Category: Commerce Notes PPT

The price elasticity of supply is a measure of the degree of responsiveness of the quantity supplied to the change in the price of a given commodity. It is an important parameter in determining how the supply of a particular product is affected by fluctuations in its market price. It also gives an idea about the profit that could be made by selling that product at its price difference. In this article, we will discuss the elasticity of the supply formula, different types of elasticity of supply, the supply curve characteristics, and many more. 

The price elasticity of supply refers to the response to a change in a good or service’s price by the supply of that good or service. According to basic economic theory, the supply of goods decreases when its price increases. 

Similarly, one can also study the price elasticity of demand. This illustrates how easily the demand for a product can change based on changes in price. Price changes fairly rapidly if the price of a product changes. This is known as price elasticity of demand. 

Price Elasticity of Supply Formula

After having understood the elasticity of supply definition in economics, we now move to the elasticity of supply formula which is based on its definition.

[E_{S} = frac{% Delta P}{% Delta Q}]

Here, [E_{S}] denotes the elasticity of supply which is equal to the percentage change in quantity supplied divided by the percentage change in the price of the commodity. 

The Law of Supply

Since producers compete for profits in a free market, profits are never constant over time or across different goods. Entrepreneurs, therefore, shift resources and labor efforts towards products that are more profitable and away from those that are less profitable. 

The law of supply refers to the tendency for price and quantity to be related. For instance, assume that consumers demand more oranges and fewer apples. More dollars are bidding for oranges, but fewer for apples, resulting in higher orange prices.

5 Types of Elasticity of Supply

Price elasticity of supply is of 5 types; perfectly elastic, more than unit elastic, unit elastic supply, less than unit elastic, and perfectly inelastic. Read below to know them in more detail. 

1. Perfectly Elastic Supply: A commodity becomes perfectly elastic when its elasticity of supply is infinite. This means that even for a slight increase in price, the supply becomes infinite. For a perfectly elastic supply, the percentage change in the price is zero for any change in the quantity supplied.

2. More than Unit Elastic Supply: When the percentage change in the supply is greater than the percentage change in price, then the commodity has the price elasticity of supply greater than 1.

3. Unit Elastic Supply: A product is said to have a unit elastic supply when the change in its quantity supplied is proportionate or equal to the change in its price. The elasticity of supply, in this case, is equal to 1.

4. Less than Unit Elastic Supply: When the change in the supply of a commodity is lesser as compared to the change in its price, we can say that it has a relatively less elastic supply. In such a case, the price elasticity of supply is less than 1.

5. Perfectly Inelastic Supply: Product supply is said to be perfectly inelastic when the percentage change in the quantity supplied is zero irrespective of the change in its price. This type of price elasticity of supply applies to exclusive items. For example, a designer gown styled by a famous personality.

The point to be noted is that the elasticity of supply is always a positive number. This is because the law of supply states that the quantity supplied is always directly proportional to the change in the price of a particular commodity. This means that the supply of a product either increases or remains the same with the increase in its market price. 

Determinants of Price Elasticity of Supply

• Marginal Cost- As the cost of producing one more unit is rising with output or Marginal Costs (which are the increased costs related to each additional unit produced) are rising rapidly with output, then the rate of output production will be limited, i.e Price Elasticity of Supply will be inelastic., which means that the percentage of quantity supplied changes less than the change in price. However, if Marginal Cost rises slowly, then Supply will be elastic.

• Time- As the price elasticity of supply increases over time, producers would increase the quantity supplied by a greater percentage than the price increases.

• Number of Firms- It is more likely that the supply will be elastic when there are a large number of firms. This occurs because other firms can step in to fill the supply gap.

• Mobility of Factors of Production- When the factors of production are mobile, then the price elasticities of supply are higher. This means that labor and other manufacturing inputs may be imported from other regions to quickly increase production.

The Elasticity of Supply Curves

We have previously inferred the elasticity of supply definition, the elasticity of supply formula, and its various types. Let us now have a look at how these different values of the price elasticity of the supply formula are plotted on the graph. 

Keeping the quantity supplied on the X-axis and the price of the commodity on the Y-axis, we can draw certain conclusions from the different values of elasticity of the supplied formula. 

