Category: Commerce Notes PPT

It is quite common among the working class to enjoy with their family whenever they get a hike. Their first instinct is to buy something new, pamper themselves, or share the experience with their family. Such spree of buying something has a significant impact on the demand for such products. This is what income elasticity of demand is. Let us look more into the details of the income elasticity of demand.

What is the Income Elasticity of Demand?

According to the Income elasticity of demand definition, it is the elasticity in demands resulting from the changes in the income of the customers. It is expressed as the percent change in the demanded quantity per percent change in income. Mathematically, it is expressed by the income elasticity of demand formula.

Income elasticity of demand (YED)= %change in quantity/ % change in income

If the YED for a particular product is high, it becomes more responsive to the change in consumer’s income. The first step to measure YED is to categorize the goods as normal and inferior. It is to be kept in mind that the YED can be positive, negative, or even unresponsive.

How to Find Income Elasticity of Demand?

The best way to understand the topic is to measure the demand responsiveness with respect to the income of the customer. In most cases, the increase in income is directly related to demand. Therefore, the demand for the product will be a nice scenario for how to find income elasticity of demand.

Income Elasticity of Demand: Types

In general, there are five kinds of income elasticity of demand, and these are:

• High- An increase in income is associated with an increase in demand.

• Unitary- An increase in income is proportionate to the increased demand for quantity.

• Low- A rise in income is less proportionate than the demand increase of the quantity.

• Zero- A demand quantity remains the same, although income changes.

• Negative- A rise in income is related to a decline in the demanded quantity. 

The best way to assign the different kinds is by using an income elasticity of demand calculator.

Normal Goods

As said earlier, the income elasticity of demand depends on the quality of the product. For measuring income elasticity, the coefficient is YED. A positive value of YED indicates that the product has an elastic income. Most goods have positive YED. This indicates that when the income increases, the demand also increases. 

These normal goods are differentiated into normal luxuries and normal necessities. Compared to the normal luxurious goods,  the normal necessity goods have a smaller margin of elasticity in income. The normal necessities goods include fuel, medicine, and milk. Any income elasticity of demand example for normal necessity goods has a YED value between 0 and 1. The demand for normal necessity goods is not controlled by a change in the income of the consumers or changes in price. For a normal necessity product, the percentage of change in demand is less than that in the consumer’s income.

Normal luxuries are considered to be highly elastic in income. Luxury goods include jewelry and high-end electronics. Income elasticity of demand example for normal luxury will be to buy HD television or high-tech mobiles with the bonus that the consumer receives.

For normal luxury products, the change in demand percentage is more proportionate to the changes related to income. However, it must be considered that the luxury concept is contextual, depending on the consumer’s circumstances.

Inferior Goods

Inferior goods are considered to have a negative income elasticity. The YED value for inferior goods is less than zero. For inferior goods, the demand for goods decreases when the income of the consumer increases. The decrease in demand for inferior goods is attributed to the presence of superior alternatives. For example, public transports are considered to be inferior goods, if the consumer decides to take a cab. Generally, it is found that when there is an increase in income, the consumer prefers to avoid inferior goods, and their demand decreases. However, when the income decreases, the demand for inferior goods increases and the demand curve exhibits an outward swing. Another income elasticity of demand example will be the use of margarine. Butter is the costlier option, but when the income decreases, people opt for margarine, which is the cheaper alternative to butter.

International business is of prime importance in today’s era amongst economies of the world. It holds more significance for the fast-growing economies like the BRICS countries (Brazil, Russia, India, China, and South Africa). The annual rate of growth of India in the international business is above 8%.  

India has rich resources that are way above those of other nations. That is why India is seen as the right nation to explore business opportunities. Amongst many of the resources that make India lucrative for business, the top ones are:

• Highly and semi-skilled manpower.

• Technologies within the country.

• Rich natural resources.

• Budding middle-class segment.

• The willingness of the Indian government to participate in the world trade

Introduction of India’s Role in World Business

India is known to be one of the fastest-growing economies in the world, next only to China. It holds the place of the 10th largest economy in the world. It is predicted that the top three countries that are likely to dominate the 21st-century economy are; the United States, China, and India. Forty percent of the world’s GDP (gross domestic product) comes from these countries. India, which is already using the World Bank’s PPP (Purchasing power parity) exchange rate, has the 3rd largest GDP in the world. 

The growth of India’s GDP to 203.39 trillion USD in 2019-20 owes it to the integration of the domestic economy through two channels; trade and capital flow. The per capita income of India has also become three times in these years.

India’s Export of Services

In the Indian economy, the services sector holds tremendous value. Almost 55 percent of India’s GDP comes from services. India’s trade in services has been a significant driver in its exports in the last two decades. India tops the chart as the fastest growing nation in global service trade. 

