisfying our needs - let it be our immediate need or some future need. Either way, it is the act of consumption. So, whenever we are eating at some eatery or restaurant, or purchasing some provisions, clothes or other household and electronic goods, all these are counted to be acts of consumption. Similarly, consulting a Doctor, availing hospital services, legal services or salon services - all these acts are also adding to the concept of consumption function.

Types of consumption
Every consumption does not lead to immediate satisfaction of needs.
  • Some portion of the consumption adds to storage and future utilisation of those goods. For example purchasing a bag of rice and other monthly or weekly purchases. These items are consumed throughout the month or week.
  • Some items of consumption are used for longer durations of life like electronic goods, furniture and other equipments which are utilised for years.
  • Many items of goods and resources are procured for using them in manufacturing other end products. This consumption can be termed as industrial consumption. Industrial consumption leads to production of many goods and products that are again utilised by end users or intermediaries. So, it is a chain of consumption.

Limitations of Consumption
There can be some limitations to consumption as it is dependent on other circumstances that are inter linked with it. 
  • An individual's income determines his consumption. As the income is limited in nature for any one person, he can spend only a certain amount of money to purchase things or services. So, his consumption is limited according to his income.
  • Availability of goods also determines or affects consumption function. You may be wanting to buy something, but it is not available in your region or presently not there in stock. So, you are unable to buy it and should look at other options or go without it.
  • Ignorance of knowledge also affects consumption, as you are unaware of some goods in market and so do not think of purchasing them.

Bad effects of Consumption
Consumption, if uncontrolled, can lead to many worst situations of economy.
  • Consumption makes goods and services out of stock sometimes.
  • Consumption can dry up the resources of economy thereby depriving the future generations of their resources.
  • Consumption can make governments depend upon other countries for goods and resources thereby tilting the balance of payments position negatively.
From the above facts, we are able to see that our needs and wants require to be controlled and balanced by curtailing unnecessary consumptions of goods and resources. Then only can our economy prosper.

Wednesday, 26 August 2015

Distribution of Goods and Services as one of the basic economics activities of man

Distribution also is considered as one major economic activity in addition to the three basic economic activities. It is the activity that comes after production and its job is to distribute the goods and services that have been produced during the period to their points of consumption. Goods produced does not get consumed in the local market of your region itself when productions are on large scales. So, the goods need to be transported to all corners of the market depending upon their requirements. First of all, you may need to create awareness in the market about your produce so that people come to know of it and demand it for their requirements. This involves publicity and advertisement. Then, you need the transporting facilities and storage facilities also for the goods till they get consumed.

So, distribution of goods and services involve these following major activities.

To get requirement or demand for your goods, the public should be aware that you are producing so and so goods and/ or services. This can be achieved through advertisements in all leading newspapers or broadcasts on Radio and TV. Further, awareness about your products as to their quality and functions also need to be publicised through distribution of pamphlets and TV advertisements. This will make interested people to demand for your products.

When you receive requirement for goods, you need to transport them to the required places. This can be done either with your own fleet of vehicles or through public transportation facilities available like carriers, couriers, railway freight services, cargo services, etc.

Distribution of goods may require storage space and facilities also for storing the goods at destination points or even at intermediary points till actual consumption takes place to protect them from heat and rain. You can't ship each and every requirement separately, since it will be not economical and may delay the supply also. So, storage occupies an important role in the distribution of goods.

So, from above analysis, you can see that distribution of goods is a very complex economic activity involving publicity, transportation and storage of goods also and it needs to be considered as the second major economic activity after production.

There can be exceptions, in which case there may not be the need of this distribution activity taking place. For example, food consumed directly at small roadside eateries, a hair-cut in the saloon, etc. where there is no involvement of distributing activities. It is a case of direct production and consumption.

Thursday, 6 August 2015

A study of the basic economic activity - Production and factors of production

Production is one of the basic economic activity. 
  • Production can be defined as the conversion of resources or raw materials with the help of other inputs into usable goods and services.
  • It is the process of making / producing or developing user friendly goods and services employing or utilising the various means and resources that are available in an economy.

Man can not consume goods in their raw form in most of the cases. The raw materials and resources need to be processed and tamed in order to be consumed. For example, production of cars, buses, trains, etc. require the steel to be first mined in its raw form, then burned, molted and moulded to give shapes. It requires engineering skills, labour force, finance capital for purchasing the steel and machines/ tools, and for payments to labour, etc. Further it requires the skills of efficient management for controlling the various processes as well as efficient usage of inputs.

So, production implies utilisation of resources as well as the other input factors of production. Here one should notice that only those inputs which become a part of the output or those that are consumed and used up during production process are to be treated as the factors of production..