• When [E_{S}] = infinite (Perfectly elastic supply), the curve (SS) is a straight line parallel to the X-axis. 

• When [E_{S} > 1], a flatter curve ([S_{2}S_{2}]) is obtained which when extended intersects the Y-axis.

• When [E_{S} < 1], it results in a steeper curve ([S_{3}S_{3}]), which when extended crosses the X-axis.

• When [E_{S} = 1], the curve ([S_{4}S_{4}]) comes out to be a straight line that passes through the origin at an angle of 45 degrees. 

• When [E_{S} = 0] (Perfectly inelastic supply), the curve ([S_{1}S_{1}]) obtained is parallel to the Y-axis.  

This graph shows us the relationship between the different types of elasticity of supply and helps in understanding the elasticity of supply definition better. 

Did You Know?

Alfred Marshall, a British economist, gave the concept of elasticity of demand and supply in his book “Principles of Economics” in 1890. He was the one to define the elasticity of supply and deduced the price elasticity of the supply formula. He also explained that the prices of some goods such as medications, salt, gasoline, etc. can increase without reducing their demand in the market, which means that their prices are inelastic. This is because these goods are crucial to the everyday lives of consumers.

It’s said that the primary role of any manager is decision-making. Managers take a sequential series of actions to make sound choices that are in the company’s interest. This method is known as the process of decision making. The atmosphere of decision making, however, is also an essential factor in this process. Let us learn some crucial aspects of decision making.

We often face circumstances in our everyday lives where we need to make choices. Making a decision is not a simple task; you will be badly affected by a wrong decision while making the right decision will favour you and support you. 

Decision Making and Choice

Decision-making is the thought process of selecting a choice between the options available. When we settle on a choice, it is a goal to eliminate any doubt and hesitation. Typically, the best decisions are the decisions that will bring successful outcomes. We need to look at both the positive and negative aspects of each choice when making decisions. Before making a decision, we should always think of all the alternatives and weigh them wisely. 

It is possible to consider decision-making as the mental processes (cognitive process) that lead to choosing a course of actions between many alternative scenarios. Any decision-making process generates a final choice. An act or an opinion of choice may be the product of decision-making.

The ability to predict the outcome of the choices available is essential to make the right decision. The steps involved in the decision-making process are:

• Define the Problem

• Determine Requirements

• Establish Goals

• Identify Alternatives

Step 1. Define the Problem

Collecting all the relevant data and determining the intent and root causes of a problem is the first step in defining a problem. Our aim at this stage is to obtain a conceptual description. This abstract definition will be used as a basis that we can later redefine and form. However, this does not mean that we are just looking at a part of the picture or just a wild guess.

Step 2. Determine Requirements

At this point, the specifications and conditions needed to solve the problem are decided by us. Like a software upgrade, before it can be implemented successfully, some specifications must be met. This is to ensure that our shareholders’ interests are still secured by the solution that we are implementing.

Step 3. Establish Goals

Goals are the desired result that we would like to see in the outcome of decision-making. 

Determine the targets are merely setting a goal well in contrast to the minimum desires. 

Step 4. Identify Alternatives

And we’re finally defining all the alternatives. All of these alternatives must at least satisfy the minimum criteria we have previously determined. To see whether it meets the requirements or not, we must look at all the other options. Those alternatives which do not fulfil the requirement are omitted. We will end up with a couple of better options by doing this filtering. We can then compare and determine which is the better choice to choose from.

The ‘environment’ in which a decision is made is one of many factors that decision-making needs to evaluate alongside many others. 

Through this article, we examined three different types of decision-making environments and how to handle them effectively if you ever find yourself in one. There are different levels of complexity in each of them, and each has distinct features.

Additionally, we compared the different environments to each other, and, after sufficient research, we discovered that uncertain decision-making environments proved to be the most difficult to deal with and the riskiest ones to make decisions in.

Making different types of decisions is a result of the environment and is highly influenced by it. Leadership is about making better decisions using the information available and resources at your disposal.