The service sector has been beneficial to India in many ways such as:

• Attracting significant foreign investments.

• A significant contribution to export

• Providing large scale employment.

The service sector of India comprises a wide range of activities such as transport, trade, hotels and restaurants, business services, financing, insurance, etc. From the year 2014-2018, India’s export of services has shown an upward trend. 

The Indian government has come up with SEIS (Service exports from India scheme) which is geared towards promoting the export of services from India. The SEIS provides duty scrip credit for eligible exports. The service providers in India would get rewards under the SEIS scheme for all the eligible exports. Check out the salient points of the SEIS scheme:

• Any service provider (company, firm, and partnerships) who has net free foreign exchange earnings of more than 15000 USD in the preceding financial year are eligible for duty credit scrip. 

• For individual service providers, the minimum net free foreign exchange earning required is 10,000 USD.

• The service provider must have an active import-export code (IE code) to be eligible under the SEIS scheme. 

• The net foreign exchange earning SEIS is calculated, as shown below:

• Net Foreign Exchange = Gross Foreign Exchange earnings – Total foreign exchange which has been remitted, spent or paid.

Indian Trade Portal 

Successful bilateral and multilateral trade negotiations have boosted world trade in the past decades. There has been a considerable reduction in tariffs on exported goods. India’s involvement in world business increased its external trade by getting into trading agreements with numerous different countries. 

To facilitate the rate of export and import in India, a web-based Indian Trade Portal has been designed by the department of commerce (government of India). The key features of this Indian Trade Portal are:

• Goods are classified as per country-specific disaggregated harmonized system (HS) levels 6,7,8, etc.

• The portal has updated tariff data for Indian, ASEAN, and India’s 25 foremost export destinations.

• It has the list of SPS (Sanitary and Phytosanitary) and TBT (Technical barriers to Trade) requirements for India and India’s 25 foremost export destinations.

• One can search the data based on HS codes and product names.

India’s Foreign Trade in Goods 

The goods foreign trade by India was 31.4% of the total GDP in the 2019 financial year. India’s Foreign Trade in Goods primarily happens with the United States, UAE (United Arab Emirates), China, Saudi Arabia, Hongkong, Singapore, and Iraq. 

Recently India signed up for free trade agreements with South Korea and ASEAN. India is also in negotiation with various partners like Australia, the EU, New Zealand, MERCOSUR, and South Africa. 

The main goods exported from India are:

India imports the following commodities:

The table below gives a snapshot of India’s import and exports of goods from 2015 till 2019.

An intermediate good or consumer good is a product that is used to produce finished goods or products. Some intermediate goods can be directly used without further processing in the industry to make another product or the same goods can be used for producing another good. For example, salt can be used directly by the consumers or it can be further processed by different industries to make other products such as in the glass manufacturing industry.

Since these intermediate products can be further used in the production of other goods, they are referred to as “semi-finished products”. In other words, they become inputs in the production of another product. In this article, students will learn about what makes intermediate products different from final goods, and the examples and cost of production of intermediate goods.

Final Goods vs Intermediate Goods

Final Goods:

• In terms of customer consumption, final goods are those goods that are purchased for consumption such as milk. Although milk can be industrially processed to make other products such as curd or sweets as a final good, milk is used for consumption.

Intermediate Goods:

Examples of Intermediate Goods

It is to be noted that intermediate goods are not the same as capital goods. Machinery, land or tools that are used as factors of production are regarded as capital goods. Capital goods are not included in the final product but intermediate goods can be included in the final product.

In building a house, the radial saw used to cut wood is a capital good while the plywood used in the flooring is an intermediate good. The house is the final product.

Cost

Intermediate goods are the links between the raw materials and the final products in a production process. They are also seen as inputs. Therefore, these goods have an additional value that cannot be classified with raw materials.

Economics is a vast subject that deals with human behaviour and sustainably aims in the distribution of resources. Consumers can increase the way profit and welfare of society by maximizing satisfaction. Microeconomics is a part of this extensive subject which reads this way of human behaviour. 

Students need to understand the basic concepts of microeconomics to differentiate between the factors affecting it. This section speaks about the way microeconomics is related to a nation’s economy in a broadway.

The Introduction to Microeconomics and its Fundamentals

The economic theory is applied to distinguish between real-life situations which are done following two concepts Macroeconomics and Microeconomics.

Here macro means large or big, which deals with the larger picture or a country. Macroeconomics is related to the economy and its problems like inflation, poverty, and other issues. It studies the aggregates and effect on the economy incomplete, which is total changes of process.