There are four major factors of production without which you can not carry on the production activity. They are-
  • Land,
  • Labour,
  • Capital and
  • Entrepreneurship. 
Now, let me give a brief account of these factors of production as to their importance in production.

Land is one important factor of production. Land is used for cultivation to grow all food grains, vegetables and other trees and plants. The fertility of soil gets used up here in production. Again, land contains rivers and lakes which provide the water for our consumption, besides being used for fisheries and internal transportation purposes. 

Land is the base for all our minerals, oils and other resources. We mine them, process and use them in producing various goods and products that are consumed by us or further used in production of many other different varieties of goods.

Labour is required to do all physical tasks as well as skilled operations in order to produce something.
Purely physical labour includes lifting of weights, ploughing of soil for agriculture and other unskilled jobs like helpers and servants.
Skilled labour requires special talents in the field through education and training like teachers, doctors and engineers.
All of these professionals aid to the production of goods and services as their time and energy are consumed in the process.

Capital is one more important factor of the 4 factors of production. You can't do any business without capital. Production requires the accumulation of resources which are procured by paying money or equivalent before starting any production. So, you have to invest capital before starting the production or establishing any kind of business.
Even after accumulating the required resources, you have to pay for the services utilised of land, labour and other intermediary activities before you may start earning income or profits from the business. So, capital is one important factor of production.

Even after all your resources and inputs have been procured to start your production, you need some managerial skills and talents to run your production process. You need to organise everything in a systematic manner to enable  production. You need to know what to produce, how much to produce and the inputs required for the output. You should be able to calculate and predict things prudently and efficiently in order to produce maximum output with the available limited resources in order to succeed. So, entrepreneurship plays an important role in production and you can't ignore it. 

Sunday, 2 August 2015

About Four basic economic activities

Any economy is a result of and is always engaged in four basic economic activities to sustain, develop and prosper itself. They are:

  • Production,
  • Distribution,
  • Consumption and
  • Capital formation.
These are the backbone of any economy. These economic activities create the wealth and purchasing power for economy. They lead to capital formation also. 

We can't consume most of the goods in their raw form. It requires processing, refining, shaping, mixing, tanning, manufacturing, cultivating and many other procedures to make the resources consumable by human beings. All these are done through production. So, production utilises the available resources to produce the required outputs to meet the needs of people. We always need production to satisfy our needs for existence.

Distribution involves in the passage of goods and services from one hand to the other or from producer to consumer through exchange or transfer. It involves intermediary agents also in the process. It may include bequeathing of assets, transfer of charity funds, subsidies and free social welfare services, all that imply economic values.

Consumption is the result of our desires and wants and it requires the goods that are produced to satisfy its urgency levels. So, consumption implies production in most cases. There are very few uneconomic goods that can be satisfied without production activity like free water, free air.
Consumption is an unending activity. We always need something to satisfy most of our recurring wants on daily basis. So, there will be an unending consumption activity in any economy at any given point of time. It is a continuous process which again requires continuous production of goods and services.

Capital formation takes place when large quantities of goods and services are produced which may result in accumulation of stocks and wealth. Further, production uses the factors of land, labour and capital resulting in wealth distribution to these factors in return for their use or services mostly in the form of rent, wages, interest and any other form of income. This income is used for consumption and balance income is again reinvested in assets and stocks to form capital for future usage.

So, you are able to see that there are four basic economic activities in a society which impact the economic position and development of any economy in our world..

Let us have a deeper look into each of these activities in our next chapters.

Friday, 19 June 2015

Allocation of Resources and other major economic problems

Why allocation of resources is important?
The problem or need for allocation arises due to two facts:
a) that resources are not sufficient in any economy and 
b) each resource or factor of production has varying uses. 
So it becomes necessary to efficiently utilise the available resources to their best possible results by choosing among their varying uses and combinations.

It is a known fact that no economy can be fully equipped on its own in meeting out all its demands or in satisfying all the needs of its consumers. Wants are innumerable and varying. Different wants need different products or services to satisfy them. And they require necessary resources or inputs for producing those goods and services. But no country can produce on its own all the services and goods required by it nor do they possess all the resources required for producing them. Each one has to depend on its neighbouring state for something or other of its needs and resources. So, a best economy is one which tries to meet all its needs through a better management and efficient allocation of resources to their best and utmost use, thereby depending very rarely on other countries.

As we know, allocation of resources to their best optimum uses is a very great challenging problem. For this purpose you should collect vast details of the nature of resources and their varying qualities and probable ways of using them for producing the required goods and services to obtain maximum beneficial results.You should think in terms of whatever combinations of resources can be tried upon to produce the required maximum beneficial results.