Types of Decision Making Environment

We can experience several times in decision-making where we don’t have the necessary information to decide and keep hesitating. It’s often a decision that we have a lot of data with the circumstances and are very specific. There are three types of settings for decision making that we can define. There are also –

• Decision Making in Certain Conditions

• Decision Making in Uncertain Conditions

• Decision Making in Risky Conditions

Decision Making in Certain Conditions

Decision-making under such circumstances ensures that the person who makes a decision has all the complete and appropriate knowledge for the decision to be made. With all the data available, the individual can predict the outcome of the decision. We can easily create a particular decision with confidence by being able to predict the result. Typically, the product that gives the best outcome will be used and carried out.

Decision Making in Uncertain Conditions

When you are unaware of the situation, making a decision is similar to the absence of information to help us decide. The decision-maker doesn’t know the future because of inadequate knowledge and can’t predict the outcome of any choice he has. The decision-maker will have to judge and decide based on their expertise to decide under certain circumstances. They have to communicate and seek advice from people who have more experience if they do not have those experiences. However, there is a slight risk involved because we cannot predict the outcome, but knowledge from the past will close the gap.

The success or failure of the said company would be determined by the nature of the decisions made in it. So before making an important decision, all the knowledge and alternatives available must be studied. The decision-making process will help a great deal. The atmosphere in which they are made is another aspect that impacts these decisions. In which these choices are made, there are a few different types of environments.  

The Expenditure method is a system used for determining the Gross Domestic Product (GDP) of a country. This method considers consumption, investments, net export, and government Expenditure to calculate a nation’s annual GDP.

 

Expenditure method of National  Income can be considered as the most common way to calculate GDP as it includes both public and private sector expenses incurred within a nation’s borders. However, this system can only be used to calculate nominal GDP, which is not adjusted for inflation.

 

Do you know: This method is also often referred to as the ‘Income Disposal Method’.

 

How is GDP Determined?

The process of calculating GDP with the Expenditure process is similar to that of determining demand as the total spending of an economy is considered as aggregate demand. For which reason, both Expenditure and aggregate demand shifts in tandem with each other.

 

However, aggregate demand usually considers the average price of all goods and services produced and utilized in an economy. That makes it similar to GDP only in the long run, after adjusting for inflation.

 

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Expenditure Formula

There are primarily four different types of aggregated expenses that are utilized to determine GDP. These are –

1. Investments made by businesses.

2. Government expenses on goods and services.

3. Household consumption.

4. Net export (total exports minus the value of imported goods and services).

 

The Expenditure Method Formula is as Following – 

[GDP = C + I + G + (X – M)]

 

Here, C is consumer spending on different goods and services, I represents investments made by businesses, and on capital goods, G represents government’s spending on goods and services provided to the public, X is exports, and M is imports.

 

Task for you: With the above mentioned Expenditure formula, determine India’s GDP for the financial year of 2018-2019

 

Primary Components Used in Expenditure Method of Calculating National Income

The above mentioned types of aggregated expenses can be further broken down depending on the parameters these include. Let’s take a look – 

1. Consumer Spending – Consumer spending usually accounts for a large part of a nation’s GDP. It can be divided into two categories – purchases of durable and non-durable goods, and procurement of services. 

Consumer spending includes expenses incurred by individuals residing within the domestic territory, or abroad. For example, expenses made during one’s foreign travel will also be added to consumer spending.

However, it does not include any expenses incurred by foreign visitors in India.

2. Government Expenditure – It represents expenses undertaken by both State and Central authorities for providing infrastructure, essential commodities, and other requirements to the general populace. Expenditure method of measuring National Income also includes expenses made towards education, healthcare, and defence industry.

3. Business Investment – Business investments include capital Expenditures on assets by different organizations.

Business investment can be divided into two categories – 

• Gross Fixed Capital – It indicates expenses incurred during purchase of fixed assets. Gross fixed capital can be further categorised into two types.

• Gross Business Fixed Investments – It includes expenses made towards long-term assets, such as machinery, real-estate, production facility, infrastructure, etc.

• Gross Residential Construction Investments – Expenses incurred by businesses for purchasing or constructing residential units upon receiving tenders. 

