Category: Commerce Notes PPT

Business owners often resort to public borrowing to meet capital deficit or for expansion purposes. Now, there are several means through which company owners can generate funds. Notably, the issue of debenture is arguably one of the best ways of generating some money for the company. 

Both debenture holders and company owners tend to benefit through the issue of debentures. To elaborate, the company owners can raise the required amount of capital, while debenture holders generate income in the form of debenture interest.

Before we dive straight into the meaning of debenture interest, we should become familiar with the fundamental concept of debentures first. It would help us to gain a more precise idea of the concept and all its aspects.

What is Debenture?

A debenture is an unsecured debt instrument. Typically, it is a certificate which is issued by a company as an acknowledgement that it owes money to its holder. It is issued to the public through a prospectus which is quite to the issue of shares.

The fact that there is no collateral involved with debentures, their holders are heavily dependent on the reputation and creditworthiness of the issuer.  Like mentioned earlier, the primary purpose of issuing debenture is to raise the required funding or capital for business-oriented reasons. For investors, debentures are deemed to be low-risk investment options that help to generate substantial returns. Debenture can be defined as an unsecured debt unit. It is a certificate that is issued by a company where it states that it owes money to the owner of the debenture. This is issued to the public by a prospectus. There is no collateral included in the debentures and the holders of the debentures are dependent on the reputation of the company that issues the debenture. Debentures are mainly issued so that fundings can be raised or the capital required is obtained for business-related reasons. The investors see debentures as a low-risk investment that can help them to get substantial returns too.  

 

Debenture interest can be defined as the money the owner of the debenture is supposed to earn after they invest money in the debenture of the company. If the company wants collateral security then the owners would not get any interest on the amount they have invested. It is paid at a rate that is fixed on the face value. Interest is a charge on the company that issues a debenture and the interest must be paid irrespective of the status of revenue. According to the Income Tax Act of 1961, the companies that issue debentures have to deduct TDS on interest at a rate of interest specified. In simple terms, interest can be defined as an award where all the holders of the debentures receive the interest for investing in the company’s debentures. The company is the one that pays the interest at a regular period which is previously set by the interest rate in the face value.

Test Your Knowledge: Who are debenture holders?

1. Company Owner

2. Creditor

3. Debtor

4. Promoter

Types of Debenture

As per the Companies Act, 2013, a company cannot issue debentures that accompany voting rights. Other than that, companies can issue the following debentures –

1. On the Basis of Security

i. Secured debentures

ii. Unsecured debentures

2. On the Basis of Convertibility

i. Convertible debentures

ii. Non-convertible debentures

3. On the Basis of Priority 

i. First mortgage debentures

ii. Second mortgage debentures

4. On the Basis of Negotiability

i. Bearer debentures

ii. Registered debentures

5. On the Basis of Permanence 

i. Redeemable debentures

ii. Irredeemable or perpetual debentures

Test Your Knowledge: A debenture whose principal amount is not paid by the issuing company only at the time of liquidation is known as:

1. Redeemable Debentures

2. Non-convertible Debentures

3. Bearer Debentures

4. Irredeemable Debentures

 

What is Interest in Reserved Debenture?

Debenture interest can be explained as the capital which debenture holders are entitled to earn for investing their money in the said company’s debenture. However, if a company tends to issue debenture as collateral security, the holders would not receive any interest on their investment.

Typically, interest on debentures is paid at a fixed rate on their face value systematically. It must be noted that such an interest is a charge on debenture issuing company’s profit and must be paid to the holders, irrespective of the revenue status.

As per Income Tax Act, 1961, debenture issuing companies are required to deduct TDS on interest on debentures at a specified rate of interest. However, such a tax is imposed only if the payable interest amount exceeds the mentioned limit. The tax thus collected is deposited to the income tax authorities by the denture issuing company.

Test Your Knowledge: Interest paid on debenture is:

1. Appropriation of Profits

2. Charge Against Profit

3. Transferred to General Reserve

4. Transferred to the Account of Sinking Fund

On that note, let’s check out how debenture interest is treated in the books of accounts.

 

Accounting Treatment of Interest on Debenture

This is how debenture interest is treated in accounting in a different situation.