The major economic problems faced and dealt with by any Economy are as follows:-

1) Availability of resources
What are the resources available in the economy? Does the economy have sufficient stocks of all resources required in producing its goods and services? Water, power, minerals, fuel stocks, land and man power are some of the major requirements for producing any goods or services. Does the country possess all these resources? To how much extent it has these stocks?

2) Locating the needs and wants of consumers
For producing goods and services, you should first know about the needs and wants of people and the quantum of those demands. Only when you know about locating the needs and wants in marketing, can you start thinking of allocating the resources for their production. Then you will come to know of the gaps between needs and available resources.

3) Knowledge about ways and means of producing goods and services
Once you know about the demands for goods and services, you will get a picture of what is to be produced. Then, you should think of the ways of producing the goods and services that are needed.
You should ponder over different methods of producing goods and services by using different combinations of resources. A same product is produced using different combinations of materials, labour and power. So, you should decide about the combinations possible.

4) Locating priorities for production
You should think about preferences in the order of producing goods and services. Which goods and services need to be produced with more emergency and importance over others? And which class of consumers or regions of demand need more attention than others? You must decide whether you feel food grains and medicines as more important than beverages, garments and electronic goods or vice versa.

5) How much to produce of each item?
Then, you need to decide upon how much of each particular item to be produced considering the repetitive demands for many goods and services on regular basis due to the recurring nature of wants. For example food and water are recurring and continuous requirements. So, they need to be produced in vast quantities. Cars and bikes are not so much demanded and so produced in lesser quantities. Even among cars certain models and brands are too costly and not demanded by many. So, you have to know how much to produce of each item. Research on which item requires to be produced more and which in lesser quantities.

6) Factors of Production and choice making
We need to make decisions regarding which factor of production is to be used and in what mix ratio. For example, farming can be done on a land either by using manual labour or with the help of mechanised process. Water can be supplied by digging bore wells or by supplies through river canals or even through water tankers. So, you decide the means of production.

7) Dealing with scarcity of resources
How to deal with the problem of scarcity? There two ways of dealing with scarcity as mentioned below.
  • Scarcity leads to choice among available alternatives and also in full utilisation of available resources. So, you can minimise the bad effects of scarcity of resources by choosing the right product or service at the right time that fits into your most urgent needs and demands. By doing so you are further able to put your resources in use to their full satisfaction/ utilisation level. As a consumer, you will buy what is more important that can give maximum satisfaction to you. As a producer, you will produce those goods and services that are most demanded by consumers and which result in most perfect combination of resources thereby increasing your profits also.
  • The other solution to scarcity is growth of resources. Inventing new fields of resources by continuous research and experimentation. Any kind of resource like land, labour, mines and capital are always prone to expansion through continuous explorations.
So, these are some of the major economic problems faced by any kind of economy which need to be given utmost attention, whether it is capitalist, planned or mixed economy. Allocation of resources to their best combinations and utmost uses along with efficient management of resources by using them to their full extent and contributing to the growth of resources are some of the best ways of tackling this problem.

Thursday, 7 May 2015

What is Economy? Understanding its relevance in Economics & Types of Economy

What is Economy?
Economy is a system or organisation, wherein, economic activities take place. It is a man-made system for facilitating the satisfaction of the various wants and needs of human beings that can be achieved through generation of income and production and consumption of goods and services.

How does Economy come into existence?
Economy is created by man to facilitate his existence in the society. Man needs to satisfy his wants in some way or another to maintain his existence and for this he needs a system of economy to get a living.

In primitive world, there was no system of economy and man used to satisfy his wants randomly on his own. He plucked fruits or dug edible roots from earth and  hunted birds & animals to satisfy his hunger. He used to live at water resources to satisfy his thirst. He covered himself with leaves to protect from heat, cold and rain.. He never thought of the need for economic institution nor did he possess such kind of knowledge.

But, gradually, he learnt about exchanging his goods with items available from others (known as barter system) and then invented coins and currency, production, distribution and consumption  to satisfy his ever growing needs. Slowly, he started learning about saving or economising the goods and resources as population started increasing and natural resources appeared to be not enough in satisfying his needs. He invented other means like improved farming, manufacturing, marketing, professional services etc. to earn income and exchange things with others and thus modern economy and economic systems came into existence.

Some notable features of an Economy
  • Economy or economic system is manmade to get his living.
  • Economy is always susceptible to changes.
  • Economy differs according to geographical, cultural and available natural resources.
  • Demand, Production, Consumption, Saving and Investment are the important activities of an economy. 
  • The producer and consumer can be the same person in an economy as whatever produces, he consumes also.