• Inventory Investment – Investments made towards the acquisition of raw materials, semi-finished or finished goods are included in this category of Expenditure. These are considered as items that cannot be utilised for current consumption. Inventory investment is determined by calculating the closing stock balance and opening stock balance at the end of each year.

• Net Exports – The difference in valuation between the exports and imports undertaken by a country within one financial year is considered as net exports. Exports are considered an output of an economy whereas imports are considered as Expenditures as they are not produced within a country’s National boundaries. Instead of calculating these factors separately, the difference is considered as the net export.

Task for you: Can you categorize the goods and services that India exports overseas? Name the five most high-volume export items.

 

Precautions Considered While Using Expenditure Method of National Income

Students should keep in mind several factors while using the Expenditure method of calculating National Income. These include – 

1. Any expenses on account of intermediate goods cannot be considered to determine a nation’s Income as these expenses are already included in the value of final goods produced. Otherwise, it will lead to double-counting of a single Expenditure, thus inflating National Income inaccurately.

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2. Any transfer payment should not be included under the Expenditure formula as these payments do not add any value to a nation’s economy.

3. Purchase of any second-hand goods is not included in the total Expenditure method as these do not affect the total value of goods and services produced. However, any brokerage paid on the purchase of such goods or services has to be included in the calculation.

4. Procurement of assets such as shares, bonds, debentures, etc. is also not included in the calculation as these represent changes in ownership instead of changes in goods and services’ values. Contrarily, any brokerage earned on the trading of shares will be considered as a productive service.

5. Any expenses incurred due to producing goods for self-consumption, services provided by the government and non-profit institutions (that serve households) are also included in the National Income. Moreover, imputed values of occupied residential units are also considered as a productive service; hence those are considered in the National Income.

To learn more about the Expenditure method, its formula, and its different factors refer to our study materials today. Learn through a series of interactive courses and curated Q&As crafted by our skilled mentors to sharpen your knowledge. Also, don’t forget to install ‘s app for instant access to all our content.

 

Expenditure Method

Students must have understood the Expenditure method, how is GDP determined, the formula, primary components and the precautions that are taken while calculating. 

Since it is a mix of theory and practical, students are advised to follow an effective strategy for preparation so that they are able to achieve the goals in terms of marks that they have set for themselves.  

Accounts is a very interesting subject. Reading the theory of accounts is not similar to reading the ones of history or biology. This subject needs a lot of practical knowledge and understanding, you may always try to look for the logic and practical reasons behind it. Accounts also contain some mathematical calculations. The chapters of accounts are interrelated, you may find the same concept in chapters 2 and 7. So you do not leave any concept and go forward in order. Also, it is emphasised that you should be clearing your doubts at the source, carrying forward them could lead to more confusion and more weak areas. 

You should always do all the accounting homework given to you without fail. Make sure that you do not miss any homework and make all the efforts to complete it. Only practice is the key to ace in a subject like accounting. Working on your homework problems may teach you the concepts. It would be better if you understand that if you can’t work on your problems without referring to the textbook you should practice more as you are not yet ready for your next exam. In simpler words, it means that you shall be able to solve the problems without keeping the formula chart in front of you. 

Another key to ace in this subject is being regular in the class. Try your best to attend all the classes and give your best. Another thing that you should keep in mind while going to the class is that you should be well prepared before you go to the class. This will help you get the best out of the class and will increase your participation also. It works on a simple logic that if you don’t listen, you don’t register and that way, you won’t understand. That is why it is important to be regular in your classes and pay heed to whatever is being taught. 

Focus on understanding, not memorizing. Focusing on understanding helps you memorize automatically. But if you just memorize and don’t understand, it is a waste of time and energy. You may try to focus on learning and have a better understanding of concepts and not on cramming the textbook material. 

Maintaining speed in the test of the subject like accounts is a must. You should try to keep your pace during the exam as most of the tests are of a certain time limit and it needs to be completed while heed, efforts and within the given period. You shall not slow down while performing the exam. The best way to do that is trying to attempt a lot of sample papers at home and setting time boundaries for the same. 

When you think about one thing that helps you grow as a person every single day, what comes to your mind? 

Somebody who can transform your journey in unimaginable ways is only a mentor.