A. In Case Interest is Due and the Tax on It is ignored – Interest Paid Journal Entry 

B. In Case Interest on Debenture is Due and TDS is levied – TDS Payable Journal Entry

C. In Case of Payment of Interest on Debenture – Interest Payable Journal Entry

 

D. In Case of Deposition of TDS – TDS Payable Journal Entry

 

E. Transferring Interest to the Statement of Profit and Loss at Year-End

 

Test Your Knowledge: What is the nature of a debenture application account?

1. Personal account

2. Real account

3. Nominal account

4. None of these

Task For You: Pass a journal entry for TDS deducted.

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The term Cyberspace seemed to have originated from a Science fiction movie. However, in the 21st century, it has become an integral part of our lives. Let us learn what Cyberspace is, the importance of laws to determine Cybersecurity in the introduction of Cyberspace.

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What is Cyberspace Definition?

The best way to define Cyberspace is the virtual and dynamic space created by the machine clones.

According to the Cyberspace definition, it is a web consisting of consumer computers, electronics and communication networks by which the consumer is connected to the world. 

Cyberspace History

The word Cyberspace first made its appearance in Wiliam Gibson’s Science fiction book Necromancer. The book described an online world filled with computers and associated societal elements. In that book, the author described Cyberspace as a 3D virtual landscape created by a network of computers. Although it looks like a physical space, it is generated by a computer, representing abstract data.  

After the publication of the book, the word Cyberspace became a mainstay in many English dictionaries. The New Oxford Dictionary of English provides Cyberspace definition as the notional environment used by the people to communicate over networks of the computer. 

As per the Cyberspace meaning, Cyberspace is a virtual space with no mass, gravity or boundaries. It is the interconnected space between networks of computer systems.

Bits and Bytes- Zeroes and ones are used to define Cyberspace.  It is a dynamic environment where these values change continuously. It can also be defined as the imaginary location where two parties can converse.

If we look into the Cyberspace meaning, it is not a physical space but a digital medium. The differences between a physical world and Cyberspace are as follows:

Cyberspace vs. the Physical World

Cyberspace can be compared to a human brain where the network of computers represent the innumerable neurons and the connections between them. Therefore, it can be considered as a link between the physical and the infinite world.

Cyber Laws and Cyber Security

In order to ensure that humans do not misuse Cyber technologies, Cyber laws are generated. The overall idea of Cyberlaw is to stop any person from violating the rights of other persons in Cyberspace. Any kind of violation of Cyber rights is considered to be a Cyberspace violation and is deemed punishable under Cyber Laws.  

It is important to note that since Cyberspace does not belong to the physical world, the physical laws do not apply to Cyberspace crime. A separate set of Cyber laws are formulated by the government to provide Cybersecurity to Cyber users. Such Cyber laws are needed to monitor and prevent any immoral or illegal activities of humans. Some

of the common Cyberspace violation activities include hacking, theft, money laundering, terrorism, piracy, etc. Hackers can get hold of any internet account through the Domain Name Server (DNS), phishing, IP address, etc. to get entry into the computer system of any person and steal the data, or introduce computer bugs and render the system ineffective. 

Cyber Laws

Cyber laws encompass all the legal issues related to the communicative, distributive and transactional aspects of network-related information devices and technologies. It is different from the Property Law or any other law. Unlike property law, it is not so distinct; it is broader since it covers several areas of laws and regulations. It encapsulates the statutory, legal and constitutional provisions related to computers and the internet. Cyber laws are related to individuals and institutions that 

• Generates software and/or hardware to allow people with entry into Cyberspace, and

• Make use of their computer system to gain entry into Cyberspace.

If we go by the Cyberspace definition, Cyberlaw can be considered as a generic term related to all regulatory and legal properties of the internet. Any activities of the citizen related to or concerned with the legal aspect of Cyberspace come under the purview of Cyber laws.

To define the different arms of Cybersecurity, two main acts are considered in India. They are:

• The Indian Penal Code, 1860

• The Information Technology Act, 2000

Cyberspace

Cyberspace mainly refers to the computer which is a virtual network and is a medium electronically designed to help online communications to occur. This facilitates easy and accessible communications to occur across the world. The whole Cyberspace is composed of large computer networks which have many sub-networks. These follow the TCP or IP protocol. 