Purpose of Economy
The purpose of any economy is to satisfy human wants though interaction among people. It is a process of bringing the services and goods within the reach of consumers through different activities of production, supply and consumption with the help of available resources and factors of production. The involvement in these various activities generates income to those factors. But, any economy is bestowed with limited resources only for performing these activities. The available resources are either scarce or not known to us. May be they are not fully discovered and utilised. So, those economies which utilise the resources to their utmost use become more developed than others who are unable to use them more perfectly. Thus, we see variations in economies.

Three Types of Economy
Broadly, there are three types of economy known as Capitalism, Socialism and Mixed Economy. Let us look at the salient features of these economies.

Capitalist Economy
  • Under capitalist economy, the producers are free to take their decisions without any interference from government mechanisms.
  • They own the properties and resources acquired by them. There are no restrictions as to ownerships and boundaries.
  • Profit earning is the main force driving the capitalist economy. Producers are interested in increasing their profits and consumers are interested in availing utmost satisfaction.
  • But, capitalist economy has the drawback of monopolising the markets.

Socialist Economy
  • Under socialist economic conditions, the common cause of society is considered as more important factor.
  • The government interferes in all matters and sets norms and guidelines for producers and businessmen.
  • All resources are owned by government in the interests of public and they are allotted to producers and manufacturers according to some procedures and laws established by the government in the interest of public.
  • Social welfare is the main goal in this kind of economy rather than profit motive.

Mixed Economy
  • This is a mixture of capitalism and socialist economy. The good features of both economies are combined together to form mixed economy.
  • In this mixed economy, both private and public participations are there.
  • More essential resources and factors of production along with activities of business are controlled by government in this type of economy by creating public enterprises and corporations.
  • Price mechanisms are controlled by government, fixing prices of essential commodities and controlling hoardings and black marketeering, etc.
  • Annual plans and long term plans are made by government to control all financial and economic activities.
  • This mixed economy is a good type of economy for the development of society, if properly employed by both government and businessmen honestly.

Economy and Economic Development
Economy of any place gets identified by its being developed or undeveloped or underdeveloped natures. So, economic development is the standard of measurement for identifying economies at any given time.

What is Economic Development?
Economic development refers to the all over growth of economy in general. It means that the people living in that economy are enjoying a good level of standard of living by being able to earn ample income which satisfies almost most of their wants. Some of the salient features of economic development include the following.

  • It is not simply limited to a mere growth of income and standard of living. 
  • Economic development implies that people are living a better life in every aspect of life. 
  • There is reduction of poverty and unemployment and diseases. 
  • The gap between rich and poor gets narrowed with more opportunities created for earning of income and acquisition of wealth made accessible to poor also.
  • There will be control over population growth and and hygienic conditions of environment.
  • The overall expenditures of public and governments will be within the limits of available income and resources of income.
  • A state of improvement in technology and trade relations has been achieved.

Three states of Economy based on their development
Based on economic development, economies can be classified into developed, under developed or developing economies. Let us have a look at the features of these economies.

Developed Economy
A country that has attained most economic growth and is enjoying comparatively good standard of living and better quality of life with higher per capita income, is known as a country with developed economy. Such countries have higher standard of education, better amenities, higher mortality rate, etc. Factors like GDP or Gross Domestic Product, Gross National Product, use of advanced infrastructure and level of industrialization are indicators for developed economy. Countries like USA, UK, Germany, Japan, Australia are some of the examples for developed economies.

Under-developed Economy
Countries with poor growth and poor standards of living are classified as under-developed economies. They are characterized by very low GDP, low per-capita income, poor standards of living, poor amenities and low mortality rate. But most of these countries have now moved to the class of developing countries.

Developing Economy
This group constitutes of all those countries that are still developing but have moved out of the Under-developed category of economy. These countries are characterized by continuously dwindling statistics of growth and standards of living, major disparities and wide gaps economically between different classes of people and regions. The resources do not get fully utilised or tapped in these economies. Countries like China, India, Pakistan, Sri Lanka, Brazil and Mexico are among a long list of developing countries.

Saturday, 11 April 2015

Characteristics of Human Wants

As discussed earlier, human wants are those desires which are backed by some purchasing power of man. Now, these human wants have many characteristics of their own and different levels of satisfaction capacities. Let us look at some of these characteristics of human wants.

Wants are Unlimited in Number
Just like desires, wants are also unlimited. If you satisfy one want, another want arises and it is an endless process. But your resources are limited and so, you can not satisfy all your wants. Ultimately you will satisfy some wants of most urgency and postpone the others for a later period.

Some wants are Recurring in Nature
Many wants need to be satisfied again and again at certain intervals. For example hunger needs to be satisfied again and again for 3 or 4 times in a day. Maintaining a good look of your face and head require periodical hair-cutting, shaving, applying lotions, creams and face powders, etc. All these are examples of recurring wants.