Whether it’s about motivating you to get out of your comfort zones or pushing you to learn new things or giving valuable advice or supporting you- as solid as rock— a good mentor can do it all for you! 

However, choosing someone to be a right mentor for you can be a tricky task to do, for many of you. So, before you take this important decision— make sure you research well and then, decide. 

Now, before you dig deeper into this subject, I would like you to take an insight of the best learning platforms- ! 

It’s about accelerating your careers, Choose Wisely! 

A Joint Venture Account is an agreement where two or more parties join to create a partnership for a specific business venture or purpose for a particular period.

Two individuals or firms join to create a partnership for a specific purpose for a short duration or it might be temporary also. This partnership does not use the name of the company. The profits or losses are shared in the agreed ration. Some of the features of Joint Ventures are discussed in this article.

What is a Consignment Agreement?

If goods are sent by their owner to the dealer or the agent who accepts to sell the goods, it is done under a consignment agreement. Here the owner is referred to as the consignor and the other party is referred to as the consignee. The consignee has the right to return the goods without any obligation, in case they are not sold. The consigner remains to be the owner until the goods are sold.

Features of Joint Venture Agreement

The features of the joint venture are discussed below:

1. Duration: This venture is formed for a short duration and so, it is termed as a temporary partnership.

2. Parties: The parties or the individuals who join to form this venture are called the co-venturers.

3. Funds: The funds used for each business are brought to the joint venture account.

4. Sharing of Profits or Losses: The profits or losses are shared as per the terms agreed between the co-venturers. If there is no such agreement, it is shared equally.

5. Computation of Profits or Losses: The profit or loss is computed by the co-venturers on the completion of their business or venture.

Difference Between Consignment and Joint Venture

There are a lot of differences between consignment and joint venture accounts. Some of the differences between a joint venture and consignment are explained below.

1. Meaning: Joint venture is a temporary partnership between two or more parties for a specific business whereas Consignment is just an act of sending the goods by the owner to the seller to sell the goods. 

2. Parties: The parties in a joint venture are called co-venturers whereas in a consignment act they are referred to as the consignor and the consignee.

3. Relationship: In a joint venture, the relationship between the parties are like partners whereas in a consignment it is that of a principal and agent. 

4. Rights: The co-venturers in a joint venture have equal rights whereas in a consignment, the consignor has the rights of the owner or the principal and the consignee has the rights of a seller or an agent. 

5. Share of Profit/Loss: In a joint venture, the profit or loss is shared as per the agreement whereas in a consignment the consignee receives a commission based on the sale of goods. 

6. Ownership: In a joint venture, the co-ventures are the owners whereas in a consignment only the consignor remains the owner. 

7. Communication: In a joint venture, the parties keep sharing the information regularly whereas in a consignment the consignee just sends an account to the consignor.

8. Maintenance of Accounts: The co-venturers maintain accounts in various methods as agreed in their venture, whereas the parties of the consignment have only one method of accounts maintenance. 

9. Continuity: In a joint venture, the business comes to an end once the purpose is completed whereas it depends on the consignor and the consignee to decide on the continuity.

10.  Basis of Accounting: In a joint venture, they follow the cash basis of accounting whereas in a consignment they follow the accrual basis of accounting.

Difference between the Joint Venture and Consignment Chart

Joint Ventures’ Purpose:

The number of joint ventures that can be formed is limitless. Joint ventures can be formed by two or more companies from the same industry, or by two companies from different industries, or by two companies from separate countries, or by two companies from different industries and countries. As a result, the scope of organizing a joint venture is limitless, and they can be formed and profited anywhere mutual collaboration is required.

Joint ventures are particularly widespread in the oil business, and they frequently involve a local and a foreign company. In the oil industry, JVs are frequently considered as a feasible business strategy because the firms can complement their capabilities while the JV provides the foreign company with a geographic presence. The most well-known company is Fuji-Xerox. P&G chose a joint venture with Godrej primarily to gain access to the company’s distribution network and manufacturing facilities.