Microeconomics is related to the smaller region as it focuses on building smaller blocks of an economy. It deals with an individual unit like the demand for a product in a market. This concept is applied to a smaller level of the economy for a smooth flow of cash.

A good example will be a supply of products, the cost of an item, etc. These processes govern the microeconomics concepts and their function. Demand and supply are two essential factors that affect these two factors.

Basic Microeconomics Issues in an Economy

Every country’s economy faces problems relating to the scarcity of resources, which results in issues of the economy. A country’s economy has to decide the even distribution of limited resources. The problems that are usually seen in an economy are mentioned below.

What to Produce?

As resources are limited, the economy has to decide the alternative to deal with the issue. It decides on the process of distribution and allocation of resources. An economy plans on allocating resources towards the demand and thereby sacrifices other wants. There is always an option or alternative to deal with this concern. Here the ultimate goal is the maximum satisfaction of human beings.

It is essential to know that when one item is reduced than other goods increase. After deciding what to produce, and the economy has to choose the quantity to be made.

How to Produce?

An individual can employ various technologies to produce goods and services without errors. This includes choosing inputs in a combination of information. Ideally, two techniques can be implemented 

Labour intensive technique – In this process, an individual uses more labour and limited capital.

Capital intensive technique – This manufacturing technique uses more capital and limited labour.

These techniques are used by the economy for manufacturing and are based on abundant input. It also implies more human power and labour imposed techniques. If more capital is provided, then the capital intensive approach can also be used in Microeconomics.

For Whom to Produce?

In this issue, an economy has to choose the masses for whom the goods and services have to be produced. Here the distribution of profits is the primary concern.

There are several factors and issues related to types of microeconomics. A student can gain information on these topics by referencing quality study materials. One can check educational sites like that offers solutions and exercises for an assortment of services.

They also offer live classes and budget-friendly notes for high flying marks in exams. For achieving the desired ranking, download the app today.

Collateral Security

To get a detailed meaning, let us first know about principal security. Loans that are secured by the mortgage of the assets are known as the principal or primary security. The security given in addition to the primary security is called Collateral Security. The term collateral security can be referred to as the assets given that a lender considers as security for the loan. This acts as a protection for the lender. 

In any case, if the borrower fails to pay the amount of the money he took from the lender, the lender has all the rights for the collateral property offered to him by the borrower. Therefore, he has the right to seize it, sell it, and get the money to compensate for the unpaid portion of the loan.

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Types of Collateral

The collateral type generally depends on the loan type. Let us take a look at the collateral security examples. Suppose you take a loan for a car, the car is considered as the collateral security for the loan. Similarly, if you take a mortgage, then your home is considered as collateral.

For a business owner to take out the loans successfully, he should know about the types of collateral that are considered while borrowing.

Invoice Collateral:

If a company or a borrower fails to pay the money to the bank /lender, then they can use the Invoice as collateral. This can be done in two different ways one is factoring and the other is discounting.

In the case of the factoring method, the company approaches the lender and sells the unpaid invoice to them. Through this, the lender can be compensated by the amount of money he gets from the payments of the customers.

In the case of the discounting method, the company can get even ninety percent of the invoice worth. Here the repaid amount excludes the fee or interest while the payment is done to the bank or lender.

Inventory Financing:

This is used by the private or small business that doesn’t have access to the other options. Inventory financing means the credit that is obtained by the business to pay it beforehand for the products which are not sold.

Cash Secured Loan:

This is very commonly used and it works in a simple way. In a cash-secured loan what happens is, the bank will freeze your savings account or any other assets in share to that. After the payment of the debt, they will be available.

Issue of Debentures as Collateral Security

A debenture is defined as a debt instrument which is generally raised to meet the long-term capital needs. Debentures generally include stocks, bonds, and other security of the company. Generally, debentures are a secured mode of investing in a company because if we invest in shares, then the interest has to be paid. In this, a company can issue a debenture as collateral security for the loan. In legal terms, it is defined as the documents which generate liability. This is just considered as collateral security. It has no impact on your balance sheet. If the repayment is not made by the company, then the bank will take it. This is considered as a debenture issue.

During the period, the company has a fixed interest to the lender/creditor. Generally, the creditors take a part or complete asset possessed by the company in case if it fails to repay the amount taken.

Solved Example

The accounting treatment for the debentures issued as collateral security generally consists of two methods, which are given below.

First Method:

While issuing the debentures as collateral security, the companies won’t make any general entry in the account books. Rather than that, it spends the note below the liabilities in the balance sheet. Doing this indicates that the issue of debentures has secured the loan.

Second Method:

In this method, the debentures issued as collateral security is noted in the journal. On the asset side of the balance sheet, the Debenture Suspense account should appear. On the liability side, the Debentures should appear. The entry will get reversed once the company repays the loan to cancel it.