Wants are Satiable
We find that we are able to satisfy all our wants that we try to satisfy at any point of time. At any given point, we satisfy each single want to its full extent. We are able to satisfy hunger, for example, by consuming a plate of meals or two or utmost by three plates, say. Like wise, we satisfy thirst by drinking one glass or two or three glasses of water for that particular occasion. So, wants get satisfied to their full extent at any given point.

Wants are sometimes free wants (Economic and Non-economic Wants)
Some of the wants get satisfied without having to pay anything in return. For example, air, water, sunlight, nature's beauty all these are free wants. We need not pay anything to satisfy these wants. But, with time, they may become non-free items: we pay for bottled water, oxygen cylinder and the like. But, basically, some of these wants are free and known as non-economic wants; while other paid wants are classified as economic wants.

Present Wants have an edge over Future Wants
Most of us give more weight at satisfying our more recent and present wants and postpone the future wants due to the reason of limited resources available with us in satisfying our wants. So we give more importance to our present wants and satisfy them first.

Wants change according to place and time and person to person
Wants depend upon your place, tastes and likings and on time also. Different people have different wants in different environments. They depend upon culture, civilisation and time and age.

Wants change with Economic and Technological development
Advancement in economy and technology affects the wants greatly. Previously, we used to want for a Radio or a Telephone set. But now most of us, if not all of us, want to possess a TV set or mobile phone as our basic requirement. This is due to progress in economy and technology.

Thus, we are able to see that Wants are capable of different characteristics and have variant satisfying levels according to circumstances and environmental factors.

Human Wants, How they differ from Desires and their Satisfaction

Here, I am giving some basic knowledge and facts about desires and wants and their satisfaction. To know about Human Wants in Economics and their characteristics, we should first know about the difference between wants and desires and be able to distinguish the wants from desires.

What is Desire
All human beings have Desires. They are just like some natural instincts or longings. We desire to be rich, to be healthy, to be happy and reach to a high status and position in society. We like to live in posh bungalow, own a car, dine in 5 star hotels, wear stylish apparels, own huge bank balance, travel in air, so on; it is an endless list.These are all desires and can be had by any person. Desires and dreams are fantastic things. They can be had at any of the oddest occasions also because they need no price to be paid for having them.

Human Wants
Now, coming to wants. Human Wants in Economics are desires that are supposed to be backed by purchasing capacity. You can not fulfil all of your desires at any case. You should have money or some purchasing power to get your desires accomplished. So, a desire becomes a want when you think of achieving it and try to satisfy the desire with your purchasing capacity. You will try to earn some income or possess wealth in order to satisfy them.

Difference between wants and desires
  • Desires are natural instincts which start even from birth. Wants are developed from these natural desires, while man grows on along with his earning capacity and purchasing power.
  • Desires do not require purchasing power for their existence. But wants require to be backed by some purchasing power.
  • Desires are infinite in number. They keep on growing always. Wants are also innumerable, but they often develop with your growing capacity and environmental conditions.
  • Most of the Desires are left unsatisfied. But, in case of Wants, most of them get satisfied during your lifetime. 

How do Wants get satisfied?
Wants are satisfied by way of acquiring and strengthening your purchasing power. You earn income and accumulate purchasing power to satisfy all your wants.

  • Wants get satisfied in two different ways. They are satisfied through consumption of goods or utilising the services of different service providers.
  • Purchasing a house, car, clothes, food, etc., are examples of some wants satisfied with goods. 
  • But these goods alone can not satisfy your wants. You will further require the services of a doctor, a hair cutter, a washer-man, a housemaid and many other professional men for satisfying some of your wants.
  • Again,wants are satisfied with the backup of resources. So, you can satisfy wants as long as the resources are there, not after that.
  • Some wants get satisfied with a single consumption whereas many other wants need recurring and regular consumption, like eating food, wearing clothes, shaving, hair-cutting and others.

Sunday, 29 March 2015

What is Break-Even-Point?

Break-even point refers to an optimal level of business activities of any firm where cost of production and price match each other. It is a stage where there is no profit or loss in the business. Total revenue matches with total costs.From this point, you can reach towards profit by improving your operations efficiently or, on the other hand, may incur losses due to mismanagement and defective planning.

Definition of Break Even Point
Break-Even-Point can be defined as a point in business scale where the value of total costs equal to total sales or revenue at any point of time. It is a point where expenses equal to income and there is neither profit nor loss in the operations of business. The operations of sales and production of the business break even at this point in a curve or lines joining the costs and revenues.