Fixed Shop Retailers

Retail stores are known for selling goods and services to customers by using multiple channels of distribution with a sole aim to earn the profit. Retail stores can be of two types: itinerant and fixed. Fixed retail stores are top-rated in urban areas and large cities. Consumers in urban areas always desire to shop from fixed retail shops such as supermarkets and malls.

Let us discuss two fixed shop retailers that are large retailers and chain stores or multiple shops:

Large Retailers

Large retailers are also known as departmental stores. Department stores are considered as one of the important parts of the retailing industry. The stores are huge and provide a variety of products to the customers under one roof. These products are classified into departments and all these departments are located under the same roof. In urban areas, more departmental stores are being established because of their popularity among the masses.

A departmental store is an independent unit selling different products under one roof. The products may include womenswear, menswear, electronics, toys, etc. Some department store examples are Macy’s, Big Bazar, Reliance Smart, etc.

Features

Some of the crucial features of departmental stores are:-

• They are usually located in densely populated areas which turn out to be a great advantage for them.

• Departmental stores goal is to improve the shopping experience of its valued customers by introducing different facilities. 

• Departmental stores are companies with shareholders because of the size of the operation. Needs of funding is significant in the case of these stores.

• Departmental stores do not believe in middleman and operate retailing as well as warehousing functions.

• Departmental stores follow the method of centralized purchasing.

Advantages

Advantages of departmental stores are:

• The convenience of customers is one of the most important advantages of departmental stores. Customers can buy different type of products and fulfil all of their shopping needs under one roof. By visiting departmental stores, customers can save their time that they would have wasted in visiting different stores. Customers can save time and labour.

• A departmental store doesn’t only provide different products but also ensures customers variety in each product. For example, if a customer is buying a TV, then he/she gets to choose a  product from different brands that are there in the store.

• Departmental stores operate on a vast scale; thus, it gets the benefits of large scale production. When production is huge, the cost of production decreases that helps the company to sell the products at a low price and make profits.

• Departmental stores are financially stable, which help them to run promotions for their company; this attracts the customers.

Disadvantages

Disadvantages of departmental stores are:

• The departmental stores also provide many special services to its customers which results in an increase in their operating cost. A higher operating cost restricts the company to offer discounts to its lower-income customers.

• The departmental stores are huge, which make it impossible to attend and assist each and every customer shopping in the store.

• Establishing a departmental store requires a considerable amount of funding and a large place thus making it quite difficult. There is a lot of risk in this field as a huge amount of money is involved without any certainty.

Chain Stores or Multiple Shops

Chain stores are also known as multiple shops which function under one brand and have common ownership. This is branches or outlets of a single brand that are spread across the country. These type of shops were first established in America and now have become popular all over the world. Some examples of multiple shops are Croma and Dmart.

Chain stores have common ownership and do not have individual owners like in franchising. The looks and designs of each chain store are similar to one another. The display system, the colour of the walls, furniture and other arrangements are also kept uniform in all chain stores in order to retain a brand identity. Some of these chain stores examples are Dominos, KFC, etc. 

There is a popularity of chain stores in India also. Many Indian companies are adopting this type of retailing for their companies. Some examples of chain stores in India are Reliance Fresh, Lifestyle,  Dmart, etc.

Features

Some features of chain stores or multiple shops are:

• Chain stores also follow the method of centralized purchasing because the head office sends the product to individual chain stores for sales.

• The chain stores are located near populist areas with the idea of remaining close to its target customers.

• The control and responsibilities of the chain store are in the hand of the branch manager or store manager. He/she is responsible for giving reports to the head office regarding the performance of the chain stores.

• There is one head office.

As described in Section 13 of the Indian contract act, when a mutual understanding between two parties gets established in order to satisfy particular planning, can be termed as consent. People often get confused between consent and free of consent. 

Consent is a contract between two or more parties to agree with a mutual commitment to achieve a desire or any other. Free consent in business law helps to understand all the legal rules which we need to follow in business.

What is Free Consent?

Let us define free consent as a contract based on Section 13 of the Indian contract act 1872 is, the meaning of free consent is an agreement made between two parties for the same purpose with the Union of thoughts. It is under the principle of consensus-ad-idem. It is the definition of free consent.

