FUNDAMENTALS OF ECONOMICS AND MANAGEMENT

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6011SYLLABUS-2FOUNDATION : PAPER -FUNDAMENTALSOF ECONOMICSANDMANAGEMENTSTUDY NOTESThe Institute of Cost Accountants of IndiaCMA Bhawan, 12, Sudder Street, Kolkata - 700 016FOUNDATION

First Edition : August 2016Reprint : April 2017Reprint : March 2018Edition : August 2019Published by :Directorate of StudiesThe Institute of Cost Accountants of India (ICAI)CMA Bhawan, 12, Sudder Street, Kolkata - 700 016www.icmai.inPrinted at :M/s. Sap Prints Solutions Pvt. Ltd.28A, Lakshmi Industrial EstateS.N. Path, Lower Parel (W)Mumbai - 400 013, MaharashtraCopyright of these Study Notes is reserved by the Institute of CostAccountants of India and prior permission from the Institute is necessaryfor reproduction of the whole or any part thereof.

Syllabus – 2016PAPER1: FUNDAMENTALS OF ECONOMICS AND MANAGEMENT (FEM)Syllabus StructureAFundamentals of Economics50%BFundamentals of Management50%B50%A50%ASSESSMENT STRATEGYThere will be written examination paper of three hoursOBJECTIVESTo gain basic knowledge in Economics and understand the concept of management at the macro and micro levelLearning AimsThe syllabus aims to test the student’s ability to: Understand the basic concepts of economics at the macro and micro level Conceptualize the basic principles of managementSkill sets requiredLevel A: Requiring the skill levels of knowledge and comprehensionSection A : Fundamentals of Economics1.Basic concepts of Economics20%2.Forms of Market20%3.Money and Banking10%Section B: Fundamentals of Management4.Management ProcessSECTION A: FUNDAMENTALS OF ECONOMICS1.50%[50 MARKS]Basic Concepts of Economics – Micro & Macro Economics(a) The Fundamentals of Economics(b)Utility, Wealth, Production(c) Theory of Demand (meaning, determinants of demand, law of demand, elasticity of demand- price, income andcross elasticity) and Supply (meaning, determinants, law of supply and elasticity of supply)(d)Equilibrium(e) Theory of Production (meaning, factors, laws of production- law of variable proportion, laws of returns to scale)(f) Cost of Production (concept of costs, short-run and long-run costs, average and marginal costs, total, fixed and variablecosts)

2.Forms of MarketPricing strategies in various forms of markets3.Money and Banking(a)Definition of Money, Types, Features and Functions(b)Definition, functions, utility, principles of Banking(c) Commercial Banks, Central Bank(d)Measures of credit control and Money MarketSECTION B – FUNDAMENTALS OF MANAGEMENT4.Management Process(a)Introduction, planning, organizing, staffing, leading, control, communication, co-ordination(b)Concept of Power, Authority, Delegation of Authority, Responsibility, Accountability(c)Leadership & Motivation – Concept & Theories(d)Decision-making - types of decisions, decision-making process.[50 MARKS]

ContentsSECTION A : FUNDAMENTALS OF ECONOMICSStudy Note 1 : Basic Concepts of Economics1.1Definition and Scope of Economics11.2Few Fundamental Concepts9Study Note 2 : Theory of Demand and Supply2.1Demand212.2Supply372.3Equilibrium42Study Note 3 : Theory of Production3.1Meaning of Production513.2Factors of Production and its Classification513.3Production Functions533.4Law of Variable Proportion543.5Law of Return to Scale56Study Note 4 : Theory of Cost4.1Meaning of Cost594.2Cost Function614.3Cost Curves624.4Economies of Scale66Study Note 5 : Market5.1Meaning of Market775.2Perfect Competition785.3Imperfect Competition79Study Note 6 : Money6.1Definition of Money976.2Functions of Money986.3Components of Money Supply996.4Quantity Theory of Money101

Study Note 7 : Bank7.1Meaning of Banking1097.2Commercial Banks1097.3Central Bank1157.4Financial Institution117Study Note 8 : Money Market8.1Meaning of Money Market1258.2Structure and Functions of Indian Money Market126SECTION B : FUNDAMENTALS OF MANAGEMENTStudy Note 9 : Management Process9.1Introduction1419.2Definition of Management1429.3Management – Science, Art, Profession1439.4Management Principles1449.5Management 79.12Co-ordination1709.13Directing172Study Note 10 : Management – Concepts10.1Concept of Authority20110.2Concept of Power20210.3Delegation of Authority20310.4Concept of Responsibility21010.5Authority, Responsibility and Accountability212

Study Note 11 : Leadership and Motivation11.1Leadership22511.2Motivation233Study Note 12 : Decision Making12.1Concept and Definition25512.2Types of Decision25612.3Decision – Making Process25712.4Techniques of Decision Making258

Section - AFUNDAMENTALS OF ECONOMICS(Syllabus - 2016)

Study Note - 1BASIC CONCEPTS OF ECONOMICSThis Study Note includes1.1 Definition and Scope of Economics1.2 Few Fundamental Concepts1.1 DEFINITION & SCOPE OF ECONOMICSWhat is Economics?Economics is one of the social sciences. It explains about the economic activities of a man. Any activitywhich is related to earning of the money and spending of the money is called economic activity.Almost all people are engaged in economic activities, because they want to earn the money.The main economic problem is to transform society’s resources into consumable commodities by usingproductive technology. It is a problem because human wants are unlimited and society’s resourcesare limited. So the central task of economics is to decide how much of which commodities are to beproduced for the optimum satisfaction of human wants.Subject Matter of Economics:In economics, a want is something that is desired.Want is the starting point of economic activity. Wants leads to efforts. An effort leads to satisfaction.WantsEffortsSatisfaction.This is the subject matter of economics. This subject matter of economics is divided into four parts.(i)Production(ii)Exchange(iii) Distribution(iv) Consumption(i)Production: In economics, Production involves the creation of goods and services by usingresources. It is a process to change the raw materials into final/finished goods. It is nothing butcreation of utility. To produce anything so many factors are essential. All these factors are classifiedinto four categories. They are:(a) Land(b) Labour(c) Capital(d) OrganizationTechnique and Technology:Technique is defined as the ratio in which the inputs are combined together to produce one unit of theproduct. For example, if capital (K) and labour (L) are used in the production process and if 1 unit of Kis combined with 2 units of L to produce 1 unit of the product, then, K:L 1:2 will be called the techniqueTHE INSTITUTE OF COST ACCOUNTANTS OF INDIA1

FUNDAMENTALS OF ECONOMICS AND MANAGEMENTof production. Suppose, we know two more techniques of production eg., K:L 2:3 and K:L 3:4, thenwe know the technology which is nothing but the spectrum of all available techniques. Here, theknowledge of the three available techniques ie., K:L 1:2, K:L 2:3, K:L 3:4 will form the technology.(ii)Exchange: It means change of the goods from one person to another person. Once up on a timegoods are exchanged for goods. It is called “Barter system” To overcome the Inconveniencesin the barter system money was invented. Now the goods are exchanged for money. Price isessential for the exchange of goods for money.(iii) Distribution: Distribution means sharing of the income among the factors of production. The totalincome which is generated by selling of these goods and services in the market must be distributedamong the factors of production in the form of rent, wages, interest and profits.There are two types of distribution1. Micro distribution2. Macro distribution1.Micro DistributionMicro distribution is nothing but pricing of factors of production. It means it explains how the price(rent) per a unit of land is determined. In the same way how the price per unit of labour andcapital, etc. is determined are discussed.Ricardian theory of rent, modern theory of rent, different wage theories, Interest theories profittheories etc are discussed.2.Macro DistributionMacro distribution means sharing of the total national income among the total factors ofproduction. It means we came to know whether the income is distributed properly or not properlyamong the people in the society.Modern economists extended the subject matter of economics. They added some other conceptsto the economics. They are:(a) Employment (b) Income (c) Planning and Economic development (d) International trade(iv) Consumption: It is an act to use the goods or service to satisfy the wants. In economics, Consumptionis typically defined as final purchased by an individual that are not investments of some sort. Inother words when you buy food, clothes, a hair, airplane tickets, a car, etc., that’s consumption.Through consumption the consumer destroys the utility of the commodity. This utility was createdby the producer through production.In someone buys a house to live in, that should be defined as consumption. If they buy a house torent out it to someone else, that should be defined as an investment. Similarly, if they buy a car todrive, that’s consumption. If you buy a car to use as a taxi for a business, that could be construedas an investment. In short the reason for the purchase determines whether something is viewed ason investment or as consumption.1.1.2 DEFINITIONS OF ECONOMICS:The definitions of economics can be classified into four categories.(a) Wealth definitions2THE INSTITUTE OF COST ACCOUNTANTS OF INDIA

Basic Concepts of Economics(b) Welfare definitions(c) Scarcity definitions(d) Growth definitionsWealth definitions: Almost classical economists followed wealth definition. It is mostly associated withJ.B. Say and Adam smith. Adam smith was called “Father of economics”. The name of book written byAdam smith is “An enquiry into the nature and causes of Wealth of nations (1776) Adam Smith delinkedthe economics from political economy and he explained It in a scientific manner.Definitions:According to J. B. Say, “economics is the study of science of wealth.According to Adam Smith, “economics is the science which deals with the wealth”.According to the above definitions: Economics explains how the wealth is produced, consumed, exchanged and distributed. According to Adam smith man is an economic man. Economics is a science of study of wealth only. This definition deals with the causes behind the creation of wealth. It only considers material wealth.Criticism:This definition was criticized by so many philosophers they are Carlyle, Ruskin, Walrus, and Dickens andothers.According to critics, economics is a decimal science, Gospel of Mammon, bread and butter science,uncompleted science etc.Wealth is of no use unless it satisfied human wants.This definition is not of much importance to man and his welfare.Welfare definition:This definition was given by Alfred Marshall. He was the follower of Adam smith. He wrote a famousbook “Principles of economics’ (or) “Principles of political economy” in 1870.Definition:“Economic is the study of mankind in ordinary business of life. It examines that part of Individual andsocial action which is most closely connected with the attainment and with the use of material requisitesof well being”.According to Alfred Marshall’s definition, economics is one side study of wealth on other and moreimportant side is the study of part of man (or) welfare of the man.Main Points:1. According to this definition economic is a social science.2. According to definition goods are classified into two types (or) categories3. Material goods4. Immaterial goods5. According to Alfred Marshall economic is a normal science.THE INSTITUTE OF COST ACCOUNTANTS OF INDIA3

FUNDAMENTALS OF ECONOMICS AND MANAGEMENT6. The top priority is given to man (or) welfare of man secondary priority is given to wealth.7. Marshall enhanced the status of man from economic man to social man. Economics related onlysome material goods which promote the human welfare.Criticism:This definition was criticized by Lionel Robbins on the following grounds:1. According to Robbins welfare definition is uncompleted definition.2. According to Robbins economics must be neutral between ends.3. According to Robbins economist must be as a describer not a describer.4. Marshall neglected some materials goods which do not promote human welfare, but these goodsare also produced; exchanged & consumed. So, they also come under the subject matter ofeconomicExample: Cigarette and alcoholic products.Scarcity Definition/Robbins definitionsThis definition was given by Lionel Robbins. He wrote a famous book “an essay on the nature andsignificance of economic science” (1932).Definitions:“Economics is a science which studies human behavior as a relationship between ends and scarcemeans which have alternative uses”. - RobbinsMain Points:In the above definition1. Wants are unlimited2. Limited resources3. Alternative uses of limited resources4. Problem of choiceMerits:1. According to this definition economics is an analytical science.2. Economic turn into universal science.3. According to Robbins. It is a positive science.4. Neutral between ends.Criticism:These definitions also criticized by so many economists on the following terms:1. It is not a universal science.2. Not applicable to developed countries.3. Not applicable to communist (or) dictatorship countries.4. It is not applicable to developing countries like India.5. It is an old wine in a new bottle.6. It also neglected the dynamic concepts.4THE INSTITUTE OF COST ACCOUNTANTS OF INDIA

Basic Concepts of EconomicsGrowth DefinitionThis Definition was given by J.M. Keynes and P.A. Samuelson in the book written by Samuel son was“Economics - An Introductory Analysis (1948). In this book he gave a new definition to economics.Definitions“Economic is the study of how men and society choose with ‘or’ without use of money to employ thescarce productive resources that would have alternative uses to produce various commodities overtime for distribution them for consumption now or in future among the various persons and groups inthe society. It Analysis the costs and benefits of improving pattern or resource [use allocation]. - P.A.SamuelsonMain points:1. Like the scarcity definition it also accepts the unlimited wants and limited resource which havealternative uses.2. According to Samuelson, the problem of scarcity of resources not only confined to present but alsoto the future. It means he introduced the concept of time element.3. He also adopted a dynamic approach to the study of economics considering Economic Growthas an integral part of economics.4. This definition includes Marshall’s welfare definition and Robbin’s scarcity definition.Scope of Economics Economics is a social science. It studies man’s behaviour as a rational social being.TraditionalApproach It considered as a science of wealth in relation to human welfare. Earning and spending of income was considered to be end of all economicactivities. Wealth was considered as a means to an end – the end being human welfare. An individual, either as a consumer or as a producer, can optimize his goal is aneconomic decision. The scope of Economics lies in analyzing economic problems and suggesting policymeasures. Social problems can thus be explained by abstract theoretical tools or by empiricalmethods.ModernApproach In classical discussion, Economics is a positive science. It seeks to explain what the problem is and how it tends to be solved. In modern time it is both a positive and a normative science. Economists of today deal economic issues not merely as they are but also as theyshould be. Welfare economics and growth economics are more normative than positive.1.1.3 MICRO AND MACRO ECONOMICSThe terms ‘Micro’ and ‘Macro’ are introduced by Ragnar Frisch in economics. He is the Prof. of OsloUniversity in Britain. According to him the economics is studied in two ways i.e., Micro level and Macrolevel.THE INSTITUTE OF COST ACCOUNTANTS OF INDIA5

FUNDAMENTALS OF ECONOMICS AND MANAGEMENTMeaning of Micro economics:The word Micro is derived from Greek work ‘Mikros’, means very small or Millionth part. It studies aboutthe behavior of Individual units. Individual units are a consumer, a producer, a firm or industry. Marshalldeveloped the Micro economics very well. According to Marshall the Micro economics divide theeconomy into small units or small parts each part is studied. It explains how a consumer gets maximumsatisfaction how the producer gets maximum output and how the firm gets maximum profits.Definition:Micro economics is study of particular firm particular household, individual prices, wages, incomes,individual Industries, particular commodities”. - K. E. BouldingScope of Micro Economics:The Micro economics explains how the price of a good is determined and how the price per unit offactors of production is determined and it is also deals with theories of economics welfare. So Microeconomics is called “Price theory”.Scope of EconomicsTheory of outputand employmentTheory oftrade cyclesConsumptionInvestmentTheory ofInflationTheory ofEconomics growthMicro theory ofdistribution DemandUsers or significance of Micro economics:1. Understanding the operations of economy2. Economic welfare of people3. Managerial economicsMacro Economics:The word “Macro” is derived from Greek word “Makros”, “large or very big”. The Macro economicsstudies the economy as a single unit. It does not deal with Individual units. It deals with the aggregates‘or’ totals and averages.For example: national income, full employment, total output, total investment, total consumption etc.Definition:According to Gardner Ackaly, “Macro economics is concerned with such variables as a aggregatevolume of output of a economy with the extend to this resources are employed with the size of thenational Income and with the general price levelScope of macro economics:Macro economics studies about the National Income i.e. calculation of the national income, trendsin the national income etc., It also deals with total employment (full employment), total output etc.,It also studies about trade cycles, Inflation etc., It also deals with theories of economic growth andmacro theory of distribution. It is also called Income and Employment theory.6THE INSTITUTE OF COST ACCOUNTANTS OF INDIA

Basic Concepts of EconomicsBoth Micro and macro economics are interdependent. From 1930 onwards there is an importance tothe Macro economics.Scope of Macro economics can be explained by the following chart.Scope of MacroTheory of outputand employmentTheory oftrade cyclesConsumptionInvestmentTheory ofInflationTheory ofEconomics growthMicro theory ofdistribution DemandThe Macro economics analysis some problems of the economy1. Level of output and employment2. Fluctuate in level of output, employment and National Income3. Changes in the general price level4. Economic growth and economic development5. Theories of distributionSignificance of Macro economics:1. Understanding the working of an economy2. Formulating policies3. Prepare the economics plans4. Take the remedial measures of trade cycles & InflationWHETHER THE ECONOMICS IS SCIENCE OR ARTMeaning of Science:The term science implies:1. A systematic body of knowledge which traces the relationship between cause and effect.2. Observation of certain facts, systematic collection and classification and analysis of facts3. Making generalization on the basis of relevant facts and formulating laws or theories there by.4. Subjecting in the theories to the test of real world observations.5. Like the physics chemistry and botany economics also satisfy the above four characteristics.Economics is regard as science.Economics as an Art:Keynes defines Art as ‘a system of rules for the attainment of a given end”. The object of Art is toformulate rules to be used for the formulation of policies.THE INSTITUTE OF COST ACCOUNTANTS OF INDIA7

FUNDAMENTALS OF ECONOMICS AND MANAGEMENTDifference between science and Art:1. Science is theor

A Fundamentals of Economics 50% B Fundamentals of Management 50% B 50% A 50% ASSESSMENT STRATEGY There will be written examination paper of three hours OBJECTIVES To gain basic knowledge in Economics and understand the concept of management at the macro and micro level Learning Aims The syllabu

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