Importance of Break-even point
  • Break-even point is very helpful in calculating the minimum level of output that is to be crossed to make profits in business. Or, in other words, you can know about the minimum sales that are required to be made to meet out all expenses and make an extra unit of profit.
  • The business man is able to know the minimum number of units required to be produced and sold to level both his fixed costs and variable costs so that with an extra unit sold he can start making profit.
  • So, break-even point calculation can be used by management in setting the prices of products and in determining the minimum sales target to be achieved by them.
  • Further, it is very useful in controlling your fixed costs as you are able to know the impact of fixed costs on your performance level.
Calculation of Break-even Point
Break-even point is calculate with the assumption that Total Cost= Total Revenue or income.
Now, total cost includes both Total Fixed Cost and Total Variable Cost.

Total Fixed Cost is your fixed expense which more or less remains the same. But Variable Cost is related to number of units produced. So Total Variable Cost depends upon your production and sales quantity. So, let us assume that Variable Cost multiplied by the number of units gives you the Total Variable Cost. If Variable Cost is V and number of units is X, then Total Variable Cost = V*X (Variable cost multiplied by X units).

Let Total Fixed Cost be TFC. and Total Revenue be TR. But TR is Price of product multiplied by number of units produced or sold. So, let TR be equal to P*X (Price multiplied by X units)

Now, Break even point or BEP will be equal to TFC + VX = PX or to change the position,
TFC= PX- VX  = X (P-V)

To deduce the number of units required to be produced or sold, the equation will be
X = TFC divided by P-V

If we give values to above concepts:- Suppose TFC = 1,000,000 and P is 100 and V is 60.

From above formula of X = TFC/ (P-V), so, 1000000 divided by (100- 60) ie. 1000000 divided by 40.

So, the number of units required to produce and sell is 25,000 units. This is the Break-even production or Break-even sales to be achieved in order to realize the full expenses incurred by the business.

Benefits of using Break-Even-Point concept

  • By using this method, you are able to know the production and sales targets to be achieved by your business during any period of business.
  • You can control the costs and production levels according to your available options to achieve maximum benefits and to reap profits.
  • In the above example, if you feel it is difficult to achieve the production of 25,000 units, then you may consider other options like reducing your Total Fixed Cost or reduce the Variable Cost or you may even consider of increasing the selling price of your product to meet the expenses.
  • You can plan your future plans and build budgets and projects with the help of this break-even method of concept.

Limitations to application of Break-Even-Point
There are some limitations in applying this method as it is based on some pre-assumptions.

  • Break-even concept assumes that Fixed Costs are constant. But in actual cases, fixed costs also change when there is large scale increase in production or sales as you require to employ more staff and hire more space for increased activities and many other expenses also increase.
  • This concept again assumes that variable cost is constant during the entire period of application of this concept. If there is any slight variation in the variable cost during the period of application, then also, the entire calculation will become useless and all predictions will go wrong.
  • This method does not take into account the stock of inventory as it assumes that production quantity is equal to sales quantity.
  • It further assumes that in multiple product companies, the mix ratios of production are equal to the mix ratios of sales. It considers that the relative ratios between different products are maintained same as that of sales.

Wednesday, 11 March 2015

Marketing strategy & techniques -Three stages of Marketing Strategy

Need for strategies
As I discussed earlier in another chapter, marketing applies both scientific and artistic approaches towards creating customer base and selling your products. Selling your product requires a great deal of wooing your customers. Gone are the days, when the businessmen used to simply keep their shops open and wait for the customers to come and exchange your goods for their money. There is much competition now and nobody will approach on his own to buy your product unless you attract him with your Marketing Strategy.

So, selling your product requires use of alluring and effective strategies so as to attract buyers and establish your market. Marketing Strategy is aimed at increasing your sales and promotion of your business. It is a package of the plans and techniques employed for establishing and promoting your business. It involves use of many different techniques at different levels of business. Before starting business,you need to find out the tastes of buyers and locate your prospective buyers and the areas for your market. Then, you need to advertise your products and services, give discounts and incentives to create market for your goods and establish your strong hold in your area.

Apply strategy according to your business
Different types of products or different areas of market require different marketing strategies typical of their own markets. So strategies can differ from product to product or from area to area. Agricultural product requires its own typical strategy and electronic product requires its own strategy for marketing. Similarly, more advanced cultures need their own typical strategies whereas rural culture has its own strategy for marketing. So, each strategy applies its own marketing technique to promote its business. But overall, the principles are the same. We need to find out our market and prospective buyers. Then we establish our business choosing the products and areas of operation according to the requirements. Then it involves in retaining the customers with incentives so that they may not shift to other products and sellers.