Free Consent Example

In order to understand more clearly, let us illustrate a case of free consent. Let us assume A and B are two parties, and ‘A’ had some financial crisis, so he wants to make a contract. After knowing all the information and after analyzing the situation, ‘B’ wants to accept the contract made by ‘A’. Here the contract or agreement is made with the mutual consent of both the parties. This is nothing but the free consent of the contract.

Consent and Free Consent

Even though the meaning of both consent and free consent seems to be similar, slight differences are observed when we go through them in detail. Now we will see the differences between consent and free consent, where it varies and the importances etc. in detail as follows- 

Elements:- The elements of consent are limited to a similar purpose as well as the same sense of mind. On the other hand, the elements of free consent should be free from fraud, coercion, undue influence, misrepresentations, and other mistakes too. 

Void: The contract will be voidable if there is no consent. In contrast, the voidability of the contract will be decided by the aggrieved party in the absence of free consent. 

Violating Factors of Free Consent

We have various factors that affect free consent, and it relates to the voidability of the contract. So both the parties participating in your contract should be aware of these factors and should be cautious for a free flow of the contract till it’s the due date.

Consent is only considered as a mutual relationship between two parties whereas free of consent  includes a mutual understanding as well as it’s free from 

1. Coercion: when a person unlawfully, threatens or forces a person via some forbidden acts, leads to coercion. It means the entry of either of the parties might be forceful or any of them committed to illegal activities or commitments against the Indian penal code etc. The effect of coercion leads to the cancellation of the entire contract after investigating thoroughly. The legal body will restrict the obligations of both parties in this case. If the commitment is done forcefully, clearly we can say that it is not free of consent.

2. Fraud: Another important factor of free consent is fraud. When a person provides false assertion, makes any promises in order to deceive a person or plans to get an advantage over the other party, then the act is considered as fraud. It involves the omission of promises made during the agreement, the false assertion of facts, false actions to cheat the other party, etc. and many more deceiving actions come under this fraud. According to Section 17 of the Indian law of contract, the other party has been given rights to claim for the deceived amounts as well as to revoke the entire contract and can make modifications where he got damaged.

3.  Misinterpretation: Providing a false assertion or fake representation of the fact to the party or making unwarranted information to mislead the other party.  According to Section 18 of the Indian law of contract, the misrepresentation is nothing but showing the false information at the beginning of the contract itself. The facts which are committed at the ground level may not be reliable, then it is considered as misrepresentation of the contract. Again here we have two kinds of misrepresentations-one is innocent misrepresentation and the other is a negligent misrepresentation. 

4. Undue influence: when one of the parties has a dominating nature or uses its power to work against the will of the other party. Undue influence is another factor to violate free consent. It occurs when one of the other parties dominates the other party in any aspect. There is a chance of taking unfair advantage because of their dominating position on the other party. The principal behind undue influence is the doctrine of equity. The effect of undue influence leads to the voidability of the contract of free consent under Section 19 A. It requires valid proof to file a case on the dominating party. Generally, the undue influence affects the below parties –

5. Mistake: Mistakes can have so many impacts and it causes a lot of issues. It can be mutual or individual or can be of many types.

Pros and Cons of Free Consent

1. Pros of free consent: Free consent is considered as more reliable and flexible. The most important criteria the free consent satisfy can be listed below:

• The contract made according to free of consent provides proper protection to the validity enforceability of an agreement.

• It acts as a major protecting shield to the parties from various unavoidable circumstances.

• It plays a major role to withstand the autonomous power and providing an unbreakable foundation to the running policy or principle.

2. Cons of free of consent: Although having a lot of advantages, free of consent also contains some kinds of mistakes too. These includes:

• Unilateral mistake: when one side party makes a particular mistake, then it is termed a unilateral mistake.

• Bilateral mistake: As the name suggests, when both the parties get involved in mistakes, then it is termed a bilateral mistake. This can be further classified into two types:

• Mutual mistake: A mistake is said to be mutual when both parties misunderstood each other’s policy forming a void, then it is termed as a mutual mistake. 

• Common mistake: Avoid that arises due to a common mistake in the contract is termed a common mistake. But this mistake is not mutual and is done individually.