The TCP (Transmission Control Protocol) is a standard for communications that allows the application programs and other computing devices to exchange data and messages over a Cyber network. These are designed to send data across the internet which then makes sure that the sent data are successfully delivered over the networks. It is the standards that are mostly used to define the rules of the internet and are defined by the Internet Engineering Task Force or IETF. It is a very commonly used protocol and it ensures that there is an end-to-end delivery of data. 

On the other hand, Internet Protocol or IP is the protocol or method that involves sending data from one device to another using the internet. Each and every device has an IP address that is unique to it and this gives it its identity. The IP address enables communication and exchange of data to other devices across the internet. It defines how devices and their applications will exchange packages of data with each other and connected networks.  All the transfer occurs through either of the Internet Protocol Suite or protocols i.e. either TCP or IP. 

Cyberspace is that space in which users share information, interact with each other; engage in discussions or social media platforms, and many other activities. This concept was introduced by William Gibson in his book ‘Neuromancer’ which was done in 1894. Thus, this term is still widely used among everyone as it is rapidly growing and used for various purposes by an individual. 

Issue of Shares is the process by which companies pass on new shares to shareholders, who can be either individuals or corporates. While acquiring the shares, companies follow the rules prescribed by the Companies Act 2013.

There are 3 basic steps of the procedure of issuing the shares.

1. Issue of Prospectus

2. Receiving Applications

3. Allotment of Shares 

A share is a unit of ownership in a company or an organization. It is also considered as an asset because in case a company makes a profit, an amount in proportion to the share held by you will be provided to you in the form of a dividend. Anyone who holds a share is called a shareholder for that specific financial asset or organization.

It should be noted that an organization is allowed to offer shares to be purchased by others through the Companies Act 2013 and has to follow the rules predefined under the act.

Generally, the Issue of Shares is of two kinds – common shares and preference shares. While the former allows for voting rights to the shareholders, the latter does not permit the holders of any rights. 

However, the dividend is passed on to both in case of a profit. In another instance, when there is a bankruptcy, the preferred shareholders are given preference in matters of dividend sharing. So, they receive the dividend even before the common shareholders and have an upper hand.

What is the Issue of Shares?

The meaning of the Issue of Shares is that the shares of an enterprise or any financial asset are distributed among shareholders who wish to purchase them. These shareholders can be either individuals or corporates who take part in buying the shares at a specific price.

Let us understand the concept of share allocation with the help of an example.

A company called XYZ has a total capital of Rs. 6 lakhs. It has divided the capital into 6000 units of shares each amounting to Rs. 100. Therefore, you can see that each unit or share of the company costs Rs. 100. Individuals or corporations can purchase the share at this price.

Hence, holding a share in an organization is often regarded as partial ownership as well. It is for the same reason that anyone holding a share is termed as a shareholder. 

What are the Steps involved in Issue of Shares?

The process of issues of shares is primarily divided into three significant steps, which are:

1. Prospectus Issue

This is the first step of the Issue of Shares wherein an enterprise releases a prospectus to the public. It contains the details that a new enterprise has come into being and that it would require funds from the public to operate, for which the public can purchase shares of that particular enterprise.

The prospectus has all the necessary details of that share issuing authority along with details pertaining to how they will collect money from investors.

2. Application Receipt

The second step in share issuing is the receipt of application as and when an investor wishes to purchase a share of that asset or enterprise. However, they have to follow the necessary rules and regulations as cited in the prospectus issued earlier.

They also have to deposit the amount against shares they are willing to purchase. The money has to be deposited to any scheduled bank along with the application.

3. Share Allocation

This is the last step in issues of shares wherein after completing the formalities from the investor’s side, the enterprise will issue the shares to the investors. As there is a minimum subscription limit, one has to wait till that quota is fulfilled.

Once that limit is fulfilled, the shares will be allocated to those investors who have subscribed for the capital shares. A letter of allotment is also sent out to those who have been allocated with shares.

Therefore, this process makes up for an authentic way of trading shares between investors and enterprises.

The main reason for issuing new shares by the company is to raise money to finance the business. The following are some of the examples where an Allotment of Shares may be considered.

• A number of shares will usually be issued when the company is established. With the help of a share issue, the company will be able to trade, along with any money that the company may borrow.