Three stages of applying Marketing Techniques 
Any type of business involves three stages of your Marketing Strategy for setting up the business and its market. These stages are as follows:
  • Locating business opportunities and areas before starting business through study and research.
  • Promotion of business after setting up your product and market.
  • Retaining the market base and customer confidence through good quality, after sale service and support.
All these three stages of business require employment of appropriate and efficient marketing techniques. Let us study the techniques employed at each of these stages of business.

Techniques employed before establishing business
  1. Conduct research to study the culture and tastes of the area where you want to establish your business. This will let you know what options are available for you to trade in and you can choose one that is most suitable to you. For example, if the people are more cultured and like fashionable dresses, advanced electronic items or continental foods, you can choose one of these items as your business.
  2. Know about the resources available for procuring or producing your goods and about available transportation facilities for conducting your business.
  3. You need to keep knowledge of the local laws and restrictions that are in effect in your business area to protect yourself from any later complications. 

Marketing Techniques to be employed after business commencement
  1. Ensure good quality of your products. Your product should be preferred by customers as a better one in comparison with other sellers. Then only will they come to you.
  2. Pricing to be done reasonably. Fix your product price at a reasonable level which can be a bit lesser than other traders so that customers get attracted by the low price. The difference need not be much. Even a fraction of 1% can attract more customers to your product.  
  3. Ensure continuously ready availability of your products. If customers do not get whatever they want readily available at your store, they will look for other shops and you can lose your customer base.
  4. Promote your business through various methods like distributing pamphlets, erecting posters and banners at different places of your area so that people come to know of your business. You can advertise through TV channels and by placing advertisements in news papers also. Showing a celebrity using your product can be a more effective tool of publicity for your product. Sometimes using sex appeal also works out to great extent. These are all publicity stunts for growing your business.
  5. Make your on-line presence felt by maintaining a website and posting the salient features of your business and all your products there on the website. This will facilitate the prospective buyers to find out the sellers of their products easily.
Marketing Techniques for retaining, evaluating and improving your customer base
  1. Best technique to retain customers or attract more customers is to offer some value added services and discounts to regular customers. Offer some discount, or a coupon or a reward points card to allure and satisfy the regular customers. They get pleased to know that they get points or discount coupons every time they shop with you and they turn around more frequently to enjoy this satisfaction.
  2. Offer free appraisal and usage/maintenance tips on your products. Let the customers know some important features and facts of your product which they do not know. Also instruct them how to use and maintain the product for yielding longer life benefits. This will make them more confident about your products.
  3. Another most important technique to be employed in business is packaging and brand image of your product. A nice package with good design and appealing colours will enhance your product. They get associated with your brand image as an identity for good quality. 
  4. Ask for feed back from customers to know their opinions about your products and services. Thereby you can know about the likes and dislikes of customers, why they are choosing your product instead of others and how you can improve your quality to satisfy them. This will always help you in improving your business and growing your customer base.
  5. One more technique is to interact with customers in a cool manner when they come to you or are on-line. Applying gentle manners and sweet voice enhance your image in their minds and creates a great image of your business and goodwill among customers.
  6. Sometimes adding new items to your business can keep customer base intact and also create new customers.
  7. Finally, be prepared to adopt yourself to the changes in tastes, culture and technology.

What is Marketing? Differences between Selling and Marketing

Marketing is the process of creating market for your products through selling and business promotional activities. It is a kind of creating communication between prospective buyers and sellers/ producers of goods and services.

But selling is very limited in scope. It aims at simply selling the product without caring for the quality assessment and customer care.

Definition of Marketing
Marketing can be defined as the process of communicating the value of a product or service through promotional activities and brand building, thereby creating a customer base for the business.

It is a set of activities employed by a company associated with the buying and selling of goods and services including consumer research, advertising and selling till the point of delivery of goods to the ultimate consumers.

Marketing process employs both scientific and artistic approaches for selling of these products. Scientific approach because it indulges in the study of market conditions and research of customer tastes and product quality. Artistic because it needs to be appealing to the senses of customers. It employs the 4 P's of marketing - Product, Price, Place and Promotion. These 4 P's determine their marketing activities. The ultimate goal of marketing is to reach to the customers with an aim to satisfy their needs and maintain a long term relationship with them.

Why Selling is Different from Marketing?
Now, coming to the discussion of differences between selling and marketing concept, let us look at the salient features of selling activity and marketing activity by comparing them through this below table.