Did You Know?

Debentures are called robust debt instruments of a company as they can create a win-win situation for both borrowers and lenders. The rate of interest paid on the dividend share is more than when compared to the rate of interest paid on the debenture. Due to this advantage, many companies prefer to issue debentures as the fixed rate of interest associated with them irrespective of any changes made in the price levels.

Human activities that generate income are identified as economic activities. Economic activities are broadly arranged into primary, secondary, tertiary activities. These are even further categorised as an organised and unorganised sector of job conditions. The organised sector is registered with the relevant body or administration and adheres to its legislation and requirements. The unorganised sector, on the other hand, can be defined as a sector that is not established with the government and hence does not have to adhere to any rules. Whilst the former refers to major operations such as enterprise, government, and industry, the latter consist of small operations such as minor trade, private corporation, and so on.

There is a subtle difference between organised and unorganised sectors, which is detailed below.

What is the Organised Sector?

An organised sector has been recognized by the government. Individuals get guaranteed labour in this industry, and the job terms are set and predictable. Enterprises, schools, and hospitals that fall under the organised sector are susceptible to a set of laws. It is extremely tough to break into the organised industry because appropriate entity registration is required. The government regulates and taxes the industry.

Professionals in the organised sector enjoy several advantages, including job stability and additional benefits such as various allowances and remunerations. They have a set monthly income, work schedule, and salary increases at regular periods.

We will now differentiate between organised and unorganised sectors. 

What is Unorganised Sector?

An unorganised sector is defined as a sector that is not established with the government and does not have definite and consistent employment conditions. There are no government laws and regulations enforced in this industry. It is simple to enter such a sector because no affiliation or certification is required. Since the unorganised sector is not regulated by the government, no taxes are levied. Small businesses and services with low-skilled and inefficient workers are included in this category.

Workers’ work schedules are not predetermined. Furthermore, they may be required to work on weekends and holidays occasionally. They are paid daily rates for their labor, which are far lower than the government’s minimum wage.

The Major Difference Between Organised and Unorganised Sector

On the following basis, the distinction between the two sectors can be simply defined:

• The organised sector is one in which the job conditions are set and consistent, and workers are guaranteed work. The unorganised sector is one in which labor arrangements are not set and consistent, and businesses are not regulated by the government.

• Personnel in the organised sector are paid monthly. Workers in the unorganised sector, however, get paid on a regular or even daily basis.

• When we differentiate between organised and unorganised sectors, we may say that in the organised sector, government laws are scrupulously obeyed in the organised sector, whereas, in the unorganised sector, they are not.

• Workers in the organised sector are paid according to government guidelines. In comparison, salaries in the unorganised sector are lower than those set by the government.

• Occasionally, employees in organised sectors get a pay raise. In contrast, in the unorganised sector, earnings and wages are rarely increased.

• If you look back at what is organised sector, you may realize that in the organised sector, job stability remains, but not in the unorganised sector.

• Those in the organised sector receive additional advantages such as medical care, pensions, vacation travel reimbursement, and so on, which are unfortunately not available to workers in the unorganised sector.

Organised Sector Examples:

• Government employees of all kinds come under the organised sector example, quite obviously as the definition of organised sector implies that the government has recognised it, and since the government itself sets the rules, employees working for them must also adhere to such rules.

• Bank employees are bound by the rules set by the bank, which ultimately are regulated by the government as well, and so they must stick to the set laws and regulations as well.

• Registered workers at industries are also part of the organised sector. Since the industry is linked with the government and its legislations, it falls under the category of the organised sector.

• Another example would be government schools and colleges, which are directly linked to the government’s employees and the administration itself.

Unorganised Sector Examples:

• One of the most common examples of the unorganised sector is construction enterprises. Construction company workers do not need to be regulated by the government and abide by rules set by the company’s board itself.

• Farming is also another example of the unorganised sector, as it has no predetermined timings, rules, or salary.

• Hotel management is also part of the unorganised sector – working on its own rules and working on timings set by the hotel’s management.

Conclusion:

The organised sector is made up of government-registered industries, businesses, enterprises, institutions, hospitals, and other organisations. Stores, clinics, and workplaces with a legal license are also included. Construction workers, sweatshop labourers, labourers on the streets, and personnel working in tiny factories not linked with the government, on the other hand, operate in the unorganised sector. In comparison to the unorganised sector, the organised sector has a low unemployment rate. In this article, we have differentiated between the organised and unorganised sectors and learned much more. 

Fun Facts:

In India, the unorganised sector employs 83 percent of the workforce, while the organised sector employs only 17 percent.

 

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