• Allotment of Shares is considered when the company requires new funds to grow the business organically. There are various factors that influence how many shares to issue.

• In order to repay all or some of the company’s borrowing, shares can be issued.

• Shares can be issued to fund the purchase of another company, which means raising cash from a share issue and using that cash to acquire the new business.

• Shares can also be issued to continue trading after a particularly difficult period, to repair a damaged balance sheet or in case of problems across an industry or part of a wider downturn in the whole economy.

• The company can make a capitalization Issue of Shares to existing shareholders. Rather than the shareholders needing to pay for the shares themselves, the company uses its own money to fund the allotment. This generally has the effect of reducing the value of the shares in issue, which may, in turn, make them more merchantable to investors.

• If shareholders prefer not to receive a cash dividend, the company may offer them a ‘scrip’ dividend instead by allotting shares of the same value as the cash dividend. This is often popular among companies because issuing shares as a dividend does not impact cash flow in the way a cash dividend does.

• In case a director or employee of the company takes on a share option after being permitted by the company, the company may acquire shares.

• The company may consider allotting the shares in case a new director or senior employee joins the business or an existing employee becomes a director. This can demonstrate the commitment of an employee or a new director to the business, and they will have a clear interest in the company’s success. The shares would either be passed to the employee or new director through a transfer from existing shareholders or by a new Allotment of Shares.

What are the Different Classes of Shares?

The types of issues of shares are usually set by a company or enterprise that is issuing its share to the public. This division is generally set to keep a limitation to all rights being conferred to those shareholders.

For instance, the right to vote and the amount of dividend they will receive when there is a profit incurred by an enterprise whose share is out for sale is decided on the basis of such divisions.

The division is made in the following two types –

1. Ordinary Share

This is the most common type of share issued by an enterprise that grants voting rights to the shareholders.

2. Deferred Share

These shares grant fewer rights than common shares, wherein dividends are paid only after a certain period of time and various other constraints.

3. Redeemable Share

As the name suggests, these shares might be bought back by an enterprise that sold them for the first time from the shareholders.

4. Non-voting Share

These shares do not permit any voting rights to their shareholders. Meaning that the shareholders are not able to partake in any executive decision regarding that organization. However, they are part owners of the enterprise.

5. Preference Share

These shares grant a prefixed amount of dividend to its shareholders. They do not enjoy voting rights, though they receive a dividend before any other shareholder.

6. Management Share

The shareholders are granted special voting rights when they hold management shares. Herein, for every share that a shareholder holds, they are permitted to exercise two votes.

7. Alphabet Share

These types of shares are a subcategory of common shares, wherein management divides the shareholders into multiple classes, all these classes are granted different voting rights.

What are Equity Shares?

Equity shares are issues of shares that are purely meant for ownership. It is entirely opposite to preference shares and does not provide any preference rights to shareholders during the distribution of dividends. However, these shareholders have voting rights.

The Process for Issue and Allotment of Shares

The following steps are involved in the process for the issue and Allotment of Shares.

Step 1: Board resolution

Step 2: Passing of special or ordinary resolution

Step 3: Filing of necessary forms 

Step 4: Approval of the ROC

For more information on shares and their types, check out our online learning programmes. There are several high-quality study materials for your understanding. All of the study materials are prepared by subject experts to provide you with a clear understanding of every concept. So, avail of them now and ace your exam preparation.

In an oligopolistic market, firms do not have a fixed demand curve. The demand curve changes when the competitors change the price/quantity of the product. Yet, the oligopolist must know their demand curve to maximise profits. Economists, thus, have developed many price-output models to explain the oligopoly market behaviour.

The two most popular ones of them are- kinked demand curve theory and cartel theory. Here, in this blog, we will discuss the kinked demand curve at length. The kinked demand curve theory is a theory about oligopolistic and monopolistic competition. It was brought forward by Paul Sweezy as the first attempt to explain sticky prices.

The kinked‐demand theory of oligopoly describes the high degree of interdependence that exists among the firms that form an oligopoly. The market demand curve faced by each oligopolist is determined by the output and price decisions of the other firms in the oligopoly. This is the considerable contribution of the kinked‐demand theory.

Kinked Demand Curve Definition

Like traditional demand curves, kinked demand curves are downward sloping. As the name suggests, the kinked demand curves have a ‘kink’. This kink is nothing but a discontinuity at a concave bend and this kink is what sets it apart from the traditional demand curves. Now let’s find out why these kinks exist in the first place.

For a long time, it has been observed that prices are mostly “sticky” in oligopolistic markets. Prices remained inflexible even when costs fell. This drove both economists and industrialists crazy. Economists racked up their brains all day but could not explain this strange phenomenon. Not to mention, this was extremely bad for business. In came Sweezy, an American economist with his kinked demand curve theory. Then, economists and industrialists cheered alike.

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Sweezy said that every firm has two market demand curves for its product. At high prices, the firm faces a relatively elastic market demand curve. If the prices are low, the firm faces a relatively inelastic market demand curve. The two demand curves intersect at a point, such as c. This point c is exactly where the kink lies. Point c gives the equilibrium price and quantity. 

As explained above, an oligopolist faces a kinked demand curve because he faces competition from other oligopolists. Suppose oligopolist A increases his price above the equilibrium price, but the other oligopolists do not increase their prices. So, the consumers flock to the other oligopolists in the market to buy lower-priced goods. Thus, at higher prices, Oligopolist A faces an elastic demand curve and loses business.

The exact opposite thing happens when Oligopolist A decreases his price below the equilibrium price. The other oligopolists follow his pricing decision. Each oligopolist, thus, matches his competitor’s price. So, consumer demand for each oligopolist’s product becomes less elastic. The kinked demand theory thus illustrates the high interdependence level of oligopolistic firms.

We know that firms in perfectly competitive markets maximise profits by equating their marginal cost and marginal revenue. The same profit-maximising condition holds for firms in oligopolistic markets too.

For perfectly competitive firms, any change in the marginal cost or marginal revenue is adjusted by a corresponding change in the price/quantity of the product. The same, however, cannot be done for oligopolistic firms. Due to the “kink” in their demand curves, the marginal cost curve or marginal revenue curve could change without changing the price/quantity of the product.

It has been observed in many oligopoly markets that prices remain rigid for a very long time. Even in the face of reducing costs, they change infrequently. In order to explain the reason behind this price rigidity under oligopoly, an American economist Sweezy came up with the kinked demand curve hypothesis.

The model for an oligopoly is one of the examples of a kinked demand curve. In an oligopolistic market, the kinked demand curve hypothesis illustrates that the firm faces a demand curve with a kink at the level of prevailing price. Accordingly, the curve is less elastic below the kink and more elastic above the kink, which means that the response to a price decrease is more than the response to a price increase. The concept of the kinked demand curve is based on the firms who wish to gain more profits and the firms who’re dominating the industry.

Impact of Price Rise

• Consumers may switch to its rivals in case a firm increases the price, then it becomes more expensive than rivals.

• There is likely to be a notable fall in demand for the rise in price. And therefore, demand is price elastic.

• In that event, increasing-price firms will lose revenue because of the fact that the percentage fall in demand is greater than the percentage rise in price.

Impact of Price Cut

• It will lead to a different scenario if a firm cuts its price. In the short term, if a firm cuts its price, it would cause a big rise in demand. Hence, this would lead to an increase in revenue. Eventually, the firm would gain market share.

• Although, other firms will respond by also cutting prices to follow the first firm because of the obvious fact that they will not want to see this fall in market share. Hence, if all firms cut prices, the individual firm will only see a small rise in demand.

• There is a significantly small percentage rise in demand because the price war demand for a firm is price inelastic. 

• In case the demand is inflexible and the price falls, then revenue will fall.

Prices Stable

The firm has no incentive to raise the price or to cut price if the kinked demand curve is true. 

Drawbacks of Kinked Demand Curves

Ever since its inception, the kinked demand curve theory has received its fair share of criticisms as well. First, it does not explain the mechanism of establishing the kink in the demand curve. It also does not state how the kinked demand curve is reformed when price/quantity changes. Most of the time, other oligopolists follow pricing decisions when one oligopolist increases the price. The theory, however, does not consider this possibility. Finally, the kinked‐demand theory does not consider the possibility that oligopolists might collude while setting price and quantity.

So, we can see that the kinked demand curve theory can explain the oligopolistic market behaviour only to some extent. It has been deemed incomplete and insufficient by many economists ever since its foundation. Later, the birth of the cartel theory covered many of its drawbacks. Although back in 1939, the kinked demand curve theory came closest to explaining the puzzling oligopolistic market.

Key Points

• A kinked demand curve takes place when the demand curve is not a straight line but has a different elasticity for higher and lower prices.

• One of the examples of a kinked demand curve is the model for an oligopoly, which suggests that prices are inflexible. Those firms will face different effects for both increasing price or decreasing price.

• The kink in the demand curve takes place because rival firms will behave in a different way to price cuts and price increases.

• Hence, the kinked demand curve is said to be characteristic of an oligopoly.

Fun Fact

Kinked demand curves do not exist only in oligopolistic markets. The cocaine market has a kinked demand curve but it is not an oligopolistic market. The price of cocaine, an addictive drug, is generally very high. Hence its demand curve is pretty elastic. So, when the price of cocaine decreases, many people try it for the first time. And once these “new” users get addicted, they will continue to use cocaine even when the price increases again. Therefore, the demand for cocaine will then be inelastic. Hence, cocaine has a kinked demand curve as the kink lies in between the inelastic and elastic demand curves. Thus, the cocaine demand curve is a kinked demand curve example.

Management in organizations and businesses refers to the process of getting people, tools, and devices together to achieve desired goals. It requires an efficient allocation of resources, planning, directing, and controlling. Organizations can be viewed as systems and management is human action (including design) that facilitates the production of useful outcomes from this system.

Introduction of Levels and Functions of Management

An organization has many different kinds of resources like human resources, technological resources, financial resources, and natural resources. The deployment and manipulation of all these resources come under the umbrella of management goals.

In today’s time, businesses have become more complex, and with that, management processes have also become more complicated and need a higher level of degree and skill.

Given the technological advancements made, the management can no longer be done by a single person. That is why different parts of management are now assigned to varying levels of management throughout the enterprise. Hence, now there is a hierarchy with different levels of responsibility and authority in the management, department-wise executive-level.

The levels of management in a company depend on the size and nature of the business. However, all the levels of management work in tandem to achieve the common goal of the organization. In the sections below, we will learn about the functions of different levels of management.

Levels of Management

There are primarily three broad levels of management in any organization. Segmenting management into different levels of management is vital for the performance and productivity of the organization as a whole.  The levels are defined below:

People who have the ultimate power and authority over the business fall in this level of management. Board of directors, managing director (MD), chief executive officer (CEO) are some of the top-level managerial positions.

 

Determining and overseeing the goals, procedures, and policies of the business are the functions of top-level management. The list of roles and responsibilities of this level includes:

• Laying down the vision, goals, and broad policies of the organization.

• Preparing strategies for the business.

• Instructing how to prepare the department-wise budget, schedule, processes, etc.

• Encouraging harmony and boosting collaboration.

• Appointing executives for the middle layer of management or the department managers.

• Communicating with the outside world to build the face of the brand.

• Responsibility towards shareholders to maintain the performance of the company.

This is also called executive level management. They are subordinates to the top-level management, and their job is to direct and organize the low-level managerial personnel. In a small organization, there could be just one layer of middle-level management. Still, in larger companies, the middle section can further be divided into senior and junior level executives. The main tasks of middle-level management are:

• Interpret the policies of the company.

• The directive and plans laid out by the top-level managers are executed by the middle-level under these policies.

• Inspire lower-level employees to better their performances.

• Send reports and data to higher levels of management promptly.

• Coordinate and participate in the hiring process of lower-level management.

• Establishing plans for the subunits of the organization under their supervision.

This level is also known as the supervisory level, which comprises section officers, superintendents, foremen, supervisors, etc. They execute and coordinate day-to-day workflows to make sure deliverables are met on time, and the project reaches its completion. They are the first line of managers featured at the base of the operations, and their fundamental job is to communicate the problems of the firm to the higher levels. Their main functions include:

1. Assigning tasks and responsibilities to workers.

2. Instructing workers in their daily activities.

3. Arranging for necessary tools, machinery, equipment, etc which are necessary to carry out the daily tasks of workers.

4. Ensure quality work is done and the quantity of production is in line with business goals.

5. Report the work status periodically to the higher levels of management.

6. Improving the company image in the eyes of the workers as they are in direct contact with them.

7. Maintaining decorum, harmony, and discipline at the workplace.

Functions of Levels of Management

Henri Fayol, a French mining engineer, initially identified five elements of management. Now there are four commonly accepted functions of management that a manager needs to perform as part of his daily activity. The different levels of management and their functions are summarized below:

1. Planning:

The future course of action is based on the basic planning done by managers. The predetermined goals are taken as the base to chalk out the future course of the most appropriate actions in the planning phase. Planning, in a nutshell, gives answers to:

1. What job to do.

2. When to do the job.

3. How to do the job.

Planning, in other words, is deciding on the best possible way of achieving the goals.

2. Organizing:

Once the plan is in place for a project or task, the next step is to procure resources for achieving the goal. The resources are of various kinds; human, physical, financial, technological, raw materials, etc. It also involves developing a productive relationship between the resources to achieve organizational goals most efficiently in the most efficient manner. As a process, organizing involves:

1. Identifying activities to be performed.

2. Group the activities into different departments.

3. Assigning duties based on activities.

4. Identifying responsible people for the activities and delegating authority.

5. Coordinating relationships.

3. Directing or Leading:

Directing is an interpersonal aspect of management that deals with guiding, motivating, influencing, and supervising subordinates. It has 3 elements:

1. Supervision –

It is the act of watching and directing the workers.

2. Motivation –

Management needs to infuse subordinates with zeal and passion for their work. They could use positive, negative, monetary, or non-monetary incentives to achieve this.

3. Communication –

To bridge the gaps in understanding, communication in the form of sharing information, opinions, etc. is an essential part of leading.

4. Controlling:

In this step, one measures the actual achievements against the goals set. If there are deviations, one needs to take corrective measures. The main objective of controlling is to ensure things are conforming to the standard and guidelines set. It comprises following steps:

1. Establish what is meant by standard performance.

2. Measure the actual performance.

3. Compare the actual with the standard.

4. Take corrective actions to bridge the gap, if any, between the standard and actual performances.

This curve is used to determine the possible projections of cost and output for the long term. While a short-term curve does exist, the factors that go into determining a short-term curve are a mixture of fixed inputs and variable inputs. However, given the sheer unpredictability of the future, the long-run average cost curve is mostly constructed using variable inputs. The long-run average total cost curve is used to determine productivity and cost in the long run. 

Derivation of Long-run Average Cost Curve

To understand the reasoning behind the derivation of a long-run average cost curve, it is preferable to start with three short-run average cost curves. 

As the term suggests, short term average cost curves can be used for any firm in the short run. The firm can modify the increase or decrease in output and cost by changing the variable inputs appropriately. However, planning for the long run involves a little more creativity and understanding. 

After closely examining each SAC (also referred to as plants, there may be more than 3 for a single firm), the firm will need to determine the most optimal curve to maximize production and minimize cost. To this end, the firm will need to choose the most optimal SAC, which will then be projected into the long term. While one SAC might give the firm the required results, another SAC might give them greater returns. This is why it is essential to consider multiple variables and create multiple SACs to determine the best cost vs output scenario. SACs are the key to how to find the long-run average total cost curve.

Long Run Average Cost Curve Definition

To define the long-run average cost curve, consider an array of SACs that will vary only slightly to form a specific gradation. In such a case, the curve that is formed by connecting the lowest points of each SAC will form the long-run average cost curve. Given that this long-run curve is drawn tangentially to all the increasingly graded SAC, it showcases the points with the lowest cost and thus gives the firm an idea of what SAC it can use to achieve the desired output.

So if any point on the LAC is what the goal the firm wishes to reach, then the firm will employ the corresponding SAC that is closest to the point along the tangent. Multiple SACs along the tangent will be able to sustain a specific output, but only one will be able to do it at the lowest cost. Using the wrong SAC or improperly grading the curve will result in increased cost for the same output or (in cases of a faulty LAC) result in a decreased output for the expected cost. 

The long-run average cost curve is used to plan the desired output for a specific cost, granting it the title of the planning curve. This is because a firm can plan their cost and productivity by choosing the right plant along the long-run average cost curve.