Differences between Selling and Marketing

Narrow minded
Limited in scope
Unlimited scope
Engaged in simple selling activities
Involves customer creation, selling and business promotional activities also
Sole purpose is profit making
Thinks about customer care, social cause and product quality also
Operates in a limited area
Engages in widespread areas
Limited staff engagement with a sole proprietor as owner
Employs huge staff of marketing and sales managers and selling agents and sales staff
Proprietor himself oversees sales
Marketing manager is head for marketing activities
Selling is done simply by sitting in the shop
Marketing involves field study and field work
Customers come on their own needs
Customer base is created by wooing them

The above are some of the major differences between Selling and Marketing activities.
So you are able to distinguish now the differences between selling and marketing concept and thereby understand that selling is a component of the wider field of marketing.

Friday, 20 February 2015

Inventory Management Techniques

What is Inventory Management?
Inventory management is a process of managing and supervising the procurement, usage and maintenance of inventory (purchases and stocks) for benefit of the business. It is not a simple observance but includes efficient control and streamlining of the purchases, issues and storage of the goods with prudence and smart decision making skills.

Inventory management involves application of some efficient tools and techniques for a better control of the inventory.

So let us have a look at some of the most important tools and techniques employed in inventory management.

Employing Economic Order Quantity technique
I have already discussed about this method- what is the definition and method of applying this technique through the calculation of Economic order quantity as an equation of EOQ= square root of [{2DS} / H ] 
So, you can refer to that article for detailed understanding of this technique.

Applying ABC Analysis of Inventory technique
This is another popular method of inventory management. It is a kind of Pareto analysis applied in any type of business or studies conducted to categorise suppliers, customers, staff, places or activities into different groups of importance for dealing with them accordingly. ABC analysis of inventory implies the following steps and features.

  • In this technique, all items of inventory are categorized into 3 major groups of A, B and C according to their importance and significance for the business.
  • "A" group items are of most important significance as they constitute mostly costly and critical items for the running of business. 
  • C group of items are of least important and of very low cost items. 
  • B group consists of medium importance of items for running the business.
  • Once all items are categorized into these three groups, the top management can concentrate more on the A group of inventory and other groups of inventory can be managed at lower levels of supervisors.
  • This will enable more efficient control of inventory and thus minimise the costs and losses.
  • Generally "A" group items may constitute 10% to 20% of total number of items in quantity or to identify in value they may be about 60% to 70% of the total value of inventory.
  • "C" group items can be of 70% in number to the total quantity of items and may value less than 10% of the total inventory value.
Fixed Order Quantity technique
This fixed order quantity model technique can be applied mostly for high costly items like most important spares for plant and machinery without which your plant will stop running. So, you need to keep some stock of these items for emergency purpose. You may study the past trend of consumption for such items and estimate your requirement for a particular period, say one year. Then you will place order for these items irrespective of immediate requirement and keep them in stock.

Fixed Time Order technique 
When fixed time period inventory model is applied, you will be periodically placing orders at given intervals of time without waiting for requirement indents placed from departments. You will be fixing the intervals according to the consumption levels per week or month of these items, which mostly constitute general regular usage items of small values. These items will constitute mostly of tear and wear or use and throw items.

Cycle Counting technique
This is one more popular technique applied for better management of inventory. Popularly known as cycle counting in inventory management, this method employs physical counting of inventory items in small groups at various places of a ware house or stores of the business establishment instead of counting all inventory on a single day so as to facilitate normal running of the business activities.

In this process, goods are stored in small groups at different places with proper records maintained of receipts and issues. Periodical checking are done by counting the items and tallying with records. This will ensure efficient management of inventory without hindering production or business functions.

When to place purchase orders?
Placing purchase orders for replenishment of goods is one of the key factors of inventory management which needs to be prudently applied by inventory management. The inventory managers should be mostly efficient in calculating the correct time of when to place purchase orders.

  • A deep analysis of the consumption and purchase statistics of your business during a period of last 2 or 3 years can give you a correct picture of what are the requirements during a certain month or period for running the business. You can estimate how much is consumed during a certain interval of time.
  • So, you can frame up the quantity required of each item for a certain week or fortnight or a month as the case may be.
  • Now, you may enquire about the delivery period of these items and the time taken by the consignments in reaching your place. These details can be easily obtained from your suppliers and transporters or from your previous experiences.
  • Further, you must be able to calculate some extra grace period required in case of failures in systems of transportation or due to weather conditions and other factors that may occur. 
  • You may have to provide for sudden spurt in demand for your products thereby increasing your consumption of inventory.
  • You may have to think of shortages in stocks with suppliers or any other problems of suppliers that can affect your purchases being delayed.
  • So, when you will have to place an order depends on all these circumstances. You should add all these points to calculate your ordering times.

To sum up, an efficient inventory management involves great abilities of the inventory managers in foreseeing all factors that can affect your procurements and stocks and needs prudent and smart decision makings. So, efficient inventory manager will employ and consider combining all good points of all of the above mentioned techniques of inventory management to obtain maximum